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Numis downgrades Greene King and M&B as it grows more cautious on managed pubs
Analysts at Numis Securities downgraded Greene King and Mitchells and Butlers on Thursday as the brokerage grew increasingly cautious on managed pubs given the sector's above-average exposure to labour costs and high operational gearing.
Numis downgraded both stocks to 'reduce' after deeming the recent share price strengthening of 11% at MAB and 6% at GNK over the last quarter as "unjustified".
Cost pressures across the travel and leisure sector resulted in an average fall of 100 basis points (bp) in sector margins throughout 2017. However, the industry still saw a rather wide range of outcomes, as GNK saw margins drop 170bp while the likes of JD Wetherspoon saw an uptick of 80bp, with Numis concluding that the "gap between winners and losers" was more likely to widen during the current financial year than it was to tighten.
The analysts pointed out that although some operators had been able to minimise the financial impact through mitigation, the 4.4% labour inflation to £7.83 per hour, set to become more binding during the third year of the National Living Wage programme, would capture an increasing proportion of the workforce.
Numis highlighted Fuller Smith and Turner, EI Group and Marston's as having more defensive models due to their preference of leased and tenanted properties, plus the stronger emphasis on wet sales, which had steadily recovered during the tail end of 2017.
Mitchells and Butlers, which had cited a high level of uncertainty after it opted not to pay an interim dividend and instead chose to wait until results from its full twelve months of trading had come in to decide whether or not it would make a payout, had seen its balance sheet come under increased scrutiny after showing just 6% headroom to the level where cash could not be upstreamed, well below the sector average of 19%.
Numis also pointed out that if a company such as Greene King, which had one of the highest levels of operational gearing in the sector due to its high proportion of EBIT from managed pubs, was to fail a restricted payments test it would be seen as a reminder to the market of the inflexibility of securitised debt vehicles.
At 1430 GMT, GNK shares were down 6.2% to 525.40p, while MAB was down 2.4% to 263.02p.