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Shares in Wagamama owner Restaurant Group edge lower as Peel Hunt downgrades stance

Peel Hunt cut its rating to ‘hold’ from ‘add’ but raised its target price to 145p from 135p.
Restaurant Group bought Wagamama for £500mln last November, part funded by a rights issue

Wagamama owner Restaurant Group PLC (LON:RTN) shares are fairly valued following a jump in the price, Peel Hunt said as it downgraded its recommendation on the stock.

Peel Hunt cut its rating to ‘hold’ from ‘add’ but raised its target price to 145p from 135p.

The broker’s previous ‘add’ stance was on the basis that it thought the shares were cheap, the company has been rescued by shareholders in a rights issue last November and Wagamama should flatter like-for-like sales for “a while”.  

READ: Restaurant Group takes a punt on former HBOS and Coral boss as its new CEO

“However, following a bounce in the share price, Restaurant Group’s shares, on almost 7 x enterprise value/EBITDA December 2019, are now fairly valued in our view,” Peel Hunt said.

Peel Hunt pointed out that 2018 adjusted pre-tax profit would have fallen 24% without cost cuts as a weak performance in leisure and retail park brands offset strong growth in pubs and concessions.

The broker said shareholders have suffered but the rights issues, the halving of the dividend and the recent acquisition of Wagamama should enable earning to start growing.

For 2019, consensus forecasts are for a 2.5% increase in like-for-like sales. Peel Hunt said this leaves no room for Wagamama to slow.

“We estimate the company needs almost 2% like-for-like sales growth to cover just labour cost inflation, and even higher like-for-like sales to stop the labour ratio rising even higher.”

Restaurant Group, which also owns Frankie & Benny’s and Garfunkel’s, releases its first quarter trading update on May 17. Peel Hunt expects the release to be “reasonably positive”.

Earlier this month the company appointed former HBOS and Coral boss Andy Hornby as its new chief executive.

Peel Hunt said Hornby faces many challenges including slowing the labour ratio’s continual upward trajectory, executing the commitments management made at the time of the rights issue, maintaining Wagamama’s like-for-like growth and existing leisure/retail leases.

Around noon, shares fell 1.7% to 139p.

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