Mitchells and Butlers - still room at the bar

Mitchells and Butlers: This industry giant of a group (including Nicholsons, Browns, All Bar One, and Harvester), finally seems to be making solid headway under the leadership of Alistair Darby, with the financials looking stronger, even if the shareholder register is still colourful. (Joe Lewis, the 78 year-old ex-pat businessman controls just under 27% of the equity.) In these in-line interim results (28 weeks to 11^th April 2015), revenues are up 9.5%, adjusted operating profits up 4.1% at £153m and eps up 5.9% at 14.4p. Total LFL sales were up 1.7%, led by LFL food volumes up 2.9% (against +0.2%), although the Orchid pub acquisition has diluted margins from 14.5% to 13.7% temporarily. Again there is no dividend, but I will come back to that. The group is investing in the business with capex at £94m, against £86m in the equivalent period last year. Net debt is down to £1.9bn, being 4.4x a rolling annual EBITDA. Net cash flow of £47m was up from £43m, before the mandatory bond amortisation of £30m (1H 2014 £28m). Drains on cashflow included a further £23m of pension catch up payments (1H 2014 £20m), with the 2013 triennial deficit now agreed at £572m.

The outlook is fairly non-committal, but it doesn’t sound like there are any particular concerns. So consensus forecasts of around 36p for FY2015 should hold, giving a modest PE of 12.4x at 446p, with 40p slated for FY2016. The agreement with the pension fund trustees is that any resumption of dividends must, initially, be funded out of cash flow after bond amortisation. On a market capitalisation of £1.84bn, a 1% dividend would cost £18.4m, against a net cash flow after bond amortisation in the first half of £17m. So I reckon that once a bit more progression has been made on growing the P&L, a dividend of some sort is not that far off, with an interim for FY2016 possible. The shares have moved up from 370p since I wrote positively on them last November, but the PE is still modest, the balance sheet is looking better and the resumption of dividends is becoming more plausible. The shadow of Joe Lewis and his stake may hold the shares back for now, but means there is still time to start tucking a few away. (Neil Cumming^, 14^th May 2015)

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