Restaurant Group Gives Investors Indigestion

The Week: A former bank boss may not be the man to save Restaurant Group, says Morningstar columnist Rodney Hobson, but things are settling down at Melrose Industries

Rodney Hobson 6 September, 2019 | 9:41AM
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This is clearly a lousy time to be running restaurant chains. Hard on the heels of the disaster that has befallen celebrity chef Jamie Oliver’s outlets comes dire news from Restaurant Group (RTN), the owner of the Wagamama and Garfunkel’s outlets.

Wagamama's Success Comes at a Price

Chief executive Andy Hornby is writing £100 million off the value of the assets and setting aside nearly £11 million to pay for onerous leases, a move that knocked 12% off the share price. This is on top of the £300 million written off in previous years. The main problem is the leisure division, mostly Frankie and Benny’s and Chiquito outlets at multiplex cinemas where you might think there is a ready made clientele but where outlets suffer when there are no new exciting films showing. At least half the 152 outlets in this division will close over the next few years.

Underlying profits actually rose more than a third. The star was Wagamama, with sales up an impressive 10.6% on a like-for-like basis, but this has come at a price. The acquisition of the Japanese-style chain sent net bank debt soaring from £24.2 million to £316.8 million. One must hope that interest rates do not rise any time soon.

Group sales were a respectable 3.7% ahead over the six months but what worried investors was the figure of only 0.2% over the most recent six weeks, with the leisure division returning to modest decline compared with a weak performance last year, when the football World Cup and hot weather kept punters away.

While Hornby can be blamed for the collapse of banking group HBoS 10 years ago, he cannot take responsibility for what has happened at Restaurant Group under three previous bosses over the past five years, since he has been in situ only since last month.

I worry that a man who failed as chief executive of a bank is hardly the person to put your faith in at a struggling restaurant chain. The shares are down from a peak of 740p four-and-a-half years ago to 130p now. They have lost more than half their value over the past 12 months. If Hornby can halt the slide, his reputation will be justifiably restored. I wouldn’t put money on it.

Is the Worst Over for Melrose?

Few takeovers in modern times have been as bitterly fought as that of engineering group GKN by Melrose Industries (MRO) early last year. The initial bid had to be increased substantially, GKN attempted to assuage shareholders by breaking up, MPs and trade unions tried to call a halt on the grounds of national interest and the pension fund trustees raised concerns. In the event, the bid sneaked home with 52.4% acceptances after Melrose promised to retain a London listing.

A year later, prospects look a little more settled. In the six months to June 30, revenue has doubled and underlying profits are up substantially, reflecting the enlarged group.

More important, Melrose is trading in line with expectations for 2019, with the three main divisions of GKN on track to achieve previously announced targets. Net debt is better than expected thanks to strong cash generation. The interim dividend is raised 10% from 1.55p to 1.7p

Aerospace is doing significantly better and is the recipient of substantial investment. It has become the group’s largest division and creator of profits. Automotive and powder metallurgy are maintaining profits despite the downturn in the automotive industry. Progress is being made on resolving the GKN loss-making contracts.

Melrose shares have moved erratically sideways around 180p over the past 11 months but are now back above 200p. I think the worst is over and they should soon break above the recent high of 205p.



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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Melrose Industries PLC609.40 GBX-1.77
Restaurant Group (The) PLC64.70 GBP0.00

About Author

Rodney Hobson

Rodney Hobson  is a columnist for and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.

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