Mitchells & Butlers Plc

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

In November 2020, the Company will publish the full-year results.

Rationale for Valuation – Sell at GBX 225.00

• The Company was impacted by reduced capacity as a result of enforcement of social distancing measures and by consumers' caution to visit pubs and restaurants.
• On a trailing 12 months, EV/EBITDA multiple is significantly higher as compared to the Hotels & Entertainment Services industry multiple, reflecting overstretched valuations.
• In H1 FY20, the Company’s net margin and Return on equity were in the negative zone.
• On leverage front, the debt-equity was higher as compared to the industry median of 1.05x, reflecting that the Company is highly leveraged as compared to the industry.
• From the technical standpoint, 14-day RSI stood at ~87.43 (overbought zone), which means the stock price could decline in the short term.

Key Risks

• The prolonged lockdown scenario can significantly impact the cash flows and liquidity position.
• Also, the UK restaurant sector is exposed to a variety of risks ranging from distorted demand for their product on the face of social distancing measures and also exposed to the next wave of outbreak.

Pre-Close Trading Update (covering the 51 weeks ended 19 September 2020, as on 24 September 2020)

(Source: Company Website)

• In the first three weeks of September 2020, the Company’s like-for-like sales declined by 6.4% as compared with the previous period (weeks 1-24).
• While in August 2020, the Company has made a growth of 1.4% in like-for-like sales and was helped by UK government, which funded Eat Out to Help Out (EOHO) scheme and temporary reduction in the rate of VAT.
• On the year to date basis (till 19 September 2020), the total sales declined by 35.4%, driven by the closure period.
• The Company’s unsecured cash balances stood at approximately £100 million, and further undrawn committed unsecured facilities were around £140 million.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Conclusion

Overall, the future remains both uncertain and challenging, with other additional restrictions being imposed. In March 2020, the investment programme was suspended, due to Covid-19. However, it has shown a recovery sign in August 2020, supported by the EOHO scheme and VAT reduction. Further, the prolonged impact of the COVID-19 outbreak continued to affect its financial results, plans, operations, outlook, goals, reputation, liquidity and stock price. Also, the outlook for the pubs & restaurants industry and the Company seems dim in the near-term. Therefore, it is advisable to book profit as of now, considering global headwinds persisting currently due to COVID-19 pandemic. The stock made a 52-week low and high of GBX 92.30 and GBX 483.00, respectively.

Based on the risks associated and factors as discussed above, we have given a “Sell” recommendation on Mitchells & Butlers at the current price of GBX 225.00 (as on 11 November 2020, before the market close at 9:47 AM GMT), while we will look forward to reinvesting at the right time when the market dynamics become favourable.

Marston's Plc

Marston's Plc (LON: MARS) is operating pubs and breweries with three business segment – Destination and Premium, Taverns and Brewing.

On 10 December 2020, the Company will release the full-year results.

Rationale for Valuation – Sell at GBX 68.07

• The Company’s EV/Sales and EV/EBITDA multiples are significantly higher as compared to the Hotels & Entertainment Services industry multiple, reflecting overstretched valuations.
• The stock has underperformed the index (FTSE All-Share index) during the last two years period and delivered a negative return of around 35%.
• From the last two years, the Company’s net margin and Return on equity were in the negative zone.
• On leverage front, the debt-equity ratio stood at 2.37x in H1 FY20, which was higher as compared to the industry median, reflecting that the Company is highly leveraged as compared to the industry.
• From the technical standpoint, 14-day RSI stood at ~83.57 (overbought zone), which means the stock price could decline in the short term.

Key Risks

• Another round of lockdown, Brexit and political uncertainties put pressure on consumer confidence which might affect the sales of the business.
• The Company’s interest payments are not well covered by their earnings, and they reported a net loss for FY19.

Recent News

On 11 November 2020, the Company announced that it has formally asked the holders of the Secured Class A Notes, which is for further technical waivers in H1 FY21. Noteholders have been asked to respond by 1 December 2020.

On 30 October 2020, the Company has completed the brewing joint venture with Carlsberg UK Holdings Limited.

Trading Update (for the 53 weeks ended 3 October 2020, as on 15 October 2020)

• For FY20, the Group sales declined by 30% year-on-year to £821 million, with a decrease in total pub sales of 34% and Marston's sales of 22%.
• In July, August and into September, the consumer confidence has increased, supported by the success of the Eat Out To Help Out campaign, reduced VAT and good weather in September.
• On 3 October 2020, the net borrowings were £1,329 million (excluding IFRS16 commitments), with £90 million of headroom.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Conclusion

In September and October, the administrations and the UK Government subsequently introduced additional restrictions, with new rules for pubs, bars and restaurants. Meanwhile, the transformational deal with Carlsberg will contribute to a further reduction in net debt. However, there is much uncertainty ahead. Also, considering the heightened level of uncertainties, the management remained cautious regarding the outlook. Moreover, any change in licensing requirements can adversely impact on the operations. Furthermore, the disruption in global supply chains amid pandemic and political unrest can affect both pub and restaurant division. Stock 52 week High and Low were GBX 18.40 and GBX 133.80, respectively.

Based on the risks associated and factors as discussed above, we have given a “Sell” recommendation on Marston's at the current price of GBX 68.07 (as on 11 November 2020, before the market close at 10:54 AM GMT), while we will look forward to reinvesting at the right time when the market dynamics become favourable.

Restaurant Group Plc

Restaurant Group Plc (LON: RTN) is a FTSE All-Share-listed restaurant and pubs operator, which operates in the United States through the Wagamama division.

Rationale for Valuation – Sell at GBX 69.35

• The Company’s net margin and Return on equity are in the negative zone.
• The stock has underperformed the index (FTSE All-Share) during the last year and delivered a negative return of approximately 52% in the last year.
• The outlook for the pubs and restaurants industry looks dim for the rest of the year. Therefore, the Company expects any recovery to be muted.
• The Company’s Price/Earnings multiple is significantly higher as compared to the Hotels & Entertainment Services industry multiple, reflecting overstretched valuations.
• From the technical standpoint, 14-day RSI stood at ~85.04 (overbought zone), which means the stock price could decline in the short term.

Key Risks

• Trading conditions are quite volatile and uncertain.
• The Company already unveiled the challenging update due to Brexit related uncertainties, and now COVID-19 restrictions induced closure of the sites.

Recent News

On 6 November 2020, the Company announced that Allan Leighton, as a Senior Independent Director, will step down from the Board with an immediate effect.

Financial Highlights (for the 26 weeks ended 28 June 2020 (H1 FY20), as on 6 October 2020)

(Source: Company Website)

• On a like-for-like basis, the Company’s sales decreased by 58% in Concessions, growth of 11% in Wagamama, increased by 4% in Leisure and rose by 14% in Pubs.
• The fall in EPS (earnings per share) reflects both the losses in H1 FY20 and the greater number of shares in issue following the equity raise.
• The Company has a £132.9 million of cash on the balance sheet, with a £50 million of minimum liquidity requirement.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Conclusion

As per the ongoing impact of the pandemic and government-imposed restrictions, the Company and sector outlook is uncertain. It has been a difficult and extraordinary period for the hospitality sector. RTN expects Covid-19 will have a lasting impact and will take some time to return to pre-Covid levels. Moreover, due to the current challenging market dynamics, the management is unable to provide accurate financial guidance. RTN works in a challenging environment which requires continuous investment, sometimes at the cost of profitability, to stay ahead of competitors. The stock made a 52-week low and high of GBX 20.26 and GBX 167.70, respectively.

Based on the risks associated and factors as discussed above, we have given a “Sell” recommendation on Restaurant Group at the current price of GBX 69.35 (as on 11 November 2020, before the market close at 8:04 AM GMT), while we will look forward to reinvesting at the right time when the market dynamics become favourable.

Fuller Smith & Turner Plc

FTSE All-Share listed Fuller Smith & Turner Plc (LON: FSTA) is in the premium pubs and hotels business.

Rationale for Valuation – Sell at GBX 810.00

• The Company’s Price/Cash Flow, EV/EBITDA and Price/Earnings multiples are significantly higher as compared to the Hotels & Entertainment Services industry multiple, reflecting overstretched valuations.
• In FY20, the Company’s net margin and Return on equity are in the negative zone.
• The stock has underperformed the index (FTSE All-Share) during the last year and delivered a negative return of approximately 27% in the last year.
• The outlook for the pub and restaurant industry looks dim for the rest of the year. Therefore, the Company expects any recovery to be muted.
• From the technical standpoint, 14-day RSI stood at ~83.36 (overbought zone), which means the stock price could decline in the short term.

Key Risks

• The Company might face a challenge due to changing consumer spending behaviour.
• Market uncertainty and increased demand can lead to cost pressures in several areas, such as food and drink production, utilities, and staff costs.

Trading Update (for the 23 weeks from 29 March 2020 to 5 September 2020, as on 10 September 2020)

• In the managed pubs and hotels, the sales have grown steadily and are 80% of the previous years (on a like-for-like basis).
• In August 2020, trading across the Fuller’s estate was buoyed by the Eat Out to Help Out scheme.
• In Cotswold Inns & Hotels, the business has shown a decent performance.
• The Company has a strong balance and well-positioned to navigate any challenges.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Conclusion

Further, there are chances that full recovery could take some time, higher than other non-essential industries; but new avenues within the restaurants' space like delivery, takeout and other technological development could support their top line. However, the first half of 2021 will undoubtedly continue to be influenced by the normalisation of the consumer behaviours and global economic environment. From a technical perspective, RSI is indicating a bearish setup for the stock, and it is not financially viable to take a fresh position currently. Therefore, it is advisable to book profit as of now, considering global headwinds persisting currently due to COVID-19 pandemic. The stock made a 52-week low and high of GBX 486.00 and GBX 1,090.00, respectively.

Based on the risks associated and factors as discussed above, we have given a “Sell” recommendation on Fuller Smith & Turner at the current price of GBX 810.00 (as on 11 November 2020, before the market close at 10:28 AM GMT), while we will look forward to reinvesting at the right time when the market dynamics become favourable.

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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

Disclaimer

PLEASE BE ADVISED THAT YOUR CONTINUED USE OF THIS SITE OR THE INFORMATION PROVIDED HEREIN SHALL INDICATE YOUR CONSENT AND AGREEMENT TO THESE TERMS.

References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.

This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332.

The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine is not responsible for material posted on this website and does not guarantee the content, accuracy, or use of the content in this site. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated.

Kalkine do not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional licensed financial planner and adviser.