Pub companies have had a well-documented hangover after years of over-expansion and too much borrowing. However, it would be a shame to allow the sector's past woes to get in the way of buying potential bargains, and the often strife-torn Mitchells & Butlers (MAB) pubco is such an opportunity if it can maintain its operational improvements.
Operational gearing starting to boost profits
- Moderate expansion of pubs estate
- Pension-fund deficit becoming less acute
- Dividends should return next year
- Still plenty of debt
- Boardroom ructions
Mitchells does not need that much to go right for its own performance to improve. For example, its programme of operational improvements - including streamlining IT, refurbishing pubs and managing its menus better - has kept earnings growing, despite forecasts that like-for-like sales in 2013 will remain flat. The best that analysts at stockbroker Numis Securities can come up with is that like-for-like sales will nudge up by around 0.4 per cent.
However, the process of gradually improving its pubs estate, rather than going hell for leather for growth, could contribute to a 9 per cent increase in Mitchells' earnings, the broker believes. That's impressive given the unpromising backdrop to trade and suggests that Mitchells has significant potential for operational gearing to boost profits as its improvement programme gathers momentum.
Although M&B has been adding pubs to its portfolio - it aims to open 30 next year - it is restrained by its debt burden. At least this is stable - it has remained steady at £1.8bn for the past 12 months, and City analysts assume that whatever expansion occurs from now on will be financed from Mitchells' cash flow, rather than new debt. The company plans a roll-out of around 50 pubs in 2015 and the plan seems to be to use moderate expansion to drive profits, rather than aggressive pricing or marketing to push up like-for-like sales. This is sensible, but it does mean that Mitchells will continue to lag the better performing pubs operators for some while.
MITCHELLS & BUTLERS (MAB) | ||||
|---|---|---|---|---|
| ORD PRICE: | 393p | MARKET VALUE: | £1.62bn | |
| TOUCH: | 392-393p | 12-MONTH HIGH: | 475p | LOW: 292p |
| DIVIDEND YIELD: | 3.0% | PE RATIO: | 11 | |
| NET ASSET VALUE: | 275p | NET DEBT: | 157% | |
| Year to 29 Sep | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 1.98 | -127 | -20.6 | nil |
| 2011 | 1.80 | 132 | 30.7 | nil |
| 2012 | 1.89 | 83 | 17.1 | nil |
| 2013* | 1.89 | 180 | 32.9 | nil |
| 2014* | 1.96 | 194 | 35.4 | 11.8 |
| % change | +4 | +8 | +8 | - |
Normal market size: 5,000 Matched bargain trading Beta: 1.2 *Numis Securities forecasts | ||||
The state of the company's pension fund could also be set to improve. Although the fund's deficit (as defined by accounting standards) has nearly doubled year-on-year to £100m, the trend is for deficits to narrow as equity markets recover and interest rates on government bonds rise. If the pension hole closes faster than previously predicted, that could free up some of the £40m-a-year contributions that Mitchells is making to that end. In addition, it would bring a restoration of dividends closer. City analysts expect the resumption of payouts next year (see table), which could boost the share price.
The persistent bear point with M&B is that the company has had its share of boardroom strife over the past few years, with big investors - in particular ex-currency trader Joe Lewis - willing to push their weight around. On the bright side, the past year has seen an outbreak of boardroom peace and new chief executive Alistair Darby has been left to run the business without distractions in his first year. Obviously, the debt issue hasn't disappeared, but Mitchells is unlikely to need a re-financing until 2017, and its repayment schedule stretches out to 2030.
