Prelims – dividend not lightly restored
Mitchells & Butlers (L:MAB) has not paid a dividend since 2008, and its resumption has been extensively discussed, planned and considered for sustainability. Arguably the bellwether of the UK pub industry, its return to the dividend list now broadens its potential investment appeal. This is the opportunity for investors who believe M&B is capable of closing the 30% valuation gap to peers, although no one should expect that to be quick.
Dividend restored…
The final dividend of 5p, equivalent to a full year 7.5p, represents a yield of 2.3%. Its resumption has been carefully considered in terms of borrowings (£1.9bn against property of £4.2bn), free cash flow for investment and the demands of the pension scheme (balance sheet liability £304m, deficit contribution in 2015 £86m).
…at a trading low point
The results, although positive at earnings level, belie the increasingly sluggish nature of national discretionary spend, as well as M&B’s uncompetitive profile. Adjusted operating profit of £328m was up 4.8% and EPS increased 9.5%, driven by flat interest and a slightly lower tax rate. However, like-for-like sales growth, up 0.8%, has reduced from +1.4% in H1 to flat in H2, and in the current eight weeks has slumped to -1.6%. That signals smaller and more agile competitors taking market share. Operating margin, down 0.3 percentage points to15.6%, was however improved (by 0.3 points) in the second half as the company worked through inefficiencies following the acquisition of Orchid (173 sites) in June 2014.
The action plan now
Under incoming CEO Phil Urban, Mitchells is focused on (1) building a more balanced business – including upscaling some of the company’s smaller yet more successful brands such as Miller & Carter; (2) instilling a more commercial culture, with an emphasis on profitability; and (3) increasing the pace of execution and innovation. Part of the upside should be driven by conversion of Orchid sites to its own brands – the 41 conversions to date (of 96 planned) are achieving 30% ROI.
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