Broker snap: Nomura rates Restaurant Group, M&B and Marston's as buy

15th Jun 2012 11:29

In a research note published this morning analysts at Nomura comment that the pub sector has suffered from the perfect storm of long-term wet-led decline, short-term pressure on UK consumer spending and investor aversion to high leverage. For that reason they are cautious on the overall consumer environment, but believe that in an unloved part of the leisure sector there are certain companies providing exposure to structural growth in the casual dining market at attractive valuations. In particular, they point out that the pub closure rate of 25 per week masks an important underlying shift in demand moving from obsolete drinks-only venues to larger food-led pub restaurants where the outlook is more favourable.As such, they believe that free cash flow yields at Restaurant Group (12%), Mitchells&Butlers (13%) and Marston's (14%) stand out as offering the best value relative to their growth prospects and these are their Buy recommendations.Whitbread, however, remains their top pick because of the growth potential in the Premier Inn and Costa brands, their expectation of an improvement in revenue per average room trend from the third quarter and the potential for a re-rating of the Costa business where we expect growth of circa 20% in earnings before interest and taxes.On the other hand, they see downside to estimates from pressure on like-for-like sales and believe the earnings per share sensitivity is highest for Wetherspoon (-11%) and Spirit (-10%). Furthermore, neither has a particularly attractive valuation on free cash flow yields of 10% and 7% (normalised for tax), respectively. We therefore initiate on both with Reduce recommendations. AB