Leading analyst Anna Barnfather at Panmure Gordon has said that investors in The Restaurant Group (TRG) will require further reassurance before the group’s stock can re-rate.
She said: “Over expansion and poor execution has seen a rapid down turn in Frankie and Benny’s fortunes, dragging down group LFL sales growth and precipitating dramatic earnings downgrades and a rapid share price de-rating. Management changes have been made and a strategic review underway including significant culling of underperforming sites with 33 to be sold and 29 impaired.
“We believe that the plan to reduce exposure to retail sites, update menus and accelerate maintenance capex makes sense but that it takes time to win back customers hearts and minds to restore LFL momentum. Additionally, its recent woes limit its ability to pass on wage inflation costs, adding to margin pressure. Hold with new price target of 410p.”
TRG has slowed down its roll out plans (from c40 to c26 pa) as the new management team re-focuses on restoring LFL growth and curtailing the tail end of its estate.
Barnfather said: “This involves a step up in maintenance capex and review of menu architecture (content and pricing). A strategic review is still underway but early indications are that this will not include any major corporate restructuring/brand disposals nor disposal of either the Pubs or Concessions division. LFL sales showed a decline of 3.9% for the first half of the year with management maintaining guidance for full year decline of 3.5% to 5.0% resulting in PBT guidance of £74-80m for 2016E (pre £59m of exceptional charges).”
In 2015, total staff wages amounted to £225m, equivalent to 32.9% - one of the highest in the sector - making TRG significantly exposed to wage inflation.
Barnfather said: “Additionally TRG’s broad menu range mean margins could come under additional pressure were food cost inflation to materialise. Having said that, we believe that there is scope for significant head office cost savings which have run up to £38m in 2016 (from £26m three years ago).
“TRG is mainly a restaurant operator (leased rentals and concessions turnover rents) with some exposure to freehold pubs within its Brunning & Price division. As such its balance sheet is asset-lite but also almost debt free with Net debt to EBITDA ratio of 0.4x (increasing to 3.4x post lease adjustment). Financial leverage is therefore not a concern with comfortable DSC and interest cover ratios and significant cash generation to cover is capex requirement.
“The shares are down 40% over the last 12 months with earnings estimates down 22% to put the stock on 2017E EV/EBITDA of 6.9x and PE of 12.8x. While this is attractive versus historic levels, questions remain about how fast trading can be stabilized and how long the new management takes to conclude on its strategic review. We believe investors will require further reassurance before the stock can re-rate; hence we stay at Hold pending interim results. Our SOTP valuation of 410p is derived using 8.0x EV/EBITDA multiple for the Restaurants division, 9.0x for Pubs and 9.5x for Concessions.”