Interactive Investor

Light at end of the tunnel for Mitchells & Butlers?

25th November 2021 08:43

Richard Hunter from interactive investor

A tough environment for the pubs industry has left its stain on these numbers, but some see the current glass as being half-full. Our head of markets explains why. 

Pubs and restaurants were in the eye of the pandemic storm and their fortunes fluctuated accordingly.

For Mitchells & Butlers (LSE:MAB), a fair proportion of the year was viewed from behind closed doors with lockdowns in place. As such, annual revenue declined by 28% and like-for-like sales by 9.6%, although more promisingly the latter has shown growth of 2.7% in the eight weeks since the end of the reporting period. The limitations of the trading environment also resulted in a pre-tax loss of £42 million, although this represents a narrowing of the previous loss of £123 million.

The group has a number of factors in its favour, which should promote optimism on a continuing recovery. The company owns around 82% of its property estate, the £351 million fundraising exercise and general credit facilities have eased balance sheet pressures, and the return to cash generation will further consolidate the group’s financial position. Although temporary, the VAT reduction on food and non-alcoholic drink sales provided a windfall of £81 million, and the cash on hand figure has also seen a marked improvement.

Sales in the second half of the year amounted to £846 million, comparing to a previous number of £436 million and demonstrating the company’s capability when the shackles were off. More broadly, industry estimates suggest that since March 2020, there has been a reduction of 8.6% in licensed premises which, all things being equal, should be to the benefit of the likes of MAB in terms of reduced competition.

The fluctuating fortunes during the pandemic have also resulted in an unsurprising change in consumer behaviour which may yet return to its previous state. Even as lockdowns were generally lifted, many consumers were still working from home, meaning that MAB saw stronger sales in suburban rather than city centre venues, and a general trend towards more digital experiences such as table service by app may have changed some habits.

Less positively, the general environment has inevitably left its stain on these numbers. Despite the limited progress the company has been able to make, revenues and operating margins are approximately just half of pre-pandemic levels. Inflationary pressures are currently evident in terms of both utilities and employment costs, and wage inflation may not yet have peaked following the impact of Brexit on the availability of temporary staff.

Previous borrowings will also need to be addressed, although the current net debt figure has been meaningfully reduced. The lack of shareholder returns will also help the situation, although the need for cost reductions via the Ignite programme will be under increasing scrutiny as the company attempts to regain a proper footing.

In some ways, the share price reflects what MAB has achieved and what still needs to be done. Over the last year, the price has added 13%, as compared to a gain of 18% for the wider FTSE250, but on a pre-pandemic two-year view the shares remain down by 47%.

Even so, there is clearly some light at the end of the tunnel and MAB is already seeing the benefits of unrestricted trading. The company by nature may be seen as being towards the more speculative end of the range, but the market consensus of the shares as a "strong buy" indicates a willingness for some to see the current glass as being half-full.

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