Despite the fall today, shares are likely to still trade on a similar EV/EBITDA multiple once Brokers trim their forecasts
Companies: Fulham Shore Plc
Well, that was an unwelcome start to the day...
Fulham Shore (LON: FUL), the owner of Franco Manca and The Real Greek, released a Trading Update this morning ahead of its AGM that confirmed a slowdown in revenue growth this year and confirmation that EBITDA will be below market expectations. Shares opened down c.25%.
To confirm, I am a Fulham Shore shareholder.
Management emphasised that it has already opened 10 restaurants this financial year and that the plan to open 15 in total over the year is unchanged. However, it highlighted the opportunity that is presenting itself with other restaurants closing and spaces opening up:
"...given an increased availability of sites for sale due to the well-publicised pressures on other restaurant operators, we have decided to review our opening pipeline and to seek to improve terms with landlords of new sites we had already identified. This may delay some of our openings to later in this financial year."
The restaurant openings will be more back-end weighted this year and will, therefore, contribute less to revenue and earnings this year.
The other piece of unwelcome news raised by Chairman David Page was higher fixed costs as Fulham Shore expands:
"The Group is experiencing a higher fixed cost element to support its increased level of operations, especially in The Real Greek."
..."Headline EBITDA (as defined in the Company's accounts) for FY18 will be significantly higher than that achieved in FY17, it is likely to be less than current market expectations."
It is difficult to know what is behind the higher fixed costs without more detail, but by relating it to the increased level of operations could mean higher than expected costs for the central commissaries. Given these are "fixed costs", their impact should fall as the Group continues to expand.
Looking at the various Broker notes on Research Tree, analysts were expecting EBITDA to grow to c.£10.5m in FY 2018 (from £7.1m in FY 2017). Before today's fall, that translated into a 2018 EV/EBITDA of c.11.5x.
The EV is currently c.£106m after the share price collapse today. If 2018 EBITDA forecasts were to drop to, say, c.£9m, that would imply the market is pricing the company at a broadly unchanged 2018 EV/EBITDA multiple of c.11.5x.
As a holder of the shares, the announcement is clearly disappointing. EBITDA margins will be lower than expected this year. If these lower margins are a more permanent feature, this will reduce unit economics and mean either a slower expansion or more debt to fund growth. In this scenario, the Balance Sheet has plenty of capacity to carry more debt, especially as EBITDA continues to ramp year-on-year, so I would expect the latter.
The prospect of Franco Manca becoming a nationwide chain means that, on a three to five-year view, assuming Management delivers, this is still an exciting story. However, it's taken a 25% smack in the chops today.
