Tuesday, 22 December 2015

Mitchells & Butlers said to be carrying out "full review"

Could pub and restaurant operator Mitchells & Butlers see significant structural change in 2016?

The shares, down about 12pc on the year, have lagged rivals Greene King, up 25pc over 2015, and Marston's, up 17 over the year.

So, the company is under pressure to revitalise, especially as it has some pretty punchy shareholders, including Tottenham Hotspur backer Joe Lewis and Irish tycoons JP McManus and John Magnier.

And according to stockbroker Stifel, Mitchells & Butlers is now carrying out a full review of the pub estate "to determine the optimum use for each asset".

Now, that's the first time I had heard Mitchells & Butlers was carrying out a "full review" of anything for quite some time. Hat tip, then, to the analyst over at Stifel, Jeffrey Harwood, who seems to have stumbled across a scooplette.

A spokesperson for Mitchells & Butlers declined to comment.

Anyway, I have pasted Jeffrey Harwood's note below for readers that are interested in the so-called "full review":

Change underway - shares offer significant upside
A full review of the pub estate is underway ; greater focus will be given to premium brands and formats 

Change Underway : Phil Urban, appointed CEO in late September, is planning a number of important changes to instill a more commercial culture into the group, and drive sustained profit growth. A full review of the estate is underway, to determine the optimum use for each asset.
Change is planned at mid-market brands, specifically Harvester, which has underperformed. There will be an acceleration in conversions to premium concepts including Miller & Carter. In addition some Toby and Crown Carvery sites are likely to be converted to the successful Pizza, Pub and Carvery format.
Greater emphasis is being placed on profits and margin than sales, or non-financial targets such as Net Promoter Score, and we understand these initiatives are already leading to a better conversion of revenue into profit. The business is still in need of modernisation and there is clear scope for improvement as the business has lagged its competitors in recent years, despite the high quality of its pub estate.
Property: The shares trade at a discount to NAV of 355p per share before deferred taxation. We consider the property valuation is conservative and note that each 10% movement in property values increases NAV by 103p per share. There is scope to increase trading areas through the reallocation of under-utilised space. Some properties offer scope to add hotel accommodation by converting upper parts and extensions.
Finance: At September 2015 net debt was £1.87bn giving a net debt/EBITDA of 4.3x. Interest costs should decline due to the amortisation of the bonds and with the current interest cost of 6.4%, there is scope to reduce this high cost of debt in the medium term.
Outlook: Like-for-like sales in the first eight weeks of the current year were down 1.6%, which is disappointing, but we expect trading over the Christmas / New Year period will improve. A trading update is expected on 28 January.
Forecasts, Valuation: Following a period of operational underperformance, the rating looks low to us both in absolute terms and in relation to its listed competitors. With the best national pub estate in the country, we believe the business has the potential to deliver much more for shareholders. The new CEO is embarking on a period of significant change, which should lead to a turnaround in the performance of the group. The current rating looks low on earnings and asset considerations and we note the shareholder structure is potentially unstable. Our target price of 465p is based on 12x earnings for 2015/16E.

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