If investing in recovery prospects is your thing, there are probably more possibilities out there now than at any time over the past decade. Barely a day goes by when we don’t hear news of some company or other that’s struggling with some sort of setback, and there are surely plenty whose share prices are oversold and which could handsomely reward those who buy the shares now.
The trouble is, I also think we’re in one of the riskiest times for recovery investors too, with many companies either failing to turn themselves around or being rescued in a deal that wipes out shareholders — Debenhams and Thomas Cook spring to mind.
Price crash
Where does Restaurant Group (LSE: RTN) fit in after its shares plunged 15% on Tuesday morning in response to first-half results? Oversold and ready to bounce back?
Restaurant Group’s troubles go all the way back to March 2016, when 2015 results kicked off a share price slump that continues to this day. The report came with a warning of challenging trading conditions, softening consumer demand and weaker consumer confidence, which the company said were likely to persist.
And persist they have, with business at the firm’s flagship Frankie & Benny’s chain having a few tough years. There’s been a lot of effort made to turn things round, together with an attempt to expand out of trouble by buying up Wagamama. But that acquisition was double-edged, as it added to Restaurant Group’s already large debt pile, and it was not welcomed by a large portion of the company’s shareholders.
Overcapacity
The first half of 2019 saw Restaurant Group record a statutory pre-tax loss of £87.7m. But a lot of that was due to writing down the value of sites it described as “structurally unattractive,” and to “the well documented over capacity and continued like-for-like sales decline in the casual dining market” leading to a “more cautious medium-term outlook to assessing impairments.” Adjusted pre-tax profit was put at £28.1m.
In short, the company is facing too little demand to justify its number of restaurants, and it’s been gradually closing underperforming ones for some time. And now, according to the BBC, around half of the firm’s Chiquito restaurants are facing possible closure, with each to be reviewed when its lease next comes up for renewal. Expensive leases are the scourge of many in the retail sector right now, and that’s not a good sign.
Dividend
There’s been no effect on the dividend so far, and there’s to be an interim payment of 2.1p per share in line with the firm’s policy. I always question a policy of paying out dividends when there’s huge debt on the books, and Restaurant Group’s has risen to £316.8m — but analysts are still predicting a 4% yield this year.
There is some optimism, and with a 23% EPS recovery forecast for 2020, the shares are on a forward P/E for that year of 10. That might look cheap, but I put little trust in retail/leisure forecasts for 2020 when we have no idea what state our economy will be in even just a few months ahead.
Restaurant Group is another I place on my list of possible turnarounds I’ll only consider buying after I see it happening.
