A leading analyst has upgraded his recommendation on The Restaurant Group’s shares to Buy on the back of increased visibility in the context of an expanding new site pipeline, combined with consistently high returns.
Nick Batram at Peel Hunt said: “The bullish comments made by management at the recent interim results regarding the future site pipeline suggest to us that there could be considerable upside from 2014 and beyond. Indeed, it is possible that 2014 could see a level of openings (40+) not seen for seven years. Not only is site availability improving, but the success of Coast to Coasthas given the group an additional format to pursue an expanding number of opportunities.
“We expect free cash flow of c£70m in the current year (and growing beyond) and this is more than sufficient to support an annual 40-50 site opening programme, while at the same time continuing to deliver double-digit dividend growth. With cash payback of two to four years across the various formats, the increased investment opportunity deserves to be reflected in the rating.”
Given the increased visibility of the pipeline and with the consistent returns achieved during a tough economic backdrop, Batram said he believed DCF was the most appropriate valuation metric at this stage. He said: “Using a discount rate of 7.5% and a perpetuity of 2%, we arrive at a fair value of 648p.”
The analyst has nudged his 2013E PBT forecast higher by £1m to £70.9m (EPS unchanged).
He said: “For 2014E, our new PBT is £78.0m (was £76.3m) and EPS 29.3p (28.9p). For 2015E, our PBT forecast is £86.1m (£83.1m), with EPS of 33.1p (31.9p). A very strong H2 in 2012 (LFL c5.75%) means that H2 2013 LFL will likely slow from the 5% reported in H1 – while this is expected it may provide a buying opportunity.”
