Fulham Shore PLC Rising dough

Hardman & Co Report Report DownloadsFulham Shore Plc (LON:FUL) proven management team is expanding both its main brands, Franco Manca and The Real Greek, ahead of expectations. FY17 saw a 55% rise in restaurants open, to 45. We estimate 60 by end FY18, more than double the end FY16 figure. The authentic, good value, casual dining experience produces average ROCE at restaurant level of over 20%. Most openings are in Headline EBITDA profit from month one. The 3rd April trading update highlighted trading in line with (ambitious) expectations, which is in comparison to many other US and UK brands, which have found the past year difficult. Fulham Shore has clearly demonstrated robust, strong growth, expanding from London and out to provincial locations, with eventual potential for franchise, a third brand and international expansion.


Strategy: Fulham Shore plc owns now 47 restaurants (set to rise to 60 this year): this leaves significant scope. For example, Pizza Express UK has over 400 outlets. This rapid expansion can be delivered profitably, including all opening costs. We model two brands: there may be scope for a third, possibly Asian or other. cuisine.

Trading: On 3rd April 2017, Fulham Shore stated that FY17E results will be in line with (ambitious) expectations. The accelerated opening programme (upgraded to 16 new restaurants in FY17) naturally has raised pre-opening costs.

Valuation: For FY19E, we estimate £13.2m EBITDA excluding pre-opening costs. The EV/EBITDA rating stands at 13.0x). This compares with recent PE transactions taking place in the 10 – 15x range, for businesses with lesser growth potential. Currently the expansion leads to negative free cash flow but flexibility of growth rates is retained, so cash generation potential is strong.

Risks: Debt increases over the next two years, given the rapid rate of expansion. Were FY20E to see a similar rate of expansion (c.15 restaurants), stable margins would lead to cash outflows reversing. Eating out is a discretionary market. Costs are rising for the sector – from ingredients and labour, through to rates.

Investment summary: There are surprisingly few successful, quoted investment vehicles offering participation in this growing global industry. The team running Fulham Shore has the potential to expand the business significantly further. Initial targets could exceed 150 restaurants. Note private equity sector interest.

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