Research: Consumer
Notwithstanding its sector ‘sweet spot’ (a healthy, customisable product at a competitive price), Tortilla Mexican Grill (Tortilla) has taken the opportunity of a change in management to refine its strategy to address challenges since its successful IPO in 2021 as well as expedite growth. Significant benefit is expected from a new delivery structure to mitigate commission charges in an important part of the business (c 30% of sales), from enhanced marketing to tackle surprisingly low brand awareness and from an initial director of food to bolster menu development. With a new FY24 target of self-funded roll-out (down from 12 to eight), franchising will drive expansion as capital light and has been so successful to date. A near-doubling in H223 pre-IFRS 16 adjusted EBITDA, if from a low base, is testament to Tortilla’s recovering financials and initiatives already in place.
Tortilla Mexican Grill |
Cracking on
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Travel and leisure |
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30 April 2024 |
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Notwithstanding its sector ‘sweet spot’ (a healthy, customisable product at a competitive price), Tortilla Mexican Grill (Tortilla) has taken the opportunity of a change in management to refine its strategy to address challenges since its successful IPO in 2021 as well as expedite growth. Significant benefit is expected from a new delivery structure to mitigate commission charges in an important part of the business (c 30% of sales), from enhanced marketing to tackle surprisingly low brand awareness and from an initial director of food to bolster menu development. With a new FY24 target of self-funded roll-out (down from 12 to eight), franchising will drive expansion as capital light and has been so successful to date. A near-doubling in H223 pre-IFRS 16 adjusted EBITDA, if from a low base, is testament to Tortilla’s recovering financials and initiatives already in place.
Evolution, not revolution
The recent coincidence of changes in CEO and CFO should not disquiet as this is simply a function of Andy Naylor, longstanding CFO and latterly also UK MD, taking over as CEO as part of an orderly transition on the retirement of Richard Morris. Founder and CEO until 2014, Brandon Stephens remains on the board as a non-executive. This is complemented by the appointment as CFO of Maria Denny from outside the hospitality sector, bringing food and retail experience. The message is one of reacting to identified weaknesses, as mentioned above, while building on Tortilla’s key strengths, which have only heightened since the IPO, notably the popularity of Mexican food across Europe, where the company is ‘in pole position to win the race’ as it is more than twice the size of its nearest competitor. Replication of the UK model with a single central kitchen unit, which de-risks and curbs costs by removing the need for skilled staff and extraction on site, would allow control of the supply chain and offer proof of concept to franchisees, the preferred route.
FY23: Back to health
Despite continued headwinds, a 70% rise in year-on-year adjusted EBITDA without COVID-19 related VAT and rates benefit and H223 margin of 8% ahead of pre-pandemic confirm the efficacy of multiple new cost control measures. Year-end leverage was just 0.3x despite free cash flow funding only 60% of new site capex.
Valuation: Disbelieving
On pre-IFRS 16 EBITDA, FY24 consensus forecasts of £5.6m give 3.6x EV/EBITDA, which is low. Profit conversion is ‘improving’ with trading as management expects (ytd like-for-like sales down 4.7% reflect delivery model change and are at a better margin).
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Consensus estimates
Source: LSEG. Note: *Pre-IFRS 16 and excluding exceptional items and pre-opening costs. |
EDISON QUICKVIEWS ARE NORMALLY ONE-OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.
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Research: TMT
Vection’s Q324 update showed strong double-digit growth in revenue and cash receipts, driven by multiple contract wins, including its largest contract to date with an existing defence customer. A swing to positive operating cash flow in Q3 (A$4.1m), coupled with contract wins, validates the company’s streamlined sales structure, designed to bolster operational efficiency. Cash generated also supported a quarter-on-quarter reduction in debt. Management is seeing early positive signs by enhancing the platform’s compatibility with Apple Vision Pro, potentially unlocking a key growth avenue from rising enterprise adoption among large global players.