Mitchells & Butlers Plc (MAB) Ordinary 8 13/24p

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Mitchells & Butlers full-year revenue grew from £2.6bn to £2.7bn reflecting like-for-like growth of 4.3% (guidance 4.2%).

Underlying Operating profit grew by £18mn to £330mn. Margins also pushed ahead slightly helped by the successful mitigation of ongoing cost pressures.

Free cash flow fell from £349mn to £299mn due to both weaker cash generation and an increase in capital expenditure. Net debt including leases was £1.3bn.

In the first eight weeks of the new year like-for-like sales were up 3.8% despite uncertainty ahead of the UK budget. Cost-inflation guidance for the year remains at around 6%.

The shares rose 7.8% in early trading.

Our view

Mitchells & Butler’s final results reflected a year of resilient sales growth and strong cost management. News of a pick-up in trading early in the new year was greeted warmly by investors. With costs still rising however, there’s not much room for manoeuvre if demand for eating and drinking out does take a dip.

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'Neill’s 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 has helped an impressive recovery in profits, but higher employment constrained margin growth last year. This year, cost increases are expected to outpace wider inflation and rise around 6% prior to mitigation, placing further pressure on the bottom line. On the plus side, a further rise to the National Living Wage, and the impact of the Chancellor’s Autumns Statement looks to have been pre-empted in the company’s cost expectations.

Looking further 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.

With that in mind, we see the decision to keep dividend payments on hold as sensible, allowing continued investment into the business, and scope to bring down debt.

There have been some modest additions to the estate footprint. Given the supply still coming 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. However, we think the operational delivery of recent years has already been rewarded by the market. The challenging near-term outlook means that further catalysts may be few and far between.

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, Mitchells & 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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. 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.

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