Restaurant Group prepares next phase of its streamlining plan and investors queue up to back Segro’s expansion strategy

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“After yesterday’s punishing day on the markets, the FTSE 100 bounced back with a 0.7% gain to 6,380. Asian and European markets were also strong ahead of the important update on US interest rates from the Federal Reserve. The key focus will be the Fed’s updated economic predictions rather than any rate change which isn’t expected to happen,” says Russ Mould, Investment Director at AJ Bell.

“On the FTSE, utilities, financials, miners and oil producers led the way including top riser Lloyds which advanced 3.6%. Cruise ship operator Carnival continued to sail ahead, rising another 3.2%.

“Investors took profits in engineering software group Aveva following yesterday’s rally, and Ocado was also out of favour with investors.

“The fact that markets are managing to pick up will be important for investor sentiment. There has been a sense of euphoria in recent weeks with US stocks recovering all their year-to-date losses and equities around the world racing ahead.

“Yesterday’s pullback made investors more nervous and a prolonged pullback, such as three or four days of declines, could have switched the market mood to fear once again.

“While markets do still seem elevated given widespread earnings downgrades for companies, the latest price action would suggest that investors remain happy to buy equities in search of capital gains, as it is hard to find decent returns elsewhere.”

Restaurant Group

Restaurant Group was already travelling down the path to a smaller sized estate before news of a CVA. It had paid the price for having tired brands and expanding too fast without enough thought to having decent service standards, competitive prices and a modern menu, causing its earnings and share price to plummet.

“The announcement it is to now pursue a company voluntary arrangement means it can close more underperforming Frankie & Benny’s sites and seek better rental terms on part of its remaining estate.

“It effectively means Restaurant Group is a significant step closer to cleaning up its business and trying (again) to make itself fitter for the future. Notably its Chiquito and Food & Fuel brands have already been put into administration.

“There are arguments that it should have fixed the existing business before buying Wagamama in 2018 and taking on lots more debt. Yet having Wagamama has provided a new lease of life for the group principally due to its sales growth and expansion potential.

“Management will be eager to get its sites reopened as soon as possible, however Wagamama’s format of shared benches poses a challenge for social distancing.

“Right-sizing its estate is an important step in Restaurant Group’s revival but so too is the ability for its outlets to function normally which seems unlikely to happen for some time.”

Logistics Property

“The UK property market has been slammed by lockdown as the value of retail and commercial property has slumped, but one category of real estate stands out.

“The pandemic is accelerating existing trends which were driving demand for so-called logistics assets, essentially warehouses.

“As more shopping for food and other items is done online, companies need big out-of-town facilities from which to sort and distribute products as well as hubs closer to urban centres to support deliveries to customers.

“The empty supermarket shelves seen at the start of the crisis and the difficulties in transporting medical supplies around the country reflect the importance of robust supply chains of which warehouses are a key part.

“It’s little wonder that big property companies want to go on a spending spree and Segro’s oversubscribed £680 million placing will put it in a strong position to expand its estate.

“The modest discount offered on the new shares and the strong demand for the issue reflects confidence in its plans to add capacity at sites already in the portfolio, as well as acquiring land for development and buying existing assets.

“Segro has followed in the footsteps of its smaller peer LondonMetric Property which raised £120 million in May. The dividend hike alongside newly-published full year results from LondonMetric was a sign of its bullishness and was accompanied by news of new lettings with tenants from a range of different sectors.”

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