Canaccord raises Mitchells and Butlers to 'buy' following sector shake-up

Analysts at Canaccord Genuity upped their rating on pub operator Mitchells and Butlers to 'buy' from 'hold' on Wednesday, stating that bids elsewhere in the sector had ignited a reappraisal of the group and its shares.

Canaccord, which also increased its target price for Mitchels and Butlers from 300p to 400p, said the agreed bids for Ei Group and Greene King at 38.5% and 51% premiums to their last undisturbed share prices were "reminders of the latent value of the asset-intense pubcos in general" and M&B "in particular".

"The bids may have been the catalyst for our reappraisal but are not the sole reason," added Canaccord. "M&B is now making good progress versus its strategic plan, driven by its Ignite self-help programme."

The Canadian broker pointed out that M&B has "an unusual and concentrated shareholder register", where a potential bidder would only need to make a few calls to gauge the appetite for an offer - with billionaire Joe Lewis owning around 27%, Elpida owning 23% and Smoothfield holding roughly 4.4%.

While a bid for the group was far from guaranteed, Canaccord stated that in the advent of a bid, it would expect a higher multiple, more akin to Ei Group's and Greene King's trailing exit EBITDA multiples of 11.4x and 10.0x.

Canaccord said it viewed M&B as "a long-term game", noting that the group should de-lever over the next decade as it looks to pay off £1.5bn of its £2bn of debt and invests in its top-line more than its dividend.

"M&B is starting to make real progress in reducing its debt burden and over the next five years it is scheduled to pay off £478m of debt, equivalent to a transfer of 23p/share per annum from debt to equity assuming no change to EV."