Mitchells & Butlers lifts profits as pub refurb plan kicks off

Mitchells & Butlers served up improved first-half profits despite sales falling as the group looks to freshen up its under-invested pub estate with a major refurbishment plan.

Group sales fell 1.6% to £1.1bn in the 29 weeks to 9 April, as a like-for-like sales decline of 1.6% was only partially offset by new site openings.

The 294 pubs that have so far benefited from recent investment delivered a 10% improvement in sales but this was offset by a decline in the 'uninvested' remainder of the estate.

Food volumes fell 5.1% and drink by 4.8%, average spend on food was up by 3.3%, with average drink spend up by 3.6%.

Adjusted operating profit was up 2% to £156m, as operating margins edged up from 13.7% to 14.2%, and profit before tax of £83m was up 11% compared with a year ago.

Earnings per share of 18.4p were up 28% and the FTSE 250 group will pay an interim dividend of 2.5p.

After free cash flow came in at £42m and capex hit £88m, net debt stood at £1.86bn.

On recent trading, chief executive Phil Urban, who was promoted to the top role in September and recently completed a review of strategic options for M&B, said there was "much to do" in order to accelerate trading performance: "building a more balanced business; instilling a more commercial culture; and increasing the pace of execution and innovation".

"I am very clear that our best route for delivering sustainable returns for our shareholders is through the acceleration of organic growth: to maximise the return on the high-quality assets we own."

The plan is to accelerate the reshaping the estate, with a plan now set out for every pub for the next four years with the aim of building a more premium portfolio, including making some select disposals.

This has already begun with 142 remodels completed in the half and Urban aiming for 300 to 350 sites per year, "equivalent to a five to six year investment cycle compared to the cycle of over ten years on which we have been operating".

Analyst Mark Brumby at Langton Capital said this aim was laudable but execution was the issue.

"Mr Urban is not the first M&B CEO to attempt to awaken what may prove to be a sleeping giant. However, we would suggest that he is likely to be given some time and, if the troops on the ground can be incentivised and given a sense of purpose, the group could begin to perform.

"Proof is unlikely to be forthcoming for a number of quarters and, for this reason, the performance of the invested units may be an area of focus."

Shore Capital's Greg Johnson said that while recent trading was said to be improved, he noted the additional costs in the second year and some prior year benefits in the first, so sees risks to his full year forecasts for PBT of £190m and EPS of 35p.

"MAB is a cheap stock but until we see evidence of sustained delivery in trading given the abundance of value across the sector we retain a 'hold' stance."