Small Cap Value Report (Weds 29 Sept 2021) - CARD, HEIQ, GOG, ESC, QUIZ, AIR, FUL, COM

Good morning, it’s Paul amp; Jack here, with the SCVR for Wednesday.

Agenda -

Paul’s Section:

Card Factory (LON:CARD) – interim results show a small loss, due to lockdown 3. Footfall still well down on pre-pandemic level, but average transaction value is higher. CARD has missed the boat online, with only trivial eCommerce sales, an area now dominated by e.g. Moonpig (LON:MOON) . Bank debt still a problem, and very weak balance sheet, means high risk of dilution. I’m steering clear.

Heiq (LON:HEIQ) – poor interim results, way down on last year’s H1. Wobbly-sounding outlook. It’s halved in price, but still looks over-valued to me.

Go-ahead (LON:GOG) – lost southeastern rail franchise, due to accounting “errors”. CFO resigns amp; accounts delayed. I’m steering clear.

Escape Hunt (LON:ESC) – improved trading recently, since reopening, but it’s not yet clear whether this is a viable business being rolled out, or just a fad.

Quiz (LON:QUIZ) (I hold) – results for FY 03/2021 show a heavy underlying loss, as expected. However the commentary shows encouraging signs of much improved current year trading, improving gross margin, and a positive outlook for FY 03/2022. This is very much a glass half full or half empty share! I see it half full, with recovery underway, but others may disagree.

Jack’s section:

Air Partner (LON:AIR) – trading figures are down on exceptional H121 figures but are up on H120, which is a more appropriate comparison. A couple of significant acquisitions have been made over the past couple of years and if the group can generate sustainable growth going forwards, then the share price today does not seem expensive.

Fulham Shore (LON:FUL) and Comptoir (LON:COM) – two listed restaurant companies, both reporting positive trading, but with two very different valuations and track records.

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Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to cover trading updates amp; results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it’s anybody’s guess what direction market sentiment will take amp; nobody can predict the future with certainty.

We stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed – please be civil, rational, and include the company name/ticker, otherwise people won’t necessarily know what company you are referring to.

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Paul’s Section Card Factory (LON:CARD)

56p (down 6% at 13:44) – mkt cap £193m

Interim Results

Card Factory, the UK’s leading specialist retailer of greeting cards and complementary products, announces its interim results for the six months ended 31 July 2021 (‘HY22′) and an update on its long-term strategy.

Company’s summary -

Results in line with expectations

Business review successfully completed – transformation underway to omni-channel model to deliver sustainable revenue and profit growth.

Target over £600m of sales by FY 2026

H1 was impacted by lockdown 3, with stores closed for 10+ weeks

Footfall down 27% on pre-covid levels, but ATV (average transaction value) up 28% – so customers are shopping less frequently, but buying more on each trip – quite encouraging.

CARD claims to be out-performing High Street averages, but I couldn’t see the source for this.

Net debt has long been a problem, but has reduced somewhat, at £96.5m, down from £107.7m in the 6 month period.

Revenues £116.9m

Loss before tax of £(6.5)m

Targets revised (downwards) – now revenues gt;£600m by FY 26, and “trending towards” a profit before tax margin of 17% – sounds ambitious, and this is only an aspiration, so I’m not giving it much weight.

Funding options still being evaluated – bank debt remains a problem, and there are financial penalties if it is not reduced. Hence CARD remains under pressure to repair its balance sheet with an equity raise, or more expensive subordinated debt. Hence there remains dilution risk for shareholders – unknown quantity, and unknown price. Why take on that risk?

Poor online sales – only £11.9m in H1, which was down 10% on last year, but up 50% on pre-pandemic. For me, this is the deal-breaker. To be credible, CARD needs to become a substantial online player. Instead it’s let the grass grow under its feet. Moonpig (LON:MOON) for example is valued at £1.2bn, over 6 times what CARD is worth. What a missed opportunity for CARD.

Current trading amp; outlook – I can’t get excited about this, as like-for-like (“LFL”) sales are down on both last year, and pre-pandemic, which is not good enough -

We are satisfied with trading since the period end, with better-than-expected performance driven by improvements across all areas of the business. Online is trading in-line with our expectations and in store footfall and transaction volumes continue to recover, albeit transaction volumes remain 21.9% below pre-pandemic levels. Average basket value remains higher than pre-pandemic levels, with basket mix reflecting our broader product offering, offsetting lower footfall. LFL trading post period end for the 7 weeks to 19 September is -3.6% and -6.3% versus the equivalent period in FY21 and FY20 respectively.

Notwithstanding short-term uncertainty around the speed of the market recovery the well-publicised disruption that is being seen in the supply chain, shortage of staff heading into Christmas, increasing freight costs, increased energy costs and adverse product mix, we remain cautiously positive about the second half of FY22.

Balance Sheet - still the weak point for CARD. NAV is £202.7m, which includes (worthless) intangible assets of £321.3m that I deduct, to arrive at NTAV negative £(118.6)m. I think the company needs to do an equity raise of £50-100m to repair its balance sheet. If that has to be done from weakness, it could involve a deep discount, and put existing shareholders in that horrible situation where you’re almost forced to buy more shares at a lower price, to average down.

If the share price has a strong run (as it did earlier this year), then dilution becomes less of a problem, but it seems to me that management missed the opportunity to raise equity at a favourable price earlier this year, with an irrational spike in price from Feb-May 2021 having since wilted somewhat.

My opinion -

Loss of business to online rivals such as Moonpig (LON:MOON) – demonstrating how poor CARD’s strategy has been allowing online rivals to emerge amp; prosper, with its own online offerings being poor, almost insignificant.

Weak balance sheet, saddled with too much debt, still unresolved – dilution likely, at unknown price.

High Streets amp; shopping centres not fully recovered to pre-covid levels – will they ever?

Large cost pressures coming, from withdrawal of Govt support, especially furlough amp; business rates relief. Also availability amp; increased cost of labour (and recent NI rise), and ubiquitous supply chain/delivery issues that are likely to affect everyone this autumn/winter.

I don’t find the strategy particularly compelling, it all sounds quite predictable, and uses the buzzwords like omni-channel.

All in all, there’s nothing here to interest me. I’d look at it more favourably once the balance sheet has been repaired, and fresh equity used to pay off a lot of the bank debt.

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Heiq (LON:HEIQ)

101p (down 24% y’day) – mkt cap £132m

Interim Results

HeiQ Plc (LSE:HEIQ), an established global brand in materials and textile innovation which operates in high-growth markets, is pleased to announce its interim results for six months to 30 June 2021.

I’ve never been able to fathom why people were prepared to pay such a high valuation for this company.

Company summary – sounds like waffle to me -

Positive progress in executing growth strategy through strengthened product portfolio and increased customer base despite significant Covid-19 pandemic related headwinds

H1 revenue of $25.8m, down 14% on H1 LY (which benefited from the pandemic)

Gross margin fell from 57.4% H1 LY, to 50.2% H1 this time, due to cost pressures on inputs and outputs.

Operating costs up 48% to $10.6m

That’s the worst possible combination – lower revenues, lower margins, and higher overheads.

Operating profit has crashed from $10.9m H1 LY, to $3.3m H1 this year (although this is better than just $0.6m in H2 LY)

Three acquisitions in the period, costing $26.7m

New product launches.

Outlook – again rather waffly, but my overall impression is that the outlook seems uncertain, and a bit wobbly. Therefore the 24% drop in share price today is probably justified. Here’s an excerpt -

In concrete terms, we are strategically and financially engaging key customers into our innovation pipeline and at the same time leveraging the customer base and product ranges of our acquisitions to generate additional revenues. In the current market conditions, our ability to supply these newly secured customer programs throughout 2HY 2021 will be essential for our short term success.

We anticipate that the rest of 2021 will continue to be unpredictable with the previously mentioned headwinds, for us, our customers and our competitors worldwide. While we are engaging in a number of significant projects, which would have an impact on the outcome for the full year, with various factors remaining outside of our control, we cannot be certain that all of these projects will materialize in 2HY 2021.

Balance sheet – overall looks OK, although trade receivables and inventories seem high, which can sometimes indicate problems (e.g. slow-selling products, and disputed customer invoices).

Cashflow statement – another area that raises some concerns – despite bumper profits in H1 last year, it didn’t generate much cash for H1 or the full year, instead the profit got sucked into working capital.

Cash generation has improved in H1 this year.

My opinion – based on these numbers, and a wobbly outlook, I wouldn’t pay anywhere near £132m for this company.

So it looks as if the valuation includes a lot of hope for future growth.

I wasn’t impressed at all with an online presentation the company did earlier this year, which was unconvincing.

As you can see from the chart below, most of the hype from earlier this year has dissipated. Looks like Heiq reversed into a cash shell in Dec 2020. That’s a good way of floating a new company, because it means there’s an existing shareholder base, hence improved liquidity compared with a completely new listing.

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Go-ahead (LON:GOG)

780p (down 24% y’day) – mkt cap £337m

Loss of South Eastern rail franchise

This looks a can of worms. The Department of Transport is taking back Go Ahead’s rail franchise for Southeastern. Its other rail business, GTR is not affected.

“Errors” totalling £25m have emerged (i.e. under-payments to the Dept of Transport by Go Ahead), with the CFO resigning immediately.

My opinion – I don’t touch any regulated industries, because there are too many uncertainties, and they often operate on low margins, and are subject to sudden changes being imposed on them, and often carry too much debt, as we see here.

Regulated transport companies are particularly difficult to analyse, reliant on taxpayer subsidies often, with complicated contracts amp; regulatory issues. I think you need to be a sector specialist to stand any chance of picking the winners in this sector.

Today’s kerfuffle with Go Ahead reinforces my determination to steer well clear of the whole sector.

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Escape Hunt (LON:ESC)

35.7p (down 5% y’day) – mkt cap £31m

I’ve had a very quick look at the interims announced yesterday, and there’s not a lot to say really, because its sites were closed for much of H1.

It looks as if the annualised run rate of revenues (based on the recent 6 weeks re-opening) is about £10m p.a.

It’s too early to say if the company is profitable, and if this is a viable business model.

The company’s outlook comments raise the question whether it can be profitable once costs have normalised (e.g. business rates being charged again)?

With the need to constantly refresh the fit-outs, so they don’t get stale, then EBITDA seems meaningless. Capex would need to be depreciated quite quickly in my view.

The Group reached a significant milestone, delivering a positive group level EBITDA in both July and August, helped by the ‘stay at home’ summer in the UK, lower VAT rates and the business rates holiday. The performance has validated our previous assertion that, with its current estate, is the Group could become cash generative given reasonable trading assumptions.

With the foundations laid for a profitable and cash generative business, we look to the future with confidence.

My opinion - you can probably guess what I’m going to say! A market cap of £33m for what is an unproven business model, strikes me as bonkers.

Is it a fad? Possibly, we don’t know. I would only invest if individual sites were throwing off big cashflows, but that does not seem to be the case so far, although covid is bound to be suppressing demand somewhat, after all gathering in a confined space is the business model, precisely the opposite of what some people want to do.

I imagine there are likely to be more placings in future. The business model might work, who knows. But why gamble on that happening, when there isn’t yet much evidence it is likely?

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Quiz (LON:QUIZ) (I hold)

21p (down c.15% at 09:05) – mkt cap £26m

Preliminary Results

QUIZ, the omni-channel fashion brand, announces its unaudited results for the year ended 31 March 2021 (“FY 2021″).

These accounts are quite late, and only of passing interest because FY 03/2021 was impacted by 3 lockdowns, forcing the intermittent closure of Quiz’s shops. Further disruption occurred from the closure of Debenhams, resulting in most of Quiz’s concessions (shops within a shop) closing. It did a pre-pack administration in June 2020, to ditch the heavy lease liabilities, with new, improved lease terms negotiated on cheaper, more flexible turnover rents – where rent adjusts because it’s a % of monthly revenues from that site, as opposed to a fixed quarterly rent on old style leases. A handful of stores in Spain were also closed.

Therefore it’s been a highly disrupted year, what with all the chaos caused by the pandemic. On top of all that, widespread supply chain issues, and staffing, were additional headwinds.

Put all that together, and it’s remarkable the business has survived, and seems to be recovering well. It’s funny how people have different perceptions. I read this morning’s update with an increasing sense of pleasure, as for me this glass seems half full. So I was amazed that the share price fell sharply in early trading. Also I had a Whatsapp discussion with a friend who took a negative view about the update, so it just shows, different people perceive companies in sometimes very different ways.

Short term share price movements don’t bother me, as I tend to take a medium to long term view of my personal holdings, and I try to ignore the share price in between my buy amp; sell decisions. Fundamentals are what interest me amp; drive my buy/sell decisions. Day to day volatility is just background noise.

I’m more interested in current trading amp; the outlook, but for completeness here are some numbers from the (now largely irrelevant) FY 03/2021 results -

Revenue £39.7m, down 66% on prior year – obviously a dire outcome, mainly due to enforced store closures.

QUIZ not only suffered from lockdowns, but also took a hit with online sales falling sharply to £21.6m (prior year: £37.5m). This was unfortunate, because QUIZ specialises in special occasionwear, which of course was the segment that was hit hardest by the pandemic, with events being cancelled for most of the year. It tried to pivot to casualwear, but that wasn’t enough to recoup sales of its core products largely fizzling out.

Gross margin reduced, due to discounting to clear excess stock, but at 53.4% is still reasonably strong, but well down on 60.3% in the prior year.

The underlying operating loss for FY 03/2021 was £(9.4)m, and that’s after including the benefit from £8.2m in Govt grants. So an awful year, as expected.

Statutory figures are interesting, with a profit of £6.0m being reported. How come? It’s because there was a £15.6m exceptional profit from the restructuring (pre-pack administration in June 2020), as onerous liabilities were ditched, and assets bought back on the cheap, in a controversial process which enables failed businesses to clear the decks and start again, but at a heavy cost to creditors.

Profit after tax feeds through to the balance sheet, so NAV actually rose from £10.1m to £16.6m in FY 03/2021, due to the pre-pack administration.

Here are my notes from reviewing the results statement amp; narrative -

Recent trading shows store performance is now “approaching pre-pandemic levels” on a like-for-like basis – this is very encouraging in my view, because bear in mind costs (especially rents) have been slashed, so the shops should now be trading profitably.

Sales in the 5 months to Aug 2021 are up 132% on LY to £30.6m. That annualises to about £73m sales, and if we add in something for the Xmas party season, then I reckon we’re looking at a run rate of c.£80m – so a decent sized business, and considerably larger than higher market cap online-only fashion businesses Sosandar (LON:SOS) (I hold) and In Style (LON:ITS) – although they are both growing their top lines strongly, which QUIZ is not. So maybe the price differential is warranted?

Bank facility of £3.5m extended a year, to Sept 2022. It’s not being used anyway, but is a good backup. No covenants on this facility, making it low risk.

Key point – anticipated positive cashflow for FY 03/2022.

Reduced reliance on third parties, with most concessions now closed, and focusing on own-website sales, rather than lower margin third party website sales.

Concessions are mainly in New Look shops, an interesting development that I wasn’t aware of. There are 45 concession sites in total, which are stores within a store, operated amp; staffed by the host company, with QUIZ just supplying the inventories.

International – surprisingly high, at 19% of revenues. This is the stores in Ireland, plus franchises in 20 countries – interesting, again I wasn’t aware of this. Spain now closed.

Stores – reduced footfall partially offset by increased spend per customer (similar to what CARD said yesterday).

Gross margin since year end has improved by 400bps, so half way back up from 53% to 60%, around 57% – an encouraging sign.

Sold much of the excess inventories since year end. No additional stock provisions required.

Supply chain – QUIZ seems to have fared well here. It mentions cost price inflation, higher shipping costs, and delays, but has been able to minimise disruption, and held excess inventories, so could fill any gaps from existing surplus stock.

Substantial cost savings achieved – e.g. lower rents, reduced HQ staffing, and less marketing spend during lockdowns.

Govt support – critical, and large, at £8.2m cash (mainly furlough), plus business rates suspension.

Online – sharp increase in activity April-August 2021, as special occasions resumed.

Marketing spend now being increased, as activity improves.

Balance sheet – is surprisingly strong, largely thanks to the pre-pack administration done in June 2020. NTAV is £13.2m – a healthy position. So insolvency risk is very low now, which might surprise people who haven’t done their research properly. A widespread perception is that QUIZ is financially distressed, but that is clearly wrong if you look at the balance sheet numbers.

Working capital looks healthy, with current assets of £18.9m, and current liabilities of £12.75m. Note also how the lease liabilities are now very small.

Going concern note is interesting, as it includes a stress test of a downside trading scenario. The company sails through with adequate liquidity even in the downside case.

My opinion – I see this update positively, but that could be because it’s a top 3 position in my personal portfolio, hence the ever-present risk of rose-tinted glasses! I try to be objective always, but unconscious bias may creep in without me realising it.

The share price more than tripled recently, so the market had already priced in a change from basket case at risk of going bust, to a recovery situation with little to no insolvency risk. So maybe it was too much to expect another rise on publication of these results?

That said, a drop from a recent peak of 26p, to around 20p at the time of writing, doesn’t make sense to me, hence why at c.£26m market cap, I see this share as something I’m likely to be buying more of, rather than selling. Anything below 20p seems an attractive buying price in my opinion, with good potential upside if recovery continues.

QUIZ is not a particularly good retailer. They had a series of excellent years before the IPO, but then began deteriorating quite badly. That suggests something went wrong with product, and the competitive position clearly deteriorated.

Having said that, QUIZ has survived the pandemic, unlike many of its supposedly superior rivals (e.g. Debenhams, Arcadia Group, and many other smaller competitors). So it now benefits from less physical stores competition, and much lower rents – arguably the best position it’s ever been in, as regards competitive landscape.

Online, QUIZ seems to regaining its poise, and if they can accelerate growth there, then the upside potential for the shares could be considerable.

I bought my shares at about 8p, which was an absolute steal. I’m happy to sit tight, as the £26m valuation still looks cheap to me, given the recovery potential that appears to be taking hold.

I’m targeting an exit at 40-50p, which looks possible in my opinion.

QUIZ has been a successful, highly profitable business in the past. So with a much reduced cost base now, I don’t see any reason why they couldn’t rebuild profitability. The key focus now is to get the product right. Having survived the pandemic, and with sound finances now, management should be free to focus on getting the product right, rather than fighting for survival.

See the terrible performance of this company since it listed. Although interestingly, there has not been any dilution – it still has 124m shares in issue. Therefore, in theory at least, the share price could recover to previous highs, if financial performance recovers. That’s probably pie in the sky, as in hindsight the company was polished up for the IPO, and they stuffed a load of fund managers with over-priced shares, after a period of unsustainably good trading.

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Jack’s section Air Partner (LON:AIR)

Share price: 96p (+2.13%)

Shares in issue: 63,562,601

Market cap: £61m

Founded in 1961, Air Partner was originally a school for military pilots converting to civilian flying. Over the past 60 years it has evolved into a broader global aviation services group, providing aircraft charter and aviation safety amp; security solutions to a diverse customer base.

The group had a surprisingly strong Covid, characterised by increased demand for its charter services during lockdowns. Since then, the group has made a promising acquisition and released a confident trading update, marking it as a company of interest.

The shares have recovered in recent days but the Value Rank is still an attractive 83 and if the company is building the platform for long term sustainable growth then the share price today is not expensive by any means. Also note the persistently strong StockRank over time.

Half year results

Strong H1 trading performance… The Company now expects performance for the full year to 31 January 2022 to be materially above market expectations.

Highlights:

• Gross profit down from £27.7m to £18.6m, but still higher than FY19’s £17.2m,
• Underlying profit before tax of £3.8m, down from £10.5m but up 26.7% on the FY19 re-pandemic level of £3m,
• Net cash of £9.8m and liquidity headroom of £24.3m after accounting for £13m undrawn RCF and £1.5m overdraft,
• JetCard cash deposits up 12.5% to £19.8m due to high demand in Private Jets (H1 2020: £17.6m / H1 2019: £18.5m) ,
• Basic EPS of 4.2p; underlying EPS of 4.6p, down 64.1% on the prior year, but up 7.0% on H1 2019 (4.3p),
• Interim dividend up 6.3% to 0.85p.

Overall, 48.2% of gross profit came from outside of the UK, with the US contributing 31.6%.

As mentioned above, 2020 was uncommonly strong for Air Partner due to exceptional Covid-related demand for its charter and freight services, so FY19 figures are a more appropriate comparison.

There’s been the anticipated change in product mix since, with this Covid trade normalising and other previously depressed areas of the company recovering. Management believes current trading patterns are sustainable and all products (Group Charter, Private Jets, Freight and Safety amp; Security) have contributed at least 20% to gross profit. So there’s a nice balance to the divisions and a sense of diversified operations.

Private jets – gross profit in the US and UK is now at pre-pandemic levels despite travel restrictions in Q1, although activity in Europe is more limited.

JetCard sales have grown, particularly in the US (+229%) ‘as travellers sought a flexible and bespoke solution for flying requirements’.

Charter and Freight demand is down year on year against an exceptional comparable period. Currently charter demand is coming from government, oil amp; gas, and sport customers.

​​Safety amp; Security performing well, having secured business wins across a diverse range of customers.

In August 2021, Air Partner acquired the ‘strategically important’ Kenyon, a leading emergency planning and incident response company. This follows the acquisition of Redline in late 2019. Kenyon is expected to be earnings enhancing in 2022 and should contribute meaningfully to Air Partner’s long-term financial performance.

Recent strong cash generation will be used for organic investment and potentially additional acquisitions in line with its strategy to diversify and extend its customer offering.

Outlook:

The Board expects underlying profit before tax in the second half of the year to be strongly ahead of H2 FY21, which will result in performance for the full year being materially above current market expectations.

As the business normalises, the expected underlying PBT for FY22 could be c.66% ahead of FY20 (pre COVID-19)

Looking back at Air Partner’s FY20 annual report, that underlying PBT figure was £4.2m, so the group must be guiding towards a shade under £7m of profit before tax. Given the c£60m market cap, that looks good.

Conclusion

There are a lot of different business activities at Air Partner but the company comes across as well managed and so it could well be that these diversified operations present greater growth opportunities, rather than being too much to handle.

Even taking into account the recent spike in the share price, the shares are not overly expensive, particularly given today’s improved guidance. So there is still time to assess the growth potential of the group’s various divisions.

That could take a little time as there are a lot of different strands here for a c£60m market cap company, particularly after the recent Kenyon acquisition. Overall though I’ve a favourable impression of this share so far and believe further research could be rewarded.

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Fulham Shore (LON:FUL)

Share price: 18.74 (+2.71%)

Shares in issue: 630,528,425

Market cap: £118.2m

Two listed restaurant operators reporting today, with markedly different market caps. Fulham Shore has 75 sites and a market cap of more than £115m, so about £1.53m per site. Comptoir has 21 sites and a market cap of £9m, so just £0.43m per site. You might argue that one is overvalued and the other is undervalued but there are a few points to consider.

One, Fulham Shore has very experienced management who know exactly how to roll out a pizzeria chain nationwide. They know where the best sites are and how to outperform the competition, because they used to be that competition. They also know how to negotiate site rents to generate attractive returns on capital – much more difficult before Covid when it was very much landlords calling the shots. A lot of competitors have been stung this way, signing up to expensive units with poor economics that make it difficult to turn a profit no matter how robust the trading.

The other, Comptoir, offers a good product, but also an inherently more expensive one due to the wide menu and ingredients. I’m not sure about the terms they have signed historically for sites. Perhaps they too were able to negotiate good deals.

What’s interesting is that for two companies that listed at similar times, Fulham Shore has been able to expand much more rapidly.

But the important point now is that Comptoir has survived the lockdowns and, as with Fulham Shore, it can now grow into much more favourable market conditions. And there is that wide valuation gap of course, which means both companies are worth looking at for different reasons.

Fulham Shore AGM statement

Restrictions on dine in customers were lifted by the UK Government on 19 July 2021 and the company’s financial half year to 26 September 2021 ended three days ago. That makes for ten weeks of full trading and 16 weeks of restricted trading. Trading comparatives within this update are the comparable period in 2019.

Total revenues increased to over £39m compared to £36m. This is due to the group opening eight new sites since September 2019, strong trading when restaurants have been open, and a good performance in Franco Manca delivery. Trading in suburban sites has been particularly strong, as flagged before, but city sites are gradually recovering. Both brands (Franco Manca and The Real Greek) are trading well.

The period post lockdown restrictions being lifted, on 19 July 2021, saw a number of the Group’s restaurants around the UK breaking trading records on a regular basis. Group revenues for the three full weeks to 26 September 2021 averaged 33% ahead of the same period in 2019, an improvement on the 27% reported in our previous trading statement achieved during the three weeks to 5 September 2021. During this time, cost of sales and labour margins continued to remain stable despite inflationary pressures.

Fulham Shore is trading ahead of management’s expectations. This augurs well for the full year performance and UK wide expansion plans, with much more scope for ‘opportunistic property portfolio acquisitions’. The group is now also more actively considering dividend payments.

So far this financial year, the group has opened two Franco Manca and its 20th TRG, taking the estate to 75 units. Work is ongoing on two additional Franco Manca sites, another TRG is in the works, and 16 more potential sites are in solicitors’ hands.

Cash – cash generation is strong. Fulham Shore started the year with net debt of £3.6m (excluding lease liabilities) but this has now swung to net cash of £5m after almost £9m in net cash generation over six months, despite opening three new restaurants and building a fourth.

Conclusion

Fulham Shore is a best in class operator, one which now finds itself in unprecedentedly favourable market conditions. Page et al are well placed to build a restaurant business of substantial scale.

The obvious point to consider is valuation. I think given the conditions and the experience of the management team, there is scope for further upside but how much? The group says it has identified more than 150 additional sites and also has international franchising ambitions.

The historic £650k fit out cost has reduced to around c£500k. Those restaurants are then valued by the market at c£1.5m due to their ongoing cash generation characteristics as viable businesses.

It hopes to reach 110 sites by the end of 2025. If sites continue to be valued at £1.5m then that would be a £165m market cap by 2025, or c43% upside. But that’s assuming the market continues to value its sites in the same way. Sentiment can change.

I’m very happy with how the company is doing, but I also wonder if there are potentially bigger rewards out there for investors not already holding the shares. Which takes us onto Comptoir.

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Comptoir (LON:COM)

Share price: 7.44p (+1.22%)

Shares in issue: 122,666,667

Market cap: £9.1m

Interim results

While Comptoir has not been able to expand at the same rate as Fulham Shore, you can argue that the low valuation more than makes up for that. It has 21 restaurants and a further four franchise units. If it were to be revalued on a unit basis to be in line with its competitor, the market cap would be more than £30m.

That’s still a very small listed company, so the risks are high here and you really can’t purchase many shares at all.

Unlike Fulham Shore, Comptoir is not comparing its results to 2019 either. Note that these results are impacted by COVID-19 related closures. In 2020 periods were affected from 19 March onwards. In 2021 the periods affected were between 1 January and 19 July. So it’s still tricky to get a clear picture.

Highlights:

• Revenue down 6.9% to £5.7m,
• Gross profit down 4.8% to £4.3m,
• Loss after tax has reduced from £4.5m to £1.2m,
• Basic loss per share of 0.98p, improved from a loss per share of 4.05p,
• Net cash of £9.2m, up from £7.8m in December 2020.

The group comments:

The sector is still under extreme pressure from well-documented challenges such as the availability of labour as well as the pressure on the supply chain, but we recognise we are fortunate to be in a better position relative to many of our peers… With strong sales since the phased reopening began in April, a relatively strong balance sheet and the potential for new openings, we are optimistic for the future and the long-term prospects for the business looks extremely positive.

Since reopening, the trading performance has been very strong with the group comfortably outperforming forecasts. Since reopening in April, the group has reported positive EBITDA every period ‘at a level ahead of expectations’.

But there are some incoming challenges, namely:

• the end of the Government support such as the furlough scheme, rates holiday, normalisation of VAT
• the availability of labour and the inflationary pressures on the supply chain.

The labour and inflationary pressures will continue through 2021 and into 2022 with the National Living Wage (NLW), as well as the recently announced 1.25% increase in Employers NI (both April 2022).

The group expects to be able to navigate these issues, but there has always been a struggle to generate profits here.

On the other hand, Comptoir is adding to its site pipeline with the reduction in competition for premium sites. It intends to invest in both its Comptoir Libanais and QSR Shawa brands, with the latest Shawa opening in Westfield Shepherds Bush in September.

Outlook and current trading

Trading has continued to improve week to week. As with Fulham Shore, regional sites are outperforming those in central London. Comptoir is seeing record levels of trading in a selection of sites and all of them are making a positive contribution at the profit level.

Cash flow - Some £2.4m of cash generated from operations set against c£164k spent on investing activities and £900k of lease liability payments, but CFO is helped by a large increase in payables and provisions, up from £440k to £1.69m.

Conclusion

The shares do look cheap, particularly when contrasted with its listed peer, and trading is encouraging. Comptoir is to be commended for withstanding the past year and it will be interesting to see further updates from the group.

But it has always struggled to generate good margins and I wonder if that is just because its restaurants are expensive to run. It makes me hesitate.

You could say the same of Fulham Shore, but its margins have been better and the group has opened up a lot more new sites. So if it turned the growth tap off, profitability would increase. Pizza is also fundamentally one of the higher margin cuisines.

There is potential for margins to improve at Comptoir in today’s environment, with more favourable lease terms and less competition. But then there are also inflationary pressures. So my concern is not so much that Comptoir is a going concern, it’s more a question of how profitable that going concern can be.

That said, the market cap is tiny, so if the group can prove itself as a sustainable, profitable, growing business then the shares could multiply quite quickly. It’s very high risk though, and extremely illiquid.

Stockopedia

Source: https://www.stockopedia.com/content/small-cap-value-report-weds-29-sept-2021-card-heiq-gog-esc-quiz-air-ful-com-875950/