Fulham Shore: Platform ready for take-off

Hardman & Co

Fulham Shore plc (LON:FUL) has two restaurant brands, which are honed and proven in the sector. There is an opportunity to expand the estate to more than double its size in the post-pandemic era. Competition has been reduced and landlords are more realistic. There will still be some stresses due to increasing input costs and consumers’ wallets being squeezed by higher prices, but Fulham Shore’s good-value menus position the company defensively. Trading remains strong. It is currently trading at a discount to its peers and the value of the established platform provides potential further upside.

  • Strategy: The UK restaurant sector hit a peak of outlets in 2015 and then started shrinking under pressure on profitability. COVID-19 accelerated that process and perhaps 17% of casual dining venues have closed from the high, leaving an opportunity for well-financed, well-managed firms like Fulham Shore.
  • Rollout: Fulham Shore has two complementary brands – Franco Manca and The Real Greek – offering well-priced, authentic dining experiences. There is scope to grow the current 89 restaurants to more than 200. Profitability – which had been hit by COVID-19 restrictions – bounced back strongly last year.
  • Valuation: A peer group EV/EBITDA multiple would put Fulham Shore on a price of 19p to 22p per share. We have also estimated the value of a 200-strong restaurant business discounted back to today and come up with a central equity value of £173m, or 27p per share. A chain of 250 stretches that to 30.5p.
  • Risks: The key immediate risk is the impact of inflation on consumers’ wallets and confidence. After that, there is execution risk in the rollout plans and ongoing cost pressures for both staff and ingredients. Key to the success of growing the business is finding the right sites at the right prices.
  • Investment summary: Management has many years of experience in the UK casual dining sector. It has refined two restaurant concepts that are proven winners in a normal functioning market. The overcapacity in the sector seems to have been cleared out. This provides an ideal opportunity for a highly profitable rollout. Expansion can be readily funded from cashflow and Fulham Shore’s existing debt facilities. There is scope to more than double the size of the business.
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