ii view: Mitchells & Butlers warns about rising energy costs

This multi-branded pub and restaurant chain has seen its share price more than halve this year. We assess prospects. 

Fourth-quarter trading update to 24 September

• Like-for-like sales up 1.5% compared to the pre-Covid 2019 same quarter

Chief executive Phil Urban said:

"The trading environment for the hospitality sector remains very challenging, with cost inflation putting increasing pressure on margins, and we are also mindful of the pressures on the UK consumer over the coming months.”

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ii round-up:

Pub and restaurant group Mitchells & Butlers (LSE:MAB) today flagged an improvement in fourth-quarter sales, although warned of rising energy prices and the spread of inflationary costs to most of its supply chain. 

Like-for-like sales rose 1.5% in the fourth quarter compared to the pre-pandemic 2019 final quarter, led by a 4.1% rise in food sales countering a 1% fall in drink sales. A 6% increase in August Bank Holiday sales helped offset the impact of extreme heat and further rail strikes.

Shares in Mitchells & Butlers, which owns chains including Miller & Carter, Premium Country Pubs, Harvester and All Bar One, fell by around 8% in UK trading having come into this latest news down by close to a half year-to-date. Fellow FTSE 250 pub company Wetherspoon (J D) (LSE:JDW) is down by a similar amount, while the index itself has fallen by more than a quarter. 

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Total energy and utility costs for Mitchells had increased to £150 million for 2022 full year, up from £80 million in the pre-Covid 2019 year. Even with the newly introduced government price cap for businesses, management still anticipates a further increase on this in 2023. This comes despite initiatives underway to reduce energy usage, including a push to install voltage optimisers.

Like-for-like sales for the year to 24 September fell by 1.3%, hindered by temporary Covid-related closures in the first part of the year and site disposals since 2019.

Annual results are scheduled for November. 

ii view:

The Birmingham headquartered company operates around 1,700 outlets. Its brands include Nicholson’s, O'Neill's, Ember Inns, Sizzling Pubs, Stonehouse, Vintage Inns and Browns. It usually serves around 130 million meals and 400 million drinks every year. Along with its UK hospitality outlets, it also operates the Innkeeper's Collection of hotels in the UK and Alex restaurants and bars in Germany.

For investors, a highly uncertain economic outlook including rising interest rates and a cost-of-living crisis cannot be overlooked. Costs almost across the board are rising for businesses, the weather remains an influence on demand, while the dividend remains suspended as the company concentrates on strengthening its balance sheet.  

More favourably, a recovery in trading from the pandemic is evident, management initiatives including a focus on costs is ongoing, while a concentration on lowering debt continues. For now, and while the valuation remains undemanding, a highly uncertain outlook for its customers is likely to mean investors are happy to sit on the sidelines for now. 

Positives: 

• Diversity of brands
• Reducing net debt

Negatives:

• Uncertain economic outlook
• Not paying a dividend

The average rating of stock market analysts:

Buy