Leading analyst Simon French at Cenkos has said that he remains confident that The Restaurant Group has the skillset to make the necessary remedial action to stabilise profitability over the medium term not least given “the very high central cost base of >£35m, which is inappropriate for a contracting business of 491 sites (>£72k per site)”.
He said: “The company has announced a disappointing post close trading update with LFL sales growth decline accelerating to -5.9% in Q4 (-3.7% after 34 weeks) to bring FY LFL sales growth to -3.9% (in line with H1). The group therefore expects results to be in-line with previous guidance (£74-80m PBT on a 52 week basis, and we estimate a 53 week consensus of c£75m).
“The 53rd week added c£19m to revenue to bring FY revenue to £711m, ahead of the top of the range of market expectations (£663-706m) suggesting greater scope for cost efficiencies over the coming months. The weak performance in Q4 was across its Leisure brands suggesting the ills at Frankie & Benny’s have spread into Chiquito and Coast to Coast.
“The group has identified significant change is required at all three brands through proposition improvement (i.e. price, quality, value), improved operating processes and a leaner, faster and more focused business.
“FY results due 9th March will see the group update on these themes but the group is guiding towards a ‘difficult’ H1 and we thus expect consensus expectations of £69m PBT will need to be revised downwards today. However we remain confident that the group has the skillset to make the necessary remedial action to stabilise profitability over the medium term not least given the very high central cost base of >£35m, which is inappropriate for a contracting business of 491 sites (>£72k per site).
“Based on consensus forecasts, pre-downgrades, the group trades on 2017E EV/EBITDA of 6.7x and a P/E of 12.9x. The yield of 5.0% assumes no cut to dividends which should provide some share price support although there is no guarantee the dividend will not be re-based.”
