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:
|YoY Dividend Growth||0%||+3.6%||+4.3%|
|Qtly LfL sales trend||-2.2% (H1)||+1.5% (FY)||1.3% (Q3)|
- 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.