- Leisure business restructuring pushes company into loss
- Plans to increase profitability and reduce debts by 2025
- Activists demand better performance and strategic review
Despite an encouraging start to the new financial year with positive like-for-like sales growth, shares in Wagamama owner Restaurant Group (RTN) slid 7% to 42.1p after the company announced plans to exit 35 loss-making leisure sites.
Noting the ‘highly contested’ market segment in which leisure brands Frankie & Benny's and Chiquito operate, the company plans to accelerate disposals as well as convert a few sites to Wagamama over the next two years.
This is expected to reduce the footprint by around 30% to 75 to 85 sites by 2024.
The company’s other brands continued to perform in line with expectations for the year ended 31 December 2022. Wagamama, pubs and concessions achieved like-for-like sales above their respective benchmarks compared with 2019.
Sales recovered to £883 million from £636.6 million and adjusted EBITDA increased 2% to £83 million, while adjusted pre-tax profit was 22% higher at £20.3 million.
On a reported basis, an exceptional charge related to the restructuring of the leisure business pushed the company to a pre-tax loss of £86.8 million.
PROFITABILITY PLANS MAY DISAPPOINT ACTIVISTS
The company said it has developed proactive plans to deliver ‘significant’ EBITDA (Earnings before interest, tax, depreciation, and amortisation) margin expansion of between 2.5% and 3.5% over the next three years.
The margin has dropped from around 14% in 2019 to 9.4% in 2022 and excluding lower VAT in the first quarter of 2022 the adjusted EBITDA margin fell to 8.3%.
The group is also targeting to reduce net debt to EBITDA to 1.5 times from 2.2 times.
The plans may fail to appease activist shareholder Oasis Management which owns a 6.5% stake and criticised the firm’s corporate governance and called for an independent strategic review.
The embattled firm has also become a target for another activist Irenic Capital Management which is pushing for better divisional disclosure and divestitures according to a Bloomberg report.
WHAT ARE THE EXPERTS SAYING?
Greg Johnson, leisure analyst at Shore Capital, took a positive view on the company’s plight.
‘With circa £900 million of revenues (and building), we estimate that this could take EBITDA comfortably beyond £100 million if delivered.
‘Significantly ahead of our current FY24F EBITDA estimate of £88 million; which we would see as being materially accretive to earnings and value.’
Johnson argues the shares could be worth more than double their current price based on his sum of the parts calculation which gives credence to activist calls to split-up the businesses.
Russ Mould, investment director at AJ Bell, commented: ‘The question may well be asked, why not spin off, sell off or in some way get rid of the leisure business entirely, along with the other bits, to focus on Wagamama which is clearly a restaurant brand with genuine appeal.
‘Rename the business as Wagamama, clear out the rest, and you would have a streamlined and focused operation which might have more appeal to investors.’
Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (Martin Gamble) and the editor of the article (James Crux) own shares in AJ Bell.
