Restaurant Group recovery is far from assured, Berenberg believes
(ShareCast News) - It will be tough for Restaurant Group to deliver a sustained improvement in performance as cost and competition pressures continues to build, said Berenberg as it reiterated a 'sell' recommendation on the shares.
Recent results from the owner of Frankie & Benny's and Garfunkel's were upbeat as early-stage restructuring of the company led to a 2.2% decline in like-for-like sales in the first half of the year.
This was taken fairly well by the market but Berenberg noted that the company benefited from a number of external tailwinds, the period only included a few weeks of the new lower priced menu at Frankie & Benny's and other brand repositioning still to take place.
"Therefore, with the tailwinds unlikely to be as significant during the remainder of the year and prices at Chiquito set to be reduced over the next few months, we think the decline in LFL sales could accelerate," analysts wrote, seeing a negative effect from lower prices well into 2018 too.
EBIT margin declined 260 basis points in the first six months of the year as negative LFL growth and a variety of external headwinds hit profitability, though management expects to invest the £10m of cost savings and more into price, products and marketing.
Downside risks are seen as cost pressures are likely to continue squeezing margins more significant in the second half, with the situation little changed next year.
A highly competitive market is a further concern: "The CGA Peach Coffer business tracker shows that site additions continue to contribute circa 3 percentage points of the eating-out market's growth. The increase in sites is driven both by brands that have been around for many years continuing to expand, but also by newer brands that have quickly gained a sizeable foothold in the market. As such, we think that, in more attractive locations, competition is only becoming more intense."
"Restaurant Group investors should keep their seat at the table as recovery picks up:
In the case of Restaurant Group, the owner of Frankie & Bennys, the shares rose by 10% in a day on news that sales had fallen less quickly than analysts had expected when the company released a trading update late last month. In the first 20 weeks of this year sales fell across the group by 1.8% on a like-for-like basis, a much lower rate of decline than the 3.9% drop suffered in 2016 (and the 5.9% slide seen in the fourth quarter of last year alone). This offers encouragement that Mr. McCue can turn the group around.
The firm has very little debt and banking covenants are under no threat, so time is on the side of both management and investors. In the latters case, an unchanged full-year dividend of 17.4p equates to a 4.7% yield, so they are being paid to wait to see how this transitional year for the group develops, while analysts forecasts of a second straight 19% fall in underlying earnings per share suggest that expectations are still low.
The restaurant business is a cut-throat one but the strong balance sheet provides room for manoeuvre and the early signs are promising. Questor says Hold."
"JPMorgan Cazenove upgraded Restaurant Group to 'overweight' from 'neutral' and lifted the price target to 380p from 340p following the company's first-quarter update on Friday, as it now sees upside to the share price.
The shares have lost 17% since 10 March and the stock is now trading at 6.7x FY2018 EV/EBITDA, which appears too cheap, JPM said.
It said the group "has had a better start to 2017 than many in the market may have expected". Like-for-like sales in the first 20 weeks were down 1.8%, but this is a better run-rate than the 4% drop in LFLs the bank had expected and continues to expect for 2017 as a whole.
JPM said sales were supported by three tailwinds so far this year: strong growth in UK passenger numbers which has boosted the performance of the concessions business; good weather, especially in April and late May, which has supported the pubs business; and strong cinema admissions, which have helped the leisure business.
However, JPM does not expect these tailwinds to continue and reckons the full effect of the company's investment in pricing will only be felt in the second half of the year."
........On Friday to take advantage of SP increase. Bullish broker comment and Q1 sales held up well, but too many uncertainty's for me. Menus not yet sorted imho, both in respect of pricing and choice.
My funds now in RBG as a recovery stock (Hopefully)
I hope RTN does well and good luck to all holders.....
Just been to our local F&B and was firstly pleased to see it rammed and secondly now offering a simple menu without all of the multiple, often conflicting, special offers they used to do. I was surprised by some of the prices though but presumably this will only benefit the profit margin.
Maybe the new management have started to turn this around.
"Deutsche Bank initiated coverage of JD Wetherspoon and The Restaurant Group at 'sell' and price targets of 600p and 290p respectively, in a note on pubs groups on Thursday.
With the outlook for the UK pubs and restaurant sector is uncertain and assumptions for next year becoming more cautious due to worries about consumer spending, Deutsche saw future pressure on both sales and profits and called time on the sector for now.
Noting that JD Wetherspoon's margins are an outcome of the company's sales activity and that its low cost model relative to peers is the "more susceptible to cost inflation", with food and staff cost inflation likely headwinds, along with business rates.
The ongoing competitive operating environment is highlighted by JDW's reduced new openings programme.
Casting its eye over The Restaurant Group, the arrival of a new CEO with significant multi-site retail experience is "reassuring", but there are multiple threats to the rating and earnings resurrection.
"Trading weakness in the core format; ongoing roll-out despite format underperformance; increased competition in leisure/retail parks driven by landlords seeking to fulfill consumer's wider-ranging aspirations; the cost of regaining lost customers; and, increased costs," said the note.
The bank is also concerned that the company's the core format, Frankie & Benny's, will continue to struggle as the market moves from being competitive due to increased supply, to competitive from lower consumer spending, which could lead to earning downgrades and sites closures.
DB's estimates are some 10% below consensus, reflecting its greater caution around the delivery of a turnaround and minimal recovery in the full year of 2017.
DB also initiated pubs Marston and Mitchells & Butlers at 'hold' with price targets of 145p and 245p respectively. It reiterated its 'buy' recommendations on Greene King and Enterprise Inns but lowered its price target for the former to 875p from 950p and maintained its price target of 170p for the latter."
"Not everyone likes turnaround stocks and Restaurant Group operates in a fiercely competitive sector. But the arrival of proven new management, the honest admission that a lot of mistakes have been made and Augusts decision to hold the interim dividend all suggest that the company is capable of serving up better news in the coming weeks and months.
The firm, which owns the Frankie & Bennys, Garfunkels and Chiquitos chains, has certainly endured a torrid year. As profits growth has slowed and the profit warnings piled up, both the chief executive and the chief financial officer have gone and the share price has suffered a vicious fall a year ago it stood at about 700p, compared with last nights close of 350.6p.
The new boss, Andy McCue, the highly regarded former chief executive of Paddy Power, the bookmaker, arrived on Sept 19 and his new finance man has a good record too.
The first phase of a strategic review blamed poor management, not competition, for the trading disappointments and a revitalised menu plan, site opening programme and cost control could all restore profit growth, especially as sales momentum seems to be stabilising if the first-half numbers are a fair guide.
Patience will be required but expectations are low and the valuation more sensible. The shares now trade on barely 12 times earnings when the multiple used to be nearer 25 times.
"Restaurant Group shares fell on Wednesday as Citigroup downgraded its stance on the stock to 'sell' from 'neutral' and cut the price target to 320p from 350p.
The bank said that while there may be valuation support on a sum-of-the-parts basis, the company still faces significant trading headwinds, with limited near-term positive catalysts.
"Whilst we think recent management appointments of a new CFO and CEO are positive steps in the group's rehabilitation, we suggest there could be further store closures and exceptional costs as new management looks to revitalise the leisure operations."
"Restaurant Group's share price has bounced over 50% of late. Given this significant move, and our view that the group faces ongoing operational headwinds, we downgrade the stock to sell."
Last week, Restaurant Group said it swung to a pre-tax loss in the first half on the back of restructuring costs as it announced the closure of outlets.
In the 27 weeks ended 3 July, the group posted a loss before tax of £22.5m compared to a pre-tax profit of £38m the year before.
Meanwhile, like-for-like sales were down 3.9%, and Restaurant Group said it plans to exit 33 underperforming sites immediately as it reckons they are incapable of generating adequate returns."
"Admitting you are part of the problem, let alone the main reason, is hard to do. But it's exactly what LSE:RTN:Restaurant Group has done after a difficult year collapsed its share price by two-thirds. Alongside interim results, it's earmarked ..."
"Canaccord Genuity has raised its rating on Restaurant Group to 'buy' from 'hold' and lifted its target to 550p from 276p.
The broker said the upgrade on the owner of Garfunkels follows the replacement of chief executive Danny Breithaupt with Andy McCue, former chief of Paddy Power. The ousting of the CEO comes after a string of profit wanrings and a share price collapse.
"New CEO Andy McCue was CEO of Paddy Power where he embedded a new growth strategy which delivered record revenues and profits, as well as playing a main role in the merger with Betfair," Canaccord said.
Canaccord said the executive team has also been strengthened by the appointment of Barry Nightingale as chief financial officer and Spencer Ayers as new managing director for its Frankie & Benny's business.
Looking ahead to the company's strategic review on 26 August, Canaccord said: "We highlight a checklist of actions that investors should expect to read in the review: exit poorly performing sites, continue to develop the brand portfolio, reposition Frankie & Benny's, reduce and re-direct capex, improve digital marketing capability, reduce the overheads, review returns to shareholders including share buybacks."
Canaccord said the problems Restaurant Group faces are "not unique" but believes that the business is "fixable".
"Maturing brands inevitably require constant innovation and occasional reinvention and there are many positive case studies in the market that suggest it can be done."
"Nimmo sells Restaurant Group after profit warnings
Harry Nimmo, manager of the Standard Life UK Smaller Companies (SLS) investment trust, has sold his holding in Restaurant Group (RTN), after a succession of profit warnings.
It has become clear that increased supply has eroded its competitive advantage and could lead to continued revenue and margin pressure, he said.
Nimmo is not the only small cap trust manager to dump the stock. Neil Hermon has also sold the company from his Henderson Smaller Companies investment trust, saying the restaurant and pub operator had suffered from increased competition, a weakening brand and poor operational delivery.
Shares in the company, which runs the Franky & Bennys, Garfunkels and Chiquito chains, have slumped 45% since the beginning of the year.
Restaurant Group in April warned of a further deterioration in trading conditions and that full-year sales were likely to drop by as much as 5%."
The Motley Fool
9th June 2016
Did I miss the best buying opportunity?
Shares in Restaurant Group fell as low as 265p in May, before rebounding strongly to their current level of 367p. I've been taking a closer look to decide whether it's still worth buying ahead of a possible takeover bid or turnaround.
My view is that Restaurant's core franchise, Frankie & Benny's, has become dated and needs refreshing. However, this shouldn't be too difficult for a competent management team. Consumers are eating out in greater numbers than ever and Restaurant's balance sheet is strong, with very little debt.
Earnings forecasts have fallen recently, but on a forecast P/E of 12.5, the shares still don't look expensive. There's also a 4.4% dividend yield, which I expect will be maintained.
I suspect that any takeover bid would be priced at between 400p and 500p, so buying today could still deliver a worthwhile profit.
Garfunkels owner on the menu for activist investor
June 5 2016, 12:01am, The Sunday Times
An activist investor is building a stake in The Restaurant Group, owner of eateries such as Frankie & Bennys and Garfunkels.
Crystal Amber, whose past targets have included Pinewood film studio and the chocolatier Thorntons, has bought about 1% of the FTSE 250 company below the 3% threshold at which shareholdings must be disclosed to the market. It could take as much as 5%, sources said.
The activists swoop comes after a near-halving of The Restaurant Groups share price since the start of the year amid a trio of profit warnings.
The slump, against a background of growing competition in the sector and the falling popularity of retail parks due to online shoppings advance, has fuelled takeover speculation. Private equity firms linked to bid interest in The Restaurant Group include Cinven, the former owner of Pizza Express, and TA Associates, which has a stake in the fashion and home furnishings company Cath Kidston. A source close to the situation said the company would also make a natural target for Whitbread, the FTSE 100 parent company of Costa Coffee and Premier Inn.
Crystal Amber is known for agitating for deals in many of its holdings. A source close to the fund said there would be huge cost synergies if The Restaurant Group was combined with another operator. He added: Its got a share register with growth investors, and its no longer growing.
The funds intervention is likely to crank up the pressure on Danny Breithaupt, who has been chief executive since September 2014. Debbie Hewitt, who made her name as the managing director of
RAC, joined as chairwoman last month and has already started to shake up the board.
Stephen Critoph, the finance director, was ousted in April on the day of the third profit warning.
A source close to the company said the old board had been asleep at the wheel and suggested that Hewitts desire for change would align her with Crystal Amber.
Shares in The Restaurant Group closed at 357.5p on Friday, valuing it at £720m.
re yesterdays spike action on heavy volume,
FT saying Instinet/Nomura (which barely trades the stock usually) crossed more than 1mill shares running into the close, not known who for/why/etc
"Instinet is an institutional, agency-only broker that also serves as the independent equity trading arm of its parent, Nomura Group. It executes trades for asset management firms, hedge funds, insurance companies, mutual funds and pension funds."
Private equity firms including Pizza Express's former owner are mulling bids for struggling Restaurant Group, Sky News learns.
By Mark Kleinman, City Editor
The former owner of Pizza Express is weighing a takeover bid for the struggling listed company which operates the Garfunkel's restaurant chain.
Sky News has learnt that Cinven, the private equity firm, is in the early stages of evaluating an approach to the board of Restaurant Group, which has seen its shares plunge by more than half during the last 12 months.
Cinven, which sold Pizza Express to a Chinese investor two years ago, is not the only private equity firm circling Restaurant Group, which also owns Frankie & Benny's.
City sources said that TA Associates and other parties had been running the numbers on a possible bid, although it was unclear whether a formal approach would materialise.
Restaurant Group has endured a torrid few months, announcing the departure of its long-serving finance director and a third profit warning in quick succession less than a fortnight ago.
The company, which also owns the Mexican-themed chain Chiquito and Joe's Kitchen, which is focused on a fresh food offer, has warned investors that this year's profits to be no higher than £80m.
Shares in Restaurant Group were trading at around 327p on Thursday, giving the company a market capitalisation of just over £630m.
It was unclear what level of takeover premium would be required to persuade the company's big investors to sell, but one source suggested an offer would have to be pitched above 500p to be credible.
Another insider said it was far from certain that Cinven's interest would result in a firm offer being made for Restaurant Group.
Cinven is also a former owner of the Byron, Ask and Zizzi restaurant chains through Gondola Holdings, their one-time parent company, before the latter two were sold to another private equity investor, Bridgepoint.
Confidence in the pace of the consumer spending recovery during the last five years has buoyed confidence in the UK's casual dining sector, with a flurry of deals involving chains such as Cote and TGI Friday taking place.
A person close to Restaurant Group said Cinven's operational expertise in the restaurant industry meant there could be considerable scope to improve its performance.
"The company's reputation has been badly damaged in recent months, made worse by the poor advice of its financial public relations advisers," the source said.
Alongside last month's profit warning, Danny Breithaupt, Restaurant Group's chief executive, announced a strategic review, the results of which would be announced in August.
"We are focused in the short term on the operational levers that will improve our trading performance," he said.
"In the medium term, we are reviewing the core strategic assumptions that differentiate our operating model to ensure that we optimise returns for shareholders.
Spokespeople for Cinven and Restaurant Group declined to comment on Thursday.
RARE Alert: Apollo/Casual Dining Group said to be circling The Restaurant Group
Loyal readers will have picked up on my scepticism about the recent The Restaurant Group bid rumours in my "Burnt fingers" series. However, perhaps too much time in journalism (over a decade now) can make you too cynical.
So, I'm prepared to air The Restaurant Group takeover tale that I have stumbled across recently as it contains a lot more detail than your standard "private equity" bid rumours that go around the market every couple of weeks.
Sources say US private equity firm Apollo, which controls the Casual Dining Group (formerly known as Tragus), has been looking at combining The Restaurant Group - owner of Frankie and Benny's, Chiquito and Garfunkel's - with the Casual Dining Group.
It's not clear, however, whether Apollo has submitted a formal approach for The Restaurant Group but word is the buy-out house, founded by Wall Street buccaneer Leon Black, has got bankers at Morgan Stanley, advising on how it should pursue a deal. Apparently, talks have already been held with The Restaurant Group.
Apollo took control of Casual Dining Group - owner of Cafe Rouge, Las Iguanas and La Tasca - via a debt for equity swap in 2014. So, it's not hard to see what the US predator's angle might be given The Restaurant Group has issued three poor trading updates in a row and seen its shares crash 55pc over the last twelve months.
Now, readers need to aware this information is RARE of the RAREST kind. If you don't remember what RARE is, here is the definition:
Market gossip that hasn't been tested through formal journalistic channels (public relations executives, bankers etc). The rumour might be total codswallop but then again there may be something in it, so it's worth airing on Betaville.
What will be interesting is to see whether The Restaurant Group or Apollo/Casual Dining Group make a statement. The trend recently has been for potential offerors to go "pens down" once they are outed in the media so they don't have to confirm a report.
Restaurant Group and Apollo both declined to comment.
Ripe for takeover, but will shareholders want to sell?
Investors in Frankie & Bennys, Garfunkels and Chiquito owner Restaurant Group (RTN) should brace themselves for a dividend cut following three profit warnings this year. While this would add to shareholders pain, the 60% share price decline so far in 2016 leaves the company vulnerable to a takeover bid so dont rush to sell the shares.
The Frankie & Benny's brand is 38 per cent exposed to retail-only sites, which are seeing lower footfall and increased competition. The current priority for management is to reduce exposure to retail-only outlets and the Frankie's brand; more than 50 per cent of the portfolio is Frankie's and the aim is to reduce this to around 40 per cent to better balance the portfolio. The poor share price performance since the prelims suggests that the market has been anticipating a profit warning. Expectations have now been set at a realistic level and, while there are challenges ahead, on a PE ratio of 13 the shares are attractive. We have cut our target price to 475p.
Canaccord Genuity: Hold.
Peel Hunt : Hold.
Investors Chronicle VIEW: Buy.
The group's shares have almost halved in value this year. This is in sharp relief to their stellar performance subsequent to the financial crisis. And though management doesn't "anticipate any improvement to underlying like-for-like trends", the group remains highly cash generative and net debt is relatively modest. So while the rebalancing of the portfolio isn't achievable overnight, the group's shares now trade at a sizeable earnings discount to their peer group, against a double-digit historic premium. It's difficult to imagine there's no upside from the current share valuation, particularly with a yield pushing 6 per cent. Buy.
Restaurant Group had its Neutral rating reiterated by analysts at JP Morgan Cazenove. Target price GBP 400.00
Interesting.A major part of the problem I conclude from the presentation seems to be that Frankie & Bennys is an indirect victim of the shift to on-line buying;as a consequence fewer people are visiting retail parks & shopping centres & hence lower footfall.
I get the impression that turnover could be down at least 10% in these outlets.Difficult to see an obvious answer to this problem.
Not so much the statement, as that is just repetition of the announcement, but for the Q&A session.
CEO Danny Breithaupt does not deal well with questions over the dividend, starts off by saying that the dividend target is 2x cover and when pushed on that point agrees that means a dividend cut. Later on he says that the business is highly cash generative and management are supportive of the dividend. When pressed he says that the dividend will be supported and there will be no cut.
Other information supplied is that maintenance capex will be £30-35m for the year (a good amount being spent on the problem - Frankie & Benny's) and total capex will be £80-85m (£75m LY). Despite this much higher level than I expected, the net debt guidance is just £30-35m for the year-end (£31.7m @ 31.12.15). Which with dividends of £35m, would imply FCF of say £32m (£42m LY) and OCF of say £112m (£117m LY).
Seems a lot,but in reality lease payments represent only a little over 10% of the companies overheads & are spread over approx 400 restaurants,assuming circa 100 are freehold;wages are a far bigger overhead at around 40% of costs.For the rent bill,the company is getting the use of about £1 billion worth of property.Prime retail properties of the type occupied by RTN sell on a gross yield of circa 6.5%.So it is quite cheap.
Sure if customers stop coming into the restaurants it has got problems but it will not be the rent bill that kills the business but the remaining 90% of overheads assuming it cannot cut these back.But I suspect a few percent can be found.
Sure lease payments are ongoing but can of course be assigned to other retailers.But if there is a major collapse of trade in any business,especially one where labour & other non rental costs are the biggest overhead it will be dead from other overheads anyway.
However this business presently seems likely to remain profitable-but perhaps not as highly profitable as previously in the immediate future.
"...To me it is less the balance sheet that it is stretched, but more the future operating lease commitments of £700m plus..." - schwee
Quite so, £799m at last year end. In about 3 years these will appear on the balance sheets of all companies, rather than in the notes.
There is £67m due this year and an average £58m pa over the following four years. The rest is more than five years away. So represents less than 10% of turnover and about 11% of all costs pa.
The decline in LFL sales would have to be substantially greater than they have currently indicated, for these future commitments to be a major issue.
Interestingly Greggs take a different view* on operating leases and run with around £40m net cash on their balance sheet specifically as an offset (their operating lease commitment is £128m; £38m in the current year, representing ~5% of sales).
"...The Board continues to be mindful of the leverage inherent in the Group's predominantly leasehold shop estate (which will in due course appear as part of the balance sheet in line with new accounting requirements) and of working capital requirements. As a result we have concluded that it is not currently appropriate to take on structural debt and we will aim to maintain a year-end net cash position of around £40 million to allow for seasonality in our working capital cycle..."
I am wrong Mutandis, so thanks for that. Paul Scott is right.
Liabilities of £184m at year end.
Current assets £38m.
So to my way of thinking there is £146m of debt, offset by £108m of freeholds. So still £38m of debt.
Now there is a ton of short leasehold property, which notionally well exceeds the debt. Is this really worth the value in the balance sheet? I'm not qualified to answer that, having no personal experience of this sort of business.
My thinking is still the same as yesterday. It's an elephant which at the moment is reasonably well balanced on a pin. As long as the management run the business well, it will be fine, but there isn't much scope for mistakes. They could sell the freeholds, but doing it will 'only' release cash.
On the trading side, business doesn't sound that awful. So I don't see that so much has changed. Not enough to justify such a knock to the price.
For people who don't mind gearing, I think that this will probably be OK. For me, there are better opportunities out there, with lower gearing.....
Some important points you make Greyinvestor, but I feel a bit harsh; net debt is just £32m with net liabilities (excluding debt and cash) of £97m, so in total £129m.
On the balance sheet Freehold land & Buildings are £109m (buildings are depreciated at 2% and land does not appear to have been revalued).
That's not an outrageous offset and, in contrast to the problem TSCO found themselves in, they have historically generated reasonable amounts of free cash flow and consequently have been successful in lowering their debt level from £46m in 2013 and £50m in 2010.
They have said they will open just 30 new restaurants this year compared to 44 last year, so capex should be in the £50-60m range (£75m LY) and if pre-tax profit estimates are hit of £74 - £80m, operating cash flow should exceed capex, although probably insufficient to totally pay for the dividend that costs about £35m.
It's the CFO immediately leaving that's the worry - most odd. If my memory serves me right he sold about half his holding back in November for about 675p.
Had a quick look at this today. I expect that a few punters will make a quick buck, but........
It's the balance sheet. Even Paul Scott of Stockopedia says it's fine, and he seems like a good bloke, but is it?
What I see is a huge amount of debt which is apparently offset by a small amount of current assets plus £100m odd of property.
The trouble is that most of the property value isn't freeholds, it's leaseholds. So where is the value? Is it 'investment' ie tables, chairs and so on, or is it the notional value of a lease that can be sold on? Following Tesco, I am dubious about the real value backing the balance sheet. Can it ever be realised?
So I'm staying out on the basis that if I don't feel confident in the assets, I shouldn't buy. I could easily be totally wrong though, so DYOR.
Read Panmure Gordon & Co's note on RESTAURANT GROUP, out this morning, by visiting https://www.research-tree.com/company/GB00B0YG1K06
"The Restaurant Group has announced a further deterioration in profits and now expect FY16 PBT of between £74m-£80m versus our previous expectation of c£89m. The roll out will be slowed to 30 units this year (versus c44) and maintenance capex will step up to £35m (from £25m) with total capex of £80- 85m. Easter has been poor and LFLs has deteriorated further to run at -2.7% with total sales +4.7%. The company now expects LFL to deteriorate further and end the year -2.5% to -5.0% ..."
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