Today, I want to take a look at two UK-focused businesses I haven’t covered for at least a year. Both have made good progress during that time, but still look affordable.
Bowling a winner?
Last time I looked at 10-pin bowling operator Hollywood Bowl Group (LSE: BOWL), I was impressed. The UK’s largest operator of bowling alleys appeared to have a repeatable formula for growth and high profit margins.
What’s changed? Nothing really, as its trading update published today suggests the picture remains attractive. Like-for-like sales rose by 1.8% during the year to 30 September. New sites lifted total sales by 5.8%.
These are good numbers, although it’s worth noting that sales growth appears to have slowed slightly this year. In 2016/17, like-for-like revenue rose by 3.5% and total revenue rose 8.8%.
Happily, profits are expected to be in line with market expectations. According to the company, pre-tax profit should be 10% higher, at about £23.2m. Broker forecasts suggest that this will translate into adjusted earnings of 12.4p per share, putting the stock on a P/E of about 16.8.
Keep buying?
During the first half of this year, the average customer spend per game rose by 5.5% to £9.20. The number of games played rose by 3.6% to 6.9m. This organic growth helped to increase the group’s operating margin from 22.2% to 23.6%.
High margins and low debt mean that cash generation is very strong. The company said today that it’s considering additional shareholder returns this year, on top of the regular dividend.
City analysts expect profits to continue rising next year. They’ve pencilled in earnings growth of 10%, which puts Hollywood Bowl on a 2018/19 forecast P/E of 15, with a 3.6% yield. I’d keep buying.
Tasty treat or yesterday’s news?
One company I’ve been less confident about is casual dining firm Restaurant Group (LSE: RTN), whose biggest business is “American Italian” family restaurant chain Frankie & Benny’s.
Restaurant Goup’s share price has fallen by another 21% since I last wrote about the shares in March 2017. At the time, I warned that it might still be too soon to buy. Is that still true today?
The firm’s latest results show that sales fell by 2.1% to £326m during the 26 weeks to 1 July. Adjusted pre-tax profit was 20% lower, at £20.1m.
Management says that trading was hit by cold weather at the start of the year, and by the World Cup in the early part of the summer. In support of this claim, like-for-like sales rose by 2.4% during the six weeks to 26 August.
One big risk
The main problem I can see is that Restaurant Group is cutting prices to boost sales, despite rising costs. The company’s numbers show that its adjusted operating margin fell from 7.9% during H1 2017, to 6.4% during the first half of this year. To put this into context, the group’s operating margin was 12.7% in 2014.
I suspect that this turnaround will succeed, but that the group’s profit margins may have to stay low to enable the group to compete against newer rivals.
Restaurant Group shares currently trade on a 2018 forecast price/earnings ratio of 14.8, with a prospective yield of 5.3%. I’d rate this as a potential turnaround buy although, personally, I remain cautious.
