Tuesday tips round-up: RBS, Mitchells & Butlers

17th Jun 2014 06:56

Shares in RBS have barely budged year-to-date. However, come August 1st, when Chief Executive Ross McEwan presents the bank´s halfway figures, he will be able to boast that progress is being made. Firstly, he is extracting the lender from its Ulster Bank subsidiary, even if the value attached to that by some may be over exaggerated. As well, the flotation of about a quarter of its Citizens arm Stateside is on track to take place this autumn. Similarly, the EU-mandated flotation and disposal of 312 Williams&Glyn´s branches should begin by 2016. All of the above may come on top of the £1bn in cost savings promised for this year. Yes, there remains uncertainty over the recent investigation into the alleged manipulation of foreign exchange markets. Then there is the risk of litigation in America over the 2007 mortgage-backed securities affair. Nevertheless, its core retail and commercial banking business in the UK are seeing improvement, as the economy recovers. Most important of all, next week shareholders are expected to vote to repay £1.5bn to the UK government, another step on the path to a resumption of dividend payments. The shares remain a 'strong hold', writes The Times´s Tempus. Mitchells & Butlers acquisition of 173 new sites from the Orchid Group drew a yawn from investors. The UK´s largest pub operator believes that its more profitable brands and cheaper borrowing costs will allow it to make the deal work. If the UK economy continues to recover then the company is probably right. The average weekly sales of the Orchid pubs was about £15,300 in comparison to an average of £22,700 for the existing M&B estate. However, wheras the firm sees the pub and restaurant market expanding by 6% over the next four years its own like-for-like sales were up by just 1.1% over the 28 weeks ending on April 12th. Aggravating the above, it continues to carry a lot of debt and free cash flow fell to £70m during the first six months of the year from £82m. Lastly, its triennial pension fund valuation saw the shortfall jump from £400m to £572m at the end of March. Hence, anual pension fund contributions will jump by 10% to £45m. The shares are changing hands at at a price-to-earnings multiple of 11.3, decreasing to 10.3 next year. That is cheap when compared to its peers, whose stock is trading in the high teens. Nonetheless, that gap is justified given the debt burden and sluggish sales growth, such that any meaningful return to dividends looks a long way off. "As a result the shares are best avoided for now," says The Daily Telegraph´s Questor column. Please note: Digital Look provides a round-up of news, tips and information that is impacting share prices and the market. Digital Look cannot take any responsibility for information provided by third parties. This is for your general information only as not intended to be relied upon by users in making an investment decision or any other decision. Please obtain a copy of the relevant publication and carry out your own research before considering acting on any of this information.AB