London based Restaurant Group (RTN.L) currently operates 498 restaurants and pub restaurants throughout the UK. Its principal trading brands are Frankie & Benny’s, Chiquito, Coast to Coast and Brunning & Price. It also operates a multi-brand Concessions business, which trades principally in UK airports.
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On March 7th2018, RTN reported final results for the year ending December 31st2017. The Company said that the cost reduction programme of £10m had delivered ahead of plan and was being reinvested into the leisure business. Total sales fell 1.8% on a 52 week comparable basis, and an exceptional pre-tax charge of £13.2m saw adjusted EBITDA fall to £95.1m (2016: £121.0m). However RTN saw continued strong free cash flow rise to £84.9m (2016: £78.9m), with net bank debt falling to £21.6m at year-end (2016: £28.3m). CEO Andy McCue said: “As expected, 2017 was a transitional year for the Group, with significant investments made in price and proposition within our Leisure business, which is driving improving volume momentum. We start 2018 with a significantly more competitive offering in our Leisure business, a strengthened pipeline of growth opportunities in both our Pubs and Concessions businesses, and a leaner, faster and more focused organisation.”
The GRT (Earnings Growth Rate) is a key VectorVest metric that frequently flags up a change in fortunes, often before any official announcement from the company itself. The GRT for RTN moved into positive territory during January 2018, and has continued climbing higher all the way through to today’s GRT rating of 19%, which VectorVest considers to be very good. Although the RS (Relative Safety) metric only registers a fair rating of 0.97 (scale of 0.00 to 2.00), at 279p RTN trades well below the current VectorVest valuation of 342p per share.
The chart of RTN.L is shown above in my normal format. Earnings per share (EPS) has doubled over the past year and the share has moved from overvalued to undervalued in this period. Technically the share has broken out of a downsloping channel and also charted a double bottom on a much longer term view (not shown). The share is on a VectorVest buy signal.
Summary: A well-run restaurant business can be a real cash cow, and in the case of RTN the costs savings and operational streamlining from the management team during 2017 really do seem now to be delivering results. Although the fair RS rating tends to push RTN into the domain of the more adventurous investor, given the growth in the rate of earnings and free cash flow, VectorVest believes a clear investment case now exists for this London based group. Buy.
Dr David Paul
April 18th 2018
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