Mitchells and Butlers' margins under pressure

Restaurant and pub operator Mitchells & Butlers’ (MAB) operating margin fell by 270 basis points to 7.7 per cent as elevated cost inflation in the supply chain and the removal of the temporary VAT reduction on food and non-alcoholic drinks took their toll.

Higher costs dragged down pre-tax profits in the half, as chief executive Phil Urban noted that “the trading environment for the hospitality sector remains challenging with inflationary costs putting pressure both on the industry's margins and disposable income of our guests”.

But there could be brighter times on the horizon, as the company looks to rebuild margins towards pre-Covid levels (the operating margin was more than 14 per cent in 2019). The board said that the medium-term cost outlook was now improving, and it now expects the pre-mitigation “cost headwind” for the full year to come in at the lower end of its guidance range of 10 to 12 per cent of the expense base.

Elsewhere, it was encouraging to see volume growth across both food and drink, though volumes, like margins, are still below pre-pandemic levels. The volume performance helped like-for-like sales up by 8.5 per cent, year-on-year, and the growth rate improved to 8.9 per cent in the six weeks following the results date.

Broker Peel Hunt raised its target price from 200p to 240p on the back of these results and said that its forecasts “have further upgrade potential, due to higher sales and falling energy costs”. While the shares are less expensive than the historic rating – they trade at 16 times forward earnings compared to the 5-year average of 25 times according to consensus forecasts on FactSet – recovery still has a long way to run. Hold.

Last IC view: Hold, 148p, 07 Dec 2022