Leading sector analyst Wayne Brown has issued a Buy recommendation for The Restaurant Group (TRG), the Frankie and Benny’s and Chiquito operator, after identifying “a number of positive catalysts that should support continued momentum”. Brown, of Canaccord Genuity, said: “The Restaurant Group shares have had a good run since the interims but have only outperformed the wider Travel & Leisure by 1.9% YTD. “We have identified a number of positive catalysts that should support continued momentum. First, the group has started to roll-out its fourth brand Coast to Coast which could build out to 50 restaurants by 2015/16E. This would add £11m to EBIT, suggesting equity upside of £128m (+26%). “Secondly, its operating cash flow now exceeds the demands of both the capital spend on new openings and dividends which suggests that additional cash could be returned to shareholders. Lastly, current LFL sales momentum of +3.25% is encouraging particularly with a strong film slate in Q4.” He said the value for money segment of the casual dining market in which TRG operates has achieved +8.8% growth since 2005 despite real disposable income falling 1.1%. “The CBRE forecast disposable income growth of +0.5% in 2013E which should provide LFL sales support. Restaurant Group has a 15.5% representation within the established scheme market (Leisure & Retail parks), which not only highlights the scale of the opportunity but also its insurmountable market leading position.” Brown added: “The Restaurant Group is highly cash generative: it has averaged 20% post-tax ROCE over the past decade and now averages a two year cash pay back period on new restaurants. We estimate that it could increase the rate of new openings by 66% and leave its 45% payout ratio unchanged and fund this all out of internally generated cash. “The group has a strong balance sheet with £80m of freehold (valued at cost on the B/S) and cash is forecast to build in 14/15E. The group deserves to trade at a premium to the pubcos in our view as it offers full exposure to the structural growth in the casual dining market, has no legacy debt issues, and an enviable track record of positive LFL sales despite the challenging backdrop.” He said TRG’s shares “are discounting growth for 2012 but apply no incremental value thereafter”. “We see scope for FY13E EPS growth of 14%. Our forecasts (which are in line with consensus) assume EPS growth forecast of 9.2%. Our target price of 440p equates to 8.5x EV/EBITDA and £2m per restaurant, some 2x the average fit-out cost.”