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UBS ups Restaurant Group to ‘Neutral’, says business quality improved but risk increased

Analysts at the Swiss bank said the group’s acquisition of Wagamama had increased its “quality and growth trajectory but also raised concerns around its debt burden
Wagamama
The Restaurant Group acquired Wagamama for £550mln in November

UBS has upgraded Restaurant Group PLC (LON:RTN) to ‘Neutral’ from ‘Sell’ saying the firm’s business quality had improved following its acquisition of Wagamama but added that “risks have also increased”.

In a note, analysts at the Swiss bank said the FTSE 250 group’s acquisition of the Asian restaurant chain had increased its “quality and growth trajectory, with the brand now accounting for c.45% of EBIT in 2019E”.

READ: Restaurant Group gets a boost from Wagamama’s latest numbers

“Strong recent trading along with the benefits of delivery and recent refurbishments means we expect strong LFL to continue (5% for 2019E), with the opportunity for margin improvement given synergies and recent one-offs.”

However, the bank said “question marks” had arisen around the company’s debt burden following the acquisition, as well as the possibility that the Wagamama brand “is at its growth peak already”.

“In particular, we have concerns around the store roll-out potential given Wagamama is one of the largest UK brands by no. sites already. In addition, delivery already represents 12% of sales, and with this offered through Deliveroo, Wagamama doesn’t own the customer and therefore is at risk from growing competition.”

UBS also said it ongoing debt concerns around RTN’s other brands Frankie & Benny’s and Chiquito meant it was staying Neutral, while also cutting its target price to 155p from 172p and lowering earnings per share (EPS) forecasts for 2019 by 29% to reflect the integration of Wagamama.

READ: The Restaurant Group gets shareholder approval for £550mln Wagamama takeover, although nearly 40% voted against

“We believe risks for the group have increased alongside the opportunity, with 19E net debt forecast at 2.1x (4.6x lease adjusted) leaving little room for execution risks given the uncertain demand and cost outlook and ongoing issues in the existing business.”

The firm received approval for its £550mln takeover of Wagamama in November, however, the purchase was not without controversy as nearly 40% of those voting opposed the deal.

In mid-morning trading Thursday, Restaurant Group shares were down 2% at 156.7p.

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