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Mon 28th Jul 2014 - Analyst - M&B supertanker is slowly turning the corner
Geof Collyer – the Mitchells & Butlers supertanker is turning the corner: Deutsche Bank leisure analyst Geof Collyer has argued that the “Mitchells & Butlers supertanker is slowly but perceptibly turning the corner”. Setting a reduce Price Target of 590p for its shares, down from 620p, Collyer stated: “The process of investing in the recently acquired Orchid pubs will take just over two years to deliver the ‘fully loaded’ profits that we forecast should come from the deal. We have upgraded our forecasts by +4%, +5% & +10% for the financial years 2015 to 2017. Despite comparable or superior EPS growth to its retail peers, the shares are trading on a -20% to -45% P/E discount (FY’15E). There is still nothing in the price for management getting it right. Because of the phased impact, we have reduced our price target from 620p to 590p. With 55% upside to our target price, we remain buyers. Whilst flat like-for-like growth in Quarter Three was below par, it was not unexpected. We have looked into the like-for-likes and margins progression in more detail, and conclude that the M&B supertanker is slowly but perceptibly turning the corner. Advance evidence of further improvement is coming from increases in Net Promoter Scores and reductions in staff turnover. On top of which, our analysis suggests that M&B’s growing scale, helped by Orchid, should achieve margin stability, helping to completely offset what could have been a 185 bps margin headwind created by the expansion of the retail estate through leisure and retail park sites that are more likely to be leasehold than freehold. We have detailed our increased forecasts assuming that Orchid delivers around £27m of EBITA by the 2017 financial year. The scale of savings means that virtually all of the 79 bps margin erosion we had forecast by FY’18 will now be offset. The requirement from the agreement with pension trustees that the group should be cash positive after bond amortization before reinstating the dividend means that this is now more likely to be an FY’15 event, although quite possibly not until FY’16. It was not in our forecasts, but it delays complete rehabilitation.” Of the deal to buy 173 Orchid pub, Collyer said: “It is hard to say Orchid is not a good deal, although there are some issues, not least timing, which is seldom in the remit of the buyer. M&B has been struggling to turn around the bottom quartile of its estate and this deal will add circa 23% more pubs to what is known as the ‘Heartland estate’. M&B is part way through its biggest cultural reengineering programme ever, which could be disrupted by management attention being required to make this deal work. As with M&B’s big Whitbread pubs deal in 2006, these pubs will be ring- fenced and run by a separate management team until completion of all capex and integration. Overall, not quite the transformational deal that the Whitbread one was, but it keeps M&B out in front in terms of its number one position in the UK Eating & Drinking Out market, and provides some handy EPS momentum – during a period of dull like-for-likes delivery.”
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