I’ve purchased stock at 18.50p and below.
Fulham Shore is an investment vehicle established by David Page and managed by Nabil Mankarious. Together, they have been involved in many hugely successful restaurant concepts in the UK. They currently operate two restaurant concepts: Franco Manca and The Real Greek both of which are being rolled out.
David was the owner and managing director of the largest PizzaExpress franchise organisation between 1973-1993 with 14 sites. PizzaExpress floated in 1993 and David became the CEO. Subsequently, he and an investor group bought Pizza Express outright in 1996 and grew the number of outlets from 25 to 300. It was bought by private equity in 2002 after their investment did 23x. In 2005, David bought a small chain of burger shops called Gourmet Burger Kitchen and added 53 sites before selling the concept in 2010. Now Fulham Shore is the next vehicle of expansion.
If you are a regular to London, you probably know Franco Manca. It is a Neapolitan sourdough pizza specialist. It originated in Brixton Market in 2008 with a cult following.
By 2013 it had a handful of sites and has really refined the roll-out since and grown to 40+ sites now. The business model is simple. Successful pizza restaurants have good economics because:
- Pizzas are quick to cook
- Skill required in the kitchen is lower than average restaurant
- Facility and space of kitchen takes up less and gives more space to the front of house
- Product has broad appeal from children to couples to professionals
Franco Manca has differentiated themselves through the use of higher value ingredients and its distinctive sourdough pizzas. The pricing also sets Franco Manca apart. Despite it being regarded as a high quality premium pizza, their most expensive pizza is cheaper than PizzaExpress’ (the largest incumbent) cheapest pizza. The average spend for a pizza and a drink is £9-9.50.
It keeps the menu short at 6 pizzas and 1 special which changes 3x per year. The restaurants are smaller and buzzier with no music as they prefer the sound of people talking. They dont spend too much on the interiors but make them hard wearing e.g. lots of tiles so they have to spend less money on maintenance going forward. But the restaurants still look urban chick with exposed piping / brick work etc (depending on location obviously). The philosophy is its better to have busy place with 50 seats than an empty cavern with 150.
The goal is to have 30% return on capital. Spend about £750,000 on a restaurant and make £250,000 in EBITDA. PizzaExpress had 33% during their very successful growth phase.
So far this has played out exactly as planned. Franco Manca had 32 sites as at March 2017, 40 currently and will end the year (March 2018) with 45 sites. The goal is to add 13 sites per year however I believe this will be increased once the concept is proven outside London. This year, restaurants have opened in Brighton, Oxford, Bournemouth with more to come in Birmingham, Edinburgh, Leeds and Manchester. There is a little less halo effect when they move out of London but so far the restaurants are performing very well. The UK isnt as disparate as the US where there are more risks from expanding from one region to the other.
The Real Greek
The Real Greek serves a freshly prepared selection of hot and cold food dishes from Eastern Mediterranean regions. All restaurants are licensed and serve a wide variety of Greek wines and beers and on occassion in some branches there is live bouzouki music. It is a relaxed Mediterranean dining experience offering meze sharing plates and selection of other dishes. Again, pricing is quite low, with the average spend per diner around £15. The Company believes that Greek, and particularly Cretan, cuisine has become increasingly synonymous with a healthy diet and that the emphasis on salads, pastes, dips, fish and grilled meat is proving to be a counterweight to the fried and bread or pasta based meals prevalent today.
This concept ended the year March 2017 with 12 restaurants and is adding about 3 sites per year. They’ve already expaned outside London and the last update suggested restaurants outside London are doing even better daily turnover than in London.
New potential ventures
Nothing has been confirmed or officially talked about. David has mentioned in an interview that he has “10 brands in my head”. They are working on a steak concept, a Japanese Ramen idea and a smaller version of the Real Greek. Whether these would be opened within the Fulham Shore umbrella is also not certain. But no other concepts are required for this investment to knock the ball out of the park.
So its pretty simple. They have two businesses performing exceptionally well. The company has 17-18% consolidated EBITDA margins despite investing into a management team that can cope with a larger restaurant base. Despite investments, the consolidated company is delivering around 25-30% ROCE and the roll-out is continuing.
The company is managed by Nabil Mankarious. While a student at university, he worked in the kitchen of PizzaExpress and rose through the ranks to become a Regional Director for PizzaExpress London in 2001. From 2006 to 2011 Nabil was head of Group Purchasing at David’s previous vehicle and head of operations at Gourmet Burger (one of the products at David’s previous vehicle). Rarely do you get a David / Nabil combo with decades of successful track records managing a pretty simple £100m roll-out.
David Page has mentioned in the past that the sweet spot for a restaurant chain in the UK before it loses some of its individual characteristics and before it becomes a larger organisation selling a commodity is around 80 restaurants. That still leaves a doubling for Franco Manca and much more growth for The Real Greek before brand perception becomes a big risk.
In the year ended March 2017, the company generated £7.1m of EBITDA. I expect this to grow to £10.6m in EBITDA in the current financial year generating a profit of £6-7m.
That puts the company on current year multiples of 11.6x EBITDA and 18.7x earnings (note more EBITDA is converted to earnings in the UK due to a 20% tax rate). I believe this is cheap for a company currently growing at 30-40% and likely to grow at above 20% rates for the next 5 years. With a proven operating model. That should be relatively recession protected due to its lower than average pricing. And managed by a blue chip management team.
I also think the current multiples reflect an investment in the team to support rapid growth and that underlying static earnings would be 10-15% higher.
The balance sheet is strong with a £6m net debt position in March 2017. I estimate this growing to £15m by March 2019 before the roll-out becomes largely self-funded.
I put the company at 11x EBITDA in September 2020 for a 100% return and a 26% IRR.
I think there is further upside if liquidity improves and the company is more widely owned. Then a higher rating could be achievable.
- Economic recession
Eating out is a discretionary expenditure and the UK consumer isn’t in great shape right now. I believe Fulham Shore will be less cyclical than the industry due to its low pricing. A night out with friends at Franco Manca is a cheaper alternative to many leisure pursuits. Nonetheless, I dont expect Fulham Shore to be left unscathed by a downturn.
- Franco Manca ex London expansion
Will the brand be as successful outside London? When Franco Manca opens in London, its instantaneously full due to the brand halo and people excited that Franco Manca is finally opening near them. This may not be the case outside London. Generally there are far fewer examples of concepts failing to expand geographically in the UK than in the US. I am not too concerned about this until I see data showing there is an issue but nonetheless its a risk. We will know more in 6-12 months time. Management have already commented that the Real Greek is doing very well outide London.
- Capital allocation / dilution
It’s possible that Fulham Shore raises capital to add a 3rd restaurant concept. This would dilute our Franco Manca / The Real Greek growth story in the short term and add risk of success for a newer brand. Right now they are growing so fast that I’d be surprised if they wanted to add a third brand in the next 1-2 years.
The UK restaurant market is relatively saturated, dynamic and hence competitive. You need to be on the ball and I believe with David and Nabil at the helm, this company will be at the forefront.