60 Seconds on Restaurant Group, Marstons, and Greene King

September 4 2017

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:


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.