Shore Capital has reiterated its 'buy' recommendation on Mitchells & Butlers PLC (LSE:MAB), the FTSE 250 pub and restaurant operator, with a 350p price target, implying upside of 47% from the current share price of 239p.
The broker argues the shares, down more than 25% since the outbreak of the Iran conflict, have sold off well beyond what the underlying fundamentals warrant, with the stock now trading at a near two-decade low on a forward price-to-earnings multiple of around 7 times.
First-half operating profit came in flat year-on-year at £318 million on revenue up 2.5% to £1,490 million, a result Shore Capital describes as solid given gross cost inflation of £72 million in the period, concentrated in the first half.
The broker maintains its full-year operating profit estimate of £318 million, at the bottom of consensus, reflecting slightly reduced like-for-like (LFL) sales growth of 3%, lower than its previous assumption of 3.5%, and a reduced contribution from new openings and remodels of £6 million against £20 million in the prior year.
A step-up in estate investment created a larger-than-anticipated drag on first-half profitability, with the net contribution from reinvestment falling to £3 million from more than £10 million in each of the prior two years.
But, Shore argues this positions the group for a meaningful tailwind from the financial year to September 2027 onwards, with returns on reinvestment projects above 30%.
The broker forecasts annual operating profit improvement of around £10 million from financial year 2027, reaching £327 million, driven by modest LFL growth, ongoing cost efficiencies, and a normalised contribution from openings and remodels as cost inflation moderates toward 4%.
Net debt excluding leases fell £96 million to £747 million at the interim stage and is expected to reach approximately £790 million at year-end after seasonal working capital movements, still representing a £70 million year-on-year improvement and sufficient to push the net debt to EBITDA ratio below 2 times for the first time at the year-end.
However, Shore identifies the group's bond structure as a potential block to a rerating, noting that free cash flow is forecast to remain below mandatory bond repayment levels throughout the forecast period, keeping capital allocation focused on debt reduction rather than dividends or buybacks despite the improving balance sheet trajectory.
The broker estimates that if the group were simply to maintain a 2 times net debt to EBITDA ratio, it could accumulate around £400 million of excess capital by financial year 2028, equivalent to approximately 30% of the current market capitalisation, though it acknowledges the challenge of unlocking that value under the current debt structure.
