Restaurant Group (RTN), which operates such eateries as Chiquito, Frankie & Benny's and Garfunkel's, boasts an impressive track record, but times are getting tougher. A trading update last month suggested that its impressive growth profile could be on the verge of slipping, leaving the shares, which have soared this year, looking precariously rated.
- Impressive track record
- Generating plenty of cash
- Evidence of weakening sales
- Cost pressures ahead
- Demanding expansion plans
- Shares rated well above historic average
During the first eight weeks of 2013, group like-for-like sales rose 6.5 per cent year on year. But that dropped to 4.5 per cent growth for the first 19 weeks of the year which, says broker Numis Securities, means underlying sales during the period from March to mid-May grew just 2.5 per cent. That's partly down to weaker cinema attendance figures - many of its restaurants are located in leisure parks with cinemas. The Film Distributors' Association reported that UK cinema admissions in March fell 7 per cent year on year, and by 9 per cent in February. In the longer term, growing competition in Restaurant Group's preferred locations could hit growth. The group's focus on leisure parks and airports does guarantee decent footfall levels, but that's a strength that isn't lost on rivals. Greene King (GNK) and Mitchells & Butlers (MAB), for instance, are keen to grab a bigger slice of such business.
As well as potentially slowing sales, cost pressures are also mounting. For example, Numis expects the group's food costs to rise by between 3 per cent and 4.5 per cent and anticipates that pension auto-enrolment, which began in March, will mean a £0.5m-£1m cost annually. Then there are inflation-busting utility costs to worry about. Numis expects the group's utility costs to rise by 7 per cent, or by about £1.3m, this year. The company is also experiencing an acceleration in rental costs and the broker says that the near-£60m annual rent bill is rising at between 1.5 per cent and 1.6 per cent, compared with 1 per cent a year ago. That doesn't bode well for profit margins, which Numis expects will "fall slightly over the full year due to a combination of higher costs and slowing LFL [like-for-like sales] sales".
RESTAURANT GROUP (RTN) | ||||
|---|---|---|---|---|
| ORD PRICE: | 513p | MARKET VALUE: | £1,028m | |
| TOUCH: | 512-513p | 12-MONTH HIGH: | 536p | LOW: 282p |
| FWD DIVIDEND YIELD: | 2.5% | FWD PE RATIO: | 19 | |
| NET ASSET VALUE: | 92p | NET DEBT: | 20% | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 466 | 56.5 | 20.2 | 9.00 |
| 2011 | 487 | 48.6 | 17.2 | 10.5 |
| 2012 | 533 | 64.6 | 24.1 | 11.8 |
| 2013* | 577 | 70.2 | 26.5 | 12.8 |
| 2014* | 622 | 75.0 | 28.7 | 13.8 |
| % change | +17 | +16 | +19 | +17 |
*Numis Securities' estimates, underlying PBT and EPS figures not directly comparable with prior periods Normal market size: 3000 Matched bargain trading Beta: 0.68 | ||||
Restaurant Group's expansion plans look demanding, too. Historically, new openings have been a major growth driver for the company, with 140 new sites opened in the past five years - bringing the total estate to over 420. But just three new restaurants were opened in the first 19 weeks of the year, yet management is still sticking with its target of between 30 and 35 new openings for the year as a whole. After such modest progress with new openings so far this year, reaching that target could prove challenging.
Still, the balance sheet is robust and impressive cash generation leaves Restaurant Group well placed to fund its expansion plans. Cash flow from operations, for instance, rose by £10.2m in 2012 to £102m, which also allowed the net debt pile to be cut by £5.6m last year to £36m. A prospective dividend yield of 2.5 per cent in the current financial year, based on Numis' full-year forecast payout, isn't much to shout about, though.
