Investment Column: Is it time to raise a glass or two to M&B?

M&C Saatchi; Songbird Estates
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The Independent Online

Our view: Hold

Share price: 274.6p (-9.6p)

The pub chain Mitchells & Butlers shrugged off the recession to toast an improvement in recent underlying sales yesterday. As a result, the owner of the O'Neills and All Bar One chains said it expects full-year pre-tax profits to be "slightly above" market consensus of £83m. In a pre-close trading statement, M&B shrugged off continuing economic uncertainties to report like-for-like sales up 2.6 per cent for the 10 weeks to 19 September. That is an improvement on the run rate of 1.6 per cent for the 51-week period.

The group attributed the uplift to a spike in underlying food sales, boosted by value offers at its residential pubs, and more people spending their summer holidays in the UK. M&B also raised a glass to sales growth of 2.5 per cent at its residential division, which includes the Ember Inns, Toby Carvery and Harvester outlets.

These cushioned against the 0.1 per cent fall in sales at its high street outlets, such as O'Neills and All Bar One, which are being hit by fewer people socialising after work.

The financial situation looks rosy too. The decline in operating margins has slowed in the second half and cashflows look healthy. The group also said drawings on its £550m unsecured loan are now below £400m, which puts it in a good position for when the facility falls in December to £475m.

But before popping the champagne corks, it's worth remembering that M&B is not without risk. The outlook for consumer spending is still "uncertain" (as M&B admitted), with unemployment set to rise into the first half of next year and VAT going back up to 17.5 per cent. Mitchells & Butlers is also still burdened by a lot of debt. Total borrowings at the year end will be nearly £2.64bn. The shares trade on an estimated 2010 price-to-earnings ratio of 13, but have nearly doubled since the autumn of last year. Still, prospects are looking good, so hold.

M&C Saatchi

Our view: Buy

Share price: 82p (-0.5p)

M&C Saatchi has ruffled a few feathers with a recent advertising campaign for Dixons that attacks some of the retailer's rivals for being middle class. It suggests using the good customer service of these unnamed stores (we're thinking John Lewis and Harrods), "then go to dixons.co.uk and buy it". The question is: are its own shares cheap enough for hardy investors to indulge?

The advertising market is in the doldrums. While the decline is slowing, the timing of a real recovery is still up in the air, with optimists hoping predictions of the second half of 2010 aren't too far-fetched. Saatchi itself said long-term forecasting was difficult, adding that conditions would be depressed in the medium term.

The group put out its half-year results yesterday, and they were in line with expectations. Pre-tax profits fell a third to £5.4m. Yet the chief executive, David Kershaw, was bullish, saying the group "continues to perform well in a very challenging market". He added that trading had stabilised against the second half of last year. There is room for further cost cuts, but there are problems, especially a 36 per cent fall in the American business, hit by the loss of the Ketel One account after its sale to Diageo.

At the moment, shares for advertising companies might look like the last place you want to go (the Dixons ad uses that tagline). But the price-to-earnings ratio of eight times 2009 does not look demanding, and the company is well placed to come out smelling like roses when the recovery finally begins. Hold your nose against some of the awful ads and take a punt. Buy.

Songbird Estates

Our view: Hold

Share price: 2.29p (+1.1p)

Two months ago investors would have been well advised to give Songbird Estates a very wide berth indeed.

Songbird, which owns the majority of the company running London's Canary Wharf, was in trouble and all set to breach banking covenant tests scheduled for November, before investors bailed it out via an emergency cash call in August. An additional placing was made last week as the group bought up another stake in the Canary Wharf estate, at a pretty tasty discount.

Of course punters would have been far better holding the company's shares yesterday morning, before the one-day spike of 87 per cent after details of the placing, and the discount, were finally disclosed.

However, investors should consider that the stock is still cheap, trading at levels considerably lower than its year highs of 96p. The group is now debt-free and is out of the woods as far as administration is concerned.

Partly because of yesterday's hikes – we see little to kick the shares on much from here (the net asset value per share is just 1.32p) – and partly because rental rates in the City of London, Canary Wharf's major rival, are still soft, we would not be buyers. But hold the shares for now and be prepared to buy on news of further improvement.

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