Does a 68% Share Price Decline Make TASTY PLC an Value Stock?

Tasty PLC saw turnover from £10m to £45m in six years. The growing restaurant chain is the owners of Wildwood restaurants and DimTs (serves Asian cuisine).

If you want to know about the owners of Tasty PLC, see HERE.

According to Big Hospitality, UK diners is likely to spend £54.7bn on eating out by 2017. 

No wonder Tasty is looking for a slice of that market.

Despite the super competitiveness of the restaurant industry, Tasty PLC is expanding at a rapid pace. So, an insight on whether it is a successful growth company requires the following research:

  1. Look at the change in free cash flow;
  2. Store metrics;
  3. Operating lease and rent;
  4. What constitutes cash inflow?
  5. Cash generative assets;
  6. The situation with capex and sales;
  7. Circumstances involving financing;
  8. Outlook on the restaurant industry;
  9. Market valuation.

 

So, let’s begin.  

 

 

A Tasty’s Content

 

My one problem with Tasty PLC

Lack of free cash flow. More accurately negative free cash flow.

I know people would point out it’s in an expansion phase. They are doing it to take advantage of economies of scales. (increasing sales overcome high fixed costs leading to higher margins)

However, the business been in operations for over ten years.

Exhibit 1

TASTY FREE CASH FLOW

Since their 2006’s IPOs, shareholders saw minimal share price appreciation. (IPOs price £0.52/share, compared to today’s share price of £0.71/share, a 35% gains). There were no dividends paid during this period.

 

Revenue been growing, but are management paying attention to operational efficiencies

Although, revenue went up 17-fold in the last 10 years to £46m sounds impressive. Better yet, you got to know if operations are increasing its efficiencies.

Metrics such as revenue per store and revenue per employee is more useful than plain sales numbers.

 

Exhibit 2

tasty plc store efficiencies

 

Revenue per store gyrates between £740k and £840k, where in past two years it was at the lower range. That’s because Tasty was accelerating new store openings at a double-digit pace (2015: 12; and 2016: 13), compared with single digits.

Besides, opening a new store requires time for it to operate at full till. So, we question, if:

The new stores were dragging down the average sales per store?

Or, are the older stores achieving revenue close to a £1m each?

Until the company stops its expansion or slow it to one or two new stores opening per year, then we know.

 

Honest talk about Tasty PLC earnings

The focus on the accounting earnings falling from £3.2m to £125k is not the full story, as cash earning shows a smaller decline from £5.1m to £4.77m.

The collapse of P&L earning is due to impairment charges of (£4m) from overvaluing fixed assets. Glad that management recognises problems right away.

Another measure that people shouldn’t ignore is the cash generating power ratio.

This ratio helps you to identify if the company is generating cash inflows from operations. Or, did it came from disposals and external financings.

For 2016, 25% of all cash inflow derived from internal operations as the firm requires outside funds to grow.

 

Exhibit 3  

tasty's cash generative powers

Details of TASTY PLC leasing/expansion  

£34m of assets relating to property, plant and equipment (tangible assets) can be misleading. Don’t immediately think it belongs to freehold land.

In Tasty PLC’s case, the majority of assets aren’t freehold properties, but leasehold improvements meaning it needs to pay rent.

As the company grows, so does the rent and with it the total operating lease.

 

Exhibit 4

TASTY RENTAL COSTS

 

Despite, Tasty holding no freehold stores, the company isn’t having to foot an increasing leasing bill. Rent accounts for 11% of turnover. Six and seven years ago, it would consume 13%-14% of sales.

A true measure of leasing a store is to work out the rent for each restaurant.

Exhibit 5

tasty rent per store

 

Apparently, it has gotten cheaper from the dizzy heights of 2008-09 by 20%.

Next, we ask: “What is the leasing duration for each chain?”

Exhibit 6

 TASTY LEASING

 

Before 2008, leasing was expensive which costs Tasty £2.5m per store. Today, the level drops to £1.5m. Also, annual lease paid is 6% of total leases meaning the lease agreement is somewhere around 17 years per restaurant. (1/6% = 16.7)

These are pretty good leasing agreements, especially when buying freehold is expensive.

 

Are sales keeping up with asset growth?

Tasty Plc recent impairment charge of nearly £4m (most of it from PPE “Property, Plant + Equipment”) suggest sales are mediocre. Giving the impression the growth rate is slowing.

To dispel any illusion, you need to know about the company’s asset turnover (minus the cash).

Exhibit 7

 TASTY PLC asset and capital turnover

 

Asset turnover is fairly stable in the past seven years. The slight drop off is halted by the impairment charge write down. You can argue the impairment charge was coming from lower sales per store. (See Exhibit 2.)

As well as keeping asset valuation honest, we got to look at capital turnover.

As we say: “How much sales are getting generated from cash invested?”

Capital turnover is 1.4 in 2016 meaning every pound invested the business earns £1.40 in sales. It was as high as £1.60. Compare that with a big company like The Restaurant Group, its capital turnover is close to 2.25.

But, capital turnover is subjective because the equity can be over or understated, which affects how high or low capital turnover ratio is.

(The capital turnover is for reference only)

A more effective way to measure capital utilisation is to use “Current Year Sales over Previous Year Capex

 

Exhibit 8

 tasty plc capex sales generation

 

This is a more useful yardstick because using previous year capex gives the restaurant time to operate close to full capacity.   

Right now, the company capital investment is not generating the same level of sales in previous years.

Although it is hard to say where it will go next!

 

Tasty Plc Financing

Despite the restaurant chains generating cash profits, it can’t self-fund expansion.

Therefore, relying on external financing.

Exhibit 9

TASTY EXTERNAL FUNDING

 

The last two years were the busiest years for Tasty plc.

Since their IPO admission, it borrowed close to £32m. That works out at £3.2m per year. (See Tasty PLC outlook for estimated 2017’s capex below)

 

 

Outlook for the food industry

Now, we look at the industry as a whole.

The Guardian wrote a piece last year, citing THOUSANDS of UK restaurants could go bust in 2017, based on an analysis by an accountancy firm.

Furthermore, they cite 5,570 restaurants has a 30% probability of going bust in the next three years. What is causing an accountancy firm to feel downcast about the food and drinks sector?

These are the following reasons:

-The UK imports 48% of its food, this leads to higher operating costs;

-The cost of labour is rising from £6.70 to £7.20 in April, with a further rise to £7.50 to take place next April;

More consumers are in debt; – 48% of borrowers have a credit card which is not cleared in full each month, compared with 39% a year ago.

Although they were valid points, we don’t know how many of them are restaurant goers?

 

 

Market Valuation

 

Below is the Tasty’s market value:

TASTY MARKET VALUE

 

Tasty plc share price is close to a four-year low with a market value of £45m. 

It is very hard to value a business that is growing at a rapid pace, where market metrics such as P/E, P/B or P/S Ratios are ineffective.

There are two other ways to value this business:

  1. Management Outlook;
  2. Technical Analysis.

 

TASTY PLC Outlook

Management has revised down plans to open 7 new stores, compared to 15. That statement may not seem much, but tells us a lot about their financials going forward.

These are:

  1. Lower store openings mean lower capex (estimate around £6m);
  2. Management is likely to enhance positive free cash flow generation;
  3. The restaurant chain is conscious of its competitive sector;
  4. Focus is on existing stores;
  5. If the restaurant industry happens to get weak in 2017, then management has shielded the business from owing too much debts from creditors.

 

Technical Analysis

Looking at the business weekly chart.

 

Exhibit 10

tasty weekly chart

 

The momentum is very negative (having fallen by 68% since the beginning of 2016). That means the shares will struggle for traction this year.

Also, the narrative from management about looking for cost savings, opening fewer stores and an overall cautious mindset agreed with the technical chart set-up. That means the shares will struggle for traction this year.as well as opening fewer stores.

Until we get a positive feedback from Tasty, the share price will be in a trading range.

 

Which is why the forecast share price of between 40 pence to 80 pence per share is my recommendation for the rest of the year.

Looking beyond 2017, it hinges on the turnaround process and the UK business climate.

The key takeaway: If Tasty manages to survive and thrive beyond 2017, while other restaurants go under, then the chain is ahead of the pack.   

If not, the share price will remain depressed.

 

Final Thoughts

This is a tough one to reach a conclusion for the simple matter of haven’t set foot inside its restaurant. So, I have to go by its financial accounts.

No doubt the business will face higher costs from staff and food costs.

At the same time, there is an opportunity if they manage to come through this tough period.

The operating lease issue looks fine as annual rent per store fell. If what the Guardian been posting is true, then expect future lease costs to fall further, as landlords struggle to fill occupiers.

All that leads to one conclusion, which is this year will be tough for the restaurant industry. So, don’t Tasty PLC to take off anytime soon.

 

Call to Action

Please share your thoughts on this restaurant chain.

 

Disclosure

The opinions are expressed independently by the writer. It is for entertainment and research purposes and not taken as investment advice. Data is correct on available information at the time.

Finally, the writer does not own the company’s stock, unless stated otherwise.

 

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  • Richard Goodwin

    Thank you. This is an excellent high quality analysis. I’ll have to visit to relate the financials to the actual observable business!