UBS downgrades Restaurant Group on near-term uncertainty

UBS downgraded Restaurant Group to ‘neutral’ from ‘buy’ and slashed the price target to 305p from 780p saying near-term uncertainty outweighs the long-term potential.

The bank said Restaurant Group's profit warning at the end of April highlighted a deteriorating like-for-like sales trend, with a 2.7% drop for the 17 weeks to 24 April indicating a LFL decline of 4.4% for the last seven weeks.

“Management appear yet to have a clear explanation for the weakness, let alone a solution. As a result, we are cautious on the near term potential for a LFL turnaround. Whilst there is some valuation support at these levels, we downgrade from buy to neutral to reflect the lack of visibility, pending details of the strategic review.”

UBS said the drop in LFL growth looks to be the result of a tougher consumer backdrop, increased competition driven by strong supply growth and brand positioning.

“The group have launched a strategic review of the business, however, we don't expect any detail until August, and see limited scope for solutions that will meaningfully change the underlying trends in 2016.”

The Swiss bank now expects 2016 pre-tax profit of £74.9m versus guidance of £74-80m.

At 1148 BST, shares in the company were down 2.2% to 277.10p.