Mitchells & Butlers PLC – Operating with sufficient liquidity

Established in 1898, Mitchells & Butlers PLC (LON: MAB) is a FTSE 250 listed Company, which operates pubs and restaurants in the United Kingdom.

In September 2020, the Company is expected to announce the pre-close trading update.

Recent News
12 June 2020: The Group agreed with lending banks for an unsecured liquidity facility totalling £250 million through to 31 December 2021. It comprised of additional facilities totalling £100 million and extension to the terms of existing £150 million facilities.

Half-Year Results (for the 28 weeks ended 11 April 2020)
As per the update released on 2 July 2020, the Company demonstrated a strong operational performance before lockdown. Post lockdown, the Company had taken rapid action to protect stakeholders and reduce the costs. Further, the Group has arranged a new financing facility to ensure financial flexibility and security. The revenue in H1 FY20 stood at £1,039 million (H1 FY19: £1,186 million). However, the Company reported an operating loss of £51 million in H1 FY20 (vs operating profit of £140 million in H1 FY19). Similarly, the loss before tax and basic loss per share for H1 FY20 stood at £121 million and 25.0 pence, respectively.


(Source: Company Website)

Share Price Performance

1-Year Chart as of 3 August 2020, after the market close (Source: Refinitiv, Thomson Reuters)

Mitchells & Butlers PLC’s shares closed trading at GBX 149.00 on 3 August 2020, down by 2.61% against the last day closing price. Stock 52 week High and Low were GBX 483.00 and GBX 92.30, respectively.

From the technical standpoint, 14-day RSI is currently in the oversold zone, which means there is a good potential for a short term rebound in the stock price.
 
Valuation Methodology

Risk Assessments
Social distancing measures will significantly reduce the capacity of the business, and the duration of distancing measures is uncertain. Post reopening, the Company can face a massive shift in consumer demand patterns, which might require additional costs to address. The prolonged lockdown scenario can significantly impact the cash flows and liquidity position, especially when the Company has already reported a loss in H1 FY20.

Conclusion
The Company was performing well prior to the enforced lockdown in response to Covid-19. The Company has diversified and well-established brands to attract customers. It has a clear path plan for reopening and return to growth and profitability. Moreover, the recent financial arrangement with lending banks put them in a solid position to withstand the challenging market backdrop. Given the uncertainties, the Company abstained from providing any financial guidance. However, the Company has been curtailing costs and preparing itself for adopting the new format of operations post reopening. The fundamentals of the Company are intact; however, it cannot rule out the short-term disruption due to the challenging market conditions.

Based on the decent growth prospects and the valuation done using the above method, we have given a “Hold” recommendation at the closing price of GBX 149.00 (as on 3 August 2020), and we will recommend fresh buying at the right time.
 

Marston’s PLC – Expecting a Delay in Joint Venture Completion with Carlsberg

Marston’s PLC (LON: MARS) is a FTSE All-Share listed Company, which is engaged in the independent brewing and pub retailing business.

Recent News
23 July 2020: The Company announced that the completion of the proposed arrangements with Carlsberg UK Holdings Limited is now expected in Q4 FY20. The Group reiterated that the transaction does not raise any competition concerns, and it has sufficient liquidity to meet the requirements ahead of completion.

Interim Results (for the 26 weeks ended 28 March 2020)
As per the update on 26 June 2020, the pre-Covid-19 revenue was in line with the last year. However, the Covid-19 disruption incurred an estimated impact of around £40 million in revenue. Nevertheless, there was an improvement in net cash flow of £55 million, reflecting progress on debt reduction plan. It was also supported by £61 million disposal proceeds through the sale of 168 pubs. At the time of update, the Company had £118 million headroom on facilities though it was confronting a cash burn of £10m per month in closure period after implementing cost reduction measures. The Company secured covenant waivers or amendments on all finance facilities.


(Source: Company Website)

Share Price Performance

1-Year Chart as of 3 August 2020, after the market close (Source: Refinitiv, Thomson Reuters)

Marston’s PLC’s shares closed trading at GBX 38.44 on 3 August 2020, down by 4.38% against the last day closing price. Stock 52 week High and Low were GBX 133.80 and GBX 18.40, respectively.

From the technical standpoint, 14-day RSI is currently close to an oversold zone, which means there is a good potential for a short term rebound in the stock price.
 
Valuation Methodology
 

Risk Assessments
There is a risk that the Company might not be able to adopt the changing customer preferences and fail to attract guests. The breaches of food standards regulations will now attract higher penalties and increased media attention. Further, the Covid-19 disruption and Brexit related uncertainties can also lead to liquidity and credit risk by posing a threat to business continuity.

Conclusion
Overall, the Group is well-positioned for post-COVID-19 recovery in the medium term. It is likely to be benefitted with supply contraction in the sector to gain market share. Although there is short term uncertainty as the sector emerges from lockdown, the Group is focused on providing a better experience to customers with a safe trading environment.

The Group’s joint venture with Carlsberg UK shall generate significant synergy opportunity. The Company is expected to receive up to £273 million equalisation payment with valuing Marston's Beer Company at £580 million. The proceeds are expected to be used for further debt reduction and targeting ongoing cash flow broadly to be cash neutral. The transaction is subject to competition clearance and shall be completed by Q4 FY20.

Therefore, the fundamentals of the Company are in intact; however, the ongoing uncertainties can bring some challenges in the short term.

Based on the decent growth prospects and the valuation done using the above method, we have given a “Hold” recommendation at the closing price of GBX 38.44 (as on 3 August 2020).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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