Hostmore — Back on track

Hostmore (LSE: MORE)

Currency in GBP

Last close As at 25/01/2023

GBP0.12

−0.36 (−2.82%)

Market capitalisation

GBP16m

Research: Consumer

Hostmore — Back on track

Hostmore has reassured with confirmation that, despite sector operating challenges, its like-for-like (l-f-l) revenues since 23 May are as expected in its May update, which assumed up to 8% lower l-f-l dine-in volumes on 2019 for the rest of 2022, mitigated by pricing. Organic expansion is also on track with the new 63rd+1st in Edinburgh part of five openings planned this year, while newly enhanced banking facilities reinforce a strong balance sheet. Despite the downward revision to our current year forecasts given May’s cautious update, for FY23 Friday’s rejuvenation prospects in likely improving conditions and clear growth opportunities drive our newly introduced expectation of a sharp rebound. Hostmore’s rating of 4x FY23e EV/EBITDA is low against an average of c 7x for peers.

Richard Finch

Written by

Richard Finch

Analyst, Consumer

Consumer

Hostmore

Back on track

Trading update

Travel & leisure

14 July 2022

Price

35p

Market cap

£44m

Net bank debt (£m) at December 2021

12.2

Shares in issue

126.1m

Free float

100%

Code

MORE

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(5.7)

(43.9)

N/A

Rel (local)

(4.7)

(39.9)

N/A

52-week high/low

134p

30p

Business description

Hostmore has been formed to provide a platform for the development of hospitality brands. Its current operations are Fridays, a UK chain of American-styled casual dining restaurants (85 sites), 63rd+1st, a cocktail-led bar and restaurant brand (four sites) and QSR Fridays and Go (one site).

Next events

2022 interim results

September 2022

Analysts

Richard Finch

+44 (0)20 3077 5700

Russell Pointon

+44 (0)20 3077 5700

Hostmore is a research client of Edison Investment Research Limited

Hostmore has reassured with confirmation that, despite sector operating challenges, its like-for-like (l-f-l) revenues since 23 May are as expected in its May update, which assumed up to 8% lower l-f-l dine-in volumes on 2019 for the rest of 2022, mitigated by pricing. Organic expansion is also on track with the new 63rd+1st in Edinburgh part of five openings planned this year, while newly enhanced banking facilities reinforce a strong balance sheet. Despite the downward revision to our current year forecasts given May’s cautious update, for FY23 Friday’s rejuvenation prospects in likely improving conditions and clear growth opportunities drive our newly introduced expectation of a sharp rebound. Hostmore’s rating of 4x FY23e EV/EBITDA is low against an average of c 7x for peers.

Year end

Revenue
(£m)

EBITDA reported (£m)

EBITDA pre-IFRS 16 (£m)

PBT*
(£m)

EPS*
(p)

EV/reported
EBITDA (x)

12/19

214.8

46.7

25.6

8.6

N/A

N/A

12/20

129.1

23.5

1.5

(12.2)**

N/A

N/A

12/21

159.0

43.0

21.5

7.1**

5.1

4.8

12/22e

218.0

39.5

18.0

5.5

3.7

5.4

12/23e

251.0

47.5

25.0

13.0

8.5

4.3

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Including COVID-19 related income (UK government grants and landlord rent concessions): 2020 £22.0m and 2021 £19.1m.

In good order

Ahead of maiden interim results in September, Hostmore’s confirmation of maintained FY22 expectations is welcome in view of poor consumer sentiment and specifically after management’s ‘more prudent view’ in its May update, even if this time there is no quantification of l-f-l revenues on 2019. We are also encouraged that challenging conditions are not inhibiting expansion, with five openings this year and eight next, further enabled by a one-year extension of its term loan to October 2024 and a £5m rise to £30m in its revolving credit facility.

Positive FY23 forecasts offset short-term setback

May’s report of 6% lower l-f-l revenues on 2019 in the first 20 weeks of FY22 coupled with guidance of l-f-l dine-in volumes down up to 8% on 2019 for the rest of the year, albeit substantially offset in terms of revenue by H2 pricing, is at odds with our published expectation of 4% l-f-l revenue growth for FY22. As detailed on page 2, our revision now to l-f-l revenues down 2% and a more cautious view on margin than May’s guidance (on pre-IFRS 16 EBITDA 8% vs ‘low double digits’) give £39.5m EBITDA (previously £50.5m). For FY23 without COVID-19’s depressant in Q122 and with a full year’s pricing benefit and hopefully recovering consumer sentiment and abating inflation, 10% higher l-f-l revenue from a lower base looks reasonable, as does an improved pre-IFRS 16 EBITDA margin (10%).

Valuation: Cautious

While a discount to Hostmore’s peers is understandable owing to the profit setback, an EV/EBITDA multiple of 4x in FY23e is undemanding. We note recent directors’ purchases of c 0.5m shares at 42–43p, a marked premium to the current price.

Revenue and profit analysis

Exhibit 1: Revenue and EBITDA analysis

Year end 31 December (£m)

2019

2020*

2021**

2022e

2023e

Sites (period end)

87

85

88

92

100

Revenue

Existing (84 sites)

201.7

120.3

146.6

198.0

218.0

Change

-40%

+22%

-2% on 2019

+10%

Additions (sites)

6.2 (5)

7.3 (5)

11.7 (9)

19.0 (15)

33.0 (23)

Disposals

7.3 (2)

1.4 (2)

0.4 (2)

1.0 (1)

-

Other

(0.4)

Neg.

0.4

-

-

Dine in

211.7

114.6

139.5

207.0

241.0

Change

+3%

-46%

+22%

-2% on 2019

+16%

Dine out

3.1

14.1

19.1

11.0

10.0

Change

+13%

x4

+36%

-42%

-9%

Other

-

0.4

0.4

-

-

Total

214.8

129.1***

159.0***

218.0***

251.0

Gross profit

168.1

102.9

127.7

168.0

198.0

Margin

78%

80%

80%

77%

79%

Admin expenses

(121.6)

(100.0)

(103.8)

(128.5)

(150.5)

Share of revenue

57%

78%

65%

59%

60%

Other income:

COVID-19 government grants

-

20.5

14.9

-

-

COVID-19 rent concessions

-

1.5

4.2

-

-

Other

0.2

0.2

0.2

-

-

EBITDA – adjusted

Reported

46.7

23.5

43.0

39.5

47.5

Rent etc

(21.1)

(22.0)

(21.4)

(21.5)

(22.5)

Pre-IFRS 16

25.6

1.5

21.5

18.0

25.0

Margin, before COVID-19 related income

11.9%

-

2.4%

8.3%

10.0%

Source: Hostmore data, Edison Investment Research. Note: *245 days’ trading (national lockdown from 20 March to 28 June and from 5 November to 2 December); **National lockdown from 1 January until 26 April in Scotland and 17 May in England; ***Boosted by VAT reduction from 20 July 2020 until 31 March 2022.

Exhibit 1 shows our FY22 forecasts, revised in the wake of Hostmore’s 26 May trading update. The principal changes are as follows:

9% reduction in revenue. This is driven largely by an assumption of 2% lower l-f-l revenues on 2019 (previously 4% higher) owing to May’s update regarding l-f-l revenues down 6% in the 20 weeks to 22 May and guidance of up to 8% lower dine-in volumes for the rest of the period, to be offset significantly in terms of revenue by menu pricing increases (c 5% already with a likely further smaller rise in order to keep up with input cost inflation). We note that Hostmore is reluctant to discount. With revenues weighted towards H2, we assume that c 1% lower l-f-l revenues subsequent to the aforementioned 6% decline may translate to 2% lower for the full year. Also, the contribution from additions since 2019 looks to be lower than we expected because apart from this weaker trading there is increasing incidence of smaller units, that is 63rd+1st and QSR Fridays and Go whose target annual revenues of £1.5m and £1.0m respectively compare with £2.5m for Fridays. This has been compounded by later openings than envisaged.

39% decrease in pre-IFRS 16 EBITDA (22% lower EBITDA). Apart from the impact from lower revenues, a slightly more cautious view on gross profit margin (2% lower) and admin costs as a share of revenues (1% higher) seems appropriate owing to cost pressures, even if mitigated by efficiencies such as food engineering. In terms of pre-IFRS 16 EBITDA, our assumed margin of 8% is below that of May’s guidance of ‘low double digits,’ which seems optimistic (12% in more benign conditions in 2019).

Recent announcements

Directors’ share purchases. Between 30 May and 1 June three directors acquired in total c 0.5m shares at 42–43p.

Employee Benefit Trust indicated on 30 June its intention to purchase shares at its discretion up to a value of £0.5m.


Exhibit 2: Financial summary

£'000s

2020

2021

2022e

2023e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

129,100

159,000

218,000

251,000

Cost of Sales

(26,200)

(31,300)

(50,000)

(53,000)

Gross Profit

102,900

127,700

168,000

198,000

EBITDA pre-IFRS 16

 

 

1,500

21,500

18,000

25,000

EBITDA

 

 

23,500

43,000

39,500

47,500

Normalised operating profit

 

 

200

20,700

17,300

24,700

Amortisation of acquired intangibles

0

0

0

0

Impairments

(8,000)

(500)

(1,000)

0

Share-based payments

0

(100)

(600)

(1,000)

Reported operating profit

(7,800)

20,100

15,700

23,700

Net Interest

(12,400)

(13,600)

(11,800)

(11,700)

Joint ventures & associates (post tax)

0

0

0

0

Exceptionals

0

(8,100)

0

0

Profit Before Tax (norm)

 

 

(12,200)

7,100

5,500

13,000

Profit Before Tax (reported)

 

 

(20,200)

(1,600)

3,900

12,000

Reported tax

2,900

1,000

(1,800)

(2,500)

Profit After Tax (norm)

(9,300)

6,000

4,700

10,700

Profit After Tax (reported)

(17,300)

(600)

2,100

9,500

Minority interests

0

0

0

0

Discontinued operations

0

0

0

0

Net income (normalised)

(9,300)

6,000

4,700

10,700

Net income (reported)

(17,300)

(600)

2,100

9,500

Average number of shares outstanding (m)

N/A

119

126

126

EPS - normalised (p)

 

 

N/A

5.06

3.73

8.49

EPS - diluted normalised (p)

 

 

N/A

5.06

3.73

8.49

EPS - basic reported (p)

 

 

N/A

(0.51)

1.67

7.53

Dividend (p)

0.00

0.00

0.00

1.20

Revenue growth (%)

(39.9)

23.2

37.1

15.1

Gross Margin (%)

79.7

80.3

77.1

78.9

EBITDA Margin (%)

18.2

27.0

18.1

18.9

Normalised Operating Margin

0.2

13.0

7.9

9.8

BALANCE SHEET

Fixed Assets

 

 

321,300

311,500

309,300

311,700

Intangible Assets

146,000

146,000

146,000

146,000

Tangible Assets

170,100

159,200

158,000

160,000

Investments & other

5,200

6,300

5,300

5,700

Current Assets

 

 

46,100

39,300

34,200

46,300

Stocks

700

1,500

2,000

2,200

Debtors

6,500

5,600

7,000

7,500

Cash & cash equivalents

37,200

32,100

25,000

36,200

Other

1,700

100

200

400

Current Liabilities

 

 

(193,500)

(57,500)

(51,500)

(72,000)

Creditors

(158,100)

(23,500)

(18,000)

(21,000)

Tax and social security

(6,000)

(3,300)

(3,000)

(3,300)

Lease liabilities

(26,400)

(19,000)

(15,000)

(15,200)

Short term borrowings

(1,400)

(10,400)

(14,500)

(32,000)

Other

(1,600)

(1,300)

(1,000)

(500)

Long Term Liabilities

 

 

(200,500)

(168,300)

(165,000)

(151,000)

Lease liabilities

(133,800)

(132,000)

(132,000)

(135,000)

Long term borrowings

(63,900)

(33,900)

(32,000)

(15,000)

Other long-term liabilities

(2,800)

(2,400)

(1,000)

(1,000)

Net Assets

 

 

(26,600)

125,000

127,000

135,000

Minority interests

0

0

0

0

Shareholders' equity

 

 

(26,600)

125,000

127,000

135,000

CASH FLOW

Op Cash Flow before WC and tax

23,500

43,000

39,500

47,500

Working capital

2,700

1,000

(12,000)

2,500

Exceptional & other

(400)

0

0

0

Tax

(1,000)

1,300

(1,300)

(1,900)

Operating cash flow

 

 

24,800

45,300

26,200

48,100

Capex

(3,600)

(4,100)

(11,500)

(13,500)

Acquisitions/disposals

0

0

0

0

Net interest

(9,000)

(24,800)

(24,000)

(23,400)

Equity financing

0

0

0

0

Dividends

0

0

0

(500)

Other

(1,100)

0

0

0

Net Cash Flow

11,100

16,400

(9,300)

10,700

Opening net debt/(cash)

 

 

39,700

28,600

12,200

21,500

FX

0

0

0

0

Other non-cash movements

0

0

0

0

Closing net debt/(cash)

 

 

28,600

12,200

21,500

10,800

Lease liabilities

160,200

151,000

147,000

150,200

Closing net debt/(cash) including IFRS 16 lease liabilities

188,800

163,200

168,500

161,000

Source: Company accounts, Edison Investment Research

General disclaimer and copyright

This report has been commissioned by Hostmore and prepared and issued by Edison, in consideration of a fee payable by Hostmore. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

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Level 4, Office 1205

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NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Hostmore and prepared and issued by Edison, in consideration of a fee payable by Hostmore. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

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United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Research: TMT

Media and Games Invest — Focus on ad software platform

Media and Games Invest (MGI) is grasping an opportunity to leverage its extensive first-party data resource, generated through its games content, to build out a full stack advertising software platform that can offer good returns to both advertisers and publishers. Changes to the advertising ecosystem to protect user privacy are prompting a strategic shift to first-party data, with added benefits of improved targeting and transparency. MGI has already assembled a strong offering on the supply side and is now expanding its offering on the demand side, through organic growth and targeted M&A, which should generate further scale and efficiency.

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