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Melrose and Mitchells & Butlers lead FTSE 230 lower

Discussion in 'Market News' started by Lily, Apr 22, 2016.

  1. Lily

    Lily Forum Member

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    Companies top fallers in mid-cap index after broker downgrades

    Engineer Melrose and pubs group Mitchells & Butlers are leading the mid-cap index lower after a couple of broker downgrades.

    On Melrose, analyst David Larkam of Numis moved his recommendation from buy to hold, pointing out that its shares have climbed by 40% since it returned some £2.4bn to shareholders earlier this year after selling meter business Elster for £3.3bn.

    Melrose shares are up 40% since the return of Elster capital in January and trade at a 20% premium to our sum of the parts valuation. This reflects investor appetite to participate in the next deal given that there have been no changes to the underlying business or expectations. Whilst the track record supports such enthusiasm we see little reason to get involved at current premium levels and .. prefer to wait until there is clarity on the next transaction.

    Tough industry trading leads us to cut earnings per share forecasts 6-10% and our price target to 340p. However, we remain overweight as the relatively new chief executive is focused on improving performance, and if this fails we see plenty of other options to unlock value in this asset-rich business.

    The chief executive’s three themes [at the company’s November update] were (1) building a more balanced business, (2) instilling a more commercial culture, and (3) increasing the pace of execution and innovation. There are some indications of the latter. For example, the last few months have seen a new look, O’Neill’s, Miller & Carter’s “Steak Table” experience, a Toby Carvery app, the roll-out of contactless payments and Apple Pay, a new craft keg festival, a trial of its own coffee blend, and plans to add 500 digital gaming machines.

    However, these examples are hard to quantify, and we would look for clarity on: (1) group targets (e.g. like for like sales, operating margins, return on invested capital), (2) how the company aims to drive like for like sales (e.g. premiumisation, digital/Customer Relationship Management capabilities, improved food offer, more new product development/innovation, better incentivisation), and (3) plans to mitigate costs, particularly on the introduction of the National Living Wage but perhaps also a review of overheads (noting it has already restructured its senior operations teams).

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