Restaurant Group shares drop as Nomura cuts to 'reduce'

Shares in Restaurant Group sank after investment bank Nomura downgraded it from 'neutral' to 'reduce'.

Shares in the FTSE 250 company, which operates a number of restaurant brands including Frankie & Benny's, Chiquito, Garfunkel's and Caffé Uno, had dropped 27.3p (4.16%) to 633.50p per share by 1049 GMT.

Nomura said on Monday that the company had an impressive record of earnings growth, with a compound annual growth rate of 12%.

However it said the reason for its negative stance is due to the threat of the national living wage, set to be introduced next year.

“Effectively a 10% increase from April 2016, we believe its potential to affect a labour-intensive business such as RTN is being underappreciated by the market.

“We expect a 70bp contraction in EBIT margins in FY16 vs BBG consensus expectation of flat.”

Nomura also noted that the extra costs of around £45,000 at a number of new sites will delay the payback in investment by around six months.

It also highlighted that the increase in costs could be passed on to customers.

“In the medium term, real wage growth and a more inflationary environment would benefit RTN, but this will not be immediate, adding to the risk that 2016 is a ‘squeeze’ year before the consumer adjusts.”

Nomura also adjusted its target price from 746p to 635p on the stock and said it remained cautious on the pub and restaurant sector as a whole.