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The Restaurant Group : The Most Profitable Restaurants in the U.K.

07/10/2013 | 10:18am

LONDON STOCK EXCHANGE
Restaurants & Bars
The Restaurant Group owns more than 400 restaurants and pub restaurants in the United Kingdom under various brands such as Frankie & Benny's, Chiquito, Coast to Coast, Garfunkel's and Brunning & Price. In addition, the company operates more than 60 facilities in the form of concessions at airports in Britain. The restaurants offer a casual atmosphere and serve over 35 million meals annually.

Each brand of the group has its own specificities:
- Frankie & Benny's: a mixture of American and Italian flavors
- Chiquito: mexican food
- Coast to Coast: classic American Food
- Garfunkel's: british coffee shop
- Brunning & Price: different pubs with their own atmosphere

The group seeks to constantly evolve its offering and particularly to provide quality meals. Lists and menus are reviewed regularly and great attention is paid to the products offered. Tests are thus conducted frequently to ensure the quality and nutritional value and caloric of its dishes.

Sector

The Restaurant Group (£533 million of sales in 2012) is in competition with British restaurateurs such as Mitchells & Butlers (£1.9 billion), Wetherspoon (£1.2 billion) and Spirit Pub (£ 760 million).

In a context of economic crisis, consumers have become more selective concerning their spending. Thus, the ability to understand and adapt to customers has become essential for retail businesses. Many restaurants have therefore chosen to implement a low-price strategy with promotions and price cuts. The Restaurant Group has chosen a different approach, based on the choice as well as the consistency of services and quality offered. Moreover, they focused on communication via the Internet to continue to make consumers aware of their different brands.

The strategy paid off and the company has retained high levels of margin. The net margin was 9% in 2012 compared to 7% the previous year, while its competitor, Mitchells & Butlers, have seen it decrease to 3.7% in 2012 against 7% in 2011. Similarly, The Restaurant Group has very high levels of operating margin, with 17.9% in 2012 against 11.67% for his rival Wetherspoon and 3.5% for Spirit pub.

Sector

- Strategy generating high levels of margin despite a gloomy economy
- Implementation of restaurants in areas with high entry barriers which are likely to generate high returns on investment (ROCE of 17.85% in 2011 and 23% in 2012 compared to 4.84% for the leader Mitchells & Butlers)
- High diversity of restaurants
- Healthy financial position with leverage (net debt / EBITDA) of 0.41x, 3.5x for the sector

Weaknesses

- P/E ratio of 19x estimated for 2013, compared to a 15.2x industry average
- No geographical diversification outside the United-Kingdom

Opportunities

- From 30 to 35 restaurant openings expected in 2013
- Generates enough cash to gradually increase the opening rate of new restaurants (cash flow margin of 5.64% in 2012, 5.16% on average for the sector)

Threats

- The segment of family restaurants is becoming increasingly competitive
- Consumer confidence, a key element for leisure spending, is rooted in an overall downward trend since 2010 (85 in February 2010, 41 today)

Highlights

On the 15th of May, release of the Q1 2013, with revenues growth of 11%, 4.5% on a comparable basis.

Upcoming events

On the 30th of August, release of the first semester 2013.


The Restaurant Group adopted a strategy that differentiates it from its main competitors. Instead of lowering prices to attract customers consuming less, the British group has chosen to keep its high quality standards. The group maintains comfortable margin levels, allowing it to continue to invest in new restaurants, highly profitable, and advertising without jeopardizing its financial leverage.

A differentiated strategy, combined with levels of profitability among the best in the industry and a healthy financial situation encourage the 4-traders analysis office to set a target price of GBp 600 over a 12-months horizon.


This research note is part of the conviction buy list selected by the 4-traders equity research desk, based on fundamental and technical criteria. This stock is likely to be included in our North American portfolio by the investing team. To be informed of our trades on this stock subscribe to one of our portfolios.



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Financial Ratios

Size 2014e 2015e
Capitalization 1 188 M GBP -
Entreprise Value (EV) 1 232 M GBP 1 227 M GBP
Valuation 2014e 2015e
PER (Price / EPS) 19,0x 17,3x
Capitalization / Revenue 1,86x 1,68x
EV / Revenue 1,93x 1,74x
EV / EBITDA 10,4x 9,32x
Yield (DPS / Price) 2,64% 2,89%
Profitability 2014e 2015e
Operating Margin (EBIT / Sales) 12,9% 13,0%
operating Leverage (Delta EBIT / Delta Sales) 1,01x 1,06x
Net Margin (Net Profit / Revenue) 9,91% 9,72%
ROA (Net Profit / Asset) 14,5% 14,8%
ROE (Net Profit / Equities) 26,9% 25,9%
Rate of Dividend 50,0% 49,9%
Balance Sheet Analysis 2014e 2015e
CAPEX / Sales   11,0% 10,2%
Cash Flow / Sales (Taux d'autofinancement) 11,9% 12,2%
Capital Intensity (Assets / Sales) 0,68x 0,66x
Financial Leverage (Net Debt / EBITDA) 0,37x 0,30x
Income Statement Evolution
Restaurant Group PLC : Income Statement Evolution
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EPS Revisions
Restaurant Group PLC : EPS Revisions
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