By Nick Batram, 02 March 2010
The quoted restaurant sector came through 2009 in relatively good shape with Carluccio's, Domino's Pizza and Restaurant Group all outperforming the FTSE All Share index. In part, this was because cautious management teams set expectations low. In addition, the underlying eating-out trend also remains positive; UK restaurant spend is forecast to increase by about 20 per cent over the next five years, according to Mintel.
Nevertheless, rising unemployment and taxation means that 2010 will be another tough year, which is why our focus is on companies that we believe are well positioned to face these challenges. On that basis we rate Domino's Pizza a buy and have a target for its share price of 390p (334p now). The group now dominates the branded pizza delivery market in the UK. It plans to have 1,000 stores by 2018 compared with 608 now and is delivering double-digit earnings growth.
We also rate Restaurant Group share a buy with a target price of 260p (209p now). It has one of the best management teams in the industry and its brands, including Frankie & Benny's, Chiquito, and Garfunkels, have proved defensive and well positioned; there is also an attractive yield of about 3.5 per cent.
Carluccio's is a highly differentiated offering combining café, restaurant and retail. There are less than 50 stores in the UK and we see the potential for this to more than double. The group has net cash and is financing its roll-out programme from internal resources. In addition, Carluccio's has a major franchise deal in the Middle East and India. The first store opened successfully in Dubai last year and two further sites could open in 2010. We rate the shares a buy and have a target price of 108p (89p now) on them.
About the author:
Nick Batram is a liesure analyst at stock broker KBC Peel Hunt
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