It takes a brave investor to back UK-listed restaurant operators against a backdrop of falling consumer income and rising running costs. However, Restaurant Group offers a level of comfort that few of its peers can rival. What’s more, its share price has a habit of making good gains ahead of its full-year results, which are due early next month.
Pre-results share-price momentum
- Excellent locations
- Strong dividend growth record
- Self-financed expansion
- Competition from pubs operators
- Consumer outlook poor
The share price looks like it has begun its ascent, having risen by 5 per cent after we advised buying at 289p on the back of a trading update a month ago. In the previous two years, from the day before the update to the day of the results, the share price rose 11.5 per cent compared with a 1 per cent fall by the FTSE 350 index and 2 per cent compared with a flat market. So there is a short-term reason to be positive on the shares.
The longer-term story is based on the group's sound business model, quality management and strong balance sheet. Of course, the company is not immune to the torrid conditions that all consumer-facing companies fear in 2012. In particular, consumers' spending power is being squeezed, and the effect is likely to be increasingly evident as the year goes on. What's more, the eating out industry is having to absorb or maybe pass on rising energy bills, higher food costs and the effect of extra environmental rules. And in the summer Europe’s football championships followed by London's Olympic games are expected to draw customers away.
However, Restaurant Group, which runs chains such as Garfunkel's, Frankie and Benny's, and Chiquito, should be well-placed to cope with these pressures. The location of the companies' restaurants is a key strength. Management likes sites in busy areas, such as leisure parks with cinemas - these usually keep pulling in audiences despite economic hardship; or airports, where it has about 50 concessions, which have a constant footfall.
RESTAURANT GROUP (RTN) | ||||
|---|---|---|---|---|
| ORD PRICE: | 304p | MARKET VALUE: | £609m | |
| TOUCH: | 303-304p | 12-MONTH HIGH: | 335p | LOW: 238p |
| DIVIDEND YIELD: | 3.5% | PE RATIO: | 13 | |
| NET ASSET VALUE: | 71p | NET DEBT: | 38% | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 417 | 47.1 | 16.4 | 7.7 |
| 2009 | 436 | 48.3 | 18.9 | 8.0 |
| 2010 | 466 | 56.5 | 20.2 | 9.0 |
| 2011* | 494 | 60.5 | 21.7 | 10.0 |
| 2012* | 524 | 65.1 | 23.6 | 10.5 |
| % change | +6 | +8 | +9 | +5 |
Normal market size: 4,000 Matched bargain trading Beta: 0.9 *Peel Hunt forecasts (Profits & earnings not comparable with historic figures) | ||||
And the relative strength of the group's position means it has been able to avoid the price cutting that has characterised so much of the restaurant industry since 2009 and which has the potential to drag the weaker chains deeper into discounting as the year drags on.
Restaurant Group's success has not gone unnoticed and some pubs operators, such as Mitchells & Butlers and Greene King, have announced plans to expand in leisure parks. However Restaurant Group's experience in this niche may enable it to continue making strong returns on new openings - return on capital over the past 12 months was a handsome 18.5 per cent.
The company's strong cash flows support its steady expansion. In 2011, it added 24 new restaurants to near the 400 mark and its bosses expect to open another 25 to 30 outlets this year. Importantly, given concerns that financing could get harder to obtain in 2012, management put in place a £140m five-year revolving credit facility late last year. This will allow the company to accelerate expansion should the opportunity arise. Despite that, net debt, which was £54m at the half-year stage, is falling. This indicates the company could soon start returning capital to shareholders.
