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.
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
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
The company’s brands include:
- Hooters 11 international locations and 2 domestic locations
- American Burger Co 6 domestic locations
- Just Fresh 7 domestic locations
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 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.
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.
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
On 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.
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.
Chanticleer has been growing rapidly both by organic growth and acquisitions, as illustrated below.
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.
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
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.
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.
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.
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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