ii view: bar owner Mitchells & Butlers nears three-year high

First-half results to 13 April

• Revenue up 8.9% to £1.39 billion
• Operating profit up 64% to £164 million
• Net debt down 10.5% to £1.49 billion

Guidance:

• Now expects full-year profits to be at the upper end of City forecasts

Chief executive Phil Urban said:

“We have confidence that continued focus on effective delivery of our strategic priorities will generate further value from our enviable estate portfolio and customer offers, enabling us to build further momentum throughout the year, with a strong foundation for long term outperformance."

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ii round-up:

Mitchells & Butlers (LSE:MAB) today reported strong profit growth, enabling the owner of various pub brands to raise its annual profit forecast to the high end of existing City forecasts.

Second-quarter like-for-like sales growth of 6.1% exceeded analyst estimates of 4%, with easing costs, particularly for energy, helping push operating profit for the six months to mid-April up 64% to £164 million. 

Shares in the FTSE 250 company rose 10% in UK trading, taking them to levels not seen since mid-2021, having come into these latest results up around 5% year-to-date. That’s broadly in line with the improvement in the FTSE 250 index in 2024 and ahead of a 1% fall for rival Wetherspoon (J D) (LSE:JDW).

Mitchells operates over 1,700 pubs and restaurants. Its UK brands include All Bar One, Nicholson's, O'Neill's, and Harvester, as well as Innkeeper hotels. Its only overseas operation is via its Alex branded bars in Germany. 

Like-for-like sales for the most recent four-week trading period climbed 5.3% from a year ago. Management’s decision to raise profit hopes takes estimates for this fiscal year to around £290 million from £278 million before. Some analysts now forecast profit as high as £320 million. 

Mitchells' expectation for additional costs this financial year of £55 million, up 3% from last year, implies an increase of just 1% over the second half.  

A third-quarter trading update is likely late July. 

ii view:

The Birmingham headquartered company employs more than 50,000 people across its pub and hotel outlets. Other group brands include Toby Carvery, Browns, steak restaurant Miller & Carter and Ember Inns. Food generates its biggest slug of revenues at just over a half, followed by drink just over two-fifths and services such as hotels the balance. Geographically, Germany generates under 5% of sales. 

For investors, heightened borrowing costs have affected the spending power of its customers, which cannot be overlooked. Business costs such as staff wages have risen, group net debt of £1.49 billion compares to a stock market value of £1.77 billion, while a suspended dividend payment contrasts with a yield of over 2% at rival Fuller Smith & Turner Class A (LSE:FSTA).

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To the upside, sales growth continues to outpace the broader industry average and cost headwinds for key inputs such as food and energy have eased. Management initiatives including a focus on broader costs under its Ignite programme persist, while management’s concentration on lowering debt at the expense of the dividend looks sensible.   

It's reassuring to see Mitchells making good progress and the consensus analyst estimate of fair value exceeding 310p per share. They're still some way shy of their pre-Covid level, though, even after an impressive rally since late 2022, but the business is certainly heading in the right direction. 

Positives: 

• Diversity of brands
• Ongoing management efficiency programme

Negatives:

• Uncertain economic outlook
• The weather can impact performance

The average rating of stock market analysts:

Buy