Interactive Investor

Mitchells & Butlers shares double in six months

Local boozers are disappearing fast, but these pub chains are making shareholders a fortune.

20th November 2019 14:46

Graeme Evans from interactive investor

Local boozers are disappearing fast, but these pub chains are making shareholders a fortune.

The party is continuing for investors of Mitchells & Butlers (LSE:MAB) after one of this year's hottest stocks extended its surprise share price rally to a whopping 81%.

Today's 5% improvement to 466p followed impressive annual results in which the pub chain, whose brands include O'Neill's, Miller & Carter and Nicholson's, overcame cost and consumer headwinds to report adjusted earnings per share growth of 9% at 37.2p. Like-for-like sales were up 3.5% as M&B said it had outperformed the rest of the market.

While there's no doubting the impact of trading momentum, the biggest factor in the share price surge has been speculation that M&B could be the sector's next bid target. The stock has achieved the sixth biggest rise among FTSE 350 index stocks so far this year, behind Future, JD Sports (LSE:JD.), Softcat (LSE:SCT), IWG (LSE:IWG) and Games Workshop (LSE:GAW).

According to analysts at Stifel, M&B shares have re-rated by more than 40% in price/earnings multiple terms since rival Greene King (LSE:GNK) unveiled a £4.6 billion Hong Kong-led takeover in August at a 51% premium to its share price. EI Group (LSE:EIG), formerly Enterprise Inns, is also being acquired by Slug & Lettuce owner Stonegate at a 38% premium.

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

Stifel added: “Given the quality of its freehold estate, valued at £4.5 billion, M&B sits near the top of most people's “who's next” list.” The stock is now at a discount of just 10% to Stifel's estimated 500p net asset value, the narrowest gap since 2015.

The speculation is given extra spice by the company's unusual shareholder base, with private individuals owing more than half of the company. They include billionaire currency trader Joe Lewis, whose Piedmont investment vehicle has a reported 27% stake and made an unsuccessful bid for M&B at 224p a share in 2011. Elpida, which is the investment vehicle for Irish investors JP McManus and John Magnier, is also on the shareholder register with 23%.

Analysts at Canaccord Genuity reckon that 630p may be needed to buy M&B, based on a 10x underlying earnings multiple. While the takeover speculation means the company's share price is looking increasingly stretched – Canaccord has a price target of 400p - there are other reasons why M&B holds interest for investors.

The company hasn't paid a dividend since 2015, with the focus on reducing its £1.5 billion debt pile and managing its pensions liability. Stifel estimates the company has debt service commitments of around £200 million a year and agreed pension contributions of £48 million.

They said: “For dividends to resume, M&B wants to be in a position to fund payment after all capital expenditure, given the importance to trading of continued investment in the estate.” As cash flow is likely to fall short of this hurdle over the next couple of years, Stifel is not yet factoring in a dividend return.

The pensions deficit has just been valued at £293 million, which analysts reckon could be virtually halved if M&B wins a court hearing on moving to a CPI rate of inflation from RPI. The company is also making progress in reducing its debt burden, with a reported target of paying off £478 million over the next five years.

In the near term, M&B said it continued to trade well after reporting 1.4% like-for-like sales growth in the first seven weeks of the 2020 financial year. With more confidence in this year's forecasts, analysts at JP Morgan Cazenove raised their price target by 60p to 490p today.

M&B has benefited from its Ignite self-help programme, which has been instrumental in transforming its trading performance and profitability. A focus on improving the quality of the estate has also helped. The group operates some 1,748 pubs and restaurants in the UK, serving around 130 million meals and 400 million drinks each year.

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