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“There is a sea of red on the markets today, with Continental Europe and Asia faring the worst. Europe was hit by concerns over Italy’s budget meeting, the latest US interest rate hike served to trouble investors, and Hong Kong’s Hang Seng index saw particular weakness in technology stocks. “On the London market, the FTSE 100 dipped 0.1% to 7,502 with weakness among banks and tobacco stocks offsetting gains from oil, telecoms and service companies,” says Russ Mould, Investment Director at AJ Bell.
TUI
“Travel operator TUI comfortably wins the battle with its main UK-listed peer Thomas Cook by guiding for results to be in line with expectations despite the summer heatwave enjoyed by its major markets acting as a deterrent for some people to book overseas breaks.
“Today’s announcement raises questions about whether Thomas Cook, which warned on profit earlier this week, struggled with bookings simply because potential holidaymakers were sunning themselves at home or if there are more fundamental problems facing the business.
“The nature of TUI’s tour operating business, which is less exposed to the late booking market where Thomas Cook suffered, and its greater exposure to the high growth and high margin cruise ship business have helped the former perform better.
“TUI’s hotels business is also doing well with plans to open 60 new hotels by the end of next year. All of these factors help underpin the long-held guidance for 10% growth in underlying earnings. That is no mean feat given the myriad challenges facing the business.”
Mitchells & Butlers
“An improvement in sales is a good step forward for pubs-to-restaurants group Mitchells & Butlers, implying the benefit of considerable investment in its estate is starting to feed through to the numbers.
“Unfortunately what’s missing in the trading update is guidance on the all-important profit figure. The most important point in the announcement is weaker margins, continuing a trend seen earlier this year.
“While it says cost headwinds haven’t worsened, you also have to consider the discounting culture that now exists across the restaurant sector. Consumers have become used to finding money-off deals with great ease, either through vouchers or restaurants running promotions like two-for-one.
“That puts pressure on Mitchells & Butlers, and other operators, to either cut prices or also offer discounts to stay competitive. Naturally discounts serve to further reduce profit margins on top of cost pressures like wage inflation, property costs, energy and food and drink costs. “For example, one of Mitchells & Butlers’ main brands is now encouraging customers to collect loyalty stamps to earn a free main meal and it is offering a third off food in the daytime.
“It is fair to say the group has been lagging its peers for a long time and is only now getting the business in better shape under the leadership of Phil Urban. However, the journey is still ongoing and for shareholders there remain doubts over when the dividend is going to reappear.
“At the half year results in May the company said it would make a decision on the dividend at the year end, hence why there is no reference to the shareholder reward in the latest trading update.
“It seems clear that Mitchells & Butlers is trying to set expectations as low as it can, thus giving it room to keep the dividend suspended if it feels that margins are going to stay squeezed for some time and the business needs to stay agile during its turnaround efforts.”
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