Restaurant Group under the cosh on Peel Hunt downgrade

Peel Hunt downgraded Restaurant Group to 'hold' from 'reduce' ahead of Thursday's first-half results, cutting the price target to 300p from 350p.

The brokerage expects pre-tax profit to be down 29% to £26.1m despite some favourable footfall trends and cost savings and before the full impact of significant price reductions.

"In our view, the risk to 2018E forecasts is on the downside and the recovery period will be longer than expected," Peel said. It added that restaurants are the weakest sector in leisure, needing 2.5% to 3.5% like-for-like sales to hold profits against a backdrop of oversupply and in many cases, overpricing.

The brokerage said Restaurant Group can offset its £16m-19m of incremental costs through closures, £5m worth of central cost savings and £4m from openings. Excluding the £3m impact of one fewer week, it therefore needs LFL sales to be flat in 2017E to hold profits, a scenario that is not going to be helped by needing to cut prices.

Peel Hunt said management has done a good job with recruitment, changing the menus and sourcing cost savings.

"Some commentators claim the market will write 2017E off as a transitional year, but with price cuts weighted to Q2 and Q3 2017, there is a clear risk that 2018E will also be a transitional year, with profits falling again and requiring a cut in the dividend (which is currently only 1.2x covered). On 16x P/E, we would take some profits."

At 1255 BST, the shares were down 4.4% to 310.60p.