Chanticleer 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.
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
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.