Publicans reduced to tiers as trade body warns of hospitality Armageddon

The coronavirus pandemic has wiped more than £200m off the value of Mitchells & Butlers’ (MAB) assets, according to a full-year results announcement that revealed the heavy toll of this year’s restrictions on the pub industry. Pub group Mitchells disclosed annual figures on the same day that Fuller, Smith & Turner (FSTA) reported its own half-year numbers, with both companies falling into pre-tax losses over their respective timeframes.

Publication of their statutory announcements was shortly followed by the government’s unveiling of England’s new tiered system of coronavirus restrictions, which, according to trade body UK Hospitality, designates 98 per cent of hospitality venues in the upper two tiers. The organisation estimated that £7.8bn in trading could be lost if the restrictions remain throughout December, while 94 per cent of its members have said that tier two alone, which allows for pubs to remain open, would be unviable from a practical perspective, or see their establishments trade at a loss.

Fullers managed to make a £2m operating profit over the final two months of its half-year period, when most of its estate was open, despite heavy restrictions on dining and socialising. Like-for-like sales outside of London, where pub footfall has been weak across the sector, sat just 8 per cent below last year’s levels. But its collapse in revenues came as no surprise, given that its estate was closed for 14 out of 26 weeks over the trading period.

Both Fullers and Mitchells managed to avert marked increases in net debt. Excluding leases, Fullers’ net debt only edged up by 5 per cent to £187m, while Mitchells’ obligations remained flat at a still hefty £1.56bn. Both businesses operate largely freehold estates, and haven’t therefore faced tortuous rent negotiations with landlords during periods without income. 

But the pandemic was largely responsible for Mitchells writing its assets down to the tune of £208m. The group also estimated its monthly cash burn for the current lockdown period at £35m to £40m, before it pays its quarterly debt service cost of £50m. It said that it had access to £225m in liquidity, including borrowing facilities. Mitchells’ pledge not to pay a dividend or conduct any share repurchases until at least September 2021 will help to limit cash outflow.

Both groups are better placed to come through the nightmare of restrictions than independent rivals, who lack their clout, scale and the patience of their banking partners. Weak sales figures are beyond the control of either operator, but their tight control over existing debt levels is encouraging. Fullers’ shares trade at 24 times two-year forward consensus earnings estimates, well ahead of Mitchells’ multiple, although ratings are largely academic given the trading backdrop. The government's new stringent tier system has already drawn industry-wide criticism. With more fluctuations in hospitality restrictions likely over the coming months, we move Fullers to sell and retain our sell rating on Mitchells.