Hostmore - “We are not where we expected to be”
That was the understatement made by Robert Cook, CEO of the recently quoted Hostmore (LON:MORE).
When the group came to the market in early November last year its shares hit 156.24p on the first day of trading, before closing that night at 133.58p.
When boss Cook made his Trading Update comment in late May this year, only six months later, they closed that night at 42.90p.
They have since slipped back even further to trade around its 30.20p low.
On the face of it that does not look too good, however, I think that the current price now offers some significant upside to patient ‘penny stock’ investors.
The quoted investment trust Electra Private Equity purchased the UK franchise business TGI Fridays, the American-styled restaurant chain, for £99m in 2014.
At that time, TGI Fridays operated from 66 restaurants in a range of locations, including city centres, shopping centres and retail parks.
The listed equity company started a major strategic review of its options and its prospects, that process was started in October 2016.
Two years later the Board of the trust recommended that it should close by way of a managed wind-down of its portfolio of interests, with the view to optimise returns and cash back to investors as the company was wound up.
Apart from a handful of various investments the company had three major interests – Sentinel, the hot water system components maker; the shoe retail group Hotter; and TGI Fridays, the restaurant chain.
All three were considered to have strong management and each with good potential value.
Then along came the Covid-19 pandemic, times got so much trickier, but by then the disposal process was then well underway.
Sentinel was sold off in April last year.
Electra Private Equity was renamed as Unbound Group in January this year, with Hotter Shoes as its main business, and was then relisted on AIM.
However, before that, TGI Fridays was rebranded as Fridays and then, in November last year, the equity trust demerged its Fridays interest into Hostmore, which subsequently gained admission to the LSE.
Thank goodness its Friday
TGI Fridays was set up in the US by Alan Stillman, way back in 1965.
He was impressed by the magic of the Barnum & Bailey Circus theme of putting on ‘the greatest show on earth’.
He took that into his new business with its now famous red and white striped brand, whose venues were identified by its famous flowing cocktails, its legendary atmosphere and its charismatic bartenders.
The first restaurant was an instant success as a ‘meeting place’ for lovers of wild nights and fun times, attracted by its hot food, drinks and its ambience.
The first UK operation was opened in Birmingham in 1986, followed by Covent Garden the next year.
By 1993 it had built up to 12 sites in the UK.
Eleven years later it had grown to 41 sites and by the time Electra bought the UK franchise holding company it was up to 66 sites.
The Hostmore Group
In November last year, when the Hostmore group came to the market, the company’s estate was up to 86 sites across the UK, at locations stretching from Aberdeen to Swansea and from Jersey to Norwich.
The group has a distinct policy of situating its venues in high footfall locations, including retail parks, shopping centres and city centres.
Over the last couple of years, the rebranded Fridays has built upon its original heritage, widening its appeal and offering it to today’s marketplace by bringing back ‘That Fridays Feeling’ to existing, new and former audiences.
Fridays offers authentic American food, an innovative cocktail list and a high level of personal service.
And that casual dining experience is what Hostmore believes will help it to expand its appeal.
But it is not just the Fridays brand that the group is developing as part of its overall ambition to offer itself out as a hospitality themed platform.
The group also has ‘63rd+1st‘, a cocktail-led bar and restaurant brand with an emphasis on ‘sharing plates’, based upon the original Manhattan location of the first TGI Fridays.
The first of these new bars opened in May last year at Cobham, followed by Glasgow in September and Harrogate last November.
The group believes that there is scope for over 10 sites by next year.
In March this year the group opened its first ‘Fridays & Go’ in Dundee. A bit like a McDonalds, with ordering on touch screens and your meal freshly made within minutes. The new quick service restaurant offers fast casual service of Fridays favourites.
The group’s management considers that it could be up to 30 such restaurants within the next five years.
The latest opening in mid-May this year was a Fridays venue at Chelmsford, where it offered indoor seating for more than 250 covers, together with an additional 26 covers available outside in its al fresco dining section, while offering live sport seven days a week and live music on Friday and Saturday nights.
That new venue took the group total up to 89 sites.
Multi-Brand Expansion Strategy
Apart from its organic development, it is now also very clear that Hostmore has an inorganic growth strategy, in seeking to add rapidly growing, early-stage businesses to its portfolio of complementary hospitality brands.
It is also looking to extend its offering in other experience-led, leisure concepts, as well as exploring opportunities with TGI Friday's, Inc., the franchisor of Fridays, to expand its existing brands into new franchise territories.
The group certainly has the management team to be able to handle such multi-brand expansion.
The CEO is Robert Cook, with 30 years’ experience in the hospitality and leisure sectors, he was the former CEO of Malmaison and Hotel du Vin, CEO at De Vere Hotels and COO at Macdonald Hotels & Resorts.
Alan Clark, who is the group CFO, was formerly in the same position at Hongkong and Shanghai Hotels, then at Sandals Resorts in Jamaica. He was also at Rocco Forte Hotels, Le Meridien Hotels and Malmaison and Hotel du Vin.
Compelling Recovery Story
In mid-March the group announced its results for the 53 weeks ended 2 January 2022.
They showed that revenues were up from £129.1m to £159.0m while it made a £6.9m adjusted pre-tax profit compared to the previous £12.2m loss. That saw earnings emerging at 6.7p per share against an 8.0p loss in 2020.
When it came to the market late last year, the indications were that the group could have seen revenues of some £242m for 2022 and that it was capable of making a pre-tax profit of around £15m, generating earnings of 10.2p per share.
However, on 26 May the group issued a Trading Update for the 20 weeks to 22 May declaring that it had been enduring a challenging consumer environment, that was hit by the Ukraine situation helping to raise the cost of living.
Estimates were re-written by brokers researching the group’s prospects.
In reaction the shares fell from 50p to 42p in reaction.
Brokers finnCap are now looking for £214.3m of revenues for the current year, with profits halving to £3.5m, taking earnings down to just 2.3p per share.
Its analysts Nigel Parson and Michael Clifton now reckon that “with its shares on their knees the group’s prospects result in a compelling recovery story”.
They have a Target Price of 125p on the shares.
Their estimates for 2023 show out at £245.3m sales, a tripling in profits to £11.3m, with earnings more than trebling to 7.2p and the first-time payment of a 3.1p dividend per share.
Jumping further ahead into the 2024 year could see £270.1m revenues, £17.6m profits, 11.2p of earnings and 3.5p per share in dividend.
Looking for a trebling in price
On the basis of finnCap’s hopes I would consider that the brokers have identified a cracking medium-term investment for any investor looking for recovery, growth and even more upside.
The Hostmore group, with its shares now trading at around 32p, is currently capitalised at just £40m.
As the recovery gets underway, they could well treble within the next two years.