ii view: pub owner Mitchells & Butlers boosted by Eat Out scheme

It has strong brands and government aid, but will 10pm closing be cause for another investor hangover?

Trading for 51 weeks to 19 September

• Total sales year to date down 35.4%
• August like-for-like sales up 1.4%

Chief executive Phil Urban said:

"After a difficult period of closure, we have been delighted to welcome back our guests with the vast majority of our sites open and trading again under Covid-secure procedures.  I am particularly impressed by the way in which our teams have made this possible by responding to the challenge of our new operating environment with energy and enthusiasm.  

"The future remains both challenging and uncertain, with only this week a curfew and other additional restrictions being imposed on how and when we can operate. However, we believe we are well placed to meet that challenge and to keep Mitchells & Butlers at the forefront of the eating and drinking-out market."  

ii round-up:

Pub & restaurant group Mitchells & Butlers (LSE:MAB) today reported a 1.4% gain in August sales, pushed higher by the government’s Eat Out to Help Out scheme and VAT cut. 

Broker Morgan Stanley had been forecasting a double-digit sales decline. August food sales rose by a fifth year-over-year more than compensating for a 16% fall in drink sales. September takings to date are down by 6.4%.

Mitchells shares rose by more than 4% in early UK trading having fallen by almost 70% year-to-date. Earlier in the week, Beefeater owner Whitbread (LSE:WTB) flagged an August boost from government measures, although its numbers were complicated by the inclusion of Premier Inn accommodation sales. Both Whitbread and budget pub operator Wetherspoons (LSE:JDW) have seen their shares halve in 2020. 

Mitchells' like-for-like sales in July fell by just under a third. For the 51-week period to 19 September and including the closed period during lockdown, total sales dropped by just over a third. 

All its 1,700 plus outlets closed from the 20 March and did not start reopening in England until 4 July. Mitchells, which owns brands such as All Bar One, Vintage Inns and Nicholson's, furloughed nearly all its employees at the start of the pandemic. 

In July, it reported a first-half loss of £121 million compared to a profit of £75 million for the same period last year.

Under new government restrictions to halt a second virus spike, pubs are now to close one hour earlier at 10pm. Morgan Stanley suggests that only around 4% of sales are generated in this final hour. 

ii view:

Mitchells & Butlers operates just over 1,700 outlets in the UK and Germany. Just over 80% of the estate is freehold. Its restaurants and pub brands include Harvester, Toby Carvery, All Bar One, Miller & Carter, Premium Country Pubs, Sizzling Pubs, Stonehouse, Vintage Inns, Browns, Castle, Nicholson's, O'Neill's and Ember Inns. In addition, it operates Innkeeper's Collection hotels in the UK. 

The FTSE 250 company came into the pandemic not paying a dividend. Group net debt as of its first-half results stood at £2.2 billion, including £543 million from new accounting lease changes. Given recently adjusted banking terms, it agreed not to pay a dividend before the end of the financial year to September 2021. It currently has unsecured cash balances of £100 million along with an undrawn committed facility of £140 million. 

For investors, the reopening of its outlets and the August boost provided by the government’s Eat Out to Help Out scheme are clear positives. A new government job assistance programme, whether helping it or its suppliers, is also favourable. But group debt and a highly uncertain outlook inject a heavy dose of caution, with Mitchells shares still only for higher risk investors.  

Positives: 

• August like-for-like sales rose
• New banking arrangements recently agreed

Negatives:

• Net debt of £2.2 billion
• No dividend payment

The average rating of stock market analysts:

Buy