J.P. Morgan and Goodbody on Mitchells & Butlers

J.P. Morgan 

MAB released its Q120 trading update this morning, covering the 14 weeks to the 4th January. In summary, MAB continues to deliver. LFL was +2.6%, well ahead of JPMe at +1.0%, with growth accelerating to +3.5% in the second half of the period. We do not yet have the Coffer Peach Tracker data for the full corresponding period, but we expect that MAB has sustained its outperformance; CPT recorded an overall LFL of +0.5% in November. We maintain our September 2020 price target of 490p and expect a MSD positive share price reaction today, especially given weakness yesterday.

• LFL accelerated within the period. Total LFL was +2.6% for the 14 weeks, comprising +3.0% for food and +1.8% for drink. Although period LFL was lower than the +3.3% in Q419, the two-year average LFL was +3.7%, vs +2.3% in Q419. Particularly noteworthy is the acceleration of the two-year average within the period; two-year average LFL was +1.8% in the first seven weeks, moving to +5.2% in the most recent seven weeks.
• Q1 trade appears to be concentrating around “special occasions”, with the core three-week festive period +5.6% y/y in Q120, +9.8% in Q119 and +3.9% in Q118. For the past several years LFL growth y/y has appeared to be significantly higher during this core festive period than the other 11 weeks, as customers prioritise spending on key occasions at the expense of frequency.
• Investments. YTD MAB have completed 81 conversions and remodels and have opened one new site.
• Management commentary; “We are pleased with our trading performance over the festive trading season against a strong set of results last year, again demonstrating the breadth of appeal of our brands for special occasions. We achieved record sales levels across the five key festive days at growth of 6.5%. This continued progress reflects the output of our Ignite initiatives which will continue to be our focus for the year ahead.”
• We leave our FY20E/FY21E forecasts unchanged, in particular conservatively retaining our FY20E LFL assumption of +2.2%.
• MAB currently trades on a FY20E PER of 10.8x (~25% discount to the sector) and a FY20E adj. EV/EBIT of 12.5x (~18% discount to the sector).

Goodbody

Mitchells & Butlers this morning issued a Q1 trading update including the key Christmas trading period. Like for like sales growth for the first 14 weeks of the year to the the 4th of January is +2.6% (versus our H1 expectation of c.2.2%) with food +3.0% and Drink +1.8%. Mitchells & Butler had reported a +1.4% like for like for the first 7 weeks so it is encouraging to see a return to growth of +3.5% in the most recent 7 weeks (Food +4% & Drink +2.7%). Total sales growth for the 14 weeks is +2.6%. The festive period showed good LFL sales growth of +5.6% over the three weeks, with +6.5% growth across the 5 key festive days.

The CEO Philip Urban noted that the group is pleased with the trading performance over the festive trading period against a strong set of results last year, noting the group achieved record sales over the key festive days. This reflect the output of the IGNITE initiatives. It completed 81 conversions and remodels and opened 1 new site and remains encouraged by the returns being generated.

Overall this is a solid update from MAB given it faced very difficult comparatives, (Q119 LFL was +4.7% and the Christmas LFL was +12.3%). The exit rate from Q1 is slightly ahead of our H1 forecasts which is encouraging. On the negative side, the growth in Q1 was driven by food which is lower margin. This is unhelpful given the inflationary pressures facing the sector. The group continues to trade at a discount to peers on 11x P/E and 7.7x EV/EBITDA and we are unlikely to make any material changes to our forecasts on the back of today’s update. The shares were weak into today’s update so we would expect this update to reassure.

Paul Ruddy, equity analyst at Goodbody, comments: “We are encouraged by Mitchells & Butlers Q1 trading update which demonstrates impressive growth on growth. Like for like sales growth for the first 14 weeks of the year to the 4th of January is up 2.6% with food up by 3.0% and Drink by 1.8%. Trading over the key Christmas period was up more than 5% which is a good result given growth rates in excess of 12% last year.

“The results are proof that management continue to perform very well operationally. A myriad of incremental initiatives and high levels of investment in its estate are combining to deliver consistent sales growth.

“The company is the first of the bigger players to report on the festive period and the update showing more than 5% growth will be encouraging to the sector at large. The clouds which hung over October and November due to wider macroeconomic challenges seem to have cleared with consumers willing to go out and spend in December – hinting that sunnier skies could lay ahead.”