Shares in Wagamama owner Restaurant Group (RTN:AIM) gained 6% to 117.3p on Wednesday after the company announced a £175 million share placing and open offer as it outlined plans to reopen and deliver long term shareholder value.

RATIONALE

The new money will be used to provide extra headroom to address possible trading disruptions on new virus flareups, accelerate the group’s ambition to return to 1.5 times leverage and invest in the growth of the business.

The leverage ratio refers to net debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortisation).

Greg Johnson, leisure sector guru at Shore Capital, says based on his estimates for EBITDA of £125 million the equity raise would put the group ‘well on its way’ to achieving its goal on leverage, taking the ratio down to roughly 1.8 times.

GROWING THE ESTATE

Management see potential for the Wagamama business (around 38% of group sales) to expand to 180 to 200 sites across the UK compared with the current 144, as well as overseas JV’s and franchises. The company revealed that historically the brand has achieved a return on investment of over 40% and £500,000 of EBITDA per site.

There is also scope to roll out between 20 and 30 Wagamama delivery kitchens compared with just five in operation today. The company is also targeting 140 to 160 pubs from the 78 it has today, which have historically delivered a 25% return on capital.

GROWTH POTENTIAL

Shore Capital believes the potential growth and a return to pre-pandemic profitability could put the group on track to deliver £200 million of EBITDA, albeit, ‘some way in the future.’

Danni Hewson, financial analyst at AJ Bell commented, ‘The £175m it hopes to raise would be the sixth biggest secondary raising of the year so far in the UK and the business promises it is well positioned to deliver long-term shareholder value.

‘The biggest questions about the group’s future potential can only be answered once consumers are free to return.’

The fully underwritten placing and open offer of 175 million new shares are being priced at 100p, and existing shareholders will be able to apply for five new shares for every 37 existing ordinary shares. The placing represents a 10.5% discount to the prior day’s closing mid-price.

In a separate announcement, Restaurant Group said full-year revenues to 31 December dropped 57% to £459.8 million leading to a pre-tax loss of £47.9 million against a profit of £74.5 million last year, as sites were forced to close under Covid-19 restrictions.

READ MORE ABOUT RESTAURANT GROUP HERE.

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Issue Date: 10 Mar 2021