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Hostmore was formed in April 2021 to provide a platform for the operation and development of hospitality brands following its demerger from Electra Private Equity and listing on the Main Market of the London Stock Exchange in November 2021. On its demerger Electra shareholders were entitled to receive three Hostmore shares for each Electra share. Its current operations are the exclusive UK franchise for Fridays, the long-established American-themed casual dining brand with over 12m covers and 85 sites across the UK, and 63rd+1st, a new sophisticated cocktail-led bar and restaurant (two sites). Planned expansion is c eight net openings a year as well as the addition of complementary growing early-stage businesses and other experience-led leisure concepts.

On c 6x 2022e EV/EBITDA Hostmore trades at a clear discount to the c 11x average of peers Restaurant Group, Fulham Shore and Loungers. While this is due partly to the earlier financial periods of the latter two, when recovery from the pandemic was less advanced, it also reflects markedly higher recent sales growth rates by Loungers and Fulham Shore in particular and the challenge for Hostmore to prove itself. This may be exaggerated, given experienced management’s comprehensive measures, early signs of payoff and singular potential of the brand.

Hostmore’s sensitivities include:

Resumption of Fridays’ strong growth record post-COVID-19 thanks to strategic transformation is management’s goal. Progress to date is promising with clear restaurants market outperformance since reopening on 17 May (3% according to Coffer CGA Business Tracker). Finances are resilient with low net debt (1.5x net bank debt/EBITDA) on the eve of pandemic and a cash-generative model, which we forecast to cut net bank debt/EBITDA to below 1x by end 2022 despite funding expansion. Medium-term guidance of mid-teens pre-IFRS 16 EBITDA margin compares with 12% pre-pandemic. The financial year is to December, with 2021 finals due in early 2022.

Hostmore’s ambition to host more brands may reasonably be expected to be funded by Fridays.

Hostmore was formed in April 2021 to provide a platform for the operation and development of hospitality brands following its demerger from Electra Private Equity and listing on the Main Market of the London Stock Exchange in November 2021. As an already established, well-funded operator of the iconic Fridays brand in the UK, highly experienced management with a record of delivery views ample opportunity for growth in a favourable post-pandemic environment, accentuated by COVID-19 fallout. This will be through continued enhancement of Fridays, the development of its second brand, 63rd+1st, new franchise territories and the addition of complementary promising early-stage brands.

Fridays, Hostmore’s predominant business for now, holds exclusive UK rights to use one of the world’s leading casual dining brands under its agreement with TGI Fridays. Consequent high brand awareness, comprehensive training and support and access to industry best practices from such a proven franchisor with operations in over 50 countries are fundamental to Fridays as key competitive strengths. The company has the right to renew for an unlimited number of five-year terms (next at end 2024).

Born of the eponymous original casual dining bar and grill in 1960s New York, Fridays offers authentic American food, an innovative cocktail list and a high level of service at its 85 restaurants across the UK. Notwithstanding high brand awareness since its successful introduction here in 1986 under different ownership (Whitbread), the business was recently renamed Fridays in order to reinforce the brand’s promise of a renowned social experience, that is ‘In Here, It’s Always Friday.’ The estate is diversified both geographically, for example 28% in the north of England and 15% in the South East, and by type of location (two-thirds of sites in retail parks and shopping centres and just 14% standalone). The average size is 6,800 sq ft, varying from 5,000 to over 9,000 sq ft. In line with increasing demand for outdoor dining in the light of COVID-19 permanent outside trading space, the size of four restaurants has been added at sites in the south of England. The customer base is broad with the core demographic (40%) those aged between 20 and 29, followed by those in their 30s (28%). As an acknowledged leader in the UK branded casual dining market, pre-pandemic spend per week per store at £49,000 was twice that of the average of its peers, reflecting premium pricing and strong spend per head as well as scale and efficiency.

The rebranding was one of a series of significant initiatives led by a new management team to enhance the core offering and develop additional revenue streams. Despite the pandemic, widespread implementation of measures followed a comprehensive business review at the start of 2020 and the appointment as CEO of Robert Cook. He joined from Virgin Active, ‘the world’s leading health club,’ where he was credited with rapid and successful extension of an already iconic brand. Under his leadership a new wellness concept ‘Beyond Movement’ broadened the company’s offer from sporting fitness into body maintenance, nutrition and mental wellbeing. This followed almost 30 years in hospitality, notably as CEO of Malmaison Hotels and Du Vin, which he grew from four hotels to 27, and then as CEO of De Vere group’s Village Hotels and COO of Macdonald Hotels. Robert Cook is backed by a considerably strengthened management team.

As part of Fridays’ ‘4D Strategy’ (dine in, delivery, digital and drive in), initial key measures already effected in support of That Fridays Feeling include:

These Dine In initiatives have been complemented by the following ambitious brand extensions:

Corporate initiatives aside, Fridays’ fortunes will be determined by its ability to take advantage of widely-perceived unprecedented growth opportunities as a result of pandemic fallout. While Fridays’ estate held steady during COVID-19, as did those of Wagamama and Nando’s, there were step-change reductions, for example by direct competitors Byron and Gourmet Burger Kitchen (62% and 37% respectively, according to the Local Data Company), in the 18 months to June 2021 (see Exhibit 1). Frankie & Benny’s saw a halving in the number of its stores via a company voluntary arrangement (CVA). The Italian restaurant market, with sites that Fridays itself identifies as typically suitable for its own purposes, is estimated to have contracted by 15%.

Otherwise, UK food-led licensed premises have fallen by 11% (almost 5,000 sites) since March 2020, according to the recent CGA AlixPartners Market Recovery Monitor. Within casual dining the reduction is yet sharper at 20% (c 1,300 sites). Independent venues have suffered worse than managed groups, down 12% and 8% respectively for UK food-led licensed premises. Apparent stabilisation over the last quarter (just 1% fewer sites) is due to managed groups reinitiating expansion plans, suspended because of COVID-19, thereby masking the continued plight of independents. Moreover, consensus is that with the passing of bumper summer trading any recovery is fragile and may be derailed, given weakened finances, for example Coronavirus Business Interruption Loans and delayed creditor payments, and challenges, for example labour shortages, supply chain disruption and utility cost inflation, October’s VAT increase (12.5% from 5% since July 2020) and the end of the furlough scheme. Forecasts of up to 30% contraction in UK restaurants compared to before COVID-19 may yet come to pass.

To put it in context, the pandemic only compounded longstanding structural difficulties from excess capacity, frequency of ‘me too’ product, rising costs and narrow margins. Uncertainty after the result of the EU referendum in 2016 made matters worse as erosion of consumer confidence led to increasing vacant retail space being rented out to restaurant operators on historically cheap debt. Like-for-like UK restaurant sales according to industry monitor Coffer CGA Business Tracker stalled in the two years before COVID-19. Such stagnation in sales and inflationary pressures (notably, business rates, the National Living Wage and food imports thanks to sterling weakness) proved a sorry mix for restaurant groups, which were already highly indebted.

With only 34% penetration rate of UK’s top 50 casual dining markets (by contrast, Nando’s has 94% and PizzaExpress has 82%), Fridays has clear space to expand. The company’s plan for eight openings a year on average suggests considerable long-term growth potential.

Moreover, the property market appears seldom to have been so propitious for those seeking to expand, as reiterated by David Page, chairman of Fulham Shore, in August 2021: ‘Landlords are still facing a property glut. There are unlet premises all around the UK in unprecedented numbers. We believe that it will take many years to take up the slack.’

This has positive implications for Hostmore well beyond Fridays. By definition, the company is looking for franchise opportunities and early-stage businesses as well as experience-led leisure concepts, while innovating in-house, for example with 63rd+1st as an all-day venue where customers can work, rest and play or establishing restaurants in exclusive destinations and at one-off events.

The company’s senior management (see below) is backed by highly experienced operational management.

Assuming 2022 to reflect a return to trading normality, we look at prospective EV/EBITDA multiples in that period for Hostmore and its closest listed competition, Restaurant Group, Fulham Shore and Loungers (for the latter, the year to March 2022 and April 2022 respectively). Owing to the lack of availability of forecast data we use last reported net debt, hence the Hostmore EV/EBITDA below differs marginally from that in the summary forecast table on page 1.

On 6.5x 2022e Hostmore trades at a clear discount to the peer average of almost 11x. While this partly reflects the earlier financial periods of Fulham Shore and Loungers, when recovery from the pandemic was less advanced, it is also testimony to the proven success of their strategy, as evident in markedly superior recent sales growth rates to Fridays. From reopening on 17 May to the start of October, Loungers achieved 27% like-for-like sales growth on 2019 against Fridays’ 11% (both including the VAT benefit). Fulham Shore’s last reported revenue was up by 33% in the three weeks to 26 September, albeit not like-for-like. Hostmore has understandably yet to prove itself but investor caution at the challenge of Fridays’ rejuvenation seems exaggerated, given experienced management’s comprehensive measures, early signs of payoff and the singular potential of the brand.

Before the hiatus of COVID-19, which followed the market slowdown, Fridays had a long record of consistent top-line growth and double-digit percentage pre-IFRS 16 EBITDA margin, expanding successfully in favourable demand and supply conditions. In the decade to 2017 sales all but trebled, while EBITDA rose sevenfold. As market equilibrium increasingly checked growth, prompting widespread discounting by competitors, Fridays preferred to focus on retaining margins and differentiating by experience. With its pricing policy maintained, covers declined slightly but this was offset by higher average spend. The impact of these unfavourable market dynamics was compounded in 2018 by extreme weather and the football World Cup because at that time Fridays had minimal outside space during heatwaves and did not show TV sport. Although 2019 saw slight, partial recovery, this was thanks to the absence of the previous period’s exceptional factors, with the first signs of competitor failure as a response to oversupply. Nevertheless 2019 financial metrics remained solid: EBITDA margin 12%, like-for-like sales growth 2% and net bank debt/EBITDA 1.5x. It was at this point that Fridays’ comprehensive business review was initiated, sparking the company’s rejuvenation.

We show EBITDA at pre-IFRS 16 level in our model (Exhibit 4) as well as reported since it is taken by the company as a key measure and offers a clear comparison with the pre-pandemic performance.

The headline figures for 2020 make harsh reading as a result of COVID-19 restrictions curbing average trading days to 245 (ie 15 weeks of spring lockdown, four weeks of phased re-opening, four weeks of Eat Out to Help Out and eight weeks of increasing controls, culminating in a second English lockdown (four weeks)). Higher menu pricing in expectation of Brexit-led cost pressures and not passing on July’s VAT reduction to customers helped limit the decrease in dine in sales to 46%, as did the company’s rapid development of dine out as a new revenue source (£14m, which is almost five times that of 2019). Indeed, as Exhibit 5 shows, Fridays’ weekly like-for-like sales growth consistently outperformed the market from the end of the first lockdown in early July until the second lockdown at the start of November.

In terms of profit, effective management of payroll and variable costs including rent concessions, business rates relief and franchise royalty fee reduction (3% against customary 4%) was notable in total admin expenses’ share of sales in H220 (64%) being not materially different from that of pre-pandemic 2019 (57%). Other income of £20.6m relates predominantly to government grants under the Coronavirus Job Retention Scheme.

Forecasting revenue for H2 is awkward as the comparative was subject to exceptional factors, that is Eat Out to Help Out in August when sales were at one point over 30% up on 2019 and the reimposition of COVID-19 restrictions in October and lockdown in November. In turn the current period is buoyed by the prospect, health situation permitting, of a strong Christmas season (typically, five busy weeks, each with an extra £1m revenue) unlike last year as well as an additional trading week as H1 was closed earlier than usual to facilitate the Hostmore demerger. A further complication is the tapering of the reduction in VAT rate back to 12.5% from 1 October compared with 5% for the bulk of H220. As Hostmore (when part of Electra) has not disclosed an H219 revenue number, which we could compare with Fridays’ positive trading statement (up 11% on 2019 since 17 May), we add back the missed sales from a month of national lockdown to H220 like-for-like sales, that is 180 /150 days × £67m = £80m + plus an allowance for COVID-19 tier restrictions in October and December last year. There are then broadly compensating adjustments for the VAT change, Christmas and the extra week.

Although dine-in volumes remain behind pre-pandemic levels despite a boost from staycations and pent-up demand on reopening, lingering consumer caution is understandable and may well abate, while average spend has increased as customers treat themselves. We expect dine out sales to be similar to H220, given the clear resilience of delivery, reflecting a shift in customer behaviour (as discussed for 2022).

In terms of profit, we assume a similar gross margin (81%) in H2 to the two prior half-year periods, given the VAT benefit. Also lease expenses should be substantially lower year-on-year owing to further landlord concession agreements, which explains our reduction by a third, boosting pre-IFRS 16 EBITDA. Importantly, no government grants are assumed in H221 as trading is normal.

Consequently, there are a lot of moving parts but, boosted by lease concessions and the VAT cut, the H221 pre-IFRS 16 EBITDA margin, without COVID-19 government grants, may approach 20%, which is almost double pre-pandemic levels and well ahead of management’s mid-teens % medium-term guidance.

Fridays assumes 2022 to be trading as normal. However, there will still be exceptional items such as VAT at 12.5% for Q1 and the unwinding of COVID-19 accruals/deferred payments.

Therefore we use pre-pandemic 2019 as a benchmark for 2022 forecasts, just as hospitality companies have been reporting. Notwithstanding unchanged like-for-like VAT adjusted sales on 2019 since the resumption of outdoor dining on 17 May despite pent-up demand and a staycation boost, a 4% like-for-like growth scenario in 2022 looks reasonable. First, base market conditions in 2019 were difficult owing to chronic overcapacity, significant cost pressures and consumer uncertainty on the eve of Brexit. The COVID-19 led reduction in competition (widely estimated at up to 30%) yields a more benign environment, complemented by the growing availability of properties at ever lower rents. Secondly, there is the expected marked benefit of Fridays’ own wide-ranging brand extension initiatives, bearing early fruit in 3% market outperformance since 17 May. Delivery and takeaway show sustained market strength despite the full return of dine-in, with sales up 35% on September 2020 and 130% up on 2019 and still 29% of total restaurant sales, according to the Hospitality at Home Tracker from CGA and Slerp. Wagamama has confirmed this channel’s resilience with current sales still more than half those during the peak of lockdown 3 (Q121) and more than double pre-pandemic levels. Industry consensus is that delivery will stay as an important incremental business stream, with growth of 20% over the next three years forecast by Lumina Intelligence. Our assumption of delivery and takeaway at 5% of Fridays sales may thus be cautious.

Cocktails, a Fridays staple, are also selling well, indeed according to CGA exceeding 2019 in most weeks since reopening with a doubling of 2019 drinks market share in August. Interest is now as high in rural areas as in city centre bars, while demand for pre-batched and draught cocktails likely follows drinking them during lockdown. Therefore, with some increase in menu pricing also a factor, we are comfortable with our assumption of 4% higher like-for-like sales. Our forecasts also allow for six openings in the period, which may be cautious in view of the company’s target of eight new sites a year on average. A contribution of £7m sales (half-yearly £1.2m × 6) is envisaged.

As for profit, a return broadly to 2019 gross margin (78% against our forecast 81% this year) seems in order thanks to only three months of reduced VAT benefit and inflationary pressures in food and drink, which will offset the expected benefit of strong demand (+4% like-for-like). We look for 79% gross margin. As a balance, we assume 1% higher admin expenses’ share of revenue on 2019 owing to rising labour and utilities costs. Also significantly, lease payments are set to resume pre-pandemic levels with a little extra for new stores. Our pre-IFRS 16 EBITDA margin is therefore marginally up on 2019.

It is heartening that in 2020 at the height of COVID-19 net bank debt remained in check, at £28m in December 2020, down £11m in the year, albeit largely a function of VAT and rent deferrals, and of course government grants.

The current period should see significant negative working capital (we expect £12m) because of the unwinding of VAT arrears, agreed with HMRC, and landlord obligations in H2. We expect this to extend into early 2022, hence we look for £4m negative working capital next year. Lease payments in 2022 should be back at least at 2019 levels, as should capex. Nevertheless, our forecast is for net bank debt to fall by £3.5m (over 10%) to £26m at December 2022 (ie 0.9x pre-IFRS 16 EBITDA, compared with 1.5x before the pandemic).