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Restaurant Group keeps serving

Meagre food price inflation helped the Frankie & Benny's and Chiquito owner register a rise in adjusted operating profit.
September 1, 2015

The lack of meaningful food price inflation is proving a boon to Restaurant Group (RTN). Together with an eagle eye on expenditure, this ensured improving margins for the Frankie & Benny's owner, in spite of wage cost inflation. In the first half, the company managed a 10 basis point rise in its operating margin to 11.4 per cent, pushing adjusted operating profit up 9 per cent to £38m. Reported profit figures were skewed by the company's 2014 sale of part of its interest in The Living Ventures Group.

IC TIP: Buy at 665p

The issue of chancellor George Osborne's "living wage", which mandates a rise in the minimum wage to £7.20 in April, reaching £9 by 2020, is not overly troubling management. Chief executive Danny Breithaupt predicts a £2m impact - far less than the hit expected by other businesses such as support services companies. He says a high percentage of his staff were already paid above £7.20 an hour, especially skilled kitchen staff. Mr Breithaupt adds he "does not see it as a negative" as he thought it would mean a more stable staff.

A total of 21 sites were opened in the first half and the company expects 43-48 new sites in total for the current financial year. In years past, the focus has been on Frankie & Benny's, which now has 251 restaurants, but now Mr Breithaupt says the group is now "starting to see much more balance to our portfolio". This makes sense given the group aims, where possible, to cluster its restaurants. This means it is not uncommon to find multiple Restaurant Group chains in one location, a purposeful tactic given that each chain has a target demographic.

The group has a tiny amount of debt and relies on its free cash flow to fund expansion. This means the performance of new sites is critical, and Mr Breithaupt assures this has been "really robust", adding that he does not envisage debt being used to open more sites.

Analysts at Numis Securities expect pre-tax profit of £86m for the full year, giving EPS of 33p, up from £78m and 30p in 2014.

RESTAURANT GROUP (RTN)
ORD PRICE:665pMARKET VALUE:£1.3bn
TOUCH:664-665p12-MONTH HIGH:748pLOW: 607p
DIVIDEND YIELD:2.4%PE RATIO:21
NET ASSET VALUE:136pNET DEBT:7%

Half-year to 28 JunTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201430840.616.26.10
201533436.914.36.80
% change+8-9-12+11

Ex-div: 10 Sep

Payment: 8 Oct