Mitchells & Butlers Plc (MAB) Ordinary 8 13/24p

Mitchells & Butlers reported first half revenue of £1.4bn, up 7.0% on a like-for-like (LfL) basis.

Underlying operating profit grew by 66% to £164m helped by easing inflationary costs and a focus on efficiencies.

Free cash flow rose to £137mn from £10mn driven by the improved operating performance. Net debt including lease liabilities came in at £1.5bn.

In the last four weeks LfL sales have grown by 5.3%. Management expects that full year results will be at the top end of consensus expectations. Analysts are forecasting revenue of £2.55-£2.65bn and operating profit of £261-£290mn.

The shares were up 4% following the announcement.

Our view

Price rises are continuing to drive top line growth for Mitchells & Butlers’ pubs and restaurants. While revenue growth is slowing, a focus on operational excellence as well as easing cost pressures is helping profits to recover. Investors have responded positively to impressive first half numbers.

The market-beating sales growth is testament to a relentless focus on customer satisfaction as well as the diversity of the Group's brands, which can help it react to market conditions of the day. The broad portfolio includes family friendly restaurants like Harvester and Toby Carvery, as well as more premium offerings such as Miller & Carter steakhouses. There are also popular high street watering holes including O'Neills and All Bar One.

The Board has expressed confidence in the outlook for this year and beyond, and there are signs that the UK economy and the outlook for the consumer is starting to pick up. There can however be no guarantees.

Rising sales are all well and good, but as the old adage goes, it's revenue for vanity and profit for sanity. We’re impressed by the uplift in margins, but some challenges remain. The National Living Wage increased by 9.8% in April. Mitchells & Butlers' scale and focus on cost efficiencies should mitigate some of this, and management hopes this will allow margins to start to rebuild towards pre-covid levels, but there’s still a lot of work to be done.

With this in mind, we see the decision to keep dividend payments on hold as a sensible one, which will allow continued investment into the business. We'd also like to see some more progress on bringing down debt levels.

Whereas competitors have been trimming their estates Mitchells & Butlers has made some modest additions to its footprint. Given the supply that’s come out the market we support this move, as long as site selection is prioritised. Existing sites are also being upgraded, which looks to be an important contributor to the outperformance of its brands.

With a solid balance sheet backed by considerable property assets, Mitchells & Butlers is well placed to further grow its market share.

The valuation at close to the long-term average doesn’t look too demanding, and the company is doing all the right things. However, demand for eating and drinking out can turn quickly, which means investors need to be prepared for ups and downs. And for now, there’s no dividend on the table to help smooth the ride.

Environmental, social and governance (ESG) risk

The food and beverage industry is medium-risk in terms of ESG, though some segments, such as agriculture, tobacco and spirits fall in the high-risk category. Labour relations and supply chain management are key risks in this industry. Product governance is an area of concern industry-wide, particularly for companies operating in markets with strict quality and safety regulations. Other risks can vary by sub-industry, but community relations and resource use tend to impact most companies in this sector either directly or through their supply chains.

According to Sustainalytics, Mitchell's & Butlers management of ESG risks is average. While many of its brands are food led and family friendly there is a strong responsible drinking policy in place. In terms of ingredient sourcing the lack of Supplier Environmental Certification is something we'd like to see addressed. Labour relations is also an area of weakness with no union recognition or working hours policy identified. And there is room for improvement in both the company's whistleblower policy and ESG reporting standards.

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