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Mitchells and Butlers - sales nudge past pre-Covid levels

Nicholas Hyett, Equity Analyst | 23 September 2021 | A A A
Mitchells and Butlers - sales nudge past pre-Covid levels

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Mitchells & Butlers Ordinary 8 13/24p

Sell: 231.40 | Buy: 231.80 | Change -8.00 (-3.34%)
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In a short trading update Mitchells & Butlers (MAB) said that in the 18 week since full indoor trading re-opened on 17 May, like-for-like sales have been 97% of pre-Covid levels. In the most recent 8 weeks, trading reached 104% of pre-Covid levels. Total sales year-to-date are running at 45% of pre-Covid levels, including 18 weeks of enforced closure.

Trading has been stronger in suburban and food led brands, particularly at the higher end of the market.

As at 18 September, MAB had £197m of cash balances, with £150m in undrawn borrowing facilities. That's down from £203m of cash on 24 July, although the group has repaid £39m of debt in its Liquidity Facility - which is now undrawn.

MAB shares rose 1.4% in early trading.

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Our View

Pubs are part of the UK's cultural furniture and are important social hubs across the land. The last year has not been easy though, as government restrictions have forced bars to close or serve at reduced capacity for much of the year. Now it looks like the worst may be behind us, so focus must turn to the future.

Mitchells & Butlers (MAB) is one of the UK's leading pub and restaurant companies. The group operates across 15 brands and formats at over 1,700 sites, and 82% of the population lived within five miles of one of them at the end of the last full year. The group's brands include O'Neill's, Browns and Miller & Carters.

Overall, we think it's a decent portfolio, despite the fact that the brands aren't quite in the top tier. The group is well diversified across demographics and geographies within its sector, which offers some protection against changing tastes.

In the year ending 26 September 2019 revenue was £2.2bn with underlying operating margins of 14.2%. Healthy margins are always nice to see and could speak to the underlying strength of some of the group's brands. Revenue is on track to fully recover in the final quarter, and may even improve next year, but whether cost saving programme Ignite can return margins to previous highs remains to be seen.

In the meantime debt is something of a burden. Even in 2019 net debt was around 3.6 times adjusted cash profits, higher than we might like. A prohibition on shareholder returns until at least January 2023 will help - although what's comfortable going forward will depend on the strength of the recovery.

It helps that 82% of the group's sites are freeholds, and the balance sheet boasted £3.8bn in property assets at the end of the last full year - although there's a fair degree of uncertainty in the valuation given recent events.

For now, the focus is rightly on restoring trading to its pre-pandemic levels - and maintaining recent progress over the winter period. Once trading has recovered and the balance sheet is in order, management will have more options.

Mitchells & Butlers key facts

  • Price/Book ratio: 11.5
  • Ten year average Price/Earnings ratio: 10.6
  • Prospective dividend yield (next 12 months): 0.0%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

Half Year Results (20 May 2021)

Mitchells & Butlers (MAB) reported revenue of £219m for the six months to 10 April, down 78.9% on the same period last year due to pandemic related trading restrictions. The group made an underlying operating loss of £124m, compared with a £108m profit last year.

In February MAB raised £351m to strengthen the balance sheet and support working capital. Given the ongoing uncertainty MAB is not providing detailed guidance.

During the first 14 weeks of the half year ending 10 April, limited trading was possible and like-for-like sales were down 30.1%. Since national lockdowns were introduced on 4 January, no further sales were possible.

Over 99% of employees were furloughed when the group was unable to trade, amounting to £175m of government support. MAB also benefited from £51m of business rates relief and the 5% rate of VAT on non-alcohol sales.

Net debt stands at £1.5bn, excluding lease liabilities, down from £1.6bn at the same point last year. The group also re-negotiated its terms with lenders to avoid a breach following trading restrictions. To secure these new terms MAB has agreed not to pay any dividends or repurchase any shares until January 2023 at the earliest. MAB recorded a free cash outflow of £164m, despite a reduction in capital spending from £79m to £15m.

The estate comprises 1,735 sites, of which 1,649 are directly managed. 82% of the estate is freehold.

Since 12 April MAB has traded from an average of 535 outdoor sites, and like-for-like sales have been down 37% compared to the period before the pandemic. Almost all of the estate is now open.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.