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Morning Briefing for pub, restaurant and food wervice operators

Mon 15th Jun 2015 - Analyst: Restaurant Group could double in size to 1,000 sites
Analyst: Restaurant Group could double in size to 1,000 sites: Numis Securities analyst Douglas Jack has reported that The Restaurant Group, for which he has a 860p price target and a buy recommendation, could double the size of its estate to 1,000 sites from its current number of 480. He said: “On Thursday, we hosted an institutional site visit with The Restaurant Group. This highlighted the depth of the business in relation to management and the range of successful brands that can be rolled out to potentially take the company to 1,000 restaurants (from c.480) over the next eight years. Frankie & Benny’s KPIs are as high as they have ever been. Its breakfast sales are growing strongly and in its children’s menu, the £1.95 Ice Cream Candy Shop is performing very well. Promotions still account for under 10% of sales. The site we visited is the top performer out of 20 restaurants in the Wembley retail park. Chiquito’s new design is proving to be highly successful. This has helped cocktails’ share of drink sales to have risen to 35% from 25% over the last 18 months. The site we visited is generating £40k of AWS. Within 12 months, all the sites should have the latest design. With a mostly 18-35 year old female customer base, Chiquito is not cannibalising Frankie & Benny’s. Coast to Coast is not cannibalising Frankie & Benny’s either, targeting the 23-45 age range (although without being exclusive). Food accounts for 70% of its sales; 25% of drink sales are cocktails, which are growing quickly. Coast to Coast’s menu is being improved through becoming narrower, but with more healthy options. Brunning & Price is premium in relation to location, building, range and service, but not price. Two-thirds of these units are freehold. The pace of B&P’s expansion is limited by the availability of people, not sites, but this limiting factor should ease as the brand becomes bigger. The site we visited generates £40k of AWS. Investment in digital marketing is increasing. The company wants to get to know its core customers better (e.g. 25% of Frankie & Benny’s customers account for 80% of the brand’s sales), encouraging loyalty and frequency of visit. The new App will enable payment by mobile and possibly geo targeting. We believe management is particularly confident on 2016E prospects, reflecting building momentum and increasing scope for gradual price increases. Comps are easy in June/July 2015, Q4’15 and Q1’16. Costs are benign and the broadening portfolio of expansion brands means that the self-financed expansion rate could reach 60+ new sites pa in four to five years.”

Peel Hunt – we’re moving our Patisserie Valerie recommendation from ‘Buy’ to ‘Hold’: Peel Hunt leisure analyst Nick Batram has this morning moved his Patisserie Valerie share recommendation from ‘Buy’ to ‘Hold’. He said: “The market can’t get enough CAKE, and rightly so for a business that is still growing at 20% CAGR. Management has achieved much: improving margins in Philpotts, self-funding the opening programme from operating cash flows, and developing a more flexible format (further expanding the roll-out potential). The rating, whilst high, is justifiable in the medium term, but a 29x FY2015E (24x 2016), suggests some short-term consolidation is likely. Therefore, we move to a Hold recommendation with a 328p target price. We believe management will maintain its 20 Patisserie Valerie annual store openings target, with potential to exceed this. Management mentioned at the IPO it could open over 250 sites in the UK, referring to an external report by Javelin. However, from our discussions, We note these sites do not include travel locations, Leisure Park and factory outlet stores, or the potential for Patisserie Valerie branded stores in new geographies. We understand that management intends to open a store in Northern Ireland by the end of FY2015; this opens up a new geography for the business and we contend that it has the potential to grow the estate to over 500 sites. We upgrade our forecasts to reflect higher group margin achieved from the integration of Philpotts into the group supply chain, nudging Ebitda up to £17.9m (from £17.6m) in FY2015 despite higher Q2-weighted store openings that pare back our FY2015E revenues (from £97.4m to £96.5m). We tweak our like-for-like sales assumptions to reflect market trading, but maintain our assumptions on the store opening profile; we assume store openings are funded by operating cash flows, with enough cash to pay an interim dividend in FY2015 (we estimate year-end net cash of £3.9m). Investors can view our assumptions in our interactive model, which includes our forecast assumptions. There is plenty more to come from menu development and social media marketing, which is a high-ROI play in the casual dining market. We believe Patisserie Holdings has yet to move the needle with respect to improving existing store sales. Although we would prefer management to disclose like-for-like sales, we believe there are plenty of opportunities to chase existing store sales growth, and this presents significant potential upside. Patisserie Holdings has risen strongly following its half-year results as the market cannot get enough of the high-growth roll-out story. The group will continue to grow at 20%, but a 29x FY2015E PE ratio (24x FY2016E) suggests a pause is due. We value Patisserie Holdings using our base case DCF at 328p, with a more aggressive like-for-like bull case DCF target price of 368p. Therefore, we are moving our recommendation from ‘Buy’ to ‘Hold’. We remain positive on the long-term prospects for the business and any weakness would present a buying opportunity.” 

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