Mitchells & Butlers (MAB) reported half-year revenue of nearly £1.3bn reflecting like-for-like growth of 8.5%. This was driven by volume growth in both food and drink. Growth was strongest in the first quarter, against a comparative period impacted by Covid-19 restrictions. However, there was still growth in the second quarter in both categories.
Underlying operating profit fell to £100m from £120m as government support was withdrawn and cost inflation took its toll on margins.
Free cash flow fell by 17.5% to £94m. Net debt including lease liabilities came in at £1.7bn, a reduction of £76m.
Mitchells & Butlers noted that the trading environment for the hospitality remains challenging, but is encouraged by current trading. Like-for-like sales in the first six weeks of the second half grew by 8.9%. The Group sees the medium-term cost outlook improving.
The shares fell 2.7% following the announcement.
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Our view
Investors can take some comfort from MAB's first-half performance as demand continued to hold up well. We've seen food sales increase despite last year's strong growth, as well as a strong recovery in drinks sales.
But the trading so far this financial year has benefitted from a number of tailwinds that won't be there for the rest of the 2023. Covid-19 restrictions in 2022, the Coronation bank holiday and the World Cup are all factors that are likely to have flattered sales so far this year.
Further out, we think things could get tougher. The Group itself notes that the trading environment remains challenging. We think the true impact of the cost-of-living crisis is yet to bite consumer demand for non-essentials such as a trip to the pub.
A recovery in drink sales was the main driver of recent volume growth. This is a sharp contrast to the trends seen last year where food sales outperformed drinks. We see this as testament to the diversity of the Group's brands which can help it react to market conditions of the day. That said, we don't think it can fully avoid fall out from a weaker economy and it remains to be seen how long the volume recovery will continue.
A further return of office working and higher tourist numbers, particularly in London, are being called out as contributing factors to the ongoing upturn. It's worth keeping an eye on the strengthening pound which could dampen overseas enthusiasm to visit the capital.
Rising sales are all well and good, but as the old adage goes it's revenue for vanity and profit for sanity. The group's falling margins are a cause for concern and despite some glimmers of hope on that front Mitchells & Butlers is still expecting double digit cost inflation this year. We think its scale and focus on cost efficiencies should mitigate some of this. Management hope this will allow margins to start to rebuild towards pre-covid levels, but that is no easy task, and such rhetoric adds pressure to deliver.
It is a credit to management that its pubs and restaurants are performing ahead of management's previous expectations, but storm clouds continue to loom. With this in mind, we see the decision to keep dividend payments on hold as a sensible one, which will allow continued investment into the estate.
With a solid balance sheet backed by considerable property assets, Mitchells & Butlers is better placed than some to ride out the storm. But the valuation now sits above the long-term average, meaning shares are likely to be sensitive to any ups and downs in demand.
Mitchells & Butlers key facts
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