ii view: pub owner M&B optimistic about costs

Shares in this FTSE 250 hospitality company about halved in 2022 but are up strongly in 2023. Buy, sell, or hold?

First-half results to 8 April

• Revenue up 11% to £1.28 billion
• Operating profit down 17% to £100 million
• Net debt down 6% to £1.66 billion, down from £1.74 billion

Chief executive Phil Urban said:

“We remain focused on our Ignite programme of initiatives and our successful capital investment programme, driving cost efficiencies and increased sales. Combined with our diverse portfolio of established brands, value proposition, enviable estate locations and talented people, we believe we are well positioned to continue to outperform the sector.”

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ii round-up:

Pub group Mitchells & Butlers (LSE:MAB) and owner of brands including All Bar One, and Nicholson’s today detailed growing sales and early signs of reduced cost pressures. 

Sales for the first half of its financial year to early April rose 11% to £1.28 billion, helped by drink-led city centre pubs, especially in London, which had benefited from a further return of both office workers and tourists. Like-for-like sales over the most recent six weeks and including Easter climbed 8.9%. 

The FTSE 250 company climbed by more than 4% in UK trading to near an 11-month high, having come into this latest news up around 40% year-to-date. That’s similar to premium soft drinks maker Fevertree Drinks (LSE:FEVR) although behind a 70% gain for budget pub operator Wetherspoon (J D) (LSE:JDW). The FTSE 250 index itself is up by less than 1% this year. 

Mitchells & Butlers operates just over 1,700 pubs and restaurants. Despite improved sales, first-half adjusted operating profit fell by almost a fifth to £100 million, as elevated costs including food and energy pressured margins.  

However, management flagged a material fall back in energy prices from previous market highs and early evidence that cost increases in other areas, particularly food, will soon start to slow.

Mitchell’s Ignite programme to improve efficiency and productivity now includes initiatives such as better labour scheduling, cost-mitigating procurement strategies and energy consumption reduction. 

Full-year costs for its £1.8 billion cost base are expected to rise at the lower end of management’s previously highlighted 10% to 12% forecast.  

A third-quarter trading update is likely to be announced in mid to late July. 

ii view:

Tracing its roots back to 1898, Mitchells & Butlers today employs over 40,000 people. The Birmingham headquartered company’s many brands include O’Neills, Harvester, Ember Inns, Toby Carvery and Miller & Carter. Along with its UK hospitality outlets, it also operates the Innkeeper's Collection of hotels in the UK. Overseas, its Alex restaurants and bars in Germany account for just under 5% of overall sales. Food accounts for its biggest proportion of sales at 52%, followed by drink at 43% and services such as hotels the balance of 5%.

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For investors, the tough economic backdrop of rising interest rates and a cost-of-living crisis is pressuring available spending for its customers. Cost pressures persist including increased wage demands, pandemic related government assistance has been removed, while the dividend remains halted as it concentrates on strengthening its balance sheet.   

More favourably, sales in the wake of the pandemic continue to recover. The company owns a diverse group of brands, management initiatives including a focus on costs continue, while a concentration on lowering debt is also not to be forgotten.  

For now, and despite continued headwinds, long-term momentum looks to remain in favour of this billion-pound hospitality company. 

Positives: 

• Diversity of brands
• Reducing net debt

Negatives:

• Uncertain economic outlook
• Not paying a dividend

The average rating of stock market analysts:

Buy