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Wed 2nd Jul 2014 - Breaking News - Analyst: Restaurant Group set for two blockbuster years
Douglas Jack – Restaurant Group set for two blockbuster years: Numis Securities leisure analyst Douglas Jack has forecast two blockbuster years for The Restaurant Group as the economy improves. He has issued a ‘Buy’ note and a price target of 725p. He said: “The Restaurant Group should be one of the sector’s main beneficiaries from an improving economy. We believe there is upside to our forecasts, which already anticipate EBITDA growth, debt reduction and dividends growing equity value by an estimated 14% per annum. More competitors are targeting The Restaurant Group’s captive market locations, but mostly without both the brand and site pipeline to concern it. Historically, we have been over-concerned by this emerging threat and continue to be surprised how badly the competition is falling short. This scenario is unlikely to change in the near future, in our view. Restaurant supply grew by an unsustainable 6.0% (versus 2.0% demand growth) in 2013, but most of this expansion occurred in high street locations where barriers to entry are lowest. Restaurant Groups  expansion is in airports (with high barriers to new entrants) and leisure parks (where it has a competitive advantage), locations that benefit from better footfall trends than on the high street. Its strategy of expanding into attractive captive markets and avoiding high streets has helped it to achieve cash returns averaging 40-50% for Frankie & Benny's, 30-35% for Chiquito, 30-35% for Coast to Coast, 20-40% for Brunning & Price, circa 50% for Concessions, and even higher returns for Garfunkels. The site pipeline is sufficient to cover 40+ openings over the next three-to-four years. Like-for-like sales are the most likely source of forecast upgrades even though they are likely to have slowed from the 4% that was achieved over the first 19 weeks (to 11 May). We believe weather/cinema attendance comps are relatively easy in H2 2014E and that the company can look forward to a very strong cinema release schedule in 2015E and 2016E. The greatest threat to margins is labour costs, in our view. We believe the Restaurant Group’s share price does not fully reflect the value of its three-to-four year site pipeline. This is arguably considerable given that the average opening has historically created £1.7m of value (£2.5m equity value less £0.8m cost). Reflecting this, the company’s growth (assuming the size of the site pipeline is retained), we are retaining our 725p 12-month target price. Due to recent weakness, we upgrade our recommendation to ‘Buy’.
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