Restaurant Group (LSE: RTN) declined by 13% on Tuesday after the company announced the proposed acquisition of Wagamama for £357m. It will be paid for through a fully underwritten rights issue of £315m, with the company viewing it as a transformative opportunity to advance its growth strategy and create shareholder value.
Of course, the outlook for restaurants and retailers generally has been downbeat in recent months. Sports Direct (LSE: SPD) has seen its share price decline by 20% in the last year, with weak consumer confidence causing challenges across the industry.
Looking ahead, could either stock now offer good value for money? Or, do their risks still make them unappealing investment opportunities?
The acquisition of Wagamama is set to create an enlarged business which will benefit from cost synergies and site conversion synergies of around £22m. It also provides scope to accelerate Wagamama’s UK rollout through Restaurant Group’s site conversions, while also using the company’s existing relationships to expand its concessions presence. International growth opportunities could be improved, while the combined business intends to pilot pan-Asian cuisine ‘food-to-go’ offerings.
While the deal could provide a boost to Restaurant Group’s growth rate, the reality is that the dining industry is experiencing a challenging period. There have been a number of CVAs across the industry, while store closures have become a fact of life for many previously successful entities. As a result, and while there could be scope for synergies and a stronger overall business, I feel the rate of growth on offer may be somewhat lacking due to weak consumer confidence.
Despite this, Restaurant Group has a price-to-earnings (P/E) ratio of around 13. This suggests that it may lack a margin of safety and could be a share to avoid at the present time.
The retail sector is also experiencing a difficult period. Consumers seem to be unsure about their own financial outlooks ahead of Brexit, and this could mean that they become increasingly price-conscious. While this may be bad news for mid-market operators, value-focused stores such as Sports Direct may be able to capitalise on increased appetite for discounts among potential customers.
The company is forecast to post a rise in earnings of 15% in the current year, followed by further growth of 10% next year. After its share price fall over the last year, it trades on a price-to-earnings growth (PEG) ratio of 1.6, which suggests that it may offer a margin of safety.
Certainly, there are risks ahead for Sports Direct. It may be hurt by the continued shift of shoppers towards online offerings, while high business rates may make it less competitive than some of its online-focused sector peers. However, with what seems to be an improving financial outlook, a value-focused business model and a low valuation, I think it could generate impressive share price performance in the long run.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.