After trading in a range between about 220p and 290p for three years, the share price of FTSE 250 company Mitchells & Butler (LSE: MAB) started rising in May, and has kept going. As I write, the shares stand at 380p, which represents a 60% increase over four months.
The firm operates managed restaurants and pubs with brands such as Harvester, Toby Carvery, All Bar One, Miller & Carter, Premium Country Pubs, Sizzling Pubs, Stonehouse, Vintage Inns, Browns, Castle, Nicholson’s, O’Neill’s and Ember Inns. It also runs Innkeeper’s Lodge hotels in the UK and Alex restaurants and bars in Germany.
Bid excitement in the sector
Although the stock had already broken above the previous trading range, it shot up in August when one of its peers in the sector, Greene King, received a takeover offer and has been drifting higher ever since. Indeed, valuations in the sector had fallen to low levels, and that caught the attention of CK Asset Holdings (CKA), the company that made the offer. CKA described itself in the offer announcement as “a long-term and strategic investor in stable, profitable and cash-flow generating businesses that benefit from real estate backing.”
It’s natural for investors to start hunting for the next potential bid target, which is one of the reasons I reckon Mitchells & Butler shares have been flying. But the value case with the company has been obscured by the fact the firm cancelled dividend payments for 2018 because of high debts and pension obligations and an “uncertain outlook.”
The company is engaged in a restructuring process aimed at building a “more balanced” business, instilling a “more commercial” culture, and driving an “innovation agenda.” Meanwhile, today’s pre-close trading update for the 51 weeks to 21 September informs us that total sales increased 4% in the period, with like-for-like sales rising 3.5% in the firm’s Food category and 3.3% in the Drink category.
Ploughing money back in
The directors expect operating profit for the full year to come in flat compared to last year, “despite cost headwinds.” But it’s clear the firm has been ploughing money back into the business with its investment programme, which aims to “premiumise” the offering to customers. In the period, seven new sites opened and the company converted and remodelled 239 outlets – no wonder it couldn’t pay a dividend!
It seems to me Mitchells & Butler’s business hasn’t been in as good a shape as Greene King’s. The absence of a dividend, the restructuring initiatives, and the higher debt-load all seem to point in that direction. Meanwhile, with the share price close to 378p, the forward-looking earnings multiple for the trading year to September 2020 stands at almost 10 and the price-to-tangible-book value runs close to 0.9.
But when Greene King received its takeover offer, the shares rose just over 50%, which compares to the 60% rise we’ve seen with Mitchells & Butler. I think the stock market has probably already done a good job of ‘outing’ the value in MAB, so I’d avoid the stock now.
