Mitchells & Butlers gains on HSBC upgrade

HSBC said while the company’s first half results showed weak trading trends, the new chief executive Phil Urban has a “credible plan for improvement”.

Mitchells & Butlers, which owns Harvester, All Bar One and Toby Carvery, reported a 1.5% fall in revenue to £1.1bn although pre-tax profits climbed to £83m from £75m.

CEO Urban announced plans to reduce stores at its Harvester chain to address fierce competition and real wage inflation following the introduction of the National Living Wage.

The group has also boosted investment in the refurbishment of sites to make them more attractive to customers. It follows a review which showed revamped outlets had done better than un-refurbished sites.

“We think that this is the right approach. As we show in this note, M&B has repeatedly underinvested in its sites, so it’s hardly surprising that customers have gone elsewhere,” HSBC analysts said in a note.

“We calculate the capital expenditure (capex) shortfall could be around £140m over the last five years. The new strategy addresses this; a £20m step up in capex per annum, along with a reduction in new site openings releases much more to be spent on refreshing the existing estate and converting underperforming sites into different brands.”

HSBC said the shares have underperformed compared to its peers, trading on a fully adjusted enterprise value/earnings before interest and tax (EV/EBIT) discount of 12% to the wider sector.

The bank added that its sees value in the shares. “If sales begin to recover, as expected, and earnings forecasts stabilise, then the valuation should move back towards the wider sector.”

Shares rose 4.21% to 301.90p at 1311 BST.