Mitchells & Butler - Minority Report

Mitchells & Butlers: In general, UK pubs have enjoyed decent trading conditions over the last 18 months or so. A company boasting brands including All Bar One, Harvester, Nicholson’s, O’Neill’s and Browns should therefore be in good shape. But Mitchells & Butlers seems sluggish and has baggage. According to the last report and accounts, Joe Lewis, the Bahamas based businessman owns 26.7%, whilst Irish entrepreneurs JP McManus and John Magnier control 22.4%, as well as being linked to Derrick Smith whose Smoothfield Holding owns 3.9%. None of these parties appear willing, or able, to break a stalemate that must be holding back the group’s strategic development. Other investors are in the minority. A new CEO, Alistair Darby, arrived from Marston’s in October 2012, with a good c.v., as part of an operational turn around, but no apparent mandate from the big shareholders to do anything bold.

So far the operational improvement has been patchy. These full year numbers, to 27^th September 2014, show revenues up 4%, but LFL sales growth of only 0.6%. With operating margins down 50bps, operating profit was up just 1.0%. By re-allocating the pension deficit interest charge into underlying profit, pre-tax profits were £172m against an adjusted £171m. Eps of 32.6p were up 1.2% and again there is no dividend. During the period they spent £258m buying 173, mostly freehold, pubs from Orchid Group. Expansion and refurbishment sent capex up to £162m from £128m, leaving net debt up £199m to £1.96bn; being 4.5x EBITDA. The pension scheme triennial valuation as at 31^st March 2013 showed a £572m shortfall, up from £400m three years earlier. The annual contribution has now been set at £45m against £40m previously. The company has agreed that any future dividends will only be paid out of ‘cashflow after bond amortisation’. In this period, net cashflow after bond amortisation was (£257m), but Orchid did cost £258m, so net net was about zero. In the previous year £29m was generated on this measure.

Despite declaring that the current year has started well, we appear to be some way away from the moment when the group can see recurring cash generation large enough to support the resumption of a sustainable dividend. This ‘gold at the end of the rainbow’ syndrome is very disappointing. At 370p, the shares are on a modest 10.0x (weakening) consensus eps of 37p to September 2015, although EV/EBITDA is a far fuller looking valuation of 8.5x (including the pension deficit). There is value locked into this situation, but good investment returns may rest on reading the mood of the big shareholders as much as the analysts’ forecasts. (Neil Cumming^, 26^th November 2014)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower