FY19 trading update

Filta Group (Filta) provides cleaning services to commercial kitchens in North America, the UK and, mainland Europe. The company reported that EBITDA for 2H19 would be similar to 1H19 and thus below our expectations. The cost-saving benefits of the Watbio acquisition are still taking longer than expected. Revenue continues to be on track and some extra investment has been made in UK sales staff to maximise the revenue opportunities. We cut our EBITDA expectations for 2019 from £4.2m to £3.3m. Our 2020 expectations are unaltered.

• Forecast changes: We have cut our FY19E EBITDA from £4.2m to £3.3m and left FY20E unchanged at £5.25m. The cut to EPS – FY19E 0.1p (from 5.1p) is more substantial due to operational and financial gearing and a proportionately higher tax charge. The cuts do not reflect any weakening in the business prospects, which we still see as very attractive.
• Outlook: We downgraded our forecasts in September because the Watbio acquisition cost savings were taking longer than expected so this latest announcement is disappointing. However, management remains very confident regarding the external prospects for the business and that it will have resolved the internal restructuring issues so as to have no negative impact on FY20.
• Valuation: Filta has no directly comparable companies. We have used a DCF to derive a value range of 217p to 283p per share, using a 10% discount rate and a mid-term (2021-25) growth rate of between 6% and 12%. Our central estimate is 260p. No account is taken of future added-value acquisitions.
• Risks: In addition to normal commercial risks, Filta is dependent on the behaviour of its franchisees, which it cannot control but can help to influence by means of thorough training. The risks in the Watbio acquisition would seem to be fully understood but any future deals will inevitably involve managing some unknowns.
• Investment summary: Filta is an attractive business, in our view, combining the capital-light franchise model in North America and Europe with company-owned operations in the UK. With only a tiny proportion of the market currently served and with little or no competition, we see potential for years of profitable growth ahead.