Analysts corner: Peel Hunt on TRG/Wagamama

Peel Hunt analysts Douglas jack and Ivor Jones have expressed “considerable doubts” about The Restaurant Group (TRG)’s plans to acquire Wagamama.

They say there is a real chance that shareholders may vote against the plan, with the main concerns centring around the price paid; the high level of gearing for a labour-intensive, leasehold business; and large execution risk.

Despite the concerns, Peel Hunt moved its recommendation to Hold due to the shares falling below target price.

The note says: “At 13.2x EBITDA, Restaurant Group is paying a very full price for a 100% short-leasehold business. Although Wagamama’s LFL sales have been strong, its group adjusted EBITDA per site fell by 5%, with EBITDA margins down 200bps, resulting in flat adjusted PBT last year.

“We estimate a pro-forma P/E of 11x in 2019E. This assumes Wagamama’s EBITDA per site returns to growth before synergies. It is a concern that Wagamama (which would be run autonomously) has a group labour/sales ratio of 39% in a fast rising labour cost environment (one of the risks to our pro-forma forecasts is the assumption that pay differentials are not maintained).

“Wagamama’s LFL sales must inevitably slow (unless current sites are enlarged), and Restaurant Group needs almost 5% LFL sales in NovemberDecember, having achieved just 0.7% in the last eight weeks, to meet full-year LFL expectations of -1%. To the extent there is a miss, both Restaurant Group and Wagamama have gross profits that are 11x PBT, by our estimates.

“Pre-deal, Restaurant Group has the lowest fixed charge cover and the highest labour/sales ratio (35%) in the quoted sector, yet Wagamama should worsen the latter (to over 36%), in addition to the deal adding £250m+ of debt. Despite this, the dividend cut leaves a pro-forma yield of 4.4%, only in line with the All Share, and arguably too low for most income funds given all the associated risks. No need to own; there is better value elsewhere.”