Mitchells & Butlers PLC (LON:MAB) shares advanced after Berenberg upgraded its recommendation on the stock to ‘buy’ and lifted its target price to 360p from 265p.
The pub chain last month posted a 9% increase in pre-tax profit to £75mln for the first half as revenue rose 5% to £1.19bn and like-for-like sales gained 4.1%.
READ: Mitchells & Butlers the toast of the City as first-half sales and profits soar
The group delivered adjusted free cash flow of £23mln for the period, compared to an outflow of £3mln last year, and net debt reduced to £1.63bn form £1.72bn.
Looking ahead, M&B said it expects the market to “remain tough”, although it is “confident in [its] ability to out-perform”.
Shares 'too cheap'
“Mitchells and Butlers (M&B) still has its challenges,” Berenberg said in a note to clients.
“However, trading momentum is improving materially, a free cash flow yield of circa 15% is within touching distance, and we simply think that is too cheap for a company with significant freehold backing (it owns circa 80% of its real estate) and a balance sheet which has been significantly de-risked.”
Berenberg added that like-for-like sales momentum has shown consistent improvement in recent quarters after at least five years of sub-par sales growth and flat earnings.
The broker thinks the growth is indicative of management’s wide-ranging operational improvement initiatives, and the benefit of restaurant supply finally normalising, given that about 75% of M&B’s sales are “food occasions”.
In mid-morning trading, shares in M&B were 5.4% to 295.7p.
Berenberg downgrades EI Group
In a separate note to investors, Berenberg cut its rating on pub operator EI Group PLC (LON:EIG) to 'hold' from 'buy' and left its target price at 220p.
"We believe EI Group’s management continues to do an excellent job of creating value for shareholders," Berenberg said.
"However, with few obvious catalysts over the next 12 months, and the shares close to our price target, we struggle to justify EI Group as a new buy here, trading at circa 10x fiscal year 2020 enterprise value/earnings (EBITDA) with a circa 4% free cash flow yield."
Berenberg said EI, formerly known as Enterprise Inns, is performing well operationally with like-for-like net income in the tenanted business up 1.9% in the first half and the managed business achieving 6% like-for-like sales growth.
But there are fewer upside risks, Berenberg added.
"Having sold the majority of its commercial properties division in March, it will take some time for EI’s leased estate to re-build to a scale where an asset sale would move the needle materially," it said.
"Earnings estimates are unlikely to move materially either, with tenanted sites (which have a smoother earnings profile) still making up the bulk of the business."
Ei Group shares were 1% lower at 206.20p.