Leading analyst Douglas Jack has predicted that H1 results for The Restaurant Group (TRG) will be stronger than in the second half, which would have been hit by the good weather and tough comparatives.
Jack, of Numis, also predicted that TRG’s margins would fall for a third consecutive year in 2013. He issued a Reduce recommendation for the company at a 400p Target Price ahead of its H1 results on 30 August.
“This year, we expect growth to be stronger in H1 (with PBT up 15% to £30.0m) than H2 due to unfavourable warm weather in July/August as well as tougher LFL comps and increasing margin pressure as the year progresses. Given this, unsustainable restaurant supply growth and a valuation close to record levels, we would take profits.
“LFL sales slowed to 2.5% in March-April (from 6.5% in January-February), but should have picked up in May-June, aided by higher cinema attendance and easy comps (of 2%). Although H1 LFL sales should be up c.5%, our full year assumption is 3.5%, reflecting a likely weak start to H2 (ex-London restaurant sector LFL sales fell 5.4% on average in July, largely due to ongoing warm weather) and The Restaurant Group’s LFL comparatives are unusually tough, at 7.5%, in Q4.
On the question of margins, Jack said: “2012’s decline occurred despite LFL sales rising 4.5%. Since then, food market cost inflation has accelerated to 5.7% in July 2013 (from a 2012 average of 2.7%) and The Restaurant Group’s drinks price inflation has slowed to 4.6% (having peaked at 12% in Q1 2012). Aided by food cost hedging, margins should grow slightly in H1, but we expect them to fall in H2 due to slowing LFL sales and rising food costs.
He added: “These results should emphasis expansion, consisting of c.30 new restaurants this year. Unfortunately, such expansion is not unique: restaurant sector supply grew by an unsustainable 5.7% (a net 1,287 sites) in the year to March 2013. Such new supply should eventually lead to higher pricing pressure in leisure parks, compounded by Cineworld and Odeon (which is currently running price promotions with PizzaExpress) opening their own restaurants and incremental competition from pub operators.”
