THE ONE GROUP HOSPITALITY STKS
September 28, 2018 - 2:39pm EST by
jm671
2018 2019
Price: 3.30 EPS 0 0
Shares Out. (in M): 28 P/E 0 0
Market Cap (in $M): 91 P/FCF 0 0
Net Debt (in $M): 11 EBIT 0 0
TEV ($): 103 TEV/EBIT 0 0

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  • Going to Zero

Description

The One Group Hospitality (STKS) reminds us of Jason Industries which we wrote up earlier.  Both were spacs, where management did not perform, investors and sell-side analysts bailed and the stock plummeted, driving the company deeper into microcap land.  Then new management came in and made significant changes but it took a while for the investment community to notice/care.  Investors are starting to notice STKS.  The stock is now up 44% YTD and there are several recent 13D filers (including another one today).  This is an illiquid stock that is moving quickly so we’d suggest anyone genuinely interested in the name contact the CEO (Manny) who is very responsive to investors. 

STKS operates upscale, high energy steakhouses that “cool” people such as VIC members frequent.  STKS has approximately 34 venues which include 29 restaurants and 5 hospitality services (for hotels/casinos).  The units are located in premier locations such as  NYC, South Beach, Orlando, Chicago, Atlanta, Denver, LA , Vegas, San Diego, Toronto, Londo, Ibiiza, Dubai, Mexico City and Milan.  We believe there are significant opportunities to grow the footprint (without much capex) since there are plenty of cities throughout the world that might be interested in having an STK restaurant since relative to other traditional steakhouses, STK is more female friendly and has a more social vibe with music, etc. 

Last October the Board appointed Manny Hilario, a Board Director, to CEO, replacing Jonathan Segal who became Executive Chairman.  Manny is a true operator (as opposed to his predecessor who was more into the “scene” and less into the numbers).  Manny had most recently been CFO of Sizzling Platter, a restaurant platform focused on adding and scaling segment leading brands.   Before joining Sizzling Platter, Mr. Hilario served as COO for Einstein Noah. He previously had served as CFO for Einstein Noah Restaurant Group, Inc., McCormick & Schmick’s Seafood Restaurants, Inc., and Angelo and Maxie’s.

The company is in the process of transforming into an asset-light company with the goal of owning fewer restaurants and managing/licensing more restaurants.  Manny has also done a very good job of improving the performance of the existing units, reducing corporate overhead and preparing the company for growth.

 

US Same store sales have been quite strong reflecting…

            Q1 2017                      2.6%

            Q2 2017                      1.7%

            Q3 2017                      1.9%

            Q4 2017                      6.0%

            +++++++++++++++

            Q1 2018                      7.3%

            Q2 2018                      7.5%

 

And Adjusted EBITDA has seen a dramatic increase…

Q1 2017                      51%

            Q2 2017                      34%

            Q3 2017                      75%

            Q4 2017                      61%

            +++++++++++++++

            Q1 2018                      12%

            Q2 2018                      70%

 

 

 

STKS’s growth will come in four forms:

1)       Opening 3-5 new restaurants per year (mostly non-company owned) to capitalize on an expected short term 150 unit market opportunity.  The economics of opening a new unit are very attractive and are laid out in the investor presentation.

2)       Increasing hospitality business as hotels and casinos are increasingly looking to exit that business and have another party take responsibility for it.  STKS is targeting 1-2 new agreements per year.

3)       Operational improvements – Increasing SSS (volume and pricing), increasing store efficiency, buying better (now that the company is de-levered) it can get better terms from vendors.

4)       Other – The company has a HQ in an expensive NYC market and may ultimately move to a cheaper location.  In addition, the company will likely refinance some of its expensive debt ($6mm at 10%).

 

The company expects Adjusted EBITDA of $10 – 10.5  million this year (growing significantly next year) derived from

            Owned Unit                            7.5-8 mm

            Mang fees/incentive                11.5

            Corporate                                (9)

            Adjusted EBITDA                 $9.5 mm

 

 

Based on our conversations with management, we conservatively believe free cash flow for 2019 should approximate:

Adj Ebitda                              $13 million

Interest                                    (1)

Capex                          (3)

Taxes                           (1)

Free Cash Flow           9

 

For an equity market cap of only $85 million dollars , this seems cheap on an ebitda or free cash flow basis.  (note there are some warrants/options not included in my calculations that I can’t calculate as I sit on this delayed airplane)

This ebitda/free cash flow number may be quite conservative since it doesn’t include much benefit from a debt refi or from some potential cost savings.  EBITDA will increase in 2019 from improving restaurant operations, the full year contribution of units opened in 2018 and new unit openings in 2019. 

 

The latest investor presentation can be found at https://ir.togrp.com/presentations

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Increasing investor awareness from conferences, hitting 52 week high, 13d filings.  Also improving profitability will make it screen better and debt refinancing may be an additional catlayst

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