30 March 2015
By Maynard Paton
Quick update on Tasty (TAST).
Summary: A very promising set of results, buoyed by a strong second half. Notable features included robust cash flow and the clearing of some debt, which might suggest TAST is able to expand significantly without hefty external financing. Either way, I firmly believe the family management here can replicate its earlier success at Prezzo (PRZ) and could perhaps quadruple TAST’s current market cap. I continue to hold.
Shares in issue: 53,190,324
Market capitalisation: £74.5m
Click here to read previous TAST posts.
* These results appeared very promising
I felt these results were very promising. TAST expanded its restaurant chain from 28 to 36 outlets during the year, which lifted revenue by 28% and operating profit by 41%.
The second-half performance was particularly strong, with H2 revenue up 31% and H2 operating profit up 57%:
|H1 2013||H2 2013||FY 2013||H1 2014||H2 2014||FY 2014|
|Gross profit (£k)||1,275||1,531||2,806||1,518||2,009||3,527|
|Operating profit (£k)||846||1,016||1,862||1,026||1,600||2,626|
* Operating margins continue to improve
I am pleased TAST’s expansion continues to benefit from rising operating margins:
|Year to 31 December||2010||2011||2012||2013||2014|
|Pre-opening costs (£k)||(294)||(110)||(403)||(259)||(360)|
|Operating profit (£k)||234||1,054||1,314||1,862||2,626|
|Operating margin (%)||2.2||7.2||6.8||8.0||8.8|
|Operating margin before pre-opening costs (%)||5.0||8.0||8.9||9.1||10.0|
The margin improvement has been helped by two major costs — staff and leases — being kept under control:
|Year to 31 December||2010||2011||2012||2013||2014|
|Staff cost (£k)||(3,934)||(5,155)||(7,010)||(8,310)||(10,795)|
|Lease cost (£k)||(1,273)||(1,540)||(2,304)||(2,630)||(3,101)|
|Staff cost/Revenue (%)||37.3||35.4||36.3||35.8||36.3|
|Lease cost/Revenue (%)||12.1||10.6||11.9||11.3||10.4|
* Super cash flow supports sizeable expansion expenditure
I was impressed cash generated from operations came to £5,308k versus a reported operating profit of £2,626k.
The full cash-flow reconciliation was not published within these preliminary numbers, so I can only surmise TAST enjoyed a very favourable working-capital movement. (I will double-check the full annual report to discover what occurred).
It’s also worth noting TAST has not paid any cash taxes during the last three years, despite the income statement recording an aggregate £1.1m tax charge against reported earnings.
While I confess I do not entirely understand the tax rules involved, a very similar tax situation occurred at sister chain Prezzo (PRZ) — and this deferral of cash taxes provided sizeable funds for PRZ to open new restaurants.
Anyway, TAST’s working-capital movement and lack of tax payable meant it could spend a significant £6,378k on new (and existing) restaurants during 2014.
During the last five years, TAST’s estate has increased by 25 outlets after total capital expenditure of £19,658k. Assuming depreciation and amortisation of £4,290k is a proxy for expenditure on existing sites, I reckon the average capital cost of each new outlet has been £615k.
For 2013, the same five-year calculation would have given £609k and for 2012 the figure came to £646k. So I am pleased TAST’s new sites are not costing any more to open.
* I am surprised TAST has cleared some of its debt
TAST took on debt of £1m — with the facility to add another £3m — the other year. It was a surprising move, as sister chain PRZ had operated without any debt during its lifetime and had instead raised extra cash from shareholders to expand. But with debt costs low at present, perhaps TAST’s decision to borrow money currently makes more sense.
Prior to these results, my rough calculations suggested that for TAST to replicate PRZ’s expansion and produce multi-bagger returns, it required either:
i) further debt, and/or;
ii) extra cash from shareholders…
…to grow its estate to 200-plus outlets.
But these results showed TAST paying off £250k of its debt during 2014. If TAST was to go the debt route to expand, I’d assumed the group would now be drawing down some of its £3m unused facility to open extra sites.
(EDIT: Ah, I now see why TAST paid off the £250k. The annual report shows this debt was part of a £1m term loan and the £250k was due to be repaid during the year. £500k should be repaid during 2015 and a further £250k will be repaid during 2016.)
Looking at TAST’s super cash flow in these results, the optimist in me believes that perhaps — perhaps! — the firm may not actually need hefty extra financing from debt or share placings to become ‘the next PRZ’.
I would be amazed — and extremely pleased! — if that proved to be the case.
* The expansion plan looks encouraging
TAST confirmed it had opened a further three sites during 2015 to take its estate to 39 locations. I am also encouraged the firm claimed: “The rate of development will accelerate in the medium term”. I am hopeful the rate can soon top 10 sites a year — PRZ in its heyday was opening 20-plus sites a year.
* I continue to believe TAST can replicate the success of ASK and PRZ
TAST’s family management has already built and sold two multi-bagger restaurant chains (ASK Central for £223m in 2004 and PRZ for £304m in 2015) and I see no reason why they cannot complete the hat-trick with TAST.
* I have dropped my long-term projection calculations
Prior to these results I spent a lot of time re-jigging my long-term projections for TAST’s expansion. However, I gradually realised the number of unknowns was making my extrapolation quite unreliable.
In particular, I looked at PRZ’s financial history for comparison and I noted its expansion was partly funded by the aforementioned deferred tax payments and some very favourable working-capital movements — two items that I found difficult to predict for TAST.
Plus, I wasn’t sure (and I’m still not sure) whether TAST will expand using extra debt, extra equity or neither. Predicting potential margin improvements for TAST was another headache.
* Instead I want to keep things simple
PRZ was acquired earlier this year for £304m when it operated with 245 restaurants. Back in June 2004, PRZ had 35 outlets — comparable to TAST’s 36 at the end of 2014.
So if TAST simply follows the success of PRZ, then the next 10 years could see TAST’s £75m market cap become £304m — or advance 4.1-fold or 15% a year.
(Subtract PRZ’s £33m freehold assets from its final £304m market cap, and TAST’s market cap could grow 3.6-fold or 14% a year. (TAST does not own any freeholds)).
* In the meantime, the shares remain highly rated
TAST’s trailing P/E is 36 — so the downside could be considerable if a setback were to occur and/or the expansion history of PRZ cannot be replicated.
Next events: AGM in May, half-year results in September
Disclosure: Maynard owns shares in Tasty.