Leading analyst Douglas Jack, of Peel Hunt, has said that potential bidders for The Restaurant Group are likely to keep their powder dry until the Spring. He said that early indications from H2 are that the company’s problems are deeper than management initially thought. He also examines what MCA data has to say about the wider eating out market.
He said: “Eating out market visits have stalled, spend per head is falling and voucher activity is strong, particularly at Restaurant Group, even in the first week of Star Wars, which is also the last week before Christmas. This points to substantial voucher activity in 2018E: we believe the resultant risk to forecasts is firmly on the downside; and the next cut should take the dividend with it.”
Jack pointed to data from MCA’s authoritative Eating Out Panel, which showed eating out frequency fell in every day-part during November, with average spend down at lunch (48% of meal visits) and dinner (26% of visits), but not breakfast (26% of visits). He also noted the MCA analysis on promotions and offers, which revealed 24 out of the 25 brands are offering online promotions.
He said: “(MCA data shows) 47% of all the promotions come from upselling on menus. However, the core promotions at Restaurant Group do not: they are 33% off mains through to 24 December; having been 50% off mains until 11 December
“The demise of Restaurant Group’s share price could lead to speculation that the company could be acquired and broken up. The shares trade on c5x site-level EV/EBITDA, and the pubs and concessions businesses, which account for possibly 30% of profits, are arguably worth at least 10x EBITDA. Their sale could leave the remainder on c3x EV/EBITDA. •
“In our view, potential bidders are likely to wait for the next trading statement (25 January) and results (early March) and allow the new Chief Financial Officer (starting in February) to review market expectations before even considering the possibility of a bid.
“LFL sales were down 3.8% in early H2 (six weeks), after Frankie & Benny’s cut mains prices by 7%. The need to currently offer another 33% off mains prices in 70% of the estate indicates that RTN’s problems are deeper than management first thought. We are cutting our target price to 250p to reflect downside risk to consensus expectations of PBT rising by 9.5% in 2018E.”