Buyers binging on Mitchells & Butlers shares

by Graeme Evans from interactive investor |

If Brexit is turning Brits to drink, Mitchells' shares may have further to rise, thinks one analyst.

Maybe it's due to the Brexit shenanigans driving everyone to drink, but whatever the reason it appears pub companies like Mitchells & Butlers (LSE:MAB) are enjoying an upturn in fortunes.

The latest evidence came after the Nicholson's, O'Neill's and Harvester owner updated the market on trading for the eight weeks to September 21, with Mitchells seeing like-for-like sales up 3.3% after particularly strong drinks sales.

Rival JD Wetherspoon (LSE:JDW) had a similar story to tell in its annual results earlier this month when it said like-for-like sales improved 5.5% in the six weeks to September 9.

The trends are reflected in Mitchells' year-to-date share price performance, with the stock up an impressive 50% to its highest level since August 2015. Mitchells rose another 1% to 380p today.

Source: TradingView Past performance is not a guide to future performance

Admittedly, part of the momentum reflects recent consolidation activity in the sector after August's £2.7 billion swoop for Greene King (LSE:GNK) by CK Noble - a property company linked to Hong Kong's richest man Li Ka-shing. Marston's (LSE:MARS) shares are also sharply higher.

But Mitchells has benefited from its own market outperformance over the past year, with like-for-like sales previously up 3.6% in the first 43 weeks of the financial year. Today's figure of 3.3% for the most recent eight-week period was stronger than Morgan Stanley's 2.1% estimate and also marks an acceleration after a slower spell of trading in the third quarter.

The fact that drinks sales were particularly strong at 4% higher marked a turnaround on the summer, when food-driven business provided the outperformance. Mitchells, which operates some 1,700 pubs and restaurants in the UK, serves around 130 million meals and 400 million drinks each year.

Chief executive Phil Urban said today:

"Sales growth has remained consistently ahead of the market and we carry this momentum forward into the new financial year."

The recent upturn in performance has helped to improve the balance sheet, with the company generating free cash flow of £23 million at the half year stage in May compared with an outflow of £3 million a year earlier. Mindful of debt and pension payments, the company did not pay an interim dividend with its most recent set of results.

However, there was relief for investors today after Mitchells reported a smaller-than-expected pensions deficit of £293 million and an unchanged schedule of future contributions. The figure compares with a deficit of £450 million in 2016. In more than three years as chief executive, Urban has also seen the group pay down £213 million of net debt.

Based on Morgan Stanley's estimates, Mitchells trades with a 2020 price/earnings multiple of 9.2x. The bank rates the stock overweight at 430p due to its like-for-like sales outperformance, solid underlying free cash flow and relatively low valuation.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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