SILVER BULLETS - Espirito Santo Investment Bank incorporating ...
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THIRD QUARTER 2010<br />
Mitchells and Butlers<br />
Margin expansion on track<br />
Operating margin expansion is key to upgrades at MAB and the early<br />
signs from 1H suggest it is on track to hit its three year target. The<br />
market remains skeptical, but two strong IMS statements this quarter<br />
should help build confidence in the story. Whilst, consumer concerns<br />
remain, MAB is stretching average spend northwards replacing price<br />
sensitive consumers with more affluent ones. This will help it pass<br />
through price increases in advance of the VAT hike and offer<br />
protection should spending further deteriorate. Buy, Fair Value 360p.<br />
Target of 200-300bps is ambitious, but not unrealistic<br />
MAB’s operating margin seems to lag the food led competition, on a lease adjusted<br />
basis, despite operating from a larger estate. Management is targeting a c.200-<br />
300bps increase from the FY2009 operating margin (15.3%) over the next three<br />
years. Achieving this would imply a margin more in kilter with the competition.<br />
Big divide between consensus and the company<br />
MAB told us that there is a ‘big divide between consensus and what we think we<br />
can do’ as the market, including us, has not fully factored in the targeted margin<br />
expansion into estimates. Already, MAB surprised the market with an impressive 1H<br />
margin performance (albeit partly due to one-offs). A flat 2H margin will still imply<br />
a c.70bps improvement this year, positioning it on track to hit its year three target.<br />
MAB recognises the food opportunity<br />
In our Nov 2009 Pub survey we highlighted that consumers were willing to spend<br />
more per meal than what most pubcos charge. MAB appear to be have recognized<br />
this and started to push up average spend per head in 1H. MAB believes this<br />
strategy has seen it replace some of its more price sensitive consumers with more<br />
affluent ones. This is clearly an opportunity to drive LFL sales and margins for the<br />
business and reduces exposure from the more price sensitive demographics.<br />
MAB best positioned to pass through inflation<br />
VAT is going up, and we may yet see a hike in duty announced in the autumn, but<br />
MAB dealt with these issues relatively easily last year. Consumer weakness remains<br />
a concern so pushing through inflation is going to be tough, but we believe MAB is<br />
the best equipped pubco to do this successfully due to its multi brand strategy. At<br />
the same time, its food led offer protects it against increases in alcohol duty while<br />
VAT increases should aid its strategy of gaining more affluent consumers who are<br />
trading down from more expensive alternatives.<br />
World Cup washout a good thing…sunshine remains key<br />
The World Cup is a net negative for MAB due to its food led estate, but a poor<br />
show by England ended any trading fears. Additionally, Whitbread said the impact<br />
from the first two England games was less than expected on its pub restaurants. Of<br />
more importance to MAB is the weather, and although a barbeque is a growing<br />
temptation, as long as the sun is shining the pub trade will benefit.<br />
IMS statements to give market confidence over margins<br />
Confidence over the margin performance will lead to upgrades and with two IMS<br />
statements this quarter (22 July and late September) the opportunity exists to give<br />
the market plenty of assurance. LFL comps get tougher in 2H, but there has been<br />
nothing from the competition to suggest trade has collapsed. Nonetheless, MAB’s<br />
share price has slipped 13% relative to the FTSE All Share since its positive 1H. On<br />
an EV/EBITDA basis, MAB trades on 8.1x our calendar 2010 estimates (sector<br />
average of 8.5x). Additionally, applying a 15% discount to its EPRA adjusted NAV<br />
(to account for its non REIT status) implies a value of 345p per share. Buy.<br />
http://www.execution-noble.com<br />
BUY<br />
31.4% upside<br />
Fair Value 360p<br />
RIC, Bloomberg Code MAB.L, MAB LN<br />
Share Price 274p<br />
Market Capitalisation £1,118m<br />
Free Float 52%<br />
£m (unless stated) 2008 2009 2010E 2011E<br />
Sales 1,908 1,958 1,979 2,013<br />
Ebitda 477 428 435 458<br />
EPS (p) 30.6 23.5 25.7 30.4<br />
Dividend (p) 5 0 0 10<br />
FCF post asset churn 190 234 156 177<br />
Net Debt (2,735) (2,600) (2,444) (2,444)<br />
X (unless stated) 2008 2009 2010E 2011E<br />
EV/Sales 2.0 1.9 1.8 1.8<br />
EV/Ebitda 8.1 8.7 8.2 7.8<br />
PE 8.9 11.6 10.7 9.0<br />
Dividend Yield (%) 1.7% 0.0% 0.0% 3.6%<br />
FCF Yield (%) 17.0% 20.9% 14.0% 15.8%<br />
Net Debt/Ebitda 5.7 6.1 5.6 5.3<br />
Analysts<br />
Alistair Macdonald<br />
+44 20 7456 9126<br />
alistair.macdonald@execution-noble.com<br />
Geetanjali Sharma<br />
+44 20 3364 6774<br />
geetanjali.sharma@execution-noble.com<br />
Caroline Gulliver<br />
+44 20 7456 9173<br />
caroline.gulliver@execution-noble.com<br />
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