Morgan Stanley upgrades M&B, eyes possible dividend restart
By Alexander Bueso
Date: Monday 09 Sep 2019
(Sharecast News) - Britain's pub industry is immature, but with demand still there and capacity withdrawing at an accelerated pace, Mitchells&Butlers was set to cash in, said analysts at Morgan Stanley.
Against that backdrop, the sector finished August sporting a 1.2% rise in like-for-like sales on a trailing 12 months basis - its best showing in three years - and M&B had put in a gain of 3.6% up until July - also its best performance for three years.
That outperformance was set to narrow, but would be sustained, Morgan Stanley said, projecting a 2.0% increase in LFLs from 2020 onwards.
And its "intense" efficiencies were serving to offset the "significant" cost pressures in the market, leading the analysts to project a compound annual rate of growth of 3.0% for the firm's earnings before interest, taxes, depreciation and amortisation and of 9.0% for its earnings per share given its rapid deleveraging.
Meanwhile, better-than-expected EBITDA over the past two years and the potential for a £150.0m reduction in its original £450.0m pension deficit on the back of a possible court verdict, around the use of the appropriate inflation rate, meant that "there is growing optionality over rsuming a dividend".
Indeed, even without that court verdict its original pension deficit should have halved by now.
Another possibility was that M&B might reprofile its bonds and extend their maturities, Morgan Stanley said.
"Both of these could fund a dividend equating to a 5% yield, we estimate, though there are too many unknowns to give us confidence this is likely,and our base case is no dividend resumption given management commentary suggests the priority is to continue the deleveraging programme."
In the same note, Morgan Stanley also discussed the various rates of return that might accrue to shareholders in case of a leveraged buyout.
Morgan Stanley hiked its target price for M&B's shares from 280.0p to 430.0p and upgraded its recommendation from 'equalweight' to 'overweight'.
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