HSBC starts Restaurant Group at ‘reduce’, says path to recovery will be ‘bumpy’

HSBC initiated coverage of Restaurant Group at ‘reduce’ with a 290p price target, saying there is a gap between the current share price and the likely pace of recovery at the company.

The bank pointed out that Restaurant Group was one of the UK’s most successful restaurant operators for almost a decade, but recent issues caused by pushing hard on prices, inconsistent service levels and a confused proposition have resulted in a series of profit warnings.

“Now, with a new management team in place, a recovery plan is taking shape, although the path is likely to be bumpy given that the restaurant operator has experienced a breadth of issues, along with near term cost and competitive headwinds also working against them.

“Given management’s recovery plan, we expect the decline in like-for-like sales to ease over the next two years, though turning around the leisure estate will not be easy to do.”

The bank – whose forecasts are 20% lower than consensus – expects full-year 2017 pre-tax profit to struggle to match 2016 due to food price inflation, the national living wage, a weaker pound and rising competition. HSBC expects LFL sales to remain negative until 2018, recovering thereafter.

“Several industry experts and consultants are even more cautious on the timeline to recovery as the competition command greater brand presence which could eat into Restaurant Group’s lunch,” it said.

At 0920 GMT, the shares were down 2.9% to 333.40p.