60 Seconds on Restaurant Group, Marstons, and Greene King
The scene is set…
- The market responded well to Restaurant Group’s first half trading update last week, with shares up c10% (338p).
- Confidence is growing in Restaurant Group’s turnaround but its sales trend is negative at a time when its industry is oversupplied and facing cost pressures.
- Management itself says: ‘like-for-like sales and margins will come under inevitable pressure in the short term,’ as a result of the above.
- Warren Buffett famously said that turnarounds seldom turn. At the very least, they often take longer than anticipated (perhaps due to our innate optimism bias).
- So, is the market suffering from optimism bias here?
But what about valuation?
- An interesting, though not like-for-like, comparison might be drawn with pub companies Greene King and Marstons.
- The recent purchases of Admiral Taverns and Punch Taverns suggests this is an area of the market that is currently undervalued.
- We will look at price-earnings ratio, dividend yield, sales trends, and price to book value:
| RTN | GNK | MARS | |
| PE (pre-exceptional) | 11.3x | 9.4x | 8.3x |
| PE (post-exceptional) | n/a | 13.6x | 9.1x |
| Forecast PE | 15.2x | 9.5x | 8.2x |
| Dividend Yield | 5.1% | 5% | 6.4% |
| Dividend Cover | n/a | 1.5x | 1.9x |
| YoY Dividend Growth | 0% | +3.6% | +4.3% |
| Qtly LfL sales trend | -2.2% (H1) | +1.5% (FY) | 1.3% (Q3) |
| PTBV | 3.71x | 3.06x | 1.37x |
- Given the above information, we question whether Greene King and Marstons deserve to be on such modest PE ratios considering their positive sales growth profiles.
- Restaurant Group is making the requisite changes to its operations (simpler menus, better value, rationalising suppliers)
- But, considering current market conditions, it is possible that the scale and depth of its turnaround is being underestimated.