Mitchells & Butlers (just) back in the black

Like pub peer Marston’s (MARS), which also released annual results this week, Mitchells & Butlers (MAB) has clawed its way back to profitability after a dire pandemic-hit couple of years. The managed restaurants and pubs operator posted significantly higher revenues than its competitor, but pre-tax profits only trickled over the line into the black as cost headwinds continue to buffet the business.

The company benefited from the post-pandemic recovery in hospitality demand in the year, as cities became busier and consumers headed back to its sites, which include the Toby Carvery and All Bar One brands. Total revenues came in just below pre-pandemic levels as a result. Like-for-like sales were up by 1 per cent, and in post-period trading climbed by a robust 9 per cent against 2019. So the top line is making progress.

But the fact is that cost inflation is having a severe impact on the business. Utility bills rose by £70mn in the year. Operating costs soared, and the operating margin fell by 200 basis points to 5.6 per cent. Margins will be “lower than pre-Covid levels in the medium term”, said management. And while 45 per cent of the new financial year’s energy requirement has been hedged (presumably at elevated prices), Mitchells expects a 10 to 12 per cent cost headwind in 2023. This represents at least £180mn of additional costs – the company plans to mitigate as much as possible but there will undoubtedly be financial pain.

Peel Hunt analysts said that they continue to believe the re-rating upside exceeds the forecast downside and that the company should benefit from ongoing debt reduction. We will be keeping a keen eye on how successful cost mitigation procedures are moving forwards in challenging trading conditions. Hold.

Last IC View: Hold, 245p, 26 Nov 2021