News & Analysis

Could Restaurant Group Be A Smart Long-Term Play As It Boosts Its Post-Covid War Chest?

11 Mar 2021 | by: Anna Farley

There was some interesting news over the wires on Wednesday that could suggest the worst of the pandemic really is behind us. Wagamama owner Restaurant Group (LON:RTN) announced a £175 million fundraise, as investors looked towards a brighter future for its big-name chains. The timing of this deal feels significant and could present a lucrative opportunity over the coming years. 

Restaurant Group has weathered the ravages of Covid-19 better than most of its peers. While lockdown restrictions took down many other businesses in the hospitality sector, Restaurant Group now finds itself almost on the other side of the crisis with much less competition. Carluccio’s, for example, was sold to Ed’s Easy Diner owner Boparan Restaurant Group with 30 restaurants saved, while Byron Burger’s brand and assets were sold to a newly-formed company with 31 restaurants permanently shut. 

Better yet and Restaurant Group now has a massive war chest to deploy, as economies enter the recovery phase. Tuesday morning’s fundraise adds to the £500 million of new long term debt facilities announced last week, including a £380 million term loan plus a £120 million super senior revolving credit facility.

The extra £175 million will improve liquidity headroom in case of a Covid-19 resurgence and accelerate deleveraging.

On top of this, the capital injection will give Restaurant Group more flexibility for site expansion for its Asian restaurant chain Wagamama as well as its Pubs business. In its annual report, the company highlighted the “particularly strong” performances from Wagamama and its Pubs business during the pandemic. Chief executive Andy Hornby said:

“The Covid-19 pandemic has presented enormous challenges for our sector but the TRG team has responded decisively to re-structure our business and preserve the maximum number of long term roles for our colleagues. TRG is operationally a much stronger business than twelve months ago. The capital raising, announced today, will significantly strengthen the group’s balance sheet and provides TRG with the flexibility to invest in growing our business.

“Whilst the sector outlook remains uncertain, and we are mindful of continuing restrictions across the UK, we are confident that the actions announced today will allow us to emerge as one of the long term winners.”

It is true Restaurant Group hasn’t emerged totally unscathed, with a CVA for its Leisure business and the closure of 128 underperforming sites – mostly relating to its Frankie & Benny’s brand – as well as the administration of Chiquito and Food & Fuel.

But Wagamama, its best-known brand, has stayed strong and achieved “exceptional like-for-like sales growth” in 2020 as well as “trading well ahead of its core UK market and ahead of management expectations”.

Restaurant Group is almost over the finish line, with restaurants and pubs able to serve outdoor customers in April, indoor customers in May, and restrictions to be lifted in June.

Given likely continued restrictions relating to foreign travel and quarantine rules, internal UK demand is expected to stay high over the rest of 2021. This puts the company in a good position for a summer spike in trading when customers celebrate an end to the punishing lockdowns we’ve all had to endure.

Moreover, UK chancellor Rishi Sunak has yet to rule out a return of the Eat Out to Help Out scheme, so there could be an even greater spike in demand waiting in the wings.

Restaurant Group has significant investment potential, with shares currently trading at 113.10p compared to 164.0p at the start of 2020 and 309.57p in 2016.

The current share price makes Restaurant Group an attractive looking opportunity, as even a return to pre-pandemic levels would offer decent upside. Not only that, but with its well-funded position and significantly reduced competition in the post-pandemic landscape, this company could become the long-term winner CEO Andy Hornby is staking his reputation on.

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