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Fri 19th Jan 2018 - Update: Analyst forecasts on Restaurant Group, Marston’s and Greene King
Douglas Jack – we expect Restaurant Group’s full year trading update to be weak: Peel Hunt leisure analyst Douglas Jack has forecast a ‘weak’ Restaurant Group trading update next week. He said: “We expect the full year trading update, due on 25 January, to be weak. After all, we/consensus expect profit before tax to fall by 30% despite the benefit of closed sites being classified as exceptional onerous leases. RTN’s discounting activity is a clear sign that it has been caught up in a deteriorating restaurant sector backdrop. Like-for-like sales fell by 2.2% in H1 despite the majority of the estate benefiting from 6% growth in both cinema admissions and airport passenger volumes. In the first six weeks of H2, which included the impact of Frankie & Benny’s food price reduction and lower cinema admissions, like-for-like sales fell by 3.5% by our estimates. In July-November, cinema attendance fell by 6.3%. In H1, Ebitda margins fell by 330bps due to the decline in like-for-like sales and investment in gross margins, with the impact of higher costs being offset by cost savings and closures. Ebit margins fell by only 250bps due an 80bps fall in the depreciation charge rate even though like-for-like sales were falling and the case for investing in the estate has not diminished. Our 2017 forecast anticipates like-for-like sales falling by 2.7%, with Ebitda margins falling by 350bps, reflecting a greater than expected step up in discounting activity in H2, in addition to H1’s price cuts. Aided by £10m of cost savings, a falling depreciation charge and closures being classified as onerous leases, 2017E PBT should be close to consensus, in our view. We are more concerned about 2018 forecasts. Cost pressures should start to ease, but with less incremental costs savings (as they were fast-tracked into 2017E) and less incremental closure savings. Our/consensus 2018E forecasts require 1.5-2.0% like-for-like sales to hold like-for-like profits, with a net 12 new sites forecast to provide £3m PBT growth (with minimal change in debt). The challenge in 2018E will be growing like-for-like sales. Collectively, managed restaurants (per the Coffer Peach Business Tracker) have not generated any like-for-like sales growth over the last two years and, despite all the discounting activity, restaurant like-for-like sales still fell by 1.0% in the six weeks to 7 January (Coffer Peach Tracker ). The bull case on RTN is corporate activity, but there is no lack of other restaurant brands that are available to buy, which compounds the problem: capex and capacity always goes in much faster than it comes out.”

Douglas Jack – Marston’s wet-led pubs to continue to win: Peel Hunt leisure analyst Douglas Jack has forecast a strong performance from Marston’s wet-led pubs. He said: “We expect Marston’s trading update to be in line overall, but with the wet-led pub estates outperforming the food-led estate (D&P). We do not expect to change our forecast of 10% PBT growth in 2018E, helped by the company’s careful revex management and 36% increase in capex in 2017. We view the dividend (6.8%) and FCF yields (11.2%) as attractive. Destination & Premium’s (D&P) like-for-like sales were positive in early 2018E; our full-year assumption requires just 0.5% growth. Last year like-for-like sales rose by 0.9%, but Q1 was one of the better quarters, at 1.5%, which presents a slightly tougher comp for this update. As at late November, Christmas bookings were in line, but we expect trading in December to have been impacted by snow (in the weekend of 10 December, and after Boxing Day). We expect trading to be stronger in the wet-led Taverns estate than in the food-led D&P estate, repeating last year’s trend. Both Taverns and D&P face a comp of 1.5% in Q1, but Taverns generated higher like-for-like sales (at 1.6%) over the last full year. This is consistent with the sector-wide trend, which is also inversely correlated to changes in supply within the wider sector. We expect a solid performance in both leased pubs and brewing. Leased like-for-like profits rose by 1% last year, but by 2% in Q117. Brewing like-for-like volumes grew by 3% in both 2017 and in Q117; in addition to the strong growth that is being generated by the Charles Wells acquisition. Marston’s opened 19 pubs/bars and eight lodges in 2017, and is forecast to open 15 pub/bars and six lodges in 2018E. We believe this slowdown should enable net debt/Ebitda to fall from 6.0x pro-forma to 5.7x in 2018E, despite the company paying an increasing dividend that now yields 6.8%. Marston’s has a wide range of profit streams, most of which are stable and cash generative. It knows where to expand, and what its cost pressures will be over the next two years. The combination of these factors has reduced the risk profile of the company during a tough consumer period.”

Douglas Jack – are there sign of green shoots at Greene King?: Peel Hunt leisure analyst Douglas Jack has forecast a slight improvement in Greene King’s managed division like-for-like sale when it reports later this month. He said: “The Q3 trading update is due on 25 January. We believe the company should be capable of a slight improvement in managed like-for-like sales from the -1.4% that it posted in H1, with the tenanted estate continuing to trade positively (H1: 1.5%). Our ‘Add’ stance reflects this and the dividend yield reaching 6.4%. Managed like-for-like sales fell by 1.4% in the 24 weeks to 15 October, during which the pubs constituent of the Coffer Peach Business Tracker (CPBT) rose by 0.1%. Subsequent CPBT like-for-like sales were better, at: +0.3% in October; +2.2% in November; and +0.6% in the six weeks to 7 January. Positive signs for GNK were 3% growth in Christmas bookings and NPS rising by 6.4pts. Managed like-for-like sales are key: managed generates 71% of group profit; and costs (guidance is for a £60m increase and £45m of mitigation) are more certain. Like-for-like sales should benefit from: investing £10m in service, value and quality, as well as the rebranding/selling the 70 Fayre & Square sites in H2. Although restaurant discounting and delivery is compounding the pain on value food outlets, we do not believe GNK should reposition to drink; it has to excel in offering what restaurants cannot do so well (character, events and premium drinks). We expect to hold our forecasts that anticipate managed like-for-like sales falling by 1.0% this year. The EV/Ebitda valuation is now lower, at 7.5x, than it was during the financial crisis (7.9x EV/Ebitda), yet the balance sheet is now stronger (4.0x vs 5.7x net debt/Ebitda). Over the last decade, the managed estate has become slightly more food- led in our view (food is c40% of sales). Food-led pubs are not benefiting from supply reduction (unlike wet-led), and tend to require customers to drive to outlets, an effort and cost that customers are more likely to undertake if the pub offers character and events, as well as exceptional food, drink and service (premium rather than value). The ability of pubs to adapt partly explains why their long-term performance is more correlated to the weather than consumer confidence. It also partly explains our long-term positive view on GNK.” 

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