Thu 9th Apr 2020 - Restaurant Group to be a ‘survivor’ after exiting up to 40% of sites Restaurant Group to be a ‘survivor’ after exiting up to 40% of sites: The Restaurant Group could exit the bottom 40% of its estate after raising £57m in a share placing. Leisure analyst Douglas Jack, of Peel Hunt, has stated that the company could leave 200 relatively unprofitable leasehold sites closed, reclassifying circa £20m of lease payments as exceptional onerous leases. He noted the company has changed its sales forecasts from -25% to -45% life-for-likes this year. He added: “It reflects an expectation that social distancing restrictions will remain in place in Q3. We expect 2020E forecasts to keep changing; for example, a former WHO executive and Number 10 advisor has just said offices, bars and restaurants could re-open on 18 May. 2021E forecasts should be more robust. They should benefit from a significant clean out of the estate and cost base in 2020E. For example, we believe central costs have fallen from £52m to £38m, which is more appropriate for a business that has just put 61 Chiquito sites into administration and plans to permanently close a further 200 sites unless there are substantial reductions in rent costs. The 200 sites comprise c25 concessions in regional airports, with the balance being Coast to Coast and Frankie & Benny’s. We believe these sites will incur £20m pa of onerous lease costs, which the company will try to reduce. This should leave an estate of c400 outlets, dominated by Wagamama (c145), pubs (c75) and concessions (c46), with over 100 Frankie & Benny’s retained. The quality of the estate is improving, dramatically: The 200 sites that the company is closing generated £15m of Ebitda vs £200m of revenue in 2019. This implies average Ebitda/site of £75k on an average Ebitda margin of 7.5% for outlets that were in decline. After adjusting for Food & Fuel and Chiquito entering administration, we estimate that the remaining 400 sites generated average Ebitda/site in excess of £0.4m on an average Ebitda margin in excess of 20% in 2019. In theory, when trading conditions return to normal, the company’s actions to reduce the trading estate should boost margins by c300bps. Our 2021E Ebitda forecast assumes flat trading in line with Q4 2020E (for which -10% like-for-like sales is expected to generate £35-40m Ebitda). £35m less £7m of quarterly business rates holiday x 4 quarters = £112m Ebitda. We expect The Restaurant Group to be a survivor, emerging to lead a tough sub-sector that is experiencing supply reduction. We forecast 2020E year-end net debt to be £261m versus £480m of debt facilities, with just £3-5m of monthly cash burn under closure. However, today’s game changer is the improvement in asset quality and the potential for a material re-rating over the next year.”