Leading analysts Douglas Jack and Ivor Jones, of Peel Hunt, have given their views on the recent update from The Restaurant Group, saying the return to like-for-like sales (lfls) growth and the expansion of the pub estate are encouraging signs but that further downgrades are likely.

Leading analysts Douglas Jack and Ivor Jones, of Peel Hunt, have given their views on the recent update from The Restaurant Group, saying the return to like-for-like sales (lfls) growth and the expansion of the pub estate are encouraging signs but that further downgrades are likely.

A third of the estate should be Pubs and Concessions in 2020E, sufficient to sustain 2% LFL sales, stable profits and dividends, provided current capex plans and the 6x net debt/EBITDAR are retained. That would be a similar investment case to that of the freehold pub companies, except with higher downgrade risk, higher P/E and EV/EBITDAR ratings, and lower dividend cover

H1/H2. 2018E forecasts require 3% LFL sales growth over the last four months. We estimate 1% growth over this period would equate to under £50m of PBT. Over the last four years, H1 has accounted for 42.5-47.4% of full-year PBT; applying that to 2018E gives a FY PBT range of £42m-47m.

LFL sales are volatile, having been -5.5% in January-March, -7% in the first half of July, and peaked at 2.4% over the last six weeks, helped by a 35% increase in weekend cinema box office in August (driven by family movies: Mamma Mia: Here We Go Again! and Incredibles 2 cf Dunkirk and Spiderman last year), and growth in delivery, which has “good momentum”.

Although we believe management’s rebalancing strategy is right, operational gearing is high (the EBIT margin is 6.5%) and some of the recent pick-up in LFL sales could soon reverse, bringing more downgrades.

H1 PBT would have been down 35% without central cost reductions. We believe the potential for further cuts is limited. However, acquisitions should partially fill this gap and the LFL trend has improved, although it needs to stay at 2% or higher to avoid further downgrades, which are still likely, in our view. We are raising our recommendation to Reduce to reflect share price weakness, and our target price to 260p, equivalent to 13x P/E.