Broker tips: Restaurant Group, AB Foods, Petrofac

The bank said that while there may be valuation support on a sum-of-the-parts basis, the company still faces significant trading headwinds, with limited near-term positive catalysts.

“Whilst we think recent management appointments of a new CFO and CEO are positive steps in the group’s rehabilitation, we suggest there could be further store closures and exceptional costs as new management looks to revitalise the leisure operations.”

“Restaurant Group’s share price has bounced over 50% of late. Given this significant move, and our view that the group faces ongoing operational headwinds, we downgrade the stock to sell.”

Last week, Restaurant Group said it swung to a pre-tax loss in the first half on the back of restructuring costs as it announced the closure of outlets.

In the 27 weeks ended 3 July, the group posted a loss before tax of £22.5m compared to a pre-tax profit of £38m the year before.

Meanwhile, like-for-like sales were down 3.9%, and Restaurant Group said it plans to exit 33 underperforming sites immediately as it reckons they are incapable of generating adequate returns.

Berenberg downgraded its rating on Associated British Foods to ‘hold’ from ‘buy’ but lifted its target price to 3,000p from 2,760p on Wednesday.

The broker said AB Foods shares are up 25% since hitting a post-Brexit vote low of 2,350 on 27 June when Berenberg upgraded the stock to ‘buy’ to reflect an “absurdly” low valuation of 20x price-earnings ratio in comparison to mid-2015 levels of over 30x.

“FX movements aside, little had changed in the underlying business during the period and indeed the outlook for group profits was being supported by a significant step-up in world sugar prices over the last year,” Berenberg said.

On Berenberg’s new forecasts, ABF trades on 25x calendar year 2017 price-earnings ratio, which the broker believes is “fair” for a 9% three-year forward earnings per share (EPS) compound annual growth rate.

In its third quarter update in early July, AB Foods said the UK’s exit from the European Union will have limited impact on its business.

Since the referendum, the main impact on the group has been related to foreign exchange with the pound down 10% against the dollar and the euro. As a result ABF said it “no longer expects” to see a decline in the group’s EPS due to the positive translation effect of profits outside the UK and no material impact on margins.

Berenberg estimates the group will also benefit from an increase in sugar profit.

The broker expects about 45% of AB Food’s total sugar volumes and 35% of divisional sales come from its European operations.

“World sugar prices have increased by over 60% from the seven-year low levels in September 2015 supported by the prospect of a global supply deficit due to El-Nino-related dry conditions in some key markets.”

Berenberg believes the company can achieve €550 per tonne on average, which would support an estimated £165m earnings before interest and tax in sugar for 2017.

“Our EPS forecasts increase by 3-5% in the outer years reflecting our expected increased Sugar profit impact and 3% growth in 2016.

“On a relative basis, the stock is trading on a 75% premium to the market compared to its 65% average premium since 2010 and on a 30% premium to European consumer staples compared to the its 25% average since 2010.”

Deutsche Bank reiterated a ‘hold’ rating on Petrofac and raised its target price to 900p from 770p on Wednesday.

The bank said the oil and gas services company is “slowly getting back on course but end market recovery remains elusive”.

Petrofac’s end markets offer little evidence of any pickup despite projects supposedly moving closer to realising awards, Deutsche Bank said.

Deutsche Bank said since there is a scarcity of awards, focus remains on reducing capital intensity and net debt via the disposal of Integrated Energy Services assets. Petrofac has exited the Berantai RSC contract in Malaysia and the Ticleni PEC contract in Romania to refocus on its core markets and reduce net debt.

“But these processes are unwieldy and likely to drag, weighing on earnings and crucially sentiment,” the bank said.

“The valuation isn't stretched but getting back to its roots is slow and signs of an end market pickup is unclear,’ hold’.”

The bank’s increase to its price target mainly reflects a reduction in its estimated cost of capital. It added: “Given the uncertainties in navigating back to its roots and also with respect to its core end markets; implied valuations are not overly compelling at 14x PE, 0.8x EV-Sales and 7x EV-EBITDA ‘18, on our estimates, which we find are largely in line with long-run averages.”