A little over a year ago, I suggested Frankie & Benny’s owner Restaurant Group (LSE: RTN) had all the makings of a value trap. Since then, its share price has declined 20%. Considering how well markets performed in 2019, that’s quite an achievement.
The shares are down again today, despite what looks to be encouraging full-year results and a positive outlook. I don’t think it’s hard to spot why.
Sales up
Like-for-like sales rose 2.7% over the year to 29 December, with total sales up 56.4% to £1.07bn, thanks to the takeover of noodle chain Wagamama in 2018.
Adjusted pre-tax profit also rose to £74.5m, compared to £53.2m in 2018. That said, the company reported a loss of £37.3m on a statutory basis, due to the underperformance of its leisure sites.
Reflecting on today’s results, relatively new CEO Andy Hornby said the company’s prospects had been “transformed” by the Wagamama acquisition (despite a significant minority of its shareholders voting against the deal at the time). Ahead-of-schedule cost savings were also highlighted.
As a result of outperforming its markets, Restaurant Group now plans to focus on continuing to grow this and its Concessions and Pubs businesses at the expense of its Leisure portfolio. It’s aiming to reduce the number of sites of the latter, from 350 to between 260 and 275 by the end of next year. The company also plans to tackle its not-insignificant debt pile.
Unfortunately, all this will come at a cost to those already holding, with the £600m-cap business announcing today that it will “temporarily suspend” its dividend. Cue another drop in the share price (6%, as I type).
Restaurant Group traded on a forecast price-to-earnings multiple of 9 before markets opened this morning. With investors continuing to fret over the impact of the coronavirus on the global economy, I can’t see the shares heading significantly higher anytime soon, especially as prospective buyers will no longer be compensated for having the patience to wait for a sustained recovery in trading.
Factor in the hugely competitive environment in which it operates and the possibility that its entry into the US market might not go as smoothly as hoped and Restaurant Group remains firmly in my ‘avoid’ pile.
One to watch
Despite today’s downbeat update on how the coronavirus was affecting trading, I’d be far more likely to grab a slice of travel concessions business SSP Group (LSE: SSPG).
Admittedly, now might not be the time to buy. While trading in the UK, Continental Europe and North America (which account for the vast majority of the company’s revenues) has been as expected, operations in other parts of the world have suffered. Passenger numbers at airports in China are roughly 90% lower year-on-year, with declines of 70% in Hong Kong, and between 25% and 30% in countries such as Singapore and Thailand.
All this means SSP now expects sales in February will be 50% lower year-on-year in the Asia Pacific region. With operations in the Middle East and India also affected, this will likely reduce revenue by £10m-£12m and operating profit by roughly £4m-£5m.
Clearly, SSP’s share price could face further pressure as the story develops. Nevertheless, I remain attracted to the company’s geographical spread and its ‘captive audience’ business model. As markets continue to head lower, this is one stock firmly on my watchlist as a potential long-term buy.
