The Restaurant Group plans to convert 15 sites to Wagamama by December 2020: The Restaurant Group (TRG) has stated that it sees potential for a further 40 to 60 Wagamama sites in the UK. The company stated: “TRG expects to convert at least 15 TRG sites to the Wagamama brand by December 2020, with an expected incremental Ebitda benefit of approximately £7 million per annum at maturity. In order to achieve this, the board expects to incur capital expenditure of approximately £13 million. Furthermore, TRG believes that there is an opportunity to leverage its existing concessions relationships, including those built through its presence in 14 airports across the UK, to extend Wagamama’s presence in concessions (currently three sites nationwide). The TRG board believes that delivery represents a significant area of opportunity, and Wagamama is already one of the top brands on the online delivery platform Deliveroo. Following the acquisition, the enlarged group will be well positioned to invest behind structural growth in the delivery space including through delivery-only kitchens (where Wagamama has an early-mover advantage), in digital capabilities and in online brands. Wagamama has an international presence and proven customer resonance in markets outside the UK. TRG believes that Wagamama can be a ‘calling card’ brand enabling expansion through international concessions. Further options for international growth will be explored, considering geographies and customer preferences within each territory, rate of growth and appropriate ownership models. TRG believes that pan-Asian food is very adaptable to convenience formats and, as a first step, expects to pilot a food-to-go format in London which would have future application in concessions. Following the acquisition of Wagamama, TRG expects that circa 70% of the enlarged group’s outlet Ebitda will originate from high growth segments of the market, namely TRG’s Pubs and concessions businesses and Wagamama.” Of the possible synergies arisin from the Wagamama deal, it added: “The board believes that the acquisition presents an opportunity to deliver cost synergies across procurement, logistics, overheads and central costs. The majority of the benefits are expected to arise through scale benefits and efficiencies in third party spend. The board believes that, whilst continuing to grow Wagamama as an autonomous division, TRG can achieve pre-tax cost synergies of approximately £15 million relative to the pre-Acquisition cost base. The board expects the initial benefit from synergies in the first financial year post completion (the financial year ended December 2019), with at least 50% of pre-tax cost synergies realised in year two and full pre-tax cost synergies realised in year three and thereafter. The board expects that the realisation of these synergies will require one-off cash costs of up to £13 million over the three financial years post completion, largely incurred in years one and two.” TRG reported that the Wagamama brand appeals to customers across different day parts, with a visit split of 1% over breakfast, 35% over lunch, 21% in the late afternoon, 38% in the evening, and 5% in the late evening.

Douglas Jack – The Restaurant Group is trying to dilute it problems by buying Wagamama: Peel Hunt leisure analyst Douglas Jack has argued The Restaurant Group (TRG) is trying to dilute its problems by buying Wagamama. He said: “TRG is certainly trying to dilute its problems by conditionally agreeing to acquire Wagamama for £559m on a multiple of 13.2x EV/Ebitda, falling to 8.7x LTM August 2018 Ebitda, post £22m cost and site conversion synergies. The acquisition is expected to be earnings enhancing in 2019E and exceed the WACC in 2021E. Despite a £315m rights issue, the deal leaves the company with c£300m of debt and c8x net debt/Ebitdar. Like-for-like sales have fallen since the last update, slowing to 1.4% over the last 14 weeks, having been up 2.4% in the first six of this 14 week period, leaving YTD like-for-like sales at -2.2%, which is behind FY market expectations. Having watched the dividend fall from 2.0x to 1.2x over the last three years, the company intends to adopt a policy of paying a dividend covered 2.0x from the next dividend (for full year 2018). Further problems in the deal: Of the £22m synergy forecast, £7m is extra Ebitda from converting just 15 sites (presumably they are currently loss-making). Wagamama is a good brand, but its Ebitda was flat in 2018, a period in which its Ebitda margin fell by 200bps. Also, according to Restaurant Group’s management, Wagamama only has the potential for a further 40- 60 sites versus 138 in the UK at present. Most importantly, despite the likely dilution of the rights issue, the deal leaves the company on net debt/Ebitda of 2.2x post all synergy benefits for an estate that will be over 90% short-leasehold. We expect net debt/Ebitdar to be close to 8x, higher than that of the pub companies. In the meeting, we will seek clarification on Wagamama’s debt and rent costs, labour ratios and expansion prospects. In addition, we will ask why trading has weakened so much, in contrast to the company’s optimism in late August.” Jack has reduced his recommendation on The Restaurant Group shares with a price target of 260p.

Douglas Jack – budget winners are low-cost gyms and small wet-led pubs: Peel Hunt leisure analyst Douglas Jack has argued The Budget is positive for the consumer and, within Leisure, the leased/tenanted pub (business rates relief) and low-cost gyms (disposable income up; minimal exposure to wage inflation) are the biggest winners. He said: “Restaurant chains are the biggest loser due to having the greatest exposure to further labour cost inflation, but with limited scope to cut staffing and almost no scope to gain from the relief on business rates. The 4.9% increase in the National Living Wage to £8.21 from April 2019 raises both customer spending power and employment costs. Whereas customer spending power should benefit from the increase in the personal tax allowance (from £11,850 to £12,500, with the Higher Rate Threshold increasing from £46,350 to £50,000), most of the National Living Wage increase should be already baked into expectations and are likely to be fully offset by business rates relief in the case of many tenanted/leased pubs. The ratio of labour/sales is becoming critical. Labour-intensive operators will have to deal with the National Living Wage increase and pay differentials being maintained in many cases. For example, at Restaurant Group, with labour at 35% of turnover including head office costs, like-for-like sales will need to rise by 1.5%, subject to differentials, just to cover site labour inflation alone. In contrast, low-cost gyms have minimal exposure to labour costs, yet many of their customers will be large beneficiaries of this Budget. At The Gym Group, as one-third of joiners continue to be first-time gym users, largely due to the Gym’s affordability, this Budget should help both membership and LIVE IT take-up numbers, in our view. Business rates will be cut by a third for all retailers in England with a rateable value of £51k or less, saving up to £8k, for two years. Rateable values are typically c10% below commercial rent and 2.1x the cost of business rates. Thus, subject to location, we would expect outlets with AWS under £11k to be most likely to qualify for relief. Many, but not all, small wet-led (typically tenanted) pubs are best placed in licensed retail to fit this criteria.”