November 2021 Investor Forum

Restaurant platform ready for take-off

Fulham Shore has two restaurant brands that are honed and proven in the sector. There is an opportunity to expand the estate to nearly three times its size in the post-pandemic era. Competition has been reduced, and landlords are more realistic. There will still be some stresses with costs, but Fulham Shore’s good-value menus will stand it in good stead. We believe investors should focus on the value of a fully rolled-out business, rather than the immediate earnings outlook. Nonetheless, trading is back to above pre-pandemic levels outside central London, and the recent trading update indicated strong central London growth of late.

• Strategy: The UK restaurant sector hit a peak of outlets in 2015. COVID-19 has accelerated that shrinkage. Possibly a further 20% of casual dining venues have closed, leaving the field wide-open for well-financed and managed businesses. Fulham Shore provides value meals in a convivial setting.
• Roll out: Fulham Shore has two complementary brands – Franco Manca and The Real Greek – offering well-priced, authentic dining experiences. With 76 outlets currently, we consider there is scope to grow this to over 200. The 4 November trading update indicated that the outlets “continue to trade strongly”.
• Valuation: A straightforward peer group EV/EBITDA valuation multiple would put Fulham Shore on a price of 26p to 31p per share. We have also estimated the value of a 200 restaurant-strong business discounted back to today, and we have come up with a central equity value of £206m, or 33p per share.
• Risks: The key immediate risk remains the return of pandemic restrictions. After that, there are execution risks in the rollout plans and ongoing cost pressures for both staff and ingredients. Key to the success of growing the business is finding the right sites at the right prices and supporting the rollout operationally.
• Investment summary: The management has many years’ experience in the UK casual dining sector. It has refined two restaurant concepts that are proven winners in a normal functioning market. The overcapacity in the sector seems to have been cleared out. This provides an ideal opportunity for a highly profitable rollout, with lease costs of expansion lower than pre-COVID-19. Expansion can be funded from cashflow and the group’s existing debt facilities.