Broker snap: M&B disposal provides ammo

Panmure Gordon has strongly reiterated its 'buy' recommendation for Mitchells and Butlers (M&B) after the pubs group's latest disposal of non-core assets.

M&B is selling 333 pubs including 52 Scream bars, 71 music bars and late night entertainment venues, 75 unbranded town pubs, 67 community pubs and 68 other small pubs for £373m in cash to funds controlled by TDR Capital.

"The disposal proceeds of £373m represent an enterprise value/earnings before interest, tax, depreciation and amortisation (EV/EBITDA ) multiple of 7.2x, which compares favourably to Wetherspoon (JD) trading on 6.7x FY 2010E [fiscal 2010 estimated earnings] EV/EBITDA," the broker notes.

One-fifth of the pubs to be sold are short leasehold sites generating just £8m EBITDA and £2m EBIT. "Stripping these out suggests an EV/EBITDA multiple of c8.0x for the freehold and long leasehold portion of the estate, compared to M&B currently trading on 7.8x," Panmure Gordon added.

The broker concedes that the latest batch of disposals is likely to dilute earnings initially, but the money raised will give M&B ammunition to speed up its expansion into the faster growing areas of the informal dining market.

KBC Peel Hunt is also a fan of the deal despite estimated net dilution of 6% of projected fiscal 2011 earnings. It calculates gross dilution of earnings at about 12% but "this should be counteracted by higher growth from the remaining core estate (it historically performs 1% stronger in life for like revenue terms), and by accelerated conversions, reducing net dilution to 6%."

KBC analyst Paul Hickman called the disposal "a major step" that came "faster than most expected".

"It should facilitate the conversion of existing outlets to the six core brands as well as acquisitions of suitable assets at higher returns," Hickman believes.