Mitchells & Butlers: a pub group worth a punt

This year has been a nightmare for the hospitality industry. One company that has seen its share price suffer a particularly brutal beating owing to Covid-19 is Mitchells & Butlers (LSE: MAB). When the stockmarket collapsed in mid-March, Mitchells &Butlers’ (M&B) shares fell to less than a quarter of the level they had reached at the start of the year.

Although they rallied strongly over the next few months, they have now started to fall again owing to the return of strict social-distancing measures and regional lockdowns. M&B’s share price is now two-thirds below its level of 1 January.

Still, there are some reasons to think that things aren’t as bad as the price would imply. The government’s furlough scheme has allowed M&B to cut costs drastically during the time its pubs and restaurants were shut, while the government’s Eat Out to Help Out scheme in August helped it recover some lost ground.

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While total revenue has fallen by a third over the last nine months, compared with the same period last year, September sales were only down by around 7%. Meanwhile, M&B’s management has managed to persuade creditors and bankers not only to restructure existing debts, but also to increase lending facilities, thereby greatly expanding the group’s financial breathing space.

Of course, the latest wave of restrictions across large party of the country are hardly good news. However, their impact has been cushioned by the fact that the government has allowed pubs and restaurants that serve significant amounts of food to keep operating, even in areas under the tightest restrictions. Given that M&B derives much of its revenue from food sales, this has helped keep closures to a minimum, although some pubs in the North have had to be shut. With growing hopes that a vaccine could be approved in the coming weeks, there is a good chance that the restrictions could be relaxed in time for Christmas.

The bad news is in the price

If M&B does manage to get through the current crisis, then the upside for its shareholders could be very large. Not only does it trade at only nine times 2021 earnings (and just four times 2019 earnings), but its shares are also at a huge discount of 57% to the value of its net assets. While many of these assets are in the form of leases, it also owns the freehold of many of its pubs, which could potentially be sold to property developers in order to meet demand for houses and flats.

With M&B’s share now trading above their 50-day moving average, its looks as though market sentiment may have bottomed out and begun to improve. I suggest that you go long on the group’s shares at the current price of 163p at £12 per 1p. Given the stock’s volatility, I recommend a looser stop-loss than usual: 80p. This gives you a total downside of £996.