Some pubs and restaurants have become a little too richly valued for RBC Capital Markets, especially as they face rising cost pressure from a higher than expected increase in the minimum wage.
The Canadian bank downgraded its ratings on Marston’s PLC (LON:MARS) and Restaurant Group PLC (LON:RTN) to ‘sector perform’ from the previous ‘outperform’, while keeping JD Wetherspoon PLC (LON:JDW) at ‘underperform’.
For Mitchells & Butlers PLC (LON:MAB) the share price target was pumped up to 450p from 325p and the rating double-upgraded to ‘sector perform’ from ‘underperform’, which the RBC analysts said was justified by its trading performance and sector rerating from the recent takeovers.
“The group has demonstrated very robust trading in a tough market as the benefits of its capital-investment plans come to fruition and it was the only pubs company that saw earnings upgrades in 2019.”
Having been seen as a value sector, RBC's leisure sector analysts said the mix of the takeovers of Greene King and EI Group coupled to a post-election rotation into UK mid-caps saw the sector rise 53% last year despite earnings on average declining around 8%.
“While consumer confidence has been boosted post the election, this may be a short-term relief as the trade negotiations start to take place,” they said in a note on Friday, also acknowledging other geopolitical uncertainty as an additional headwind.
Pint half full or half empty?
Marston’s price target was nudged up to 130p from 120p, with the analysts saying they have a more cautious earnings outlook than the City consensus in the medium term, forecasting 2% LFL revenue growth to offset inflation but profits impacted by the £190mln assets-disposal programme to reduce debt.
Restaurant Group’s target price was cut to 170p from 180p, after its Wagamama chain had a robust thi9rd quarter, but its other brands expected to suffer as “we believe that the existing operations have continued to struggle from weak cinema trends through end November with the Thomas Cook collapse affecting concession revenues in the short term”.
For Wetherspoon’s the target price was raised from 1,300p to 1,550p, which is still almost 5% above the current share price.
“The group has been in the sweetspot of being a wet-led value operation and has seen strong like-for-like growth. However, earnings progress over the last 10 years has benefited from lower interest rates, buybacks, leasehold reversions and lower tax rates,” the analysts said, margins under pressure and in recent years and now facing more minimum-wage headwinds.
RBC retained a positive ‘outperform’ stance on Domino's Pizza Group PLC (LON:DOM) and it’s the preferred stock in the pubs/restaurant space with the target raised to 350p from 330p as the shares have performed well since announcing its decision to exit international operations, “although the relationship with the franchisees still requires attention”.