1H In Line, But Uncertainty Remains. Return to Sell
1H Trading in Line; Strategic Review Ongoing: At the recent 1H results,
management suggested group trading was in line with previous FY16 guidance.
The first phase of the strategic review focusing on the Frankie & Benny’s offer has
been completed identifying a number of issues, particularly around the menu, which
the group is in the early stages of addressing. The business will now look to review
the remaining Leisure brands as well as the Pubs and Concessions.
Site Closures Identified: As well as the issues highlighted regarding the offer, the
group also announced plans to close 33 sites and write down the asset value on a
further 29. In total the group took a £59.1m exceptional charge (£19m cash costs).
Limited Near-Term Catalysts: As per our recent note Valuation Supportive, But
Headwinds Remain we maintain our view that, whilst there may be valuation
support on a SOTP basis, Restaurant Group still faces significant trading
headwinds, with limited near-term positive catalysts. Whilst we think recent
management appointments of a new CFO and CEO are positive steps in the
group’s rehabilitation, we suggest there could be further store closures and
exceptional costs as new management looks to revitalize the Leisure operations.
Estimates Updated: Within the note we revise our estimates for Restaurant Group
following the recent 1H16 results. We largely maintain our FY16 revenue forecasts
whilst reducing FY17E by and FY18E revenues by -1% following changes to our
LFL and store opening assumptions. We also update our group cost assumptions,
reducing FY16E EPS by 1%, with FY17E cut by 10% and FY18E by 8%.
Return to Sell Rating: Following our updated estimates we reduce our DCFderived
price target reducing to 320p (from 350p). Restaurant Group’s share price
has bounced over 50% of late. Given this significant move, and our view that the
group faces ongoing operational headwinds, we downgrade the stock to Sell, with
an ETR of -16%.