Is The Restaurant Group (LSE: RTN) about to become London’s hottest turnaround share? Developments surrounding the coronavirus today suggest any improvement in broader investor confidence will remain elusive for some time yet. But should news flow surrounding COVD-19 improve, then this eateries operator could be one of the most popular on account of its low valuations and bright growth forecasts.
City analysts predict annual earnings will flip 13% higher in 2020. This leaves it trading on a rock-bottom forward price-to-earnings (P/E) ratio of 7.7 times. It boasts a corresponding sub-1 price-to-earnings growth (PEG) multiple of 0.6 too.
Fallen dividend hero
Up until recently, The Restaurant Group was a big attraction for income chasers because of it huge yields. Its decision to reduce the annual dividend for 2018 took some of the sheen off its appeal, though thanks to its weak share price, yields still sat on the right side of ‘chunky’.
All that has come crashing down following this week’s disastrous full-year trading statement, however. The Frankie & Benny’s and Wagamama operator announced it was temporarily suspending the full-year dividend and that, therefore, the total payout for 2019 would be the 2.1p per share interim shelled out previously.
Questions over the FTSE 250’s bulky dividends have long been doing the rounds as revenues have weakened and net debt ballooned. So this week’s news was hardly a surprise. Explaining the rationale behind the decision, chairwoman Debbie Hewitt said that axing the dividend would allow it to “retain the flexibility to grow the business, [while] facilitating an acceleration of our Leisure estate rationalisation and strengthening our balance sheet.”
Axing the dividend, although painful for shareholders, would appear to be a good idea today. While down fractionally from the prior year, The Restaurant Group had a mighty £286.6m worth of net debt on its books as of December.
It also makes sense the business is taking steps to reduce its Leisure estate in response to its huge cost pressures and an oversaturated mid-tier dining market. It plans to reduce the number of core restaurants it operates from around 350 today to between 260 and 275 by the close of 2021.
Use your noodle
I’m not convinced any of this news will help The Restaurant Group to turn around its battered operations, however. Noodle bar Wagamama might be operating resiliently, but the same cannot be said for the rest of its brands.
It plans to get diners flocking though its doors again by refreshing its menus and bolstering its brands. But this isn’t the first time we’ve heard this. A 2.8% fall in like-for-like Leisure sales in 2019 illustrates just how successful this strategy has already proved.
Other initiatives, like bolstering its delivery business, are a move in the right direction. However, with competition also intense here, there’s no guarantee it’ll prove the magic wand the group is hoping for.
So the business is cheap, but its long-term profits outlook remains extremely patchy at best. Its why the share price has dropped 68% over the past year alone. I’d be happier investing my hard-earned cash elsewhere.
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Royston Wild 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.