Tasty: Equity Placing On The Way As Results Offer Glimmers Of Hope Amid Further Losses And Significant Debt

22 March 2019
By Maynard Paton

Results verdict on Tasty (TAST):

• Miserable figures blighted by debts and losses that confirmed — albeit within the small-print — that an equity placing is on the way.

• The shares are now a gamble based on how much shareholders are asked to raise and at what price.

• Second-half trading offered hope through greater cash generation alongside improved sales per restaurant and per employee.

• Restaurants continue to be sold for cash although current trading was described as “slow”.

• Market cap now £4.2m for sales of £47m and 58 restaurants. I continue to hold.

Contents

• Event link and share data
• Why I own TAST
• Results summary
• Revenue, losses and the intention to raise new equity
• First half versus second half
• Restaurant disposals
• Management strategy
• Cash flow
• Debt and provisions
• Outlook
• Valuation

Event link and share data

Event: Preliminary results for the 52 weeks to 30 December 2018 published 20 March 2019

Price: 7p
Shares in issue: 59,795,496
Market capitalisation: £4.2m

Why I own TAST

• Experienced family management has already built and sold two quoted restaurant chains for £200m-plus (ASK Central and Prezzo).

• Bombed-out share price may provide vast upside if cash generation can improve to stave off a significant rescue fund-raising.

• Latest results offer glimmers of hope through greater sales per restaurant and per employee.

Further reading: My TAST Buy report |All my TAST posts

Results summary

Revenue, losses and the intention to raise new equity

• Dismal interim figures published during September had already heralded these miserable full-year numbers.

• Total revenue fell 6% while last year’s operating profit turned into an operating loss:

Year to c31 December	2014	2015	2016	2017	2018
Revenue (£k)	29,734	35,794	45,847	50,309	47,278
Operating profit before pre-opening costs (£k)	2,986	3,818	4,692	1,101	(478)
Pre-opening costs (£k)	(360)	(644)	(642)	(413)	-
Operating profit (£k)	2,626	3,174	4,050	688	(478)
Net finance cost (£k)	(74)	(107)	(213)	(202)	(252)
Other items (£k)	-	-	(3,925)	(9,956)	(11,087)
Pre-tax profit (£k)	2,552	3,067	(88)	(9,470)	(11,817)
Earnings per share (p)	3.88	4.64	(1.56)	(13.84)	(19.42)
Dividend per share (p)	-	-	-	-	-

• The combination of debt and long-leasehold, loss-making restaurants prompted TAST to admit — albeit within note 21 of the accounting small-print — that “the company intends to raise new equity”. 

• This new equity is in addition to the £500k the directors pledged to inject during November.

• The shares are now a gamble based on how much shareholders are asked to raise and at what price.

• The spectre of a de-listing lurks in the background. Management-connected chain Richoux gave up its AIM quotation earlier this year.

• TAST’s fundamental operational problem remains a number of under-performing restaurants due to a mix of:
  • Poor locations;
  • Rising labour and supply costs;
  • Fixed rents;
  • Middle-of-the-road menus;
  • Regular discounting, and;
  • Greater competition.

First half versus second half

• TAST’s second-half performance showed glimmers of hope.

• Glimmer 1: sales per average restaurant improved from £804k during H2 2017 to £809k during H2 2018:

	H1 2017	H2 2017	FY 2017		H1 2018	H2 2018	FY 2018
Revenue (£k)	24,375	25,934	50,309		22,997	24,281	47,278
Average number of units	63	64.5	62.5		62	60	62
Average revenue per unit (£k)	774	804	805		742	809	763

• Perhaps trading has stabilised.

• Hurt by the poor first half (deep snow, hot weather, World Cup), sales per site for the year were 18% below that achieved during 2014:

Year to c31 December	2014	2015	2016	2017	2018
Revenue (£k)	29,734	35,794	45,847	50,309	47,278
Year-end restaurants	36	48	61	64	60
Average restaurants	32	42	54.5	62.5	62
Average revenue per restaurant (£k)	929	852	841	805	763

• Glimmer 2: the gross margin improved from 1.4% during H1 to 2.5% during H2:

	H1 2017	H2 2017	FY 2017		H1 2018	H2 2018	FY 2018
Revenue (£k)	24,375	25,934	50,309		22,997	24,281	47,278
Gross profit (£k)	893	1,014	1,907		313	595	908
Operating profit*(£k)	494	607	1,101		(184)	(294)	(478)
Gross margin (%)	3.7	3.9	3.8		1.4	2.5	1.9
Operating margin* (%)	2.0	2.3	2.2		(0.8)	(1.2)	(1.0)

(*before pre-opening costs and various write-offs)

• That said, the gross margin remains extremely weak and additional central costs crept into the business during H2.

• Glimmer 3: net write-offs and impairments came to only £157k during H2 following the enormous £11m figure reported during H1:

	H1 2017	H2 2017	FY 2017		H1 2018	H2 2018	FY 2018
Profit on disposal (£k)	-	1,237	1,237		1,942	190	2,132
Onerous leases (£k)	-	(1,635)	(1,635)		(1,688)	1	(1,687)
Lease impairment (£k)	(172)	76	(96)		(890)	(7)	(897)
Asset impairment (£k)	(9,320)	(142)	(9,462)		(10,294)	231	(10,063)
Goodwill impairment (£k)	-	-	-		-	(115)	(115)
Restructure & consultancy (£k)	-	-	-		-	(457)	(457)

Restaurant disposals

• The disposal of three sites for an aggregate £505k during early 2019 provides further hope that certain TAST outlets do have value:

• That £505k adds to the £4.1m raised during H1 following the sale of two central London sites.

• Of course, not every TAST outlet can be sold on. The balance sheet shows an ‘exit provision’ of £3m. More on that later.

• And of course, TAST may in fact be selling its very best units simply to raise much needed cash.

• At least the results small-print suggested not every TAST site is a basket-case (my bold):

“Our sites are primarily based on the high street. However, we have a number of leisure, retail and tourist locations which trade well.”

“The Group intends to dispose of underperforming sites if necessary, but has been successful with a number of turnaround plans implemented on selected restaurants.”

Management strategy

• Management reiterated its five-point plan:
  • Rationalise the estate;
  • [Improve the] food and drink proposition;
  • Engage with our customers;
  • Invest in our staff, and;
  • Streamline our structure.

• Actions have included re-jigging menus, staff training, new IT and less bureaucracy.

• Menu changes during October were not too radical:

• New dishes included smoked haddock fish cakes and a chicken and cumberland sausage risotto. About a third of menu items have seen their prices lifted by between 5p and 40p.

• The menu was previously changed during July, indicating management is keen to experiment with new dishes:

• Employee ratios provided further glimmers of hope.

• Staff productivity — as measured by sales per restaurant employee — has improved to its highest level since 2014:

Year to c31 December	2014	2015	2016	2017	2018
Revenue (£k)	29,734	35,794	45,847	50,309	47,278
Average restaurants	32	42	54.5	62.5	62
Restaurant employees
Number	634	836	1,005	1,169	1,030
Cost (£k)	10,099	13,028	17,191	19,716	18,106
Revenue per employee (£)	46,899	42,816	45,619	43,036	45,901
Employees per restaurant	19.8	19.9	18.4	18.7	16.6
Cost per employee	15,929	15,584	17,105	16,886	17,579

• What’s more, employees per restaurant (at 16.6) is the lowest since the 2006 flotation.

• Perhaps the greater productivity is due to a greater supply of sector talent:

“Due to restaurant closures amongst our competitors in the sector, we have been able to secure high calibre candidates that would previously have been harder to secure.”

• I should also mention that the cost per average restaurant employee has reached £17.6k — a new high.

Enjoy my blog posts through an occasional email newsletter. Click here for details.

Cash flow

• The year-end balance sheet showed cash of £4.3m and debt of £6.4m. Net debt was therefore £2.1m.

• Add on the £505k received from the aforementioned restaurant disposals during early 2019, and net debt could now arguably be £1.6m.

• TAST’s first-half statement said cash and debt at the end of June were £2.9m and £7.0m respectively following an underlying cash outflow of £3.1m.

• During the second half, TAST generated net cash of £2.0m to give an underlying cash outflow of £1.1m for the full year. 

• TAST’s November update said cash and debt at the end of October were £2.1m and £6.4m respectively. During November and December, TAST therefore generated net cash of £2.2m.

• Trading during July, August, September and October therefore appears to have consumed cash of £0.2m. 

• Excluding £4.1m raised from restaurant disposals, net capital expenditure came to £1.3m and was covered amply by the £1.9m depreciation charged against earnings:

Year to c31 December	2014	2015	2016	2017	2018
Operating profit* (£k)	2,986	3,818	4,692	1,101	(478)
Depreciation and amortisation (£k)	1,312	1,712	2,045	2,149	1,864
Net capital expenditure (£k)	(6,378)	(9,844)	(11,652)	(5,777)	2,889
Change in working capital (£k)	1,215	67	(883)	(319)	(731)
Net cash/(debt) (£k)	1,294	(3,529)	(1,996)	(5,157)	(2,105)

(*before pre-opening costs and various write-offs)

Debt and provisions

• Interest paid during H2 was £133k and suggests an interest rate of approximately 4.0% on the outstanding debt. 

• A 4% interest rate perhaps means the bank views a default as unlikely.

• The accounts were prepared on a ‘going concern’ basis and the banking covenants were not breached:

“The Group was covenant compliant at the 30 December 2018.  Based on current and forecasted performance, the Board expect there will continue to be covenant headroom for the foreseeable future.”

• The balance sheet carries provisions of £3.3m:

• Accounting note 19 said:

“During the period a provision for onerous leases was made of £1,687,000 (2017 – £1,625,000). This provision has been made against sites where projected future trading income is insufficient to cover the unavoidable costs under the lease. The provision is based on the expected cash out flows of these sites and the associated costs of exiting these leases. The provision covers a three year period and it is expected the majority of the provision will be utilised over the next 24 months.”

• TAST essentially took a £1.7m charge during 2018 and a £1.6m charge during 2017 as its best guess of the cash expenditure required to jettison loss-making restaurants.

• In other words, cash of up to £3.3m could be needed during the next two years to exit the problem leases. 

• Some of this £3.3m may be generated by the better-performing restaurants.

• However, TAST produced an underlying £1.1m cash outflow during 2018 and continues to have debt of £6.4m to service.

• Oh, and there are long-term lease obligations that total £83m to consider:

• As such, the aforementioned small print within note 21 — that “the company intends to raise new equity” — is perhaps not so surprising after all.

Outlook

• Management blamed politics for weak 2019 trading: 

“Trading over the Christmas period was positive, though the uncertainty of Brexit has meant that 2019 has started slowly.”

“Market conditions have been increasingly challenging through 2018 and the Board’s expectation is that there will be no significant improvement in 2019. We will continue to focus on sales and cost control to ensure that the impact of the challenging economic environment is minimised.”

• But people are still eating out. For example, like-for-like sales at Wagamama have been running at 9%:

• Perhaps Brexit is a convenient excuse, and diners simply prefer Wagamama’s ramen dishes to TAST’s smoked haddock fish cakes.

Valuation

• The recent 7p share price supports a £4.2m market cap.

• To emphasise how badly TAST has fared, two years ago the group reported a £4.1m operating profit.

• A £4.2m market cap compares to revenue of £47m and a net book value of £11m.

• The estate currently comprises 52 Wildwood restaurants and 6 dim-t restaurants. Each site is therefore valued at £4.2m / 60 = £70k.

• Two years ago management claimed new a site fit-out would cost £650k.

• The landlord of the Cobham Wildwood restaurant recently purchased the site as a going concern for £350k — presumably no fit-out costs were required.

• The prospect of acquiring a decent restaurant well below its fit-out cost may tempt other buyers.

• Righting TAST’s balance sheet once and for all may require say, £3m, to reduce debts to a manageable level and, say, £3m, to cover the expected losses reflected by the aforementioned provision.

• TAST’s 2017 annual report reveals the company can issue an extra 11,959,100 shares — or 20% of the current share count.

• 11,959,100 shares placed at the recent 7p share price raises £837k.  

• £837k plus the £500k the directors pledged to supply in November does not appear enough to resolve TAST’s plight once and for all.

• But £837k plus the £500k might be enough to provide TAST some breathing room to enable further disposals and stem current losses.

• Bear in mind the nominal price of TAST’s shares is 10p — and new shares cannot be issued below the nominal price. Any equity raise will therefore require extra paperwork to resolve this matter.

• The upside potential from a £4.2m market cap could be vast if trading ever improves and/or the underlying cash generation (a £1.1m outflow for 2018) can return to a break-even (or even positive) performance.

• I am bravely/stupidly holding on to the shares in the hope the aforementioned glimmers are evidence that TAST is not completely crippled just yet.

Maynard Paton

PS: You can receive my blog posts through an occasional email newsletter. Click here for details.

Disclosure: Maynard owns shares in Tasty.

Share this post: on Twitter on Facebook on LinkedIn