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Stifel thinks pub and restaurant equity performance will be driven by companies’ ability to “flex balance sheets”

The US investment bank's analysts said: “We are social animals and eating and drinking out of the home has proved resilient to whatever the economic and political backdrop presents"
Beer drinkers
Stifel initiated coverage on both Fuller, Smith & Turner and Young & Co. with ‘buy’ ratings

Stifel has relaunched coverage of the UK leisure sector with a new analyst who thinks that, in a lacklustre operating environment, pub and restaurant equity performance will be driven by companies’ ability to “flex balance sheets”, naming Restaurant Group PLC (LON:RTN) and Fuller Smith & Turner PLC (LON:FSTA) as his top picks.

In a note to clients, the US investment bank’s new leisure sector analyst, Mark Irvine-Fortescue said that, with investor sentiment weak towards the Travel and Gambling stocks, he is commencing coverage of Pubs and Restaurants at a time when the sector “presents value, GARP  (Growth at a reasonable price), yield and transformation opportunities for investors.”

READ: JP Morgan believes UK pubs sector may be a relatively ‘safe haven’ in an adverse Brexit scenario

He pointed out: “We are social animals and eating and drinking out of the home has proved resilient to whatever the economic and political backdrop presents. We think this remains the case in today’s digital age, i.e. difficult to replicate online, with home delivery not being a genuine substitute in our ‘experience society’.”

“But,” the analyst added, “the ubiquity of technology does reflect evolving consumer trends and operators also need to evolve to stay relevant.”

He concluded: “We expect steady overall demand-side dynamics, but with emphasis on quality, value, consistency, premiumisation, convenience and experience.”

Fullers, Young’s started with ‘buy’

The analyst has initiated coverage on Fuller’s with a ‘buy’ rating and 1,250p price target and also started fellow brewer and pubs operator Young & Co’s. Brewery PLC (LON:YNGA) with a ‘buy’ and a 1,800p price target.

Irvine-Fortescue said: “Fuller's and Young's are no sleepy family businesses: with market caps similar to Marston's, and a supportive industry backdrop, we believe they should be on more investors' radar.”

Resuming on Restaurant Group with a ‘buy’, he pointed out that, in his view, the “shares are oversold having stretched its balance sheet to acquire Wagamama.”

The analyst said: “We see the deal as genuinely transformational, with a concerted effort to 'manage down' the Leisure business.”

Only ‘sell’ rating on JD Wetherspoon

Elsewhere in the sector, Irvine-Fortescue resumed coverage on Marston’s  PLC (LON:MARS), Mitchells & Butlers PLC (LON:MAB), Greene King PLC (LON:GNK), and SSP Group PLC (LON:SSP), all with ‘hold’ ratings.

He resumed coverage on J D Wetherspoon PLC (LON:JDW) with the sector’s sole ‘sell’ rating and target price of 1,100p “based on below consensus forecasts and a de-rating to more comfortable levels”.

The analyst concluded: “JDW is trading at peak valuation on peak earnings, giving cause for share price concern when there are underlying forecast downgrades and ROCE is at 10 year lows.”

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