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Restaurant Group: a quality buy

Restaurant Group's (RTN) shares are a quality play and boast a compelling growth story.
March 5, 2015

In a growing UK eating-out market, Restaurant Group (RTN) is well ahead of the pack. The company's growth has consistently outperformed that of the wider industry and, following a smooth handover, new chief executive Danny Breithaupt has his eyes firmly set on further expansion. And while the current share price may not look cheap, our table and graph mapping 10 years of historic and forecast growth to 2017 stands as testament to why it's a price worth paying.

IC TIP: Buy at 728p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points
  • Strong cinema releases scheduled
  • Strong track record of growth
  • New openings planned
  • Good 2014 results
Bear points
  • Change of management
  • Margin softness

 

10 years of growth, historic and forecast

Sales growthEPS growthDPS Growth
200717%27%21%
200814%14%6.2%
20094.6%4.8%3.9%
20106.9%14%13%
20114.5%10%17%
20129.4%9.5%12%
20138.8%16%19%
20149.5%6.8%10%
2015*8.5%11%14%
2016*11%13%10%

Source: *Numis Securities forecasts/Company, adjusted EPS figures

 

Key to Restaurant Group's success is the fact that it tends to get two crucial things very right: brand and location. The company operates several well-liked brands, including Frankie & Benny's and Chiquito, which it opens in areas of high footfall. Its 470-plus restaurants are typically found in leisure/retail developments centred on a multiplex cinema and in transport hubs, especially airports. Neatly, cinema attendance is generally regarded as non-cyclical, which helps balance out the cyclical nature of air travel. Restaurant Group also frequently puts several of its brands in the same location, which helps strengthen pricing and, according to the company, does not result in much cannibalisation of trade. The success of this formula means the group is able to generate strong cash returns from its restaurants, which it ploughs back into new openings while keeping debt levels modest.

 

 

While there has been a recent shift in top management, it doesn't look as though the simple and highly effective growth formula will be changed any time soon. Mr Breithaupt spent 13 years under former boss Andrew Page, who he credits with "future-proofing" the business. He intends to build on those solid foundations and plans to open between 42 and 50 new sites this year, compared with 40 sites in 2014. Openings have increased in number every year since 2009 and Mr Breithaupt wants "every brand to pull its weight" as he doubles the size of the estate over the next five to eight years.

The last financial year proved something of a testament to brand strength as cinema attendance was weak, dropping 4.9 per cent. Nevertheless, like-for-like sales rose 2.8 per cent, with a 10 per cent rise in overall revenue. And while margins had a momentary 20 basis point slip, analysts are forecasting a 10 basis point recovery this year. Mr Breithaupt cites the performance as evidence that the company isn't reliant on the cinema industry to drive its customer numbers and as a "clear indication" of Restaurant Group's "strong underlying trading" and "customer loyalty".

Frankie & Benny's, which accounts for 250 of the group's outlets, has been the engine of growth for a number of years and the brand is expected to add 14 to 18 sites this year following 19 openings in 2014. But Mr Breithaupt looks set to broaden out brand openings. The newest brand - Coast to Coast - hit the market in 2011. Management wants to ramp up the number of Coast to Coast outlets from 13 to 20 by the end of 2015. And a revamp of the group's Chiquito brand is also leading to new opening opportunities.

The group has also set its sights on the UK's travel hubs to drive future growth. It already runs all the catering operations at Southampton Airport and recently opened a Wondertree restaurant in the new Heathrow Terminal 2 and hopes to add three new outlets to the redeveloped Stansted airport. The company is also in negotiations over taking its restaurants into some of the UK's largest railway stations. Mr Breithaupt credits the proliferation of wifi hotspots for transforming the amount of "dwell time" people spend in the UK's travel network, which he says encourages people to eat, shop and browse in railway stations like they would in a retail centre.

Growth should also be helped in coming years by improving consumer spending and a far stronger cinema release schedule for this year and next. 2015 has certainly started well with like-for-like sales up 2.5 per cent in the first eight weeks of the year and overall sales up 9.5 per cent.

RESTAURANT GROUP (RTN)
ORD PRICE:728pMARKET VALUE:£1.5bn
TOUCH:727-728p12-MONTH HIGH:739pLOW: 552p
DIVIDEND YIELD:2.7%PE RATIO:20
NET ASSET VALUE:122pNET DEBT:16%

Year to 31 DecTurnover (£m)Pre-tax profit (£m)*Earnings per share (p)*Dividend per share (p)
201253364.624.111.8
2013580 72.728.014.0 
201463578.129.915.4
2015*68986.333.117.5
2016*76396.737.319.3
% change+11+12+13+10

Normal market size: 3,000

Matched bargain trading: SETS

Beta: 0.84

*Numis Securities forecasts, adjusted PTP and EPS figures