Berenberg downgrades Restaurant Group, sees more pain to come

Berenberg downgraded Restaurant Group to 'sell' from 'hold', keeping the price target at 300p following a strong rally in the shares.

The bank highlighted the fact the stock is up around 23% since the end of January, adding that the current valuation is unattractive.

It noted the company's weak set of 2016 results and said that while management's plan to turn the business around was laid out in fairly considerable detail, it has not changed the bank's view that the group has a very tough task ahead, considering the extent of the changes that need to be made to the leisure brands.

Berenberg said the plan to try to improve the performance of the leisure brands, which includes menu changes, pricing correction, improved labour scheduling and increased marketing, seems sensible.

However, the bank's analysis suggests significant price correction is required to bring these brands in line with competitors.

"We continue to believe it could take considerable time for the brands’ reputations to improve sufficiently for volume growth to offset lower prices. As a result, we anticipate that like-for-like sales will decline 4.5% this year, and we feel that there is risk to achieving this figure."

Berenberg added that given the way the competitive landscape has evolved in recent years, it is difficult to have confidence that the strategy will lead to a strong recovery.

The bank cut its price target on Domino's Pizza to 400p from 425p, keeping the recommendation at 'buy' as it reduces its earnings per share estimates slightly to account for the purchase of a loss-making business in Norway.

At 0846 GMT, Restaurant Group shares were down 2.5% to 342.80p and Domino's shares were down 1.5% to 319.20p.