JPMorgan upgrades Restaurant Group, says shares are too cheap

JPMorgan Cazenove upgraded Restaurant Group to 'overweight' from 'neutral' and lifted the price target to 380p from 340p following the company's first-quarter update on Friday, as it now sees upside to the share price.

The shares have lost 17% since 10 March and the stock is now trading at 6.7x FY2018 EV/EBITDA, which appears too cheap, JPM said.

It said the group "has had a better start to 2017 than many in the market may have expected". Like-for-like sales in the first 20 weeks were down 1.8%, but this is a better run-rate than the 4% drop in LFLs the bank had expected and continues to expect for 2017 as a whole.

JPM said sales were supported by three tailwinds so far this year: strong growth in UK passenger numbers which has boosted the performance of the concessions business; good weather, especially in April and late May, which has supported the pubs business; and strong cinema admissions, which have helped the leisure business.

However, JPM does not expect these tailwinds to continue and reckons the full effect of the company's investment in pricing will only be felt in the second half of the year.

The bank pointed out that an important part of Restaurant Group's recovery strategy is in the pricing of its menus. It noted that a new menu was introduced at Frankie & Benny's earlier this month, with reduced prices that will have an immediate effect on LFL sales through the balance of the year, but did not really affect LFLs in the first 20 weeks.

At 1000 BST, the shares were up 9% to 345.22p.