Leading analyst Simon French at Cenkos has said that he remains positive on The Restaurant Group (TRG) given good visibility on the rollout (c45 new restaurants adds 7-8% EPS per annum) and casual dining exposure but remains slightly cautious given customers’ preference to trade up.
He said: “We estimate only c20% of the group’s assets (predominantly Pub Restaurants and Coast to Coast) directly benefit from this trend although the repositioned Chiquito and the Concessions division are arguably also beneficiaries.
“We remain concerned that Frankie & Benny’s could lose volume despite the stretching of the menu to include higher price point dishes. Trading should benefit from easier comparatives in the last four months of the year.”
TRG announced a broadly in line trading update, reporting 2% LFL sales growth for the 19 weeks to 10 May (compared to an industry up c1%), implying 1.6% LFL sales growth in the past 11 weeks.
French said: “Total sales for the 19 week period were up 8.5% and we believe margins were broadly flat. The group opened nine new restaurants in the period, closed five and reaffirmed its openings target of 42-50 for this year, of which c2/3 will open in H2.
“Given easier comparatives and a stronger film slate the group expects momentum to build over H2 and we forecast an acceleration in LFL sales growth to 3.5%. The group should open c45 new sites this year but we note increasing competition for leisure park sites from Casual Dining Group, in particular.
“However, the group’s long established relationships with landlords has provided high levels of visibility on rollout with >100 sites signed for the next 2-3 years. We also expect the group to accelerate the rollout of hitherto peripheral brands such as Joe’s Kitchen.
“We left our forecasts unchanged following the AGM update and we remain modestly below consensus although we see little near-term upside to our assumptions of 10% total sales growth (3.0% LFL) and broadly flat EBIT margins. The stock trades on a 2016E adj EV/EBITDAR of 8.6x and a P/E of 18.8x, neither of which appear demanding given the forecast c11% three-year CAGR in EPS. The yield remains attractive at 2.7% and there remains scope to return cash to shareholders given the strong balance sheet, or make earnings accretive, bolt-on acquisitions.”
