Rising Digital And Delivery Costs Will Pressure Margins And Limit Future Earnings Potential

Catalysts

About AmRest Holdings

AmRest Holdings operates a diversified portfolio of quick service, coffee and casual dining restaurant brands across Europe, the Middle East and China.

What are the underlying business or industry changes driving this perspective?

• Intensifying competition from convenience formats and supermarkets expanding ready to eat offerings in key markets like Poland risks eroding traffic and pricing power at core QSR and coffee banners. This pressures like for like revenue growth and limits operating leverage.
• Persistently weak consumer confidence and cost of living pressures in Western and Central Europe may entrench more value driven dining habits. This can force heavier reliance on promotions and low margin bundles that compress net margins and constrain earnings growth.
• Structural underperformance and macro weakness in France, particularly at Sushi Shop and other brands, could require deeper restructuring and store closures than currently planned. This may drive higher impairment and closure costs and drag on group level profitability.
• High digital order penetration anchored in third party aggregators and delivery channels exposes AmRest to rising commission fees and intensifying deal based competition. This can dilute basket economics and cap upside to EBITDA margins.
• Exposure to a slowing Chinese consumer and a highly promotional casual dining environment for Blue Frog increases the risk that new openings fail to reach targeted unit economics. This can lead to lower returns on invested capital and subdued earnings momentum.

Assumptions

This narrative explores a more pessimistic perspective on AmRest Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming AmRest Holdings's revenue will grow by 5.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 0.9% today to 1.2% in 3 years time.
• The bearish analysts expect earnings to reach €36.5 million (and earnings per share of €0.43) by about December 2028, up from €22.6 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €122.9 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 26.7x on those 2028 earnings, down from 31.3x today. This future PE is lower than the current PE for the GB Hospitality industry at 28.8x.
• The bearish analysts expect the number of shares outstanding to decline by 0.78% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 18.01%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company is delivering record quarterly revenues, with EUR 660.5 million in Q3 alone and low single digit sales growth expected for 2025, suggesting that scale, brand breadth and geographic diversification may continue to support resilient revenue rather than a structural decline in the top line.
• EBITDA margins around 16.8% and a guided full year margin slightly above the current 15.6% indicate that operational efficiency, disciplined pricing and cost control could sustain or even expand profitability, supporting stable or rising net margins instead of margin erosion.
• Strong digital adoption, with 62% of orders now digital and an omnichannel strategy built on kiosks, apps, web and aggregators, creates a structural tailwind that can lift average ticket size and customer frequency, underpinning long term growth in revenue and earnings.
• A solid balance sheet with leverage at 2.1 times, substantial cash reserves and committed credit lines provides ample financial flexibility to keep investing in new units, renovations and digital initiatives, which can support future earnings growth and mitigate downside risk to profitability.
• Selective expansion and portfolio optimization, including net growth of 59 equity restaurants over 12 months and focus on higher return markets such as Central and Eastern Europe and Germany, may improve average unit economics and lift group level EBITDA and net profit over the long term.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for AmRest Holdings is PLN11.9, which represents up to two standard deviations below the consensus price target of PLN18.03. This valuation is based on what can be assumed as the expectations of AmRest Holdings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of PLN27.5, and the most bearish reporting a price target of just PLN11.9.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be €3.0 billion, earnings will come to €36.5 million, and it would be trading on a PE ratio of 26.7x, assuming you use a discount rate of 18.0%.
  
• Given the current share price of PLN13.88, the analyst price target of PLN11.9 is 16.6% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.