James Hollins, leading analyst at Investec, has initiated his coverage of The Restaurant Group (TRG) at a Buy with a 755p target price and said that the company has a quality estate that he expects to expand at an average annual rate of c.8%, with solid LFL growth (+3.5-4% p.a.) and modest margin expansion.
He said: “The scheduled August departure of chief executive Andrew Page creates an element of uncertainty following a sustained period of solid earnings growth (c.17% EPS CAGR FY05-13A). While we await news on his successor, we feel it is prudent to assume there will be no major divergence from the current strategy, and that the group will be able to secure a quality replacement.
“We expect resilient and rising free cash flow to drive net debt/EBITDA down close to zero by FY17E, supporting higher dividend payouts, a special dividend, M&A or accelerated organic growth. The shares trade at justifiably premium multiples and we initiate at Buy with a 755p target price”.
The group has built an estate of 445 UK units, focused on leisure and retail parks, airports, and edge- and out-of-town locations.
Hollins said: “These locations ensure a relatively captive audience with limited competition, driving a lower requirement for discounting. We forecast estate expansion of 7.6% (CAGR) to FY17E, with average annual LFL growth of 3.8% supported by improving macro conditions, strong brand and product quality recognition, and higher airport and cinema/leisure park footfall.
“Cash generation is a key factor in our positive outlook for the group, with maintenance capex only rising above £20m in FY13E, driving an historical FCF/share CAGR of 11% for FY05-13A. We forecast a FCF/share CAGR of 9% to FY17E, with excess free cash becoming available from FY15E to drive higher expansion or returns. Our DCF-based target price of 755p drives our Buy rating on initiation, with key risks relating to UK macro conditions deteriorating, cost inflation and higher competition for new sites.”