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

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Mitchells & Butlers has reported full-year revenue of £2.6bn, reflecting like-for-like growth of 5.3%, outperforming the wider market by 2 percentage points.

Underlying operating profit increased 41.2% to £312mn, slightly ahead of market expectations. The uplift reflected top-line growth as well as reduced cost inflation and improved efficiencies.

Free cash flow increased from £94mn to £234mn, reflecting the strong operating performance and stability in investment expenditure. Net debt, including lease liabilities, fell £0.2bn to £1.4bn.

Like-for-like sales in the first seven weeks of the current year grew by 4%. This is expected to slow across the rest of the year. The group anticipates headwinds of around £100mn largely due to increased labour costs.

The shares were broadly flat in early trading.

Our view

Despite some headwinds to growth in the final quarter, Mitchells & Butlers has delivered on its upgraded promises for the full year. Overall the demand picture for UK pubs and bars is looking resilient and trading this year is off to a promising start. But growth rates are likely to slow a little as the inflationary environment eases.

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

The pub sector is not one that screams high tech, but we’re impressed with the groups use of technology which has helped to improve both customer engagement and management of the supply chain.

A focus on operational excellence and easing cost pressures has helped an impressive recovery in profits. However, further rises in the National Living Wage, and forthcoming increases in employer national insurance contributions are contributing to £100mn of additional cost headwinds, limiting the scope for a further step-change in profitability this year. That also leaves less of a cushion on the bottom line if market conditions deteriorate.

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

But looking ahead we believe the group’s focus on customer satisfaction and and strong branding means there's scope for margins to rise again once the initial shock to the cost base has been absorbed. There’s also the potential for further efficiencies to be found but so far they haven’t been quantified.

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.

The group looks well placed to continue growing its market share. And the additional pressure weaker competitors find themselves under could see those trends accelerate. The valuation doesn’t look too demanding. But market sentiment is being held back by the immediate hit wage and tax increases will have on profitability in 2025. There’s also no guarantee that the strong demand seen so far this year will persist so incoming investors will need to take a long-term view.

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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