Restaurant Group hit by UBS downgrade

Restaurant Group was under pressure on Tuesday as UBS downgraded the stock to 'sell' from 'neutral' and cut the price target to 275p from 310p following a strong run in the shares recently and pointing to the turnaround plans for Frankie & Benny's.

UBS said it has analysed the new F&B proposition following the recent menu launch, along with 20 key competitors, and found that although prices have fallen, there is a value gap versus the branded pub chains which are around 22% cheaper.

"Given these brands also focus on the family value orientated market, we see risk that the F&B price cuts will not drive the required footfall increase from the core family value orientated customer F&B is looking to attract to offset price reductions."

The bank cut its earnings per share estimates for 2017 and 2018 to 20.3p from 21.2p and to 19.1p from 23.0p, respectively, given less confidence in the turnaround. While UBS reckons the strategy is moving in the right direction, it sees greater risk that, with the F&B value positioning still ahead of core competitors, price cuts will not drive the required footfall increase to offset the like-for-like pressure from falling prices.

UBS also highlighted the complexity of the F&B menu, which has 67 main courses, over double the peer average of 33.

"We believe that, given the importance of the new F&B menu in turning around the brand, we are now more cautious on the near-term ability of the current strategy to turn around the group's performance."

At 0955 BST, the shares were down 4.6% to 321.10p.