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Morning Briefing for pub, restaurant and food wervice operators

Fri 27th Mar 2015 - Analyst – Restaurant Group to provide some of best growth in sector
Analyst – Restaurant Group to provide some of best growth in sector: Deutsche Bank leisure analyst Geof Collyer has argued that The Restaurant Group (RTN) is poised to provide some of the best growth in the sector in the net five years. He stated: “The Restaurant Group proved to be a major turnaround story of the past decade by moving from a mediocre restaurant business on the edge of bankruptcy to the successful and fast-growing business that it is now. With Earnings Per Share growth of 71% over the past five years and dividend growth of 92% over the same period, driven by strong trading performance and high returns of investments, we believe that the Restaurant Group is well set to maintain this trend. We also believe that the new internally appointed chief executive Danny Breithaupt, who has been with the company since 2001 and was running the group’s largest division, should ensure this continuity. The company should generate some of the best growth in the sector over the next five years, but we believe that most of this is in the valuation, hence our Hold rating. As with our pub companies, we value the Restaurant Group on an EV/EBITA multiple, the metric that has provided the greatest degree of homogeneity for pub group multiples over the past two decades. We value the Restaurant Group on 16x EV/EBITA to 2016E versus its five-year average of 11x. We believe that the premium is appropriate, given the following factors: (i) the company’s strong trading performance with annual like-for-like sales growth of 3.5% in the next five years versus the previous five-year average of 2%; (ii) a strong new openings pipeline (we expect the group’s estate to increase c.40% by 2018E) and (iii) consistently high returns on investment. As a result of forecast increases and rolling our base year for computation of our target price, we recently increased our target price from 675p to 785p. A strong UK economy should place RTN in the sweet (or should that be dessert) spot for consumer spending. RTN’s current high multiple is a 20% premium to the sector average and a 35% premium to its own ten-year historical average. We have amended our forecasts to reflect a number of issues, but have also made the following changes: an increase in new outlet growth, but now offset by higher closures than previously expected (some old Little Frankie’s that were located in ex-Deep Pan Pizza sites where leases are expiring, an old Chiquito’s and some concessions where the contract had lapsed); an improvement in forecast like-for-likes (especially in H2) after an uncharacteristically difficult year in 2014, driven in part by a better cinema roster in 2015 and 2016 versus 2014; modestly higher margins, with higher labour costs, offset by better like-for-likes and flatter central overheads; realigning our operating lease rent drivers to come into line with growth in net new sites and rent inflation, which we have set at 2% per annum; a 100 bps lower effective tax rate.”

Enterprise responds to “statutory code” Royal Assent: Enterprise Inns has stated its “notes yesterday’s Royal Assent to the Small Business Enterprise and Employment Bill which heralds the future introduction of a Statutory Code and an independent adjudicator to regulate the relationship between large pub companies, including Enterprise Inns, and their tied tenants”. Chief executive Simon Townsend said: “Royal Assent brings greater certainty as we continue to work with our publicans and develop ways of working to accommodate the forthcoming Statutory Code. We look forward to participating in the future consultation to ensure that details of secondary legislation – the Statutory Code itself – are workable and build on the progress made to date.”

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