Mitchells & Butlers warns of Brexit impact on profits

Mitchells & Butlers has warned of problems ahead as the pubs group reported a dip in full year revenues and profits.

The Harvester and All Bar One owner said like for like sales fell 0.8% although they showed an improvement in the most recent eight weeks, with profits dropping from £328m to £318m. Chief executive Phil Urban said:

Sales growth in the first eight weeks was impacted by the Rugby World Cup in the prior year, but I’m encouraged by the underlying momentum which has seen recent weeks return to the levels seen in the summer.

In the next year, as previously announced, we face external cost headwinds, notably from further wage inflation, the recent business rates review and exchange rate movements. We are working hard to mitigate these headwinds wherever possible, both through building on our sales momentum and active management of our cost base.

On the Brexit vote specifically, the company said the slump in sterling since the referendum would increase food and drink costs:

We believe it is too early to predict with any certainty what the impact of Brexit on the economy might be, particularly without clarity on exit terms. However there are broadly three areas in which Brexit may affect us in the medium to long term: changes in consumer confidence and behaviour; changes to employment and immigration laws; and changes to input costs. The first two of the three are largely unknown at present, and therefore our approach is to stay close to developments whilst continuing to support all our 43,000 employees.

Input costs will be impacted by the value of sterling, which has fallen significantly since the EU referendum. We have a small number of sites trading in Germany, but otherwise our international trade is defined by our supply chain. The net effect of a weaker sterling is therefore profit dilutive due to the food and drink which is purchased in foreign currency, although this is partially mitigated in the next financial year by existing contracts.

The downbeat tone has sent the group’s shares 14.9p lower to 258.6p. Investec analyst Karl Burns said:

Mitchells & Butler has announced 2016 results to the end of September, with the results in line with our forecasts and consensus. However, unsurprisingly, management have provided cautious guidance around margins looking ahead to 2017 due to the negative impact of the Living Wage, business rates and movement in foreign exchange, all likely to result in downward pressure on margins. We retain our forecasts, which are around 4% below consensus, and retain our 174p price target and sell recommendation.

Numis said the impact of business rate rises was higher than it expected:

Mitchells has quantified the impact of the business rate review at £18m, with £5m in 2017. We had estimated a total impact of £12m in our recent sector note. The total will have a 90 basis point impact on margin by year five.

We are cautious on the outlook for M&B as we do not expect like for like sales to cover mounting cost headwinds and see a risk of the majority of free cash flow being required for the pension deficit recovery plan (to be announced in 2017).

But Canaccord Genuity was more positive:

Mitchells & Butlers reported prelims a fraction below our expectations but there’s a fragile but improving trend developing. The fine summer weather has been helpful but it’s only part of the story, like for likes have been recovering for six months and the positive momentum has continued into the new year. We don’t anticipate material revisions to forecasts and reiterate our buy recommendation. The stock is oversold in our view and our 350p target price implies 28% potential upside.

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