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Berenberg reiterates 'sell' for the Restaurant Group

Despite the Restaurant Group's recent trading update showing that its underlying performance is on the mend, analysts at Berenberg said the improvement was not significant enough to deliver notable growth in the second half of its trading year.
TRG's underlying earnings seemed to be boosted as a result of the annualisation of price reductions at Italian-American restaurant chain Frankie and Benny's, however, Berenberg said the smaller decline in like-for-like sales in recent weeks implied that the was too little to deliver the "notable [underlying] growth" moving forward that managament was banking on.

As well, in its most recent trading update, TRG increased guidance for new site openings in 2018.

Berenberg acknowledged that this will support financial performance, but the broker still thought that "weak underlying sales and substantial cost pressures" could have a "considerable impact" on profit generation.

TRG has not changed its guidance of £16m to 19m of external cost pressures in 2018, something it expects to mitigate roughly 50% of through leveraging purchasing scale, improved labour scheduling and overhead savings, and with underlying revenue set to decrease again this year, Berenberg added that cost inflation would have a considerable impact on profitability.

"Thus, we maintain our 'sell' recommendation, although we increase our price target to 250p," the broker concluded.

On Berenberg's new forecasts, the firm's LFL sales were set to fall by 0.7% in 2018, versus the 0.3% drop it had previously penciled in.

Combined with cost inflation, its EBIT margin was now seen shrinking to 7.7%.

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