There is significant pent-up demand in the pubs and restaurants sector which should see a swift return to profitability once reopening is allowed, according to analysts at broker Numis.

POSITIVE FACTORS ALIGN

If Australia is any guide, customers will flock back to restaurants very quickly. Since the country reopened in the early Autumn footfall reached pre-pandemic levels in October.

Reservations data from Opentable suggests people in Australia are eating out twice as often as they did before the pandemic.

With many small independent firms going to the wall over the last year, capacity in the UK has reduced by around 5% according to industry data.

Only 80% of known licensed premises were open for business in September before the second lockdown, suggesting a wider hollowing out in the sector.

While innovative companies such as Loungers (LGRS:AIM) and Fulham Shore (FUL:AIM) will be able to take advantage of lower rents and continue expanding sites, the sector will emerge from the pandemic with far less supply.

This means that larger, well invested survivors are likely to benefit from market share gains and higher margins. Numis highlights Mitchells & Butlers (MAB) and Fullers (FSTA) as well invested, asset backed survivors who are well positioned.

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Numis also reckons recent merger and acquisition activity is likely to continue as trade and private equity buyers eye growth opportunities on reopening.

Former chief Greene King chief Rooney Anand has raised £200 million from investors including US investor Oaktree Capital to invest in the pubs sector. Add in leverage and the total spending power could reach £500 million.

REOPENING

The base case across the industry appears to be that pubs and restaurants will be allowed to open in late April/early May, which will miss the key Easter trading.

This factor and general uncertainty mean that some companies may take the opportunity to follow in the footsteps of JD Weatherspoon’s (JDW) and raise more equity.

Pub group Mitchell & Butlers has said it is exploring a rights issue and Numis reckons it could look to raise up to £400 million.

Wagamama owner Restaurant Group (RTN:AIM) and catering firm SSP (SSP) are also likely to raise new money given the relatively tight headroom banking facilities, Numis said.

The sector borrowed around £500 million from the various government coronavirus schemes last year, while raising around £400 million of new equity.

Paying back the borrowed money over the next few will be a priority for most firms, but shareholders will be hoping for a quick return to profitability.

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Issue Date: 12 Feb 2021