LONDON (ShareCast) - (Sharecast News) - Analysts at Berenberg downgraded their recommendation for shares of pub landlord Mitchells and Butlers from 'buy' to 'hold' on Wednesday, noting some significant share price strength since its initial upgrade in June.

Berenberg noted that M&B shares had risen roughly 70% since issuing it with a 'buy' rating at the midway point of the year, supported by a combination of improving operational performance and the positive read-across created for the wider pub sector by the recent takeouts of peers Greene King and EI Group.

While the German bank judged that performance to be well warranted, Berenberg also said that it had been driven almost entirely through a re-rating of the shares' valuation multiple, with only modest earnings upgrades.

"As a result, we think the shares are at least due a pause for breath," said Berenberg, which did increase its price target from 360p to 480p.

When discussing the future, Berenberg said the main upside risk remained M&B's balance sheet and free cash flow.

The analysts were expecting M&B to generate roughly £90.0m of FCF in 2020 - and expected that figure to grow at a pace of about 15% per year before a further £50.0m windfall once contributions to close the company's pension deficit cease around 2023.

"However, a hearing is due mid-next year on a dispute between M&B and the trustees of its pension fund - the crux of which is, if M&B wins, its actuarial deficit would fall by c£160m (from £293m)," noted Berenberg.

"The likelihood of M&B winning is unclear, as is whether the current schedule of contributions would be amended in such a scenario - but M&B management is hopeful that, if it is successful, the trustees may consider reducing the term of magnitude of current payments."

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