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Restaurant Group relies on Wagamama

The group's recent acquistion is lifting underlying sales, but how long will it continue?
March 15, 2019

Concerns regarding Restaurant Group’s (RTN) recent Wagamama acquisition could be well-founded after like-for-like sales (LFL) growth across the Asian fusion chain slowed from 12 per cent to 9 per cent during the second and third quarters. That’s worrying considering how heavily Restaurant Group is relying on the deal to buck up sales across its own business.

IC TIP: Hold at 138.5p

Having completed the Wagamama transaction on 24 December 2018, Restaurant Group's LFL sales have risen 2.8 per cent during the 10 weeks ended 10 March 2019. But broker Peel Hunt warns that its own forecast for growth of 2.5 per cent this year leaves “no room for Wagamama to slow”. Indeed, analysts there reckon the group will need to achieve growth of at least 2 per cent just to cover climbing labour costs in 2019.

For now, the restaurant chain owner has held annual forecasts – hence the shares’ overwhelmingly positive response on results day. The group also managed to generate free cash flow of £59.6m (2017: £85.1m), although net debt rose substantially post-acquisition to represent 2.2 times cash profits.

Brokerage Numis forecasts pre-tax profits of £79.4m for 2019, giving EPS of 12.8p, moving up to £98.1m and 15.9p in 2020.

RESTAURANT GROUP (RTN)  
ORD PRICE:138.5pMARKET VALUE:£ 681m
TOUCH:138.4-138.7p12-MONTH HIGH:244pLOW: 121p
DIVIDEND YIELD:6.0%PE RATIO:57
NET ASSET VALUE:93p*NET DEBT:63%
Year to 30 DecTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
2014**63584.945.821.1
2015**68586.847.423.8
2016**711-49.3-32.923.8
2017**67928.26.723.8
201868613.92.48.3
% change+1-51-64-65
Ex-div:tbc   
Payment:tbc   
*Includes intangible assets of £614m or 125p a share
**EPS and DPS figures adjusted for November 2018 13-for-9 rights issue