Peel Hunt analysts, Douglas Jack and Ivor Jones, have given their view on the contrasting like-for-like performances at the start of the year across pub and restaurant groups.
The note says: “Ahead of March’s snow, the like-for-like trends in January-February provide a good reflection of the developing themes within the managed licensed retail sector: 3% year-on-year supply growth in both pubs and restaurants; +1.2% average like-for-like sales in pubs versus -0.6% in restaurants; and private restaurants utilising CVAs to remove their most unprofitable sites and reduce costs elsewhere.
“Since 2007, the number of pubs has fallen by 20%, and the number of restaurants has grown by 24%. In both cases, the number of managed outlets is still growing, whereas the number of leased pubs is in constant decline. Due to changes in planning laws and the recovery in drink sales, we expect pubs’ supply reduction to slow. Restaurant supply grew by 0.6% in 2017; we do not expect it to collapse in 2018, as many CVA sites will likely be run for cash.
“Prezzo, which was quoted in 2014, suffered an 8% decline in like-for-like sales in 2017, which we believe was no worse than RTN’s performance outside pubs and Concessions. The closure of 94 (of 300) sites and 25-50% rent reductions in 57 sites is expected to help boost Prezzo’s margins by 500bps. The key questions are: how much of this new firepower will be used for discounting; and with the infrastructure already in place, how many of the 94 closed sites will reopen under a new restaurant format?
“For Restaurant Group, with £0.5bn of equity value, we believe a CVA is less of an option if its like-for-like sales continue to fall; a rights issue would not solve the core supply and market positioning problems; and a sum-of-the-parts valuation is invalid if shareholders cannot extract the value in the pubs and Concessions.”
The note concludes: “Deep value is emerging in the pub sector, in which our favoured stocks have good drink-led exposure: Ei Group, with a 20% equity FCF yield, and Marston’s with a 7.7% dividend yield (13% equity FCF yield).”
