Private Investor: They won't hire cars, but they still have to eat
Saturday 05 May 2007
The spring clean continues, also known as my "spot the dog" exercise as I clear the portfolio of underperforming shares. When I say "underperforming", I mean stuff that not only hasn't fulfilled expectations, but which also shows no sign of ever doing so.
This week's eviction was Avis Europe plc. It obviously hasn't been trying quite hard enough. I was a long-term investor in the group, having bought in at the float in 1997 at 125p. I bought some more along the way as they tanked and tanked again, but last week I decided to ditch a big chunk of them, holding just a few in case some private equity deal turns up (there's been some gossip, but then there's always private equity gossip around virtually everything these days).
I sold my shares at a miserable 72p, a very poor return by any standards. The car-hire business seems to be one of the toughest to be in these days, and there are few signs of things getting better. I did have a glimmer of hope that Avis might be taken over by the likes of General Motors (Ford bought Hertz a few years ago, only to dispose of it again not long after), but that's obviously not going to happen now. Still, bygones are bygones, as the economists say, and it's time to look forwards.
I've always had a bit of a soft spot for restaurant group shares, and my taste buds have been stimulated by the unimaginatively named Restaurant Group. Now, the catering game is probably even more cut-throat than car hire, but if you've got a good enough product and a decent image, you can still make money.
That's why I've been a happy investor in La Tasca (up 50 per cent in six months and now being bought out by - yes, you've guessed it - private equity), in Tasty plc (dim sum), and in Clapham House plc (gourmet burgers and Bombay Bicycle). They all seem to have the smell of success about them.
The Restaurant Group is a slightly different proposition. Its strategy is based on avoiding the ever more crowded high street environment in favour of "captive" markets. Thus, its four businesses - Garfunkel's, Frankie & Benny's, Chiquito and Blubeckers - can be found at out-of-town locations such as airports and leisure parks. Now, only about 7 per cent of The Restaurant Group's takings come via the high street.
OK, it may have to pay BAA and its peers an inflated rent, but so far the strategy is producing some appetising returns. The most recent trading statement produced full-year figures at the top end of expectations. Pre-tax profit increased by 18 per cent to £35m on turnover up 10 per cent to £314.7m. The group's chief executive, Andrew Page, added that this year had begun well, with like-for-like sales up 5 per cent.
Chiquito was the best-performing chain, with 11 new restaurants opening during the year to take the total to 45. Frankie & Benny's boasts 139 outlets and saw earnings jump by more than 20 per cent in 2006. Some 25 new sites were opened, leaving the group with 284 mid-market eateries in Britain.
Many analysts think that the shares in The Restaurant Group are undervalued, and I tend to agree. You have two or three powerful underlying engines of growth here.
First, there's the captive market element. Second, there's the long-term trend towards more eating out and increased spending on leisure. And third, we have the seemingly insatiable appetite for foreign travel.
There's something about being at an airport that seems to rob people of their normal inhibitions about spending their cash, and The Restaurant Group's on-site outlets are very well placed to take advantage of this liberal attitude to spending. In both the long and the short term, I think that The Restaurant Group's prospects are sweet, so it joins my other restaurant shares in the portfolio (bought at 360p per share).
Having recently castigated the boards of some smaller building societies, I ought also to mention the total remuneration paid to directors the Family Assurance Society, another mutual but this time one of our friendly societies. (I am a member.)
I see from its annual report that the total bill for the Committee of Management (both execs and non-execs) rose from £868,000 in 2005 to a little more than £1m in 2006, a rise of 18 per cent. I think I'd get friendly with anyone for that sort of money.
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