Sector Note -
Experiential leisure is a fast-developing sector, offering the potential for high future growth. Despite significant macro-economic uncertainty and weak consumer confidence over the past two years, numerous data sources (e.g. Visa’s UK Consumer Spending Index and Barclaycard monthly spending data) point to the relative resilience of low-ticket leisure spending, often highlighting it as perhaps the only consistent growth area of Consumer over the past 18-24 months. A number of sentiment surveys also show consumers prioritising ‘going out’ and other ‘experiential’ leisure activities, with consumers searching out experiences – rather than the ownership of goods – with their disposable income. In particular, we have noted a huge increase in activity-based social entertainment experiences. In this Quarterly report, we have assessed the five most promising emerging sub-sectors of experiential leisure (Urban mini-golf, Competitive socialising in bars/clubs, Escape rooms, Outdoor adventure, Virtual reality/Video gaming/eSports), outlined the key dynamics (both the opportunities and challenges) of each, and identified the up-and-coming specialist operators as well as the larger quoted leisure/retail operators making initial moves in these sub-sectors in locations across UK and even internationally.
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11 Dec 19
Sector Note - Shopping Trolley: finnCap Consumer quarterly sector note
M&A is a clear theme for the UK Consumer sector: Aided by superabundant capital and low interest rates, the uptick in deal activity seen in May and June, compared to the first four months of 2019, continued into July and now early August. M&A has also broadened out across several Consumer sub-sectors (e.g. leisure, homewares, home improvement, pet care and beauty) having been more narrowly concentrated on the UK clothing retail sector and the UK pubs industry earlier in the year. Buyers have been a mixture of trade buyers and private equity operators. We also note the re-emergence of cross-border deals (e.g. Majestic Wine, Swallowfield, Focusrite, Portmeirion). Deal activity seems to be a response to many consumer companies already struggling to meet or exceed growth expectations, exacerbated by questions of how companies should navigate the new normal of a turbulent, disruptive world, and evolve their business models in response. There is no discernible unifying theme in the most recent deal activity, rather it is a mixture of: (1) achieving simplification and focus through demerger (e.g. Travis Perkins and the demerger of its Wickes DIY retailing business) and divestiture (e.g. Swallowfield); (2) scope M&A (e.g. Portmeirion, Focusrite, and boohoo Group) designed to accelerate top-line growth by adding attractive market segments, enhancing capabilities and opening up new markets; (3) scale M&A (e.g. Stonegate acquiring Ei Group) designed to achieve a lower cost position through benefits of scale (namely, cost synergies), building market power and other industry consolidation benefits; (4) establishing an initial foothold in interesting spaces (e.g. Pets at Home and Next); (5) bidders considering the long-term investment nature of the business as more suitable to the private market (e.g. easyHotel and Merlin Entertainment); and (6) forced sales process/capitulation due to financial distress/existential crisis (e.g. Bonmarché and MySale).
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09 Aug 19
Small Cap Feast
Voyager AIR The Company will focus on the acquisition, leasing and management of primarily widebody aircraft, with asset management services to be provided by Amedeo Limited the IPO will comprise a Placing and Offer for Subscription of Shares to raise up to approximately US$200m. Uniphar, a diversified healthcare services business with a workforce of over 2,000, is looking to join AIM. Raising EUR135m with market cap on admission of EUR309.6m, expected 17 July 2019. Roxi Music UK music streaming service plans London IPO as it goes up against Spotify. They have appointed investment bank Arden Partners for an initial public offering (IPO) on the London Stock Exchange later this year.
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16 Jul 19
Sector Note -
Multiple unexpected surprises across the Consumer sector. We retain our unchanged overall view that “a highly challenging and uncomfortable period lies ahead for most of the consumer sub-sectors”, with uncertainty weighing heavily. What confounds us, however, is the nature and scope of the surprises, both positive and negative, that have characterised the past three months. In this edition, we highlight five significant ‘surprises’. (1) There have already been several probably industry-changing events in the first few months of 2019 that will likely define the global video games sector for the next 5-10 years. In short, we are on the cusp of a potential distribution revolution, with the emergence of a number of new distribution platforms from several tech giants (Google Stadia, Apple Arcade, and likely others) which could materially expand the audience for video games. This ‘more content in more ways' development is especially promising for content providers and technical partners/‘work-for-hire’/co-developers. (2) In UK grocery, there were high expectations that 2019 was shaping up to be the most important year for the UK grocery sector in possibly 20 years; however, 2019 has so far not proved to be such a pivotal year. (3) We had thought that the outlook had stabilised for FMCG operators, who had broadly navigated the turbulent backdrop over the past two years. Notable unexpected profit warnings from several small/mid cap FMCG operators reminded us this was not the case and the backdrop remains highly volatile. (4) We had assumed that corporate activity in the Consumer sector would continue to be dominated by the pub sub-sector. We were surprised therefore by some notable deal activity in the Retail and FMCG sub-sectors. (5) We had thought that the IPO market was shut for Consumer companies; however, one new listing (Loungers) and an Intention to Float (Watches of Switzerland) over the past month suggest an improved listing environment.
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08 May 19
Trading update - period ending 31 March 2019
The Fulham Shore Plc (“FUL”) has released a solid trading statement ahead of its March 31st year end. Trading is in-line with market expectations (we forecast full year revenue and EBITDA growth of 12.5% and 1.4% respectively), the plan to increase the rate of restaurant openings in the year to March 2020 is maintained and there is the first indication that a dividend may be paid in the not too distant future. We view the announcement as positive against the back-drop of a causal dining sector under intense pressure. We leave our numbers unchanged and expect to introduce a forecast for 2020 post the further details that will be released with the full year results expected in mid-July.
28 Mar 19
2019 interims - LfL growth, net debt reduction
Against a back-drop of the casual dining sector being under intense pressure, The Fulham Shore Plc (“FUL”) has issued a solid set of interims for the six-month period to the end of September 2018. Revenues of £33.0m and underlying EBITDA of £4.6m were up 19.8% and 1.4% year on year respectively. Margins remain under pressure but cash generation continues with net debt at £8.9m at period end, down from £9.7m a year earlier and down from £12.0m at the end of March 2018. Current trading remains upbeat and the Company now expects to open more restaurants in the year to March 2020 than the forecast four openings in the current financial year to March 2019. We have increased our March 2019 revenue forecast (+6.2%) but our 2019 underlying EBITDA forecast remains essentially unchanged at £7.5m.
12 Dec 18
Assessing the Consumer sector’s exposure to a ‘no-deal’ Brexit. With Donald Tusk, the President of the European Council, warning this week that a ‘no-deal’ Brexit “is more likely than ever before”, we have assessed the listed Consumer sector’s exposure to a ‘no-deal’ Brexit scenario and the risks attached. As very few companies have published a detailed analysis of the challenges that Brexit represents (and their mitigation plans), we have looked at the number of references to “Brexit/EU Referendum” in recent UK earnings reports. The main five areas of risk identified are (1) Economic uncertainty including a weakened £; (2) Consumer confidence/spending; (3) Input/raw material cost volatility; (4) Workforce recruitment/retention; and (5) International trade. What is less clear is the extent to which comprehensive preparation has been made to ensure companies continue to run smoothly – deal or no deal. We conclude therefore that either UK small/mid cap Consumer sector plc feels prepared, or perhaps companies have run out of things to say amidst the deep uncertainty.
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18 Oct 18
Small Cap Breakfast
Path Investments (PATH) -RTO of a 50 per cent. participating interest in the producing Alfeld-Elze II gas field located 22 kilometres south of Hannover in Germany. Offer TBA. Due late Aug. Kropz PLC-Intention to float by the emerging plant nutrient producer with an advanced stage phosphate mining project in South Africa and exploration assets in West Africa
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23 Aug 18
Hunkering down in a tough market
The Fulham Shore Plc (“FUL”) has issued a trading statement for the year ending 25 March 2018. Primarily due to trade in the London surburban restaurants being weaker than anticipated, headline EBITDA for the period is expected to come in below market expectations. Additionally, restaurant openings for the year to March 2019 have been reined back reflecting the wide spread and well publicised market malaise impacting the UK casual dining sector. The net result is a reduction in our headline EBITDA estimate for the year to March 2018 by 15% to £7.4m and for the year to March 2019 by 28% to £7.6m.
08 Mar 18
Resilient interims - reassurance for share price
Resilient interims - reassurance for share price The Fulham Shore Plc (“FUL”) has reported a steady set of interims for the six-month period ended 24 September 2017. The trading environment remains challenging but the Group continues to achieve good levels of profitability and operating cash flow generation. Growth is being driven by new restaurant openings which are being executed on increasingly attractive terms albeit at a slightly slower rate than previously expected. We make small revisions to our numbers based on this slower roll out (2018 & 2019 underlying EBITDA down 3% and 4% respectively). Since the 6th September downgrade, the shares have fallen over 30% to last night’s close of 11.1p. We believe today’s results will reassure the market that FUL is successfully negotiating the downturn and we expect a narrowing of the valuation discount to the sector.
15 Dec 17
We examine wet-led and food-led capacity across the regions and conclude that excess capacity remains in the food-led segment (although Central, Welsh and Yorkshire regions lag the national average). Despite recent profit warnings, an increasing divergence in reported performance between pubs and restaurants, and a recent reduction in eating out frequency and spend, existing food-led operators remain too focused, in our view, on trimming estate tails and slowing rollout rather than substantial capacity reduction – and combined with smaller PE-backed concepts scaling up and landlord pragmatism, net new capacity continues to enter the market. Given the severe cost and competitive pressures, as well as downside macro risks, we foresee more pain across the sector – in the near term expect aggressive menu price discounting to continue, leading subsequently to margin pressure and forecasting risk for listed operators and financing risk for smaller, highly leveraged private operators. While rightsizing will happen (it did with pubs), the process may be protracted. We run the finnCap Slide Rule over the casual dining space, with our preferred pick (BUY, 19p PT) scoring highest on QVGM metrics. While not immune to sector woes, lacks an estate tail, should be a beneficiary of trading down, and has a number of self-help levers, as well as a management team that has seen the movie (many times) before.
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16 Oct 17
Downgrade to forecasts
While new regional openings are trading well across both brands, July/August trading softened across suburban London, driven in management’s view by a vacation exodus, poor weather impacting The Real Greek (TRG) and lower inbound tourism from the US and Middle East. September continued this trend and, while trade has picked up in recent days, it remains below expectations. Furthermore, capacity exiting the market is encouraging management to renegotiate rents, rent-free periods and reverse premiums, with a knock-on delay on the new opening schedule.
22 Sep 17
Current trading under pressure
The Fulham Shore Plc (“FUL”) has reported a trading update stating that the Group experienced a slowdown in trade in July and August. This slowdown, combined with a rising fixed cost base as the Group expands its number of restaurants, has led the Board to expect FY 2018 headline EBITDA to be below expectations. Whilst the slowdown may prove temporary, given the struggles being felt across the UK casual dining sector we assume a longer-term impact and have reduced our 2018 and 2019 headline EBITDA forecasts by 11.8% and 16.9% respectively. We continue to believe that FUL is very well placed to handle the headwinds facing the sector - driven by FUL’s straight forward product offering, value price point and an experienced management team. However, the market will likely want evidence that this slowdown is indeed temporary before positive momentum returns to the shares.
06 Sep 17
Small Cap Breakfast
Warehouse REIT - The Company will invest in a diversified portfolio of UK warehouse assets located in urban areas. The Company is targeting a dividend yield of 5.5p equivalent to a yield of 5.5 percent. for the year ending 31 March 2019. Issue price 100p. Raising up to £150m. | OnTheMarket—Intention to float on AIM to raise c. £50m which will be used to fund the growth of the OnTheMarket.com portal, already the third biggest UK residential property portal provider. Expected valuation £200m to £250m. | Charter Court Financial Services Group—Intention to float. Specialist lender serving the UK residential mortgage market. The net mortgage loan book stood at £4.4 billion as at 30 June 2017 growing at a compound annual growth rate of 92 percent since 31 December 2014. Part vendor sale and £20m primary raise. | ContourGlobal LP—Report on Bloomberg that the thermal energy power generator is considering a London listing. | Hipgnosis Songs Fund investment Company offering pure-play exposure to Songs and associated musical intellectual property rights. Offer raising £200m at 100p. The Company has decided to extend the closing date for the Placing, Offer for Subscription and Intermediaries Offer to 1 August 2017. The Company may bring forward this closing date at any time. Admission 15 September 2017
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06 Sep 17
While the decline in pub numbers over the past decade has often been attributed to the smoking ban, a rebalancing of demand from drink-led to food-led occasions and an uneven playing field between pubs and supermarkets on beer duty and business rates, we think that pubs also need to shoulder some responsibility, having largely failed to keep pace with changing trends, in particular lacking concepts that appeal to Generation Z consumers and Millennials. In this report, we discuss the characteristics of ‘Gen Z’ and Millennials (socially conservative, fiscally cautious, digitally native); what they like doing (lots in social isolation, far less in pubs and clubs); and how to tempt them back into pubs (create an ‘Instagram-able aesthetic’, offer free wi-fi and more technology, widen the wet offering and embrace non-drinkers, offer pop-up ‘immersive activities’ and employ retro with special offers that cater for groups rather than ‘couply’ stuff). Generating a strong social media presence (not just Facebook but also Instagram, Snapchat and Twitter) allows operators to be with their customers well after closing time and encourages customers to do their marketing for them.
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25 Jul 17
Bucking the trend of the peer group
The Fulham Shore Plc (“FUL”) has reported results for the year ended March 2017 in line with previous guidance and well ahead on the prior year. 2017 revenue and underlying EBITDA were up 41.1% and 36.0% respectively, driven by the expansion of the portfolio to 45 restaurants at year end from 29 at the end of March 2016. The new financial year has continued in a similar vein with a further 8 restaurants opened and management expects the good performance of the prior year to continue. This contrasts with many peers that are struggling with slowing consumer spending and rising input costs. Whilst not immune, FUL is handling the difficult market conditions admirably - we believe driven by its straightforward product offering, value price point and an experienced management team with a tight control on costs. (Matt Butlin)
12 Jul 17
Fulham Shore’s proven management team is expanding both its main brands, Franco Manca and The Real Greek, ahead of expectations. FY17 saw a 55% rise in restaurants open, to 45. We estimate 60 by end FY18, more than double the end FY16 figure. The authentic, good value, casual dining experience produces average ROCE at restaurant level of over 20%. Most openings are in Headline EBITDA profit from month one. The 3rd April trading update highlighted trading in line with (ambitious) expectations, which is in comparison to many other US and UK brands, which have found the past year difficult. Fulham Shore has clearly demonstrated robust, strong growth, expanding from London and out to provincial locations, with eventual potential for franchise, a third brand and international expansion.
15 May 17
A shore thing
We initiate with a 25p price target and a Buy recommendation. Fulham Shore is a highly investable opportunity with a strong pipeline of new openings, a differentiated product-led offering with an attractive pricing strategy, proven financial dynamics, a highly experienced management team and a number of incremental profit levers.
05 May 17
PizzaExpress Mark II
The opportunity of scaling a new and exciting value for money pizza concept, Franca Manca is significant. Recent interims testified to this expansion confidence. The group is led by a hugely experienced management team in the casual dining arena and their interests are firmly aligned. Low free float is the main ST drawback but we envisage a liquidity event on a 12m view to resolve this issue. We are positive on Fulham Shore and would encourage investors to take a much closer look.
26 Feb 16