I wrote this one up back in January 2014 at the time of their post close trading update. So there should not have been too many surprises on the menu today. However having said that, for starters I notice that the results have still managed to come in ahead of consensus despite them flagging better than expected results a month ago. I guess this is a classic case of the behavioural bias of under reaction and why earnings revisions often trend in one direction. This is because analysts are often slow to adjust to new information and often too cautious in making changes to their estimates and therefore tend to move their numbers in a series of small steps.
Now for the main course the actual results saw revenues in line at £580m (+9% with +3.5% LFL), EPS 28p (+16%) v 27p forecast, and full year dividend 14p (+19%) v 13.3p forecast. Within this the operating margin increased by 0.4% to 12.9% which equals the highest levels they achieved in 2008. They opened 35 new sites during the year, they sold 43 million meals, created over 1,000 jobs and they are targeting 36 to 43 new sites in the coming year. For a sweet finish they say that current trading in the eight weeks to 23rd Feruary 2014 saw revenues up by 10% and LFL still running at +3.5%. The Chief Executive sadly is stepping down this year although he will be retained as a consultant. He sounded reasonably positive on the outlook and made the following valid points:
"With the UK economy showing improvement, employment levels rising and inflation falling there are good prospects for an improvement in household finances. This bodes well for our sector and all of our team will be working determinedly to deliver another year of profitable progress. The Restaurant Group is in great shape and I am confident that it will continue to prosper."
Now however as we leave the restaurant we get a blast of cold air in the face when we look at the valuation on this one. Now it is a good company which is well managed and has delivered excellent results in recent years. While it was on offer at a reasonable price under 300p in the first half of 2012 when I bought it, I cannot say the same now it is trading at around 650p, close to its all time highs. Now given they have beaten the numbers today I'll have to have a stab at projecting this years numbers to get a handle on the valuation. Given they are still running at similar sales and LFL rates so far and plan a similar or slightly greater number of new openings I'll simply assume a similar growth rate for this year to last year. Thus If I simplistically add 16% to the eps and the same to dividends assuming a maintained 2x cover I get 32.5 pence of earnings and a 16.25 pence dividend. At 650 pence this leaves them on 20x PE and a yield of 2.5% which is a pretty full rating. Indeed I'd have to say both from an investment and a dining perspective that you would probably find better value in a Greene King (GNK), Marstons (MARS) or Wetherspoons (JDW) pub. However this one is growing more quickly and has much less debt and arguably nicer restaurants, so as ever you pay your money and take your choice.
In conclusion, I couldn't tell you to chase them up here, but as a shareholder I would encourage you to try one of their restaurants! Personally, I'm going to have to digest these results and consider the outlook, rating and growth to decide if I'll stay put for more helpings or ask the waiter for the bill. Certainly I wouldn't normally consider buying a stock on 20x PE and the 2.5% yield is toward the bottom end of the range I normally consider. So that's a subject (selling disciplines) I should probably come back to another day. So do keep coming here for an investment digest from me and don't forget you can sign up for free e-mail updates of my posts in the box to the right if you want. As as teaser, as I mentioned behavioural biases at the beginning of this post, I have a post all about behavioural economics planned for tomorrow.