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HSBC upgrades Restaurant Group as pubs and concessions business set to benefit from industry trends

The bank said the company’s pubs business generated a 17.9% margin in its underlying earnings in 2017, with its concessions benefitting from a 2.9% increase in UK air traffic
Frankie and Benny's
Despite half year disruption, HSBC said "self-help" initiatives could drive growth across the firms leisure brand estate

Frankie & Benny’s owner The Restaurant Group PLC (LON:RTN) has been upgraded to ‘buy’ from ‘hold’ by HSBC as the bank said the firm's pubs and concessions businesses were set to benefit from “favourable industry trends”.

The investment bank said the company’s pubs business generated a 17.9% margin in its underlying earnings (EBITDA) in 2017, in line with its food-led peers, with its concessions benefitting from a 2.9% increase in UK air traffic, which acts as a “reliable proxy” metric for the division.

READ: The Restaurant Group's focus on pubs is a bright spot, Berenberg asserts

Despite disruption to the group’s leisure brands caused by the hot summer weather and the World Cup, HSBC said the segment would benefit from “self-help initiatives” across the estate which would help drive like-for-like (LFL) sales growth and help manage cost pressures.

“We believe that self-help initiatives and softer comparatives can drive potential LFL growth, which will help to steadily grow site profitability in the coming quarters,” analysts said.

The bank added that the group remained “relatively underleveraged” with a net debt to EBITDA ratio of 0.7x at the end of the 2018 financial year, which left it with “significant firepower” to maintain its dividend and be “acquisitive”.

HSBC also upped its target price for the group to 370p from 265p, saying it saw the potential for faster pubs and concessions growth looking forward.

In mid-morning trading Thursday, Restaurant Group shares were down 2.2% at 289.8p.

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