Dataram DRAM US Gold Corporation

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Background

On June 14th Dataram (DRAM) will be acquiring US Gold Corp announced they would be entering into a merger agreement. Dataram intends to divest its existing memory hardware manufacturing business and issue a special dividend to pre-merger shareholders equal to their ownership interest in the company’s existing assets. Shares will be issued by Dataram as consideration for the merger with US Gold. The pre-merger shareholders of DRAM will own roughly 10% and the owners of US Gold will own roughly 90% of the merged company. The surviving corporation, US Gold, will own two main mining projects from which it expects to produce over 2 million in gold equivalent ounces.


Recommendation

Buy shares of Dataram prior to completion of the merger. This is a unique opportunity to invest in a company with tremendous upside. Dataram is still being valued as if it is a computer hardware manufacturer and as a result DRAM shares are trading at a steep discount to other gold miners based on its gold equivalent ounces. The post-merger gold assets are currently being valued at less than $20 per ounce…a steep discount to what will soon be the company’s new peer group.

In part this arbitrage is due to the fact that there are a number of conditions that must be met before the proposed merger is completed. I discuss these conditions and why they do not pose a threat throughout the article. I will also break down what the post-merger company will look like and why I believe DRAM shares are currently undervalued.


Summary

Many believe that Gold, or more broadly the entire minerals sector, is in the early stages of a long-term bull market. Gold is up roughly 30% YTD to $1,355/oz. It would need to increase another 35% from here to reach its prior peak of roughly $1,830 in 2011.

The majority of gold miners have doubled so far this year, and some junior miners have more than quadrupled from their lows last winter. DRAM closed at $4.20 the day it announced the merger and its plans to transition into a gold mining company. The stock has traded down roughly 65% since then, currently trading in the $1.50- $1.60 range.

US Gold Corp owns two very promising mining assets, the Copper King and Keystone projects. They also have an impressive and proven management team, starting with Director and CEO Edward Karr. Mr. Karr was a Founder and currently serves on the Board of Directors of Pershing Gold Corp. In 2004, he was named by Futures Magazine as one of the world’s Top Traders.


Management Matters

Mining is a very labor intensive industry. Not just anyone can start poking holes in the ground and hit gold. There is an intricate science to mining, and some managers are better than others when it comes to the exploration and discovery of mining assets. Lucky for US Gold, they have the help of Dave Mathewson, a geologist and explorer with over 35 years of experience in Nevada alone. Mathewson will be heading the Keystone project, which is located in Nevada in the middle of one of the country’s premier gold trends. In an interview from 2011 Mathewson said the following about his exploration and discovery process:

“Successful exploration is all about applying effective and often new ideas, basically geological concepts, in entrepreneurial ways to the rocks for the sole purpose of making discoveries.”

In other words, when it comes to mining, not all managers are equal. So one winning strategy that I have found to work over the years is to invest alongside the best and most experienced managers in the industry. Most of these managers believe in what they are working on and have a considerable amount of skin in the game. According to Karr, Mathewson will own roughly 5% of the post-merger outstanding shares of US Gold.

Dataram US Gold merger Dave Mathewson pic
Dave Mathewson on the Keystone Property in Nevada

Dave Mathewson has as impressive a track record as any in the mining industry, especially in Nevada. At Gold Standard Ventures, Dave recently struck gold after drilling only 8 holes in a similar Nevada mine. This is important because drilling costs money and empty holes are worthless. Here are some quick highlights of Dave’s Career leading up to now:

  • 1989 – 2001: Worked for Newmont Mining Company (NEM) in Nevada where he held several senior positions including Regional Exploration Manager
  • While head of Newmont’s Nevada exploration Team Mathewson made some notable discoveries including the Tess, Northwest Rain, Saddle and South Emigrant projects
  • 2001 – 2007: Independent Director, Head Geologist, VP Exploration at Tone Resources
  • 2008: Became Founder & CEO of Nevada Gold Holdings
  • 2009 – 2014: VP of Exploration and Director at Gold Standard Ventures

Dave’s latest project is working on the Keystone Project for US Gold. Unlike Copper King, there is a high degree of uncertainty when it comes to exactly how much gold Keystone will produce. Management’s initial target is 1 million but they believe the project has a potential for over 10 million gold ounces. Based on Dave’s history, I believe the high end of that estimate is more than possible.


Keystone Project

Dataram US Gold merger keystone details
click to enlarge

As one of the conditions of the Dataram merger, in June US Gold acquired 100% of the mining claims related to a gold development project in the Keystone district. The Keystone Project is located in Nevada within the Cortez Gold Trend, one of the world’s most lucrative mineral trends.

 

Keystone is just 10 miles southeast of Barrick Gold’s renowned Pipeline, Cortez Hills, and Goldrush deposits, which combine for over 50 million ounces and produce approximately one million ounces of gold per year. This project is smack in the middle of one of the top mining areas in the country. Over the past 50 years, the Cortez and Carlin Trends in Nevada have produced more than 245 million ounces of gold. As such, the company believes Keystone is a “multimillion ounce discovery opportunity” as it shares so many “geological and gold system similarities to the Cortez District just to the northwest.” The company is targeting over 1 million ounces of gold from Keystone and estimates a total project potential of over 10 million ounces.

 

But the best part of all is that a proven and experienced geologist in Dave Mathewson will be leading the project for US Gold. Here is what Mathewson had to say about the Keystone project in the June Press Release:

“Keystone is a true district-scale opportunity. In the past 40 years, I have been on and off various portions of the Keystone property. This is the first time that one company has controlled the entire Keystone District, and this control will be conducive to comprehensive, systematic, and modern-day exploration applications. We are looking forward to advancing the 2016 exploration program”  

Most recently, Mathewson was VP of Exploration at Gold Standard Ventures (GSV) where he helped consolidate the Railroad-Pinion district and the North Bullion & Bald Mountain discoveries. The Railroad Project was a blockbuster discovery for GSV.

When asked about Keystone, Dave Mathewson said it is “the best exploration project I have seen in my career… reminds me of the Railroad project on steroids.”

According to CEO Ed Karr, Mathewson has had his eyes on this project for years and believes it has the “potential for multiple world class deposits.” Mathewson believes that Keystone is a geological extension of Barrick’s Pipeline and Cortez Hills.

According to CEO Ed Karr, Mathewson has already begun working on the project and is using the same discovery plan that he used at Gold Standard Ventures.  Here is an illustration of the company’s planned timeline from their website.

dataram US Gold Corp business plans 2016-2017

 


Copper King Project

Unlike the Keystone project which is just in early stages of exploration and discovery, US Gold’s other mining property is more or less a “done-deal.” The Copper King project is an advanced exploration and development property located in the mining friendly location in the Silver Crown Mining District of southeast Wyoming. According to Karr, Copper King “has a prior completed Preliminary Economic Assessment (PEA) by Mine Development Associates (MDA) showing measured, indicated, and inferred resources of 1.1 million oz. of gold and 285 million lbs. of copper. Karr went on to explain that “the PEA was completed in 2012 at a lower gold price and shows a Net Present Value (NPV) of Copper King of $160 million at $1,100 gold.” I spoke to Karr about a month ago after the planned merger was announced and he estimated the NPV at that point was “$175 to $180 million.” Gold has increased a lot in the past month. Based on my estimates, at the current gold price of $1,360 today these resources have a NPV of roughly $200 million. The fact that the entire 1.1 million ounces are “indicated” means that they can be reasonably estimated with confidence. The fact that Copper King is an advanced stage project with a high probability of producing over 1 million ounces should provide investors some comfort.


Transition from Technology to Precious Metals

Let’s spare ourselves the argument as to whether or not DRAM’s existing business, that of memory hardware manufacturing, is a growing industry or not. All we need to do is focus on gold which right now has a number of fundamental factors working in its favor. I will name a few below:

  • Global political and economic uncertainty continues to increase the demand for Gold
    • Worries over Brexit and the global economy are creating a risk-off trading environment
  • Market expectations for tightening by the Federal Reserve have died down, which tends to underpin gold.Now rate hikes are not expected until next year
  • Low to negative interest rate policy from Central Bankers around the world will continue to weaken global currencies and investors will turn to gold as an alternative store of value
  • Exchange Traded Funds are incredibly underrepresented by the precious metals sector
    • According to Citi, ETF holdings of gold are increasing by about 100 tons per month and they expect this growth to remain “robust” throughout 2016
  • Uncertainty about economic growth and lofty asset valuations will continue to support the price of gold as a hedge

Smart Money Moves into Metals

Many big money managers including George Soros are taking bearish stances on the equity market and building their gold positions as a hedge for uncertainty. Stanley Druckenmiller recently said at an investor conference to “get out of the stock market,” blaming the fed’s continual dovishness for creating a “myopia” that “causes reckless behavior.” Druckenmiller recommended owning gold and stated it is his funds “largest currency allocation.” Druckenmiller has averaged annualized returns of over 30% during his investment career. His advice may be worth listening to. Especially considering he is just one of many renowned managers echoing the same rhetoric.


Merger Details 

The merger is still subject to DRAM’s shareholder approval as well as the closing of a financing of roughly $3 million by US Gold. Neither of these are intended to be an issue for the proposed merger to be completed. Management expects the proxy to be filed the first week of August and is targeting the end of September for the close of the deal. Current DRAM shareholders will own roughly 10% of the post-merger company. This means current DRAM shareholders will own 210,000 ounces or 10% of the 1.1 million ounces from Copper King plus 1 million initial target from Keystone.


Valuation

DRAM has roughly 2.5 million outstanding shares and a market capitalization of about $3.75M. This means the post-merger gold assets are currently being valued at less than $20 per ounce based on DRAM’s current stock price of $1.56. Even if you only take the 1.1 million of indicated ounces from Copper King, the gold is still valued at just $34 per ounce. It is often difficult to compare miners based on their gold equivalent ounces because the quality and grade of gold deposits as well as the probabilities of producing the estimated amounts can vary widely among companies. Nonetheless, this table should paint a better picture of the potential value US Gold offers relative to some of its junior miner peers.

dataram valuation vs gold peers

Keep in mind that this does not take into consideration any of the 9 million-plus “potential” ounces from Keystone.


Conclusion

Based on the valuations of other gold miners, DRAM is trading at a significant discount per ounce of gold. Instead of paying $50 to upwards of $100 per indicated ounce of gold, which is the valuation range most junior miners trade at, DRAM is only being valued at $34 per indicated gold ounce. Not to mention you have the added bonus of up to 10 million potential additional ounces from the very promising Keystone project.

I believe the market is significantly undervaluing DRAM’s post-merger gold assets and as a result, DRAM represents a special opportunity to buy some gold on the cheap.


Matt Margolis - GA sig

 

 


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Chanticleer Holdings logoIn news this morning, Chanticleer Holdings Nasdaq: HOTR) announced the successful acquisition of Little Big Burger restaurants with 8 locations in Oregon and a 9th location opening in Portland by the end of this year.

The acquisition adds over $1 million of annual EBITDA immediately, and will make HOTR EBITDA positive in Q4 2015 and onward according to the CEO, Mike Pruitt (press release).

 
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HOTR has by far the lowest Price/Sales and Price/Book ratios in the restaurant group combined with 65% revenue growth.

Company  Symbol Market Cap Price/Sales (ttm) Price/Book (mrq) Qtrly Revenue Growth (yoy):
Darden Restaurants DRI $8.7 billion 1.3 3.6 13.8%
Shake Shack SHAK $1.7 billion 3.74 5.1 74.7%
Kona Grill KONA $175 million 1.4 3.2 21.2%
Chipotle CMG $22.3 billion 5.1 9.9 14%
Jack In The Box JACK $2.8 billion 1.8 26.5 3.2%
El Pollo Loco LOCO $410 million 1.2 1.8 2.9%
Chanticleer Holdings HOTR* $16 million 0.4 0.9 64.9

Note: *The numbers for HOTR do not include accretive contributions from today’s announced acquisition.

 

Bottom line, there is not a restaurant stock out there with faster sales growth and more attractive P/S and P/B multiples than HOTR.

 

With the positive effect low gas prices typically have on casual restaurants, strong sales growth far exceeding the industry average, and the company turning EBITDA positive this year, I remain very bullish on HOTR shares and added to my position today.

And I’m not the only one adding shares.

Institutions have been buying more HOTR shares also, with 9 institutions adding 1.2 million shares in the most recent figures available.

With today’s news I expect institutional participation in HOTR to continue to increase.

Chanticleer - acquisition

Source: Nasdaq.com

 

There are times to sell a stock, times to average up, and times to average down.

Despite the recent volatility and underperformance in share price, HOTR is a stock I want to own in Q4 and into next year and I added to my position today.


 

Pulmatrix sig.

Disclosure: I own shares of Chanticleer Holdings (HOTR).

I did not receive any payment from any party for this article.

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Chanticleer Holdings logoChanticleer Holdings (HOTR)

Shares outstanding: 14.4 million
Current share price $1.39
Market capitalization: $20 Million

We’ve been following Chanticleer Holdings (NASDAQ: HOTR) closely this year and hit a home run when we encouraged investors to look closely at the restaurateur’s stock at $2.00/share in March (see article).

At the time, the Company had announced its intention to complete an $8.5 million rights offering at $2.00 per share, the proceeds of which would be used to make two acquisitions in the better burger space. The rights offering was completed, the Company made its acquisitions, and over the next two months, the stock soared on enormous volume to over $4.00 in mid-May.

 

Profit Taking + Market Correction = Buying Opportunity

Since the peak in May, HOTR shares have experienced a steep decline as stocks in general, especially micro-cap stocks, have been shredded. As we know, share prices will often swing too far in the negative direction as a result of a sector correcting and profit taking in a particular stock.  Moreover, when this takes place during a period of overall market weakness like we’ve just experienced, it can create a tremendous buying opportunity. We believe this is the case with HOTR shares now, and this article will explain why.


 

Today, HOTR has 52 branded restaurants, including 41 company owned stores (15 Hooters, 7 Just Fresh, 18 in the better burger category – 9 BGR The Burger Joint, 5 American Burger, 4 BT’s Burger Joint) and 12 franchised BGR locations. Chanticleer also controls a 3% ownership stake in Hooter of America, the parent company of Hooters – and HOTR’s CEO, Mike Pruitt, is a Board member of HOA. HOA/Hooters brings in about $1 billion from 412 restaurants.

HOTR recently announced Q2 revenue increased 65% to a record $10.8 million and reported $1 million in positive EBITDA at the restaurant level. Overall GAAP EPS of ($.24) was impacted by about $940K of “unusual and non-recurring items”.

What is really interesting is the recent announcement of the Company’s planned acquisition of the popular Portland-based Little Big Burger (8 locations) as well as HOTR’s deal to increase its ownership in the Australia Hooters locations from 50% to 80%, and lastly to acquire 50% of the Margaritaville in Darling Harbor – a store which management said on the conference call “may very well become our most profitable store in a short period of time.


 

64 Restaurants, Positive EBITDA of $6-$8 Million

Management recently held its first ever investor call in which it provided a business update, spoke about the new rights offering to complete another better burger acquisition, and most importantly provided a number of compelling financial data points. Click here for the conference call transcript.

Chanticleer Holdings August Conference Call Highlights

On a pro forma basis, we expect to begin 2016 with 64 stores having a pro forma annual revenue run rate of more than $60 million and positive Restaurant EBITDA in the $6-$8 million range. At that stage, the contribution of Restaurant EBITDA should allow Chanticleer, on a consolidated pro forma basis, to achieve sustainable positive EBITDA for the first time, a significant milestone for the Company. With 64 stores projected system-wide by end of year, Chanticleer will look much different entering 2016 than when we started 2015. We will be a stronger, more diversified, multi-brand operator with a rapidly expanding fast-casual better-burger business and a platform to expand our franchising model and benefit from ever-improving economies of scale.

Another important element in the conference call was management’s articulation of the business plan and model.

HOTR has management with extensive franchising experience at the parent level (former management of Bojangles, Krispy Kreme and CKE – the parent of Carl’s Jr. and Hardees) and terrific managers who oversee day-to-day in various regions of the US. Given their $50 million of revs, they also have purchasing power given their national contracts with vendors such as Coke, Sysco, Heinz, and Tyson Chicken. So they can typically reduce cost of goods in their acquisitions and immediately improve financial results.

With respect to their acquisitions, they target profitable, proven, small chain restaurants that have strong brand recognition and support in their local market – and no turnarounds. An example is Chanticleer’s BGR The Burger Joint, which has consistently won the best burger award in the Washington DC area, beating out the likes of Shake Shack, Five Guys, and other large brands in that market. The story is to drive growth in regional store count from both new store openings and franchising to increase revenue and to improve operational performance. An example is BGR, which now has 13 franchise restaurants with 80 additional restaurants already committed over the next 5 years.

But there was one more nugget in the call where management stated “We believe our business model allows for multiple avenues in the future creating substantial shareholder value.” One of those avenues may be growing its regional restaurant brands to a size and geographic footprint where it becomes attractive as a stand-alone entity which could be sold, spun out to shareholders or taken public through an IPO. In fact, the HOTR model may best be described as, in part, an incubator of profitable branded fast casual restaurant concepts. This gives HOTR shareholders lots of ways to win…big.

With approximately 20 million shares of common stock outstanding after completion of the rights offering and announced acquisitions, HOTR will have a (very modest) $30 million market cap at $1.50 per share.

Given the financial guidance of annual revenue of $60 million and positive Restaurant EBITDA in the $6-$8 million range – the $30 million market cap is .5 times annual revs and about 4.5 times annual restaurant EBITDA. Both of these metrics are absurdly below all other restaurant comps.

See also: September, 2015 Investor Kit.


 

Positive Forward Drivers in Place

  • Organic growth gaining steam.
    In addition to growth by acquisitions, the Chanticleer Holdings today announced increasing organic growth- see: Chanticleer Announces 7.8 Percent Year-To-Date Comp Store Sales Increase for Fast Casual Restaurants Owned More Than One Year”
  • After a significant pullback in fast casual restaurant stocks, many have recently had a significant bounce from recent lows and the sector may be coming back into favor.
  • Lower gasoline prices results in more discretionary money for consumers to eat out.
  • Wm Smith & Co. issued a research note on HOTR on August 17 wherein it provided a 12 month price of $5.50 for HOTR.
  • Just like when we made our first call in March at $2, the Company is currently in the midst of a rights offering. When the offering is completed on September 18th and acquisitions announced, we believe shares of HOTR will react the same as they did in March. In fact, a rapid 100% gain over a short period of time is both realistic, and in our opinion, quite likely.
  • Given management’s guidance of proforma annual revs of $60 million and positive Restaurant EBITDA in the $6-$8 million range, we believe HOTR will soon become a candidate for institutional interest and research coverage from analyst covering the fast casual restaurant space.
  • The risk/reward of HOTR shares at its current share price is incredibly compelling. HOTR’s shares are trading near an all-time low at the same time when its current operations and proforma financials are at their best. We strongly believe downside risk compared to upside reward is extremely favorable at present.

Conclusion

 Successful investing requires knowing both what stock to buy and when to buy it.

The last sentence in our March article on Chanticleer Holdings was:

“We believe there is a minimum 100% upside from current share price of $2.12 over the next 12 months”

…and HOTR shares doubled by May.

It’s true that history often repeats itself and we believe now is the time to take a new or increased position in Chanticleer Holdings as HOTR shares are likely to strongly outperform once again due to reasons discussed above.


No occurrence is sole and solitary, but is merely a repetition of a thing which has happened before, and perhaps often

–  Mark Twain

Chanticleer Holdings article sig

 

 


 

Disclosure: TFST Publishing LLC and MicrocapResearch.com have been engaged by Chanticleer Holdings (HOTR) as part of the company’s investor relations and corporate development program for $24,000 over a 3 month period. The publishers are also long shares of HOTR purchased in the open market.

Disclaimer

Chanticleer Holdings logo

In March, Chanticleer Holdings Inc. (HOTR) will close on a transformative transaction that will give the company the necessary scale for a rapid growth trajectory and the potential to quadruple its location count over the next few years. Despite this, the company is trading at a significant discount to its peer group.



Overview

Chanticleer Holdings, Inc. (HOTR) owns and operates multiple restaurant brands including HOOTERS® internationally/domestically, American Burger Co. ® and Just Fresh® in the U.S. Chanticleer’s growth strategy is to expand these brands in U.S. and emerging markets through accretive acquisition, franchising, and organic growth.  The Company owns all or part of the Hooters franchise rights to develop and operate Hooters restaurants in South Africa, Australia, Europe, and the Pacific Northwest region of the U.S.

February 2015 Investor Presentation

Share Structure
Shares Outstanding:  7.24 million (pre-February/March 2015 rights offering)
Market Cap: $15.06 million
Insider Ownership: 32.63%
Institutional Ownership: 9%
Public Float: 5.82 million

 


Brand Portfolio

Chanticleer Holdings brands

The company’s brands include:

  • Hooters 11 international locations and 2 domestic locations
  • American Burger Co 6 domestic locations
  • Just Fresh 7 domestic locations

 

 Hooters

Chanticleer holdings hooters logo

Chanticleer owns the franchise rights to develop and operate Hooters restaurants in South Africa, Australia, Europe, and Oregon and Washington in the U.S.
Hooters restaurants are casual beach-themed establishments featuring music, sports on large flat screens, and a menu that includes seafood, sandwiches, burgers, salads, and Hooters original chicken wings. The company originated the “breastaurant” category with its skimpily dressed all female wait staff called “Hooters Girls”. Given Hooters created a new restaurant category, it is an iconic brand name.

Chanticleer currently owns and operates in whole or part of 13 Hooters restaurants in all of its territories including five in South Africa, four in Australia, one in Hungary, one in England, and two in the U.S giving the company an established infrastructure in South Africa, Australia, and Europe to grow it network.

Chanticleer grew its Hooters network organically and through acquisition. The company opened nine locations and acquired five locations. The company’s international acquisition strategy started with Hooter’s in Nottingham England in November 2013. The company then purchased a Hooter’s in Portland, Oregon and a Hooter’s in Tacoma, Washington in a combined transaction in January 2014. In June 2014, the company acquired a 60% stake in Hooters restaurants in Parramatta and Penrith, Australia.

It’s also worth noting that as a result of recent strong gains in the value of the U.S. dollar versus foreign currencies, costs to open new stores internationally have declined. As a result, management expects the cost of opening their newest Australian and South African stores to come in “well below” their initial planning.

 

Chanticleer Holdings - hooters locations

Chanticleer also owns a 3% interest in Hooter’s of America. At the end of July 2013, Hooters of America owns 160 restaurants and operates or franchises over 430.


 

American Burger Co.

Chanticleer Holdings American Burger Co

In September 2013, Chanticleer acquired American Roadside Company, now American Burger Company. The company offers a “Made in America” menu that includes premium beef burgers, sandwiches, salads, side items, milk shakes, and beer and wine. Chanticleer recently acquired The Burger Company restaurant in Charlotte, NC, which has a similar concept becoming ABC’s sixth location. American Burger Co. has six locations including one in Smithtown, New York, three in Charlotte, North Carolina, and two in South Carolina. This fast casual concept provides the company with an established brand and tremendous room for growth. The average American Burger does $800,000 in revenues per year.

 

Just Fresh

Chanticleer Holdings just fresh logo

In September 2013, Chanticleer made its initial investment of 51%, which has since grown to 56% ownership, in JF Restaurants, LLC and JF Franchising Systems, LLS. The company operates a chain of seven restaurants throughout North Carolina, under the Just Fresh name, with the first location opened in 1994. The menu consists of fresh, health-conscious items such as salads, wraps, sandwiches, soups, freshly baked items, and smoothies. Just Fresh provides customers with a fresher, more nutritional diet. Just Fresh attracts customers due to its foods positive effect on physical health and overall wellness. The average Just Fresh does $800,000 in revenues per year.

This concept is completely different from Hooter’s and American Burger Company providing diversification as well as tremendous growth opportunities.

 

Pending Acquisition of BGR: The Burger Joint

 Chanticleer Holdings - BGR logoOn February 18, 2015, Chanticleer announced an agreement to acquire BGR: The Burger Joint, with expectations for the acquisition to close on or around March 15, 2015.  BGR: The Burger Joint is a better burger concept with a menu focusing primarily on its proprietary blend of Prime, dry-aged burgers grilled over an open flame. BGR’s buns are baked fresh by local bakers and they use fresh vegetables prepared in store. BGR was voted #1 Burger Restaurant by the Washingtonian and #1 Burger Patty by the Washington Post. BGR currently has nine corporate owned locations, eleven franchises including one international location in Kuwait, and over eighty franchise locations under development agreement almost equally split between domestic and international markets.

This acquisition will increase Chanticleer’s company owned restaurant count by 33% while increasing the company’s presence in the fast growing fast casual segment. BGR’s burgers are highly acclaimed. Its model of using Prime, dry-aged burgers grilled over an open flame and sourcing freshly baked buns from local bakers is transferable and can be a differentiating factor for the company. The average BGR restaurant does $1.5 million in sales per year.

Rights Offering

To fund the acquisition of BGR, continuing operations and future restaurant openings, Chanticleer is currently undertaking a rights offering (subscription period ends March 13, 2015). We believe the cash from the rights offering will provide ample resources for growth as the BGR acquisition will only cost approximately $5 million while the offering is expected to raise a net amount of $15.64 million.

 


 

Growth Strategy

Chanticleer has been growing rapidly both by organic growth and acquisitions, as illustrated below.

Chanticleer Holdings growth

 

The closing of BGR: The Burger Joint will bring its total number of restaurants to 48.

 

Chanticleer also plans to continue to expand the Hooters brand internationally. The company has exclusive franchise rights to develop and operate Hooters in South Africa with Durban, South Africa being Chanticleer’s first location. The company currently has five locations in South Africa with a six location re-opening in Cape Town in mid-2015. The total market opportunity in South Africa is fifteen locations or ten additional locations.

In Australia, Chanticleer has a JV agreement with existing Hooters franchisee. The company has 60% interest in four restaurants in Australia, with one more opening in early 2015. The company believes the total market opportunity of fifteen restaurants.

In Europe, Chanticleer currently has two locations, one in the England and one in Hungary. In Eastern Europe, the company owns 80% of Crown Restaurants collaborating with Crown Restaurants’ CEO Alex Hemingway. Mr. Hemingway previously worked as President and CEO of CEFG, owners and operators of Pizza Hut and KFC brands in Hungary. The company is evaluating two more locations in England and one in Poland. The overall market potential in Eastern Europe is eighteen restaurants.

Chanticleer has two locations in Oregon and Washington and sees a potential to add three more locations.

The Hooters locations are particularly attractive opportunities due to the high sales per location. Over the past two years, the company has acquired five Hooters locations (two in the Pacific Northwest, two in Australia and one in England). The total acquisition price for these five locations was $12.8 million with $12 million in annualized sales acquired or an average of $2.4 million in sales per location.

 

Acquisition Strategy  Providing High Revenue Growth + Bottom Line Improvement

The acquisition strategy has been effective in driving overall sales while reducing SG&A expenses per location. Chanticleer is able to acquire locations and leverage the existing administrative infrastructure to reduce selling, general and administrative expenses and create significant operating leverage. A previously large impediment to profitability has been the large SG&A relative to the revenue base. As illustrated in the chart below Chanticleer Holdings continues to grow its top line much faster than its SG&A, leading to a fall from 84% of sales in 2011 to 15% of sales at the end of Q3 2014.

Chanticleer Holdings G&A Expense

SG&A per location has decreased from $1.15 million at the end of 2009 to $229,230 in Q3 2014.

For the 3 months ending 9/30/2014, revenue jumped to $9.6 million, up from just $1.6 million for the same period in 2013.  Additionally, earnings improved from a loss of (.38)/share to a loss of (.08)/share for the quarter (see SEC filing). This was also the first quarter of adjusted EBITDA profitability for Chanticleer Holdings.

Chanticleer Holdings Earnings Growth vs. Industry Average

 (source: Nasdaq.com)

 


Valuation

Chanticleer is significantly undervalued relative to peers and asuming a median Price/Sales of its restaurant peer group, there is 110% upside. This does not account for the significant growth the company will see over the next few years or the value of iconic Hooters Brand.

Chanticleer Holdings valuation

Given Chanticleer’s growth potential and the transformative nature of the BGR acquisition, it is more appropriate to look at the growth of Chanticleer over the next few years.

We believe the table below illustrates very realistic targets for Chanticleer with regard to location openings as well as revenue per location figures.

Chanticleer Holdings Revenue per location

 

The Bottom Line

We believe HOTR shares are heavily undervalued based on the combination of recent strong revenue growth and the concurrent, dramatic decline in SG&A expenses/location, the pending receipt of approximately $15 million in cash from rights offering, and the pending acquisition of BGR: The Burger Joint. We believe there is a minimum 100% upside from current share price of $2.12 over the next 12 months.

Microcapresearch.com Gary Anderson


 

Disclosure: The publishers of MicrocapResearch.com are long shares of HOTR purchased in the open market.
MicrocapResearch.com to receive $20,000 from Chanticleer Holdings Inc.

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Our December picks gained an average of 76% by the end of February! 

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