Analysts corner: Edison and Goodbody on TRG

While The Restaurant Group’s H1 trading update this morning might not have looked too rosy on the surface, the fact it is mid-turnaround meant a 3.7% drop in like-for-likes was actually no worse than expected, according to analyst Edison, which shares its views of the results alongside Goodbody.

Paul Hickman, analyst at Edison Investment Research, says: “Now halfway through its third year of attempted turnaround, Restaurant Group’s interim result was always going to be down on last year.

“Like-for-like sales decline of 3.7% was actually no worse than expected following indications of a slight improvement against -4.3% for the first 20 weeks. And pre-tax profit is still £20.1m, which while 21% down year-on-year, still shows that the company is substantially profitable.

“In common with all retail and retail leisure businesses, the glacial first quarter had a one-off impact, and World Cup football doesn’t mix with sit-down restaurant business. But for the last six, now tropical weeks, like-for-like sales are up 2.4%, admittedly against a woeful comparative of around -3%,. And expectations for the full year are confirmed, implying second-half pre-tax growth of 6% to pre-tax profit of £53.3m for the year as a whole.

“While management has averted a short-term crisis, there remains plenty to do. With 57% of non-concession restaurants exposed to retail locations, any revival of demand for Restaurant Group’s offer has a lot to do with changing the physical footprint, a process likely to take years. An exceptional charge of £8.4m, coming on top of last year’s £13.2m and £126.5m in 2016, is mainly impairments and onerous leases, gives a clue that the cost of change is more than a single kitchen sink.

“While management is doing all the right things on menus, pricing, service and digital technology, the fact that 51% of EBITDA now comes from its substantial (mainly airport) concessions and smaller pubs estate is the most positive statistic in the report. This element of the business does provide a strong base on which to build a more sustainable operation for the future.

“New contract wins for 17 concessions in the first half mean that total sales in this operation should grow over 10% in 2019, showing the direction for future evolution. For the moment, however the shares are no longer outstandingly cheap at a 2018 P/E of 10.8x, although a maintained interim dividend implies a useful yield of 5.8%.”

Paul Ruddy, gaming and leisure analyst at Goodbody says H1 was challenging, there are lots of green shoots.

“Management now expects to deliver full year PBT broadly inline with expectations (Factset PBT £51.5m - £55.6m, GBY £54.6m). We would see this as a positive given the challenges in H1. Furthermore, it now intends to open 39 sites in 2018 which is an acceleration on the 22 target at the May statement (aided by the acquisitions).

“We are also encouraged by the positive LFL’s in recent trading which could mark an important inflection point for the group. The exceptional charge of £8.4m associated with onerous leases and impairment of assets is somewhat disappointing. We are unlikely to materially change our FY18 forecasts on the back of this statement but momentum looks to be improving into 2019.

“Restaurant Group trades on 6x 2019 EV/EBITDA which is attractive given today’s statement which notes that 51% of EBITDA came from the Concessions and Pubs businesses. We believe this is a very positive update from management. While H1 was weaker this should come as no surprise given the weather and World Cup impact and the positive LFL’s recently is encouraging. It is executing strongly in its strategy to grow the Pubs & Concessions businesses.”

“When we initiated with a BUY rating and 360p PT in May, our broad thesis was that management could stabilise the challenged Leisure business (Frankie & Benny’s, Coast to Coast and Chiquito) and push growth in the attractive Concessions and Pubs businesses. Today’s update and call gives us greater confidence in our bullish thesis.”

On the development of the Firejacks concept, Ruddy added that while it is trading well, management would not be drawn on whether all Coast to Coasts would eventually be formatted.

He said performance in the Concessions division “looks to be stellar”. “Given airport pax is possibly the sole significant bright spot in the consumer backdrop at present we would see this outperformance as a major positive.

“There will be 17 Concessions opening in FY18 and renewals of existing sites is impressive (85%). The new sites appear to be spread across the country but they highlighted Edinburgh, Southend and Liverpool Street Station. Interestingly, Andy also noted that there is opportunity for international development here. It expects topline growth of 10% next year from the maturity of recent openings. We estimate there could be 70-75 concession sites at year end (57 at FY17).

“The key disappointment from this mornings update was the £8.4m exceptional charge relating to property and onerous leases,” added Ruddy.

“The group announced in 2016 that it would close 41 sites, of these 29 are now fully exited and 12 are closed, these sites were exited at more favourable rates so led to a £3.5m release. However, it now expects to close 12 sites this year and has impaired a further 12 sites due to trading conditions which leads to a £12m charge across lease provisions and impairment of property & plant. Although this drag on statutory profits is disappointing, management does appear to be making tough choices and trimming the underperforming tail of sites.”