Analyst Mark Irvine-Fortescue at Panmure has said that he expects estate rationalisation to feature highly for The Restaurant Group (TRG) over the coming year, but does not envisage disposals of its Pubs or Concessions businesses.
Writing on the back of TRG’s trading update yesterday, which saw its shares fall 46p to 300p, he said: “Refreshing Frankie & Benny’s, acknowledged as them ‘problem child’, is likely to require more customer-driven menu content, better value, more relevant marketing/branding as well as higher maintenance capex. Improving trading momentum at F&B is all the more important in this climate of cost inflation (wages, imported COGS inflation, business rates) and highly competitive fast-casual dining market.
“2016 results are said to be in-line with previous guidance, but no indication which end of the £74m-£80m PBT range (on a 52w basis). We model £77m for 53 weeks. Revenue grew 3.7% to £711m based on LFL sales decline of 3.9% (PG -3.4%). The Q4 exit rate of 5.9% is concerning, driven by underperformance across the Leisure brands, as the market is still looking for signs that trading has troughed. We wouldn’t be surprised if ‘in line’ therefore means low end for 2016. TRG opened 24 sites and closed 37 sites in 2016.
“We expect the range of 2017 estimates to remain wide until there is some confidence that LFLs have plateaued and strategic initiatives start to bite. We model a fall to £65m PBT based on a -2.4% LFL sales decline. Consensus sits at £67m with a range of £59m-£78m. Management expects the trading performance to remain difficult in 1H17, but anticipates momentum improving towards the year end as strategic initiatives start to take effect.
“TRG trades on 13.5x 2017 EPS and 7.2x EV/EBITDA which could (should?) prove to be trough earnings. If so, the valuation starts to look interesting around these levels, but for now remains too early to Buy. Reiterate HOLD rating.”
