Wagamama gets bond rating boost

Bond credit rating business, Moody's has just changed the outlook on the ratings of Wagamama bonds to 'positive' from 'stable'.

Emmanuel Savoye, an AVP at Moody's, said, 'We have changed our outlook on Wagamama to positive to reflect the company's improved leverage resulting from strong top line growth and improved EBITDA generation over the last 24 months. We also expect it to keep reducing its leverage in the next 12 to 18 months.'

'Despite the UK's increasingly competitive casual dining market, Wagamama has outperformed its peers by delivering double digit percentage like-for-like sales growth in the last two financial years and in last four quarters. It also continues to expand organically through the opening of new restaurants in the UK and internationally.'

Moody's views positively:
• the track record of consistent revenue and EBITDA growth;
• the management team's success in rolling out new restaurants in the UK and to a lesser extend internationally;
• the strong brand recognition and the concept differentiation offered by Wagamama as the only major pan-Asian player in the UK.

As of 24 April 2016, UK like-for-like sales increased by 13.1% compared to FYE April 2015 and EBITDA after leases and pre-opening costs increased by 23.5% to GBP35.7 million, which is ahead of the original business plan and higher than previous Moody's expectations.

The casual dining market remains highly competitive in the UK. After a good performance in the first three quarters of 2015, the market has slowed down in late 2015 and into 2016 in terms of like-for-like sales. Although underlying positive fundamentals remain for the sector, there are also a number of challenges in Moody's view, including:

• increased competition due to continued new restaurant openings which makes it more difficult to achieve positive like-for-like sales;
• the recent outcome of the UK referendum to leave the European Union which may lead to a period of economic uncertainty and a possible decrease in consumer confidence;
• pressure on margins due to the planned increases of the minimum national living wage introduced in April 2016.

Against these challenges, Wagamama continued to achieve double digit like-for-like sales growth in each of the last four quarters, and preliminary figures indicate a continued strong performance in Q1 2016/2017 including during the period immediately following the Brexit vote.

In Moody's view, this demonstrates the quality and strength of the brand as the only player of scale offering pan-Asian cuisine in the UK. In addition, the company has implemented cost saving measures to partially offset the minimum national living wage increase, such as optimising procurement and a more efficient use of the workforce.

Moody's notes though that the development on consumer confidence post Brexit are yet to be tested and that the planned future increase in minimum national living wage may have a negative impact on EBITDA margin.

Other sources of margin pressure could arise in the market, such as an increasing use of external parties to expand in the delivery sector and a potential food cost inflation over time due to a weaker currency. However, in Moody's view, the growth of the delivery segment will also enable to expand revenues, while food cost inflation is expected to be mitigated by the long term contracts generally in place on food sourced from abroad and from the efforts taken to find alternative local suppliers.

With revenues of £229.9m, or less than half the revenues of the top players in the UK casual dining market such as Pizza Express and Nando's, Wagamama remains a small player with a strong niche position and as such the company's cash flow generation is more exposed to the underperformance of individual restaurants or the strength of its only brand and cuisine offering.

At the same time Moody's recognises that the continued growth of Wagamama in recent years has enabled it to reach a size where it can take more advantage of economies of scale, as evidenced by the opening of a new central kitchen in 2015, and the centralization of the production of sauces and other key ingredients for all of Wagamama's UK restaurants.

Moody's also notes the improving geographic diversification along with the expansion outside the UK. As of July 2016, the company has 38 restaurants across 15 countries.

Moody's expects the company to continue the roll out of new restaurants in the UK as well as internationally and to use internally generated cash flows to finance the investments required.