Sector analyst Wayne Brown has issued a Buy recommendation for The Restaurant Group (TRG), owner of the Frankie and Benny’s and Chiquito brands, saying its current valuation is “too low for such a high quality business”. Brown, of Canaccord Genuity Limited, pointed out that TRG’s shares have underperformed the wider travel and leisure sector by c.7.5% in the past three months, but said: “There is nothing by the way of news flow or any substantial change in the performance of the business or a change in the macro environment to justify this weakness.” “Since the AGM update last year, the group has expanded its estate by around 6.5%. Coupled with modest LFL sales growth underpinned by growth in air passenger numbers, and improving BRC retail data in March should provide confidence of growing footfall in out-of-town destination retail/leisure outlets.” He said the outlook for TRG, which is to report its latest results at its AGM on 17 May, “improves as we move into the second half”, due to factors including the timings of its openings programme, moderate price increases expected in the summer and high airport traffic over summer resulting in a boost of its concessions business. Brown set a target price of 385p and his his forecasts are based on +1% LFL, 26 new openings and an H1/H2 split of 45/55. He added: “RTN is forecast to be cash neutral/positive within 12-18 months and the company intends to adopt a more appropriate capital structure. This could come in the form of share buybacks or a special dividend, as was the case in 2007. We estimate that RTN could leave its opening programme unchanged and still return up to £80m in 2012 and net debt/EBITDA would remain below 1x. “Any increase in returns would not impact on RTN’s ability to direct its cash flows towards value enhancing investment. In the four years since 2007, net debt has reduced from £77m to £42m, £106m investment in expansion (108 new restaurants), £48m in maintenance capex and returned £67m in dividends. “RTN is a highly cash generative business that has averaged a CFROA of 8% and a 21% ROCE over the past two years. The current valuation of 11.8x 2012E PE and 5.9x EV/EBITDA is too low for such a high quality business and does not account for the increased level of returns that is likely to be achieved/given to shareholders.”