Restaurant Group share price (as at 3/9/19)

No ‘casual’ approach advised to investment in the UK dining sector

When The Restaurant Group unleashed its £559 million acquisition of Wagamama on unsuspecting shareholders just under a year ago, the latter responded with a sharp intake of breath. Theirs, after all, was a company operating at the centre of a casual dining sector in a trading crisis and here they were being asked to stump up £315 million through a rights issue and to stomach a cut in the final dividend. The takeover of the noodle chain was clearly a risk and to many of them the price looked very toppy.

Fast-forward a year and trading at Wagamama is storming ahead. Buying the outlets has given The Restaurant Group options, notably in the United States, and some much-needed resilience. Its share price, however, and arguably parts of the rest of the estate still leave a lot to be desired.

The Restaurant Group was founded in 1987 as City Centre Restaurants in order to buy the Garfunkel’s chain. Having acquired and opened several further brands, it changed its name in 2004. As well as dining fascias including Frankie & Benny’s and Chiquito, it owns and operates an 83-strong estate of pub restaurants, runs concessions in airports and railway stations and has several businesses, including Jumping Pan and Pyjama Hotel, that dish up delivery-only meals.

Wagamama was founded as a noodle bar chain in 1992 by Alan Yau, 56, and at the time of the acquisition it had 133 restaurants in Britain, five in America and a further 58 franchised outlets in Europe, the Middle East and New Zealand. Since then the number of sites in the UK has risen to 135, but there is one less franchise and The Restaurant Group has commited to a store expansion and conversion programme.

The noodle chain started to pay its way from day one, generating revenues of £7 million and pre-tax profit of £500,000 during the three months that it was under its new ownership before its financial year ended on March 31. In the subsequent six months, Wagamama lifted like-for-like sales by a market-beating 10.6 per cent. Assessed over a rolling 12 months, adjusted profit before tax and other items at the chain grew by 21.5 per cent to £51.4 million.

While the pub restaurants and concessions are also performing, unfortunately the same can’t be said for other brands, mainly Frankie & Benny’s and Chiquito, which suffered like-for-like sales declines that reduced the group’s overall underlying sales improvement to 4 per cent over the period. The group took an impairment charge of £100.2 million to cover the impact of an anticipated deterioration in trading, as well as a £10.7 million provision against problem leases during the first half.

In a further acknowledgement that trading life is not going to get any easier, the company has identified about 76 Frankie & Benny’s and 42 Chiquito sites that are in “structurally unattractive locations” and which it plans to close when the opportunity arises through expiring leases or break clauses.

The Restaurant Group is ploughing the right furrow to survive in the present consumer-led downturn. Although Wagamama and the concessions are its clear routes to growth, there is a question over whether they can sustain their momentum while fixing work at the rest of the group takes place. Worries about the outlook for casual dining dog the company’s share price, down 3½p, or 2.5 per cent, to 133½p yesterday and 7 per cent lower so far this year.

The shares trade on a modest multiple of 10.9 times Numis’s forecast earnings for a dividend yield of 4.6 per cent. Only the very brave might be tempted.

Advice: Avoid
Why: Wagamama is a clear performer, but the perils of the casual dining sector remove the shine.

Source: The Times

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