Resilient first-half trading

Fulham Shore reported robust trading in the first half, with revenues up 26%, to £50m. Higher pre-opening costs and the absence of various COVID-19 support measures restricted adjusted EBITDA to £6m (1H’22 £7m). However, the effect of the cost-of-living crisis and, more immediately, the transport strikes, has hindered current trading. The company is going to lower its expansion plans and focus on cash generation for the coming year. It has a strong balance sheet, with net cash of £2.8m at the half-year and a largely unused bank facility of £17m.

• Strategy: The UK restaurant sector hit a peak of outlets in 2015, before shrinking under pressure on profitability. COVID-19 accelerated that process, and perhaps 17% of casual dining venues have closed from the high, leaving an opportunity for well-financed, well-managed firms like Fulham Shore to expand.
• Rollout: Fulham Shore has two complementary brands – Franco Manca and The Real Greek – offering well-priced, authentic dining experiences. There is scope to grow the current 97 restaurants to more than 200. Profitability is resilient in the face of severe economic headwinds.
• Valuation: A peer group EV/EBITDA multiple would put Fulham Shore on a price of 10p to 12p per share. We have also estimated the value of a 200-strong restaurant business discounted back to today, and come up with a central equity value of £137m, or 21p per share. A chain of 250 stretches that to 26p.
• Risks: The key immediate risk is the impact of inflation on consumers’ wallets and confidence, and the rail strikes. After that, there is execution risk 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.
• Investment summary: Management has many years of 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. Expansion can be readily funded from cashflow and the group’s existing debt facilities. There is scope to more than double the size of the business.