Berenberg upgrades Restaurant Group, downgrades Wetherspoons

The bank downgraded JD Wetherspoon to ‘hold’ from ‘buy’ and cut the price target to 1,050p from 1,650p. It also downgraded On the Beach to ‘hold’ from ‘buy’ and reduced the price target to 320p from 400p.

Berenberg said it still thinks Wetherspoons is a very well-run business with a significantly differentiated value offer. "However, we think it could be a while before the type of sales momentum needed to drive a meaningful re-rating from its already sector-leading valuation multiples returns to the business.

"As a result, we downgrade our rating to hold but continue to fundamentally like the shares in the event of any significant pullbacks."

As far as OTB is concerned, Berenberg said it has admired the stock since 2016 and still believes in the business model. "However, we feel the recent lack of clarity on margins in the upcoming years creates too much risk to earnings estimates, particularly with the shares trading at c17x 2023E P/E (including full credit for a rebound in margins). As a result, with the shares having rallied circa 40% in the past month, we downgrade."

Wagamama owner Restaurant Group was upped to ‘buy’ from ‘hold’ with an increased price target of 125p from 110p, while WH Smith also received the same rating upgrade, with a price target hike to 1,900p from 1,750p.

Berenberg said it has been warming up to Restaurant Group "for a while now", and with the shares around 30% off last year’s highs, now is the time to upgrade the recommendation. "With the right management now instated, we think that the company can grow earnings per share at a double-digit rate for the foreseeable future, believe there is scope for upside to our recovered earnings estimates in 2023 and beyond, and envisage the business being the market leader and natural consolidator over the medium term."

The bank said it has always seen WH Smith as a great business that generates excellent returns on capital and there is no reason why it cannot continue to replicate that in the future. "With the shares down around 25% from last year’s highs, we upgrade our rating to buy," it said.

Berenberg's top mid-cap pick is National Express, while its top small-cap pick is Hollywood Bowl, both of which it rates at ‘buy’.