- Group acquires Mexican style fast-casual chain Barburrito
- Like-for-like sales up 20% year-to-date
- Accelerates growth opportunity
Wagamama owner Restaurant Group (RTN) has acquired award-winning Mexican style fast-casual restaurant chain Barburrito for £7 million and made an early repayment of £44 million of loan facilities.
The Mexican-themed business operates across 16 sites in high footfall locations from travel hubs to shopping centres.
Investors cautiously welcomed the news, with the shares nudging up 0.2% to 44.3p. This probably reflects increased concerns of recession and a potential squeeze on consumer spending.
Russ Mould, investment director at AJ Bell, said: ‘If recession hits the UK, how will Barburrito cope with consumers already under significant financial pressure?
‘A lot of its restaurants are situated in shopping centres which could become a lot quieter if people are watching their spending. If someone only has limited money to spend on food, would they pay £10 for a burrito, or buy something cheaper.’
PRICE TOO GOOD TO BE TRUE?
Restaurant Group said the acquisition is ‘well aligned’ with consumer trends such as healthy eating, convenience and quality which has resulted in impressive recent performance.
Like-for-like sales are up 20% year-to-date representing a 14% outperformance against the market. Despite positive momentum in the business Restaurant Group appears to have negotiated an attractive price.
Based on the next 12-months run-rate of earnings before interest, taxes, depreciation and amortisation (EBITDA), the price represents a 4.4 times multiple.
Mould believes the price reflects near-term risks to earnings saying: ‘Restaurant Group wants to expand the chain, particularly in the south, but it won’t be that simple.
‘Many major cities in the UK already offer burrito outlets, so there is plenty of competition. Therefore, Restaurant Group planting flags in new territories for Barburrito won’t necessarily lead to guaranteed success.’
SHORE CAPITAL VIEW
Greg Johnson, travel and leisure analyst at Shore Capital, takes a more positive stance and said the deal represents ‘a sensible strategic move in an attractive segment of the market.
‘We see scope to double the estate and EBITDA contribution over the next four years. The acquisition (under £0.5m/site) fits in line with management’s stated objectives to invest in inorganic growth opportunities, in addition to the continued rollout of Wagamama and Pub Restaurants.
Johnson noted the recent tie-up between airport retail operator Dufry (DUFN:SWX) and Italian food and beverage group Autogrill (AGL:MTA), and asked if Restaurant Group’s concessions business may be a good fit for WH Smith (SMWH).
Disclaimer: AJ Bell referenced in this article owns Shares Magazine. The editor of the article (James Crux) owns shares in AJ Bell.
