Investments: Merry-go-round at Mitchells gives us pause for thought

Speedy Hire; Melrose

Nikhil Kumar
Thursday 17 November 2011 01:00

Our view: Hold

Share price: 222.9p (-3.1p)

If Mitchells & Butlers made revolving doors, they would arguably be the best investment in the UK, if not globally. Unfortunately, it is a pub and restaurant business that has managed to trade robustly through much of the past four years, despite a series of comings and goings among senior management almost to rival the turnover of punters at its O'Neill's pub at the top of London's Carnaby Street.

In its latest management reshuffle this week, M&B has parted company with two of its long-serving divisional heads while a third, Kevin Todd, the managing director of M&B's City and Country pub brands, was moved sideways into the business development director role.

This was done to move M&B, which also operates the Toby Carvery, Browns and All Bar One chains, from its existing three-channel structure into nine "more focused and accountable brand groups". To this end, the group has promoted Robin Young to operations director from commercial director. The moves come just three weeks after M&B unveiled the departure of its interim chief executive, Jeremy Blood, which led to interim chairman Bob Ivell taking over the running of the group, as executive chairman.

This was the ninth change of either chief executive or chairman at M&B inside the past four years. A different form of turbulence has also characterised its share register, with Joe Lewis – the billionaire currency trader and 22.8 per cent shareholder through his Piedmont investment vehicle – walking away from a 230p-a-share possible offer for the company in October.

Despite all these distractions, M&B has continued to deliver positive underlying sales, driven by its continuing focus on food.

However, its growth slipped back to just 0.5 per cent for the latest reported nine weeks to 17 September. Overall, we are tempted to recommend buying M&B's shares, as they trade on a lowly forward earnings multiple of 7.24, a sizeable discount to the sector. But until it ends its management merry-go-round, we would avoid.

Speedy hire

Our view: Buy

Share price: 20.25p (+1.25p)

We've been buyers of the equipment hire firm Speedy Hire for some time now. The last time we added to our holdings was in April, when the company struck a deal to sell its accommodation hire unit. The deal was a good one – the unit had been a drag on the business – even if the sale was done at a discount to its net asset value.

Yesterday, Speedy posted some good results, announcing an underlying pre-tax profit for the six months to the end of September and confirming that it was on track to meet expectations for the full year. It also reported lower debt, which makes sense, given that the proceeds of the accommodation unit sale were to be partly used to cut the company's borrowings.

That is the business story, and it seems perfectly reasonable (and indeed reassuring). But the share price has not kept up with this. Speedy is down sharply since the start of the year, something that doesn't make a lot of sense in light of yesterday's update. There is no doubt that the darkening economic backdrop bodes ill for business for all shapes and sizes. In Speedy's case, there is the risk of its customers' cutting back on activity, and thus on the work they send its way.

But, going back to the share price weakness, Speedy is now trading at a significant discount – more than 40 per cent, in fact – to tangible net assets of 33p (that is, when you value goodwill at zero), according to the analysts at Peel Hunt. The discount-to-net-assets is nearly 60 per cent. The market, in other words, is being too bearish.


Our view: Hold

Share price: 341p (-3.6p)

The manufacturing buyout firm Melrose put out some good figures yesterday. Continuing group sales for the third quarter were up 12 per cent.

The company, which recently walked away from a bid for Charter International, also said that current trading remained encouraging, and was in line with management expectations.

Looking ahead, the picture is unsurprisingly mixed. While noting that its sales were increasing in each of its main operating regions of Europe, North America and Asia, Melrose admitted that "growth in Europe is slower". However, it added that this was being offset by performances in North America and elsewhere around the world.

Given its exposure to the power, oil and gas and mining markets, the long-term case for Melrose remains intact. The short-term picture, however, may prove more tricky, owing to the uncertain economic backdrop.

Our last "buy" recommendation was in March, when Melrose was worth around 311p. You could argue that the economic worries are reason enough to move out and bank profits. We would disagree. There is no reason to sell. But we would wait for the economic clouds to clear before adding to our holdings.

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