Interactive Investor

Insider: restaurateurs show quick profit on bargain buys

25th July 2022 08:04

Graeme Evans from interactive investor

Shares in this company had fallen sharply, triggering some big purchases by two of its chiefs. Another smart buy is also showing a nice paper profit for this CEO.

Two Restaurant Group (The) (LSE:RTN) bosses who spent a combined £200,000 on the company’s shares just over a week ago have seen the value of their investment jump 16%.

Chief executive Andy Hornby and finance director Kirk Davis made their moves on 15 July at just over 42p, close to the lowest point since October 2020 for shares in the Wagamama and Brunning & Price chain.

The purchases were disclosed to the market last Monday morning and immediately boosted confidence, with shares up by an initial 4%.

The FTSE All-Share stock closed the week at 49.16p, but remains 50% lower over this year due to fears about cost inflation and potential impact on demand as households prioritise their spending on dealing with the surge in energy and fuel bills.

Analysts at Jefferies believe the shares can recover to 130p, a level they reiterated on 12 July after Restaurant Group spent £7 million on Mexican fast-casual restaurant chain Barburrito.

The move represented the first big acquisition since a City fundraising generated £167 million at a price of 100p and the company carried out a major restructuring that tightened its focus on Wagamama and the country and suburban pub estate.

There are currently 16 Barburrito sites but Restaurant Group plans to double this over the next four years, with a particular focus on the south of England.

Jefferies said: “The deal adds another roll-out angle, to add to Wagamama and the pubs, at an attractive valuation.”

Alongside the Barburrito deal, Restaurant Group announced an early loan repayment of £44 million and the purchase of caps to manage the risk of higher interest rates. The group has headroom of more than £190 million against its £361 million debt facilities.

There was no update on trading, but Jefferies said this meant no change in consensus forecasts since May’s AGM statement revealed a market-beating performance by Wagamama. Those figures showed like-for-like sales growth of 15% against the 2019 period, with trading in the pub estate also 10% higher. Interim results are due on 8 September.

Analysts at Stifel believe the chain is now better placed and notes that in previous cycles hospitality spending has proved relatively resilient to squeezed household budgets.

The broker added in May: “The longevity and severity of cost headwinds is difficult to forecast, but TRG's balance sheet is in reasonable shape to withstand stagnating economic growth.”

According to Liberum, a valuation multiple of 5.2 times 2023 earnings more than accounted for the current macroeconomic uncertainty. Its target price stood at 100p, with the broker arguing that the company deserved more credit for its strong brands, sales outperformance and longer-term prospects.

A £20,000 investment by the boss of Molten Ventures (LSE:GROW) has taken place with shares more than half the company’s most recently disclosed net asset value.

Chief executive Martin Davis made his move on 15 July when the FTSE 250-listed stock was at 413.17p, not far from the two-year low of 371.6p recorded three days earlier. The purchase was disclosed on Thursday and Molten shares closed last week at 480.6p.

In Molten’s annual results last month, the company revealed a 26% year-on-year increase in its net asset value per share to 937p at the end of March. Its portfolio, which includes investments in banking app Revolut, digital coaching platform CoachHub and machine intelligence business Graphcore, was valued at just over £1.5 billion.

Davis said current volatility made it challenging to give a meaningful forecast of portfolio fair value growth but backed the company to deliver on its targets across the cycle.

Shares were as high as 1,190p in the autumn as the company formerly known as Draper Esprit reaped the benefit of online tailwinds created by the pandemic.

The reversal for shares comes amid pressure on two recently listed investments, Trustpilot and Cazoo. The consumer reviews platform joined the London market in March 2021 at 265p but is now 73.4p, while the New York-traded online car retailer that Molten backed with a £10 million investment has lost much of its value in 2022.

However, many of its portfolio companies are well funded, and this means Davis expects investment needs will be closer to £150 million than the £311 million reported in June.

Broker Liberum said last month: “The shares lack a near-term catalyst, but we believe the current discount offers a considerable level of downside protection. Importantly, over 80% of the core portfolio is either fully funded until exit or has over two years of cash runway on current projections.”

The company joined AIM in 2016 with a valuation of £120 million. Now listed on the main market, it is currently worth around £750 million.

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