Leader: McDonald’s Ronald McDonald
Since the arrival of Covid-19 there has been little to smile about. But the Chancellor’s Eat Out to Help Out scheme – otherwise known as ‘Rishi’s Dishes’ – has been a rare source of pleasure.
Rishi Sunak’s pledge that taxpayers will foot the bill for half the cost of all restaurant meals and nonalcoholic drinks on Mondays, Tuesdays and Wednesdays – up to £10 off per person during August – has not only been incredibly popular with customers. It has also boosted takings for the hard-hit hospitality sector, still reeling from months of lockdown.
More than 35 million half-price meals have already been consumed at 85,000 participating restaurants, leaving the Government with a bill estimated at £180million. But is the benefit of Rishi’s Dishes limited only to hungry diners and restaurant owners – or can investors also enjoy the Chancellor’s largesse?
While Eat Out to Help Out has been a lifeline for many smaller, independent eateries, larger chains are also reaping the benefit.
They include the likes of pub groups such as Marston’s, Greene King, Young’s and Wetherspoon – as well as more specialist chains such as Loungers, which operates 146 all-day cafes, bars and restaurants across England and Wales with its two brands, Lounge and Cosy Club.
One of the UK’s largest pub chains, Mitchells & Butlers, owns bars and restaurant brands including the Slug & Lettuce, Miller & Carter Steakhouse, Harvester and Toby Carvery, while one of the best-known listed restaurant companies is The Restaurant Group. It owns brands including Wagamama, Frankie and Benny’s and Chiquitos.
Ben Yearsley is a director of Shore Financial Planning. He says restaurants are being helped twice from the Chancellor’s announcements. ‘As well as benefiting from Rishi’s discount, they are only being charged 5 per cent VAT on sales rather than the normal 20 per cent. From the restaurants I’ve eaten in this month, they haven’t reduced their prices and are pocketing the difference. That’s not a complaint by the way! If you want a vibrant dining sector, it needs all the help it can get at the moment.’
Finding investment funds with big holdings in the travel and leisure sector of the London Stock Exchange is not that easy. Investment fund Artemis UK Special Situations has recently bought Wetherspoons as has Threadneedle UK Equity Income. Five Guys Burger chain is the biggest holding in venture capital trust Pembroke. The trust also has a stake in Italianstyle chain Chucs Bar and Grill.
For those with a more adventurous investment tilt, Yearsley points to the US-listed fast food giant McDonald’s which was recently bought by investment fund Artemis US Extended Alpha. As a lead player in the casual dining sector, McDonald’s is well placed to recover from lockdown – with or without Rishi’s discount.
But Yearsley says that overall it might be premature to be too positive about the hospitality sector. He adds: ‘Anecdotally, the scheme is bringing forward bookings from later in the week, so are the companies any better off as a result?
‘In the short term though, it is getting people into the habit of eating out again. If this carries on into next month. that could signal a better opportunity to invest in the sector with more certainty. Maybe, people should take advantage by enjoying Rishi’s Dishes rather than investing in companies benefiting from the scheme.’ Nick Hyett is equity analyst at wealth manager Hargreaves Lansdown. He says: ‘It’s important to take a long-term view. While a one-off boost provided by Eat Out to Help Out is certainly welcome, its impact on a company’s long-term share price is minimal. However, in this case, the sudden inflow of cash, after a lockdown where many hospitality businesses saw sales fall to zero, could well be crucial to the survival of some of these companies.’
He adds: ‘We suspect family oriented restaurants will be particular beneficiaries – the likes of Wagamama and Frankie & Benny’s. The Restaurant Group, their owner, was already struggling before the current crisis, and has had to negotiate with landlords to reduce rents. So the boost provided by Eat Out to Help Out could be key to keeping the train on the tracks in the short term.’
Yet, he adds, Eat Out to Help Out does not solve the Restaurant Group’s long-running business problems or the industry-wide issue of massive over supply in casual dining.
Hyett says: ‘From a long-term perspective, we think pub groups such as Young’s, Fuller’s and Wetherspoon are more compelling investment propositions. These groups own, rather than lease, their pubs and their sites are often not easily replicated by rivals.’
That all helps cash flow – crucial during the current crisis – strengthens balance sheets and protects prices, Hyett says. ‘Those business strengths are reflected in relatively demanding share valuations, but long term investors can afford to take a more relaxed attitude on that front.’
Tucking in: Eat Out to Help Out means people enjoying a Big Mac meal for £2.29
WHAT THE CHANCELLOR’S MEAL DEALS OFFER
Chancellor Rishi Sunak announced his ‘Eat Out to Help Out’ scheme as a way to boost the struggling hospitality industry.
Around 80 per cent of hospitality firms stopped trading in April, with 1.4 million workers furloughed, the highest of any industry sector.
While venues were allowed to open from July 4, they have had to operate at a lower capacity to comply with social distancing rules. The offer, which applies on Mondays, Tuesdays and Wednesdays throughout this month, does not require vouchers. Instead, the restaurant automatically deducts 50 per cent from the food bill up to £10 per person and charges the discount to the Treasury.
Diners can use the offer as many times as they like, but it does not apply to takeaways or drive-throughs. Venues of all types countrywide have been taking part, with people enjoying a Big Mac meal for £2.29 and two courses at Michelin-starred chef Jason Atherton for just £12.
Darius McDermott of fund scrutineer FundCalibre, strikes a note of caution, saying that most of the listed restaurant and pub brands have seen their share price fall heavily since the start of Covid.
He says: ‘Despite the success of Eat Out to Help Out, the shares of these companies have generally not bounced back that much yet. The market is concerned about the potential for a second wave of Covid-19 as well as a permanent change in consumer behaviour.’
McDermott says that investors with faith in the long-term future of the sector might be interested in investment funds such as R&M Recovery which owns Wetherspoon and The Restaurant Group, Threadneedle UK Equity Income (also mentioned by Yearsley) and Gresham House UK Micro Cap – Loungers is a top 10 holding. Threadneedle UK Extended Alpha owns The Restaurant Group while Man GLG Undervalued Assets owns Wetherspoon.
Russ Mould, investment director at AJ Bell, says that his adopted home town of Brighton looked very busy early last week, with most restaurants packed to the rafters.
He adds: ‘It is possible that Eat Out to Help Out boosts shortterm demand – although the danger is that is detracts from business at the weekend or sees diners turn up, drink tap water, eat up to their maximum discount and clog up a table.
‘But I’m not sure that I’d personally go overboard on buying restaurant stocks on the back of a temporary Government support scheme. Although, of course, there’s always a chance that Chancellor Sunak ends up subsidising people’s dinners for longer than expected.
‘The big danger is the scheme ends just as unemployment creeps higher and restaurateurs (and investors) find out that the benefits were fleeting at best.’