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Wed 31st Aug 2016 - Ratings firm Moody’s rewards Wagamama’s two years of double digit LfLs
Ratings firm Moody’s rewards Wagamama’s two years of double digit LfLs: Ratings agency Moody’s has increased its rating of Wagamama bonds to positive from stable thanks to its outperformance of peers. Emmanuel Savoye, of Moody’s, said: “We have changed our outlook on Wagamama to positive to reflect the company’s improved leverage resulting from strong top line growth and improved Ebitda generation over the past 24 months. We also expect it to keep reducing its leverage in the next 12 to 18 months. Despite the UK’s increasingly competitive casual dining market, Wagamama has outperformed its peers by delivering double digit percentage like-for-like sales growth in the past two financial years and in the past four quarters. It also continues to expand organically through the opening of new restaurants in the UK and internationally.” Previously, Propel has reported Wagamama saw 16.2% like-for-like growth in the fourth quarter of its latest financial year to 24 April. Moody’s said it viewed positively: 1) the track record of consistent revenue and Ebitda growth at Wagamama, 2) the management team’s success in rolling out new restaurants in the UK and to a lesser extend internationally, as well as 3) the strong brand recognition and the concept differentiation offered by Wagamama as the only major pan-Asian player in the UK. As of 24 April 2016 (FYE 2016), UK like-for-like sales increased by 13.1% compared with FYE April 2015 and Ebitda after leases and pre-opening costs increased by 23.5% to £35.7m, which is ahead of the original business plan and higher than previous Moody’s expectations. Over the same period, Moody’s adjusted debt-to-Ebitda decreased significantly to 5.3 times from 6.7 times and the Moody’s adjusted Ebita interest coverage improved to 1.6 times from 1.1 times, reflecting the high coupon of 7.8% on the outstanding debt. Moody’s added: “The casual dining market remains highly competitive in the UK. After a good performance in the first three quarters of 2015, the market has slowed down in late 2015 and into 2016 in terms of like-for-like sales. Although underlying positive fundamentals remain for the sector, there are also a number of challenges in Moody’s view, including 1) increased competition due to continued new restaurant openings which makes it more difficult to achieve positive like-for-like sales, 2) the recent outcome of the UK referendum to leave the European Union which may lead to a period of economic uncertainty and a possible decrease in consumer confidence, and 3) pressure on margins due to the planned increases of the minimum National Living Wage introduced in April 2016. Against these challenges, Wagamama continued to achieve double digit like-for-like sales growth in each of the last four quarters, and preliminary figures indicate a continued strong performance in quarter one 2016/2017 including during the period immediately following the Brexit vote. In Moody’s view, this demonstrates the quality and strength of the brand as the only player of scale offering pan-Asian cuisine in the UK. In addition, the company has implemented cost saving measures to partially offset the minimum National Living Wage increase, such as optimising procurement and a more efficient use of the workforce. Moody’s notes though that the development on consumer confidence post Brexit are yet to be tested and that the planned future increase in minimum National Living Wage may have a negative impact on Ebitda margin. Other sources of margin pressure could arise in the market, such as an increasing use of external parties to expand in the delivery sector and a potential food cost inflation over time due to a weaker currency. However, in Moody’s view, the growth of the delivery segment will also enable to expand revenues, while food cost inflation is expected to be mitigated by the long-term contracts generally in place on food sourced from abroad and from the efforts taken to find alternative local suppliers. With revenues of £229.9m, or less than half the revenues of the top players in the UK casual dining market such as PizzaExpress and Nando’s, Wagamama remains a small player with a strong niche position and as such the company’s cash flow generation is more exposed to the underperformance of individual restaurants or the strength of its only brand and cuisine offering. At the same time Moody’s recognises that the continued growth of Wagamama in recent years has enabled it to reach a size where it can take more advantage of economies of scale, as evidenced by the opening of a new central kitchen in 2015, and the centralisation of the production of sauces and other key ingredients for all of Wagamama’s UK restaurants. Moody’s also notes the improving geographic diversification along with the expansion outside the UK. As of July 2016, the company has 38 restaurants across 15 countries. We expect the company to continue the roll-out of new restaurants in the UK as well as internationally and to use internally generated cash flows to finance the investments required. As a result, we do not expect any meaningful free cash flow generation in the next 12 months while recognising that a large portion of the expected capex is discretionary. In light of the bullet maturities of the outstanding notes, we expect deleveraging to be driven by Ebitda growth and we currently assume that Moody’s adjusted debt-to-Ebitda will reduce slightly below 5.0 times in the next 12 months. The company’s liquidity remains adequate, including about £35.5m cash on balance sheet as of FYE 2016 and a fully undrawn £15m super senior revolving credit facility maturing in 2019. There is no scheduled debt amortisation until the bond maturity in 2020 and ample headroom under the minimum Ebitda covenant.”


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