Douglas Jack upgrades M&B forecasts by 4%: Peel Hunt leisure analyst Douglas Jack has upgraded his forecasts on Mitchells & Butlers (M&B) by 4% following the pick-up in like-for-like sales and higher returns on capex. Issuing an ‘Add’ note on the shares with a target price of 300p, Jack said: “M&B passed its restricted payment conditions (cash trap) securitised bond test by £22m of Ebitda, which we estimate is the equivalent of a 2% drop in volume-driven like-for-like sales. This and factoring in political risk (the potential impact of a Corben-led Labour government) led management to cut the first-half dividend. In 2017, we estimate expansion added £3m to profits (22% return on investment on 15% average capex), thus remodels and conversions should have contributed £17m (£20m-£3m). As remodels and conversions are included in like-for-like sales, the 1.8% increase in like-for-like sales generated £33m of profit (£17m+£16m, equivalent to every 1% of price-driven like-for-like sales adding 10% to profit before tax (£183m/(£33m/1.8) with total turnover being 12 times profit before tax). In 2018E, the same economics should apply, with costs rising by £60m, disposals costing £2m, and cost mitigation being worth £26m. With similar capex, the offset from expansion should be £3m, leaving a £33m profit shortfall. With a very similar turnover base, this should require 1.8% like-for-like sales to offset, equally split between uninvested and uplifts in invested sites. In 2018E, we forecast 1.5% like-for-like sales, resulting in Ebit and Ebitda both falling by circa £4m (on a 52 versus 52-week basis) and margins falling by 20 basis points. On this basis, we estimate the company should pass its restricted payment conditions (cash trap) bond test by £18m of Ebitda, and believe its bond would be cash trapped if like-for-like sales are negative over the full year. In this scenario, there would certainly be no final dividend, in our view. On our forecasts, the Ebitda/debt service ratio should stabilise at 1.8 times based on like-for-like sales assumptions of 1.5% in 2018E, and 2.0% in both 2019 and 2020E. Sales and cost mitigation momentum is building. Of these, like-for-like sales are most critical, and here there are clear signs that internal initiatives and capex are starting to gain traction.”

 

Peel Hunt – ‘it’s worth paying attention to what the seven Domino’s Pizza companies are saying’: Peel Hunt leisure analyst Ivor Jones has said it’s worth paying attention to what each of the seven Domino’s Pizza companies is saying. Jones said: “We publish research on three of the listed Domino’s Pizza companies – Domino’s Pizza Group (UK), DP Eurasia (Turkey) and DP Poland – and we track the performance and statements of the others. In this note, we bring together recent commentary on strategy and trading performance. We also set out the share price performance of the companies. Increased exploitation of technology is a theme that unifies the Domino’s companies, with several operators at different stages of using GPS tracking and opening new ordering channels including Amazon Echo, Google Home and Facebook Messenger. Domino’s Pizza Enterprises (Australia) has the most to say about speeding up delivery. It has a store in Holland that managed a week with a world-beating average delivery time of just nine minutes and 26 seconds. Domino’s (US) is expanding its loyalty programme to all orders (not just online) as it explores how to engage more deeply with its customers. Domino’s Pizza Group (UK) has had notable success with its ‘The Official Food of Everything’ advertising campaign. Recent trading news from all the companies indicated the combination of store roll-out and like-for-like sales growth has been continuing to serve the businesses very well. In the third quarter of 2017, for example, Domino’s reported 15% growth in ‘group retail sales’, despite including the results for the US, the most mature region in Domino’s world. The share prices of the companies has generally outperformed over time. However, in the second half of this year so far, only Domino’s Pizza Group (UK) and Jubilant FoodWorks (India) have beaten their local stockmarkets. We believe the weakness of the Turkish lira relative to sterling has weighed on the share price of DP Eurasia post-initial public offering. We believe Domino’s Pizza is a fundamentally attractive business with a powerful brand, a high-margin product, a long runway of growth globally and high returns resulting from sub-franchising many of the stores. Making money from investing in the operators will be helped by paying attention to what they are all saying, hence this note.”