Mitchell’s & Butlers first half like-for-like sales grew 4.3% to £1.5bn, almost entirely driven by higher prices. This growth, combined with cost efficiencies drove a 10.4% increase in operating profit to £181mn.
Free cash flow fell slightly to £213mn reflecting higher capital expenditure. Net debt including leases was £1.3bn.
Like-for-like sales in the 10 weeks preceding the announcement rose by 6.0%.
Full year operating profit is expected to be at the top end of current consensus forecasts which range between £304mn and £326mn.
The shares were up 4.3% in early trading.
Our view
Mitchell’s & Butlers had no issue passing on price rises to pubgoers in the first half, and recent trading has improved further. Overall, the demand picture for UK pubs and bars is looking resilient and the group is continuing to gain market share. But with the group’s cost inflation set to accelerate there’s pressure to keep the tills ringing at the bar.
A long track record of market-beating sales growth is testament to the relentless focus on customer satisfaction and the diversity of its brands, which can help it react to the market conditions of the day. The broad portfolio includes family-friendly restaurants like Harvester and Toby Carvery, and more premium offerings such as Miller & Carter steakhouses. There are also popular high-street watering holes, including O'Neills and All Bar One.
The pub sector is not one that screams high tech, but we’re impressed with the group’s use of technology which has helped to improve both customer engagement and management of the supply chain.
A focus on operational excellence and easing cost pressures has helped an impressive recovery in profits. However, further rises in the National Living Wage, and forthcoming increases in employer national insurance contributions are contributing to £100mn of additional cost headwinds, limiting the scope for a further step-change in profitability this year. Next year, cost increases are expected to outpace wider inflation and rise around 6% prior to mitigation, placing further pressure on the bottom line.
With this in mind, we see the decision to keep dividend payments on hold as sensible, allowing continued investment into the business. We'd also like to see some more progress on bringing down debt levels.
But looking ahead we believe the group’s focus on customer satisfaction and strong branding means there's scope for margins to rise again should cost-growth stabilise.
Whereas competitors have been trimming their estates Mitchells & Butlers has made some modest additions to its footprint. Given the supply that’s come out the market, we support this move, as long as site selection is prioritised. Existing sites are also being upgraded, which looks to be an important contributor to the outperformance of its brands.
The group looks well-placed to continue growing its market share. And the additional pressure that weaker competitors find themselves under could see those trends accelerate. The valuation doesn’t look too demanding. But market sentiment is being held back by the immediate hit wage and tax increases will have on profitability this year. There’s also no guarantee that the strong demand seen so far this year will persist, so incoming investors will need to take a long-term view.
Environmental, social and governance (ESG) risk
The food and beverage industry is medium-risk in terms of ESG, though some segments, such as agriculture, tobacco and spirits fall in the high-risk category. Labour relations and supply chain management are key risks in this industry. Product governance is an area of concern industry-wide, particularly for companies operating in markets with strict quality and safety regulations. Other risks can vary by sub-industry, but community relations and resource use tend to impact most companies in this sector either directly or through their supply chains.
According to Sustainalytics, Mitchell's & Butlers management of ESG risks is average. While many of its brands are food led and family friendly there is a strong responsible drinking policy in place. In terms of ingredient sourcing the lack of Supplier Environmental Certification is something we'd like to see addressed. Labour relations is also an area of weakness with no union recognition or working hours policy identified. And there is room for improvement in both the company's whistleblower policy and ESG reporting standards.
Mitchells & Butlers key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. 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.
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 disclosure for more information.