We expect a positive market reaction to Restaurant Group’s 1H results. The Group shows it is taking decisive action with its restructuring plan exiting underperforming sites and agreeing improved rental terms with landlord and airport partners. Trading performance post-lockdown is encouraging with Wagamama and Pubs seeing solid LFL growth and outperform their markets, while Leisure has traded in line with the market, and Concessions’ sales being ahead of the passenger declines. In response to COVID-19, costs have been reduced and liquidity has been improved with ND of c.£311m being better than management earlier anticipated. We update our model, reducing forecasts and hence lower our Dec-20 DCF based price target to 110p. Remain OW.
The trading performance post lockdown is highly encouraging, with 90% of the retained estate reopen, LFL sales in the 11 weeks to 20th September were ahead by 11% in Wagamama, 14% in pubs, 4% across the leisure estate and down 58% (albeit 15% ahead of passenger volumes) in its airport concessions business. This is marked outperformance against the wider market. Operationally, the group has seen a continued strong performance in takeaway/delivery and geographically across its more suburban and retail park locations, with metropolitan, most notably London, underperforming; takeout now accounts for 24% of Wagamama sales and 12% across leisure.
The group generated an EBITDA loss of £18m (IAS-17 basis) in the six months to June 2020. Given the strength of trading our full year expectations of £15m looks a light and we would expect to be upgrading to c£25-30m, which builds in some meaningful caution around the fourth quarter. We would anticipate margins were ahead in the Q3.
Net debt was also markedly better than expectations at £311m (at end June). We would expect the group to be cash positive in the third quarter. A 53rd week (£15m) and a additional restructuring costs mean our year-end net debt position is likely to remain unchanged at c£304m and we would expect further debt reduction in future years as TRG and the wider market recovers.
Following CVA’s, administrations and closures the retained estate is now expected to be around 400 sites, compared to 653 at the end of 2019. With cost efficiencies, including overhead and improved rental terms, the group is guiding to c£110-125m of ongoing EBITDA from the retained estate based on 2019 pro-forma revenues, consistent at the top-end with our previous expectations. On our estimates, at this juncture we see EBITDA of £82m in FY2021 (-16% LFL) and recovering to historic levels by FY2024.
We continue to see EBITDA of c£100m as the key benchmark for TRG. EBITDA at this level would support a material earnings base, 6p/share, and robust cash generation, free cash flow of c£60m p.a., enabling continued debt reduction. A valuation of 7x EBITDA at this juncture would equate to c80p per share (55p today), a PER of 13x and a free cash flow yield of 12%. Despite the numerous challenges that TRG, and the wider industry, face in the near to medium term we see a time horizon of “beyond four years” for per unit revenue metrics to return to pre-Covid levels as more cautious than the current economic consensus. Our central scenario has them getting there by FY2023F (with EBITDA of £100m by FY2022F and profitability back at historic levels by FY2024F), which could be worth treble the current share price. The rationalisation of the estate, strength of Q3 trading and broader industry dynamics is supportive of the investment case. BUY.
Current trading shows Wagamama and Pubs are comfortably outperforming the market, with Leisure in-line and Concessions reflecting a protracted recovery in travel. Cost and cash are being well managed, and we are happy to remain Buy rated given clear signs here of a higher quality business emerging.
Outlook commentary is largely qualitative, flagging short-term caution given ongoing impact of pandemic and government-imposed restrictions, but that the restructured business is well positioned to adapt to the challenges being faced and deliver long-term shareholder. Last week’s industry data showed LFL sales were down 23% Y/Y (-8% W/W), which seems consistent with our modeling for September sales down 15%.
Our first take is that our FY20 EBITDA of £35m seems to be in broadly the right area, although a 53rd week will now be reported, adding £2-3m of EBITDA. Year end net debt is guided to £300m-£310m, implying the business is not burning cash at this level of trading.
Liquidity: In TRG’s base case scenario, total cash facilities are £140m and less minimum liquidity requirement of £50m, available cash facilities do not go below £90m. In their stress case, this would be £27m in April 2021 and a breach of the RCF covenants in June 2021, which the directors believe they would work to waive or amend.
Stifel view. Our reading of the recovery so far is that consumers’ readiness to eat and drink out is fairly encouraging, set back by heavy-handed, unpredictable policy measures. We envisage a bumpy recovery, given the sensitivity to evolving economic and COVID developments. We regard TRG as a business transformation story offering SOTP upside potential, and COVID disruption is magnifying industry change. The strongest theme emerging from this crisis has been the change in tenant/landlord power balance, with rents being widely re-based across the sector, with variable rents (linked to sales). 71% of restaurants are back trading (per CPBT), and we wouldn’t be surprised if a lot of those still closed do not reopen; i.e. industry capacity shrinks by 20-25%. If so, that is not a long way from current demand levels, as measured by total sales down 27.7% Y/Y. The Leisure CVA reduces Frankie & Benny’s lease liabilities, which should allow investors to focus on the better quality businesses that remain. In time, we would expect TRG to command a higher rating.
Today’s interims are somewhat backward looking, so it’s best to focus on the main new news items. Briefly these are: (i) since reshaping the business Q3 trading has been strong since reopening in Pubs, Wagamama and Leisure; (ii) net-debt flat y/y which is better than feared implying c£160m headroom; and (iii) planned 50% rationalisation of the Concessions division. Yes the sector mood music is presently downbeat and the share price reflects this.
But it’s worth stepping back and highlighting the fact that Andy Hornby and the team have been highly proactive during CV19 to make the estate 40% leaner (c400 units vs 650), thereby resulting in c80% of EBITDA now coming from the growth areas of pubs & Wagmama. With sufficient liquidity to navigate a tricky 6-9 months ahead, we have high conviction that RTN will emerge as a much more robust business with a fit-for purpose growth platform. As such the shares on a FY22 P/E of 9x with >14% FCF yield offer an attractive risk-reward dynamic.
We expect today’s results to be well received and stay at Buy with a lowered 12m TP of 85p.
LFL sales have been strongly positive since the estate started to reopen in July. c90% of its estate has reopened. For the 11 weeks from 4 July to 20 September 2020, Wagamama’s LFL sales growth was 11% (an outperformance of 5% versus the market), Leisure was 4% (its strongest trading performance in over five years), Pubs were 14% (an outperformance of 20% versus the market) and Concessions were -58% (15% ahead of passenger volumes). Helped by a 27% reduction in central costs and a 30-40% reduction in rent, trading has been profitable and enabled net debt to fall in Q3. Net debt was £311m (excluding property leases) at the end of June 2020 vs £287m in December 2019. We forecast net debt to fall to £300m at year-end (although this figure would have been £285m, without an expected £15m working capital outflow at year-end) vs £470m of facilities that mature in June 2022. Due to the uncertainty of government restrictions, we are only upgrading EBITDA by £2m to reflect a 53rd week in 2020E, but believe the long-term prospects, especially from supply reduction, remain intact.
J.P, Morgan, Shore Capital and Peel Hunt on The Restaurant Group
J.P. Morgan praised TRG’s ”decisive action” on restructuring plan of exiting underperforming sites and agreeing improved rental terms with landlord and airport partners. Shore Capital said the performance post reopening was “highly encourgaing”. Peel Hunt described TRG’s like for like sales as strongly positive since the estate restarted in July.