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Mitchells & Butlers - pubs reopen but costs remain a challenge

Nicholas Hyett, Equity Analyst | 25 November 2021 | A A A
Mitchells & Butlers - pubs reopen but costs remain a challenge

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Mitchells & Butlers Ordinary 8 13/24p

Sell: 238.00 | Buy: 238.80 | Change -1.20 (-0.50%)
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In a short trading update Mitchells & Butlers reported year-end revenue of £1.1bn, down 27.8% year-on-year. As temporary tax reductions and a stronger second half failed to offset the impact of restrictions early in the trading year.

Underlying operating profit of £29m was down 70.7% year-on-year. The group expects cost pressures to remain in the short-term due to higher energy prices.

As part of new funding arrangements put in place in February the group has agreed not to pay a dividend until at least January 2023.

The shares were up 1.4% in early trading.

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Our View

Conditions earlier in the trading year couldn't have been much worse for Mitchells & Butlers. Sat on the side-lines with 99% of their staff furloughed, it wasn't until July that it was able to get fully back in the game. That's weighed heavily on recent results, and both the top and bottom line have felt the impact.

The group operates across 17 brands and formats at over 1,700 sites. With brands including O'Neill's, Browns and Miller & Carter. Overall, we think it's a decent portfolio, even though the brands aren't quite in the top tier. The group is well diversified across demographics and geographies within its sector, offering some protection against changing tastes.

Sales started to creep back up in the latter part of the financial year, supported by the reopening of 98% of pubs and a boost from reduced VAT on food and non-alcoholic drink sales. The group's had to hasten its adoption of new technologies such as order-at-table services, which is now available in most of its pubs.

However, costs are becoming a growing concern for the industry. Gas, water and electricity bills are expected to rise into 2022. Add to that an increase in wage inflation and it's a tricky backdrop to navigate. That all weighs on margins that are already feeling a pinch, forcing the group to choose between higher prices but potentially lower sales, and an increasing squeeze on profitability.

The group's balance sheet is at least in reasonable shape. All but eliminating avoidable capital expenditure in the most recent financial year and tapping investors for a £351m lifeline has seen net debt fall year-on-year. And whilst we'd like to see levels down even further, the group's 82% freehold estate means it can stomach more debt than others. Cash won't be making its way back to shareholders until at least January 2023, which should mean the balance sheet continues to improve even if capital expenditure rises.

For now, the focus is rightly on restoring trading to its pre-pandemic levels. But it's unclear how long that'll take with several hurdles to overcome in the short term. That's reflected in the group's P/E ratio which is a little behind its long-term average.

Mitchells & Butlers key facts

  • Price/Earnings ratio (next 12 months): : 10.2
  • 10 year average Price/Earnings ratio: 10.7
  • 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.

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Full Year Results

The 2021 financial year contained 18 weeks of enforced closures, as well as other restrictions, which contributed to like-for-like sales falling 9.6%. Drink sales dropped 21.6% with footfall slow to recover in city centres and traditional pubs, offset by modest growth in food sales. Like-for-like sales grew 3.8% in the final quarter as 98% of the estate was back open.

The group finished the year with 1,732 sites across the UK and Germany, of which 82% are freehold and 95% are directly managed.

Throughout the closed periods, 99% of employees were furloughed amounting to £210m of UK Government support. The business rate holiday and a reduction in VAT contributed £156m over the trading year.

Net debt, including leases, was £1.8bn at the period end - down from £2.1bn the previous year. That was driven by the group's Open Offer sale of new shares earlier in the year, which raised £351m.

Free cash flow of £117m was down 20.4% year-on-year, despite the group reducing capital expenditure by 69.4%.

Phil Urban, CEO, said: ''The trading environment remains challenging and cost headwinds continue to put pressure on the sector. However, we have strengthened our balance sheet and returned to profitability and cash generation.''

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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.