‘Kaizen’ (change for the better), the philosophy of Wagamama, Restaurant Group’s (TRG) most formidable asset, continues to apply across the board. The exit from a long tail of unattractive Leisure leases has accompanied the refinement of airport concessions, while current refinancing proposals, requiring shareholder approval on 29 March, should allow COVID-19 liquidity headroom, expansion and progress towards the medium-term goal of net debt/EBITDA (pre-IFRS 16) of under 1.5x. Given so many moving parts, FY20 results were not meaningful other than to show the strength of TRG’s retained estate when allowed to trade. Resumption in, say, 2022 of its pre-pandemic performance of £118m EBITDA (pre-IFRS 16), which excludes said rent reductions, would give an EV/EBITDA of <10x post capital raise.
Restaurant Group |
Change for the better
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Travel & leisure |
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17 March 2021 |
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*Before proposed capital raise of 175m shares at 100p Business description
Bull
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‘Kaizen’ (change for the better), the philosophy of Wagamama, Restaurant Group’s (TRG) most formidable asset, continues to apply across the board. The exit from a long tail of unattractive Leisure leases has accompanied the refinement of airport concessions, while current refinancing proposals, requiring shareholder approval on 29 March, should allow COVID-19 liquidity headroom, expansion and progress towards the medium-term goal of net debt/EBITDA (pre-IFRS 16) of under 1.5x. Given so many moving parts, FY20 results were not meaningful other than to show the strength of TRG’s retained estate when allowed to trade. Resumption in, say, 2022 of its pre-pandemic performance of £118m EBITDA (pre-IFRS 16), which excludes said rent reductions, would give an EV/EBITDA of <10x post capital raise.
2020 trading takeaway
COVID-19 restrictions, which depressed ‘dine-in’ and concessions for most of the period (sales down 57%), estate restructuring (down from c 650 to c 400 sites) and adoption of IFRS 16 (c £45m boost to EBITDA and £484m to net debt) make it difficult to assess the underlying FY20 performance. However, the continued market outperformance by TRG’s major drivers is encouraging, Wagamama (c 50% of the 2019 retained estate EBITDA) and pubs in the 11 weeks after the first lockdown, respectively +5% and +20% like-for-like sales (Coffee Peach restaurant tracker). While there was a predictable step-change in delivery and takeaway sales due to ‘dine in’ closures (2.5x for Wagagama, fivefold for the other restaurants for February 2021 vs the pre-COVID start of 2020), it also reflected TRG’s long-standing identification of the growth potential of delivery and online brands.
Ready to go
A silver lining of COVID is the sooner than expected rationalisation of c 60% of non-Wagamama restaurants ie the CVA of the main operator of Frankie & Benny’s (exit of 128 structurally unattractive leases) and closure of 45 Chiquito sites. This delivers an operation re-rated by TRG as capable of medium-term growth and complementary to a balanced portfolio: Wagamama, pubs and concessions.
Valuation: Worth tasting
With 2021 disrupted by COVID-19, we base the valuation on the pre-COVID (2019) performance and pre-IFRS 16 numbers. £118m EBITDA on net debt of c £250m (currently c £400m plus c £25m forecast exceptional costs and two more months of closures less £175m gross proceeds from the proposed capital raise) suggests an EV/EBITDA of 9.3x, which may be cautious given benign post-COVID conditions and no allowance for expected CVA rent reductions and head office savings.
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Consensus estimates
Source: Refinitiv. Note: *Pre-exceptionals; **Adoption of IFRS 16 raises EBITDA by £44.7m. |
EDISON QUICKVIEWS ARE NORMALLY ONE-OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.
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Research: TMT
Despite a tough year, TXT reported organic revenue and EBITDA growth and acquired two profitable fintech businesses. To deal with COVID-19 restrictions, management quickly shifted operations to remote working, which will now be a permanent feature. From a demand perspective, long-term contracts and a focus on sectors less hit by the pandemic have helped support the business. TXT is now positioned to benefit as hard-hit sectors gradually see demand return and its earlier-stage fintech investments increasingly win business.