The Clapham House Group (CPH) (UK)

Important: What follows is not a recommendation to buy or sell The Clapham House Group. I’m a private investor, storing and sharing notes. Read my disclaimer.

Name: The Clapham House Group
Ticker: CPH
Listed in: London (AIM)
Business: Restaurants
More information: Digital Look / Google Finance
Official Site for Investors: The Clapham House Group

Key numbers for The Clapham House Group (7/11/08)

Share price: 53.5p
Market cap: £19.60 million
Debt: Approximately £12 million
High/low (12 months): 321.50p / 53.50p
P/E (08/09/10): 4.5 / 8.5 / 6.6
PEG (Latest/Forecast): 0.2 / 0.3
Yield: 0%/0%

The Clapham House story

My discovery of The Clapham House Group began several years ago, when I ate the best burger of my life near Clapham Junction, South London. The chips weren’t bad either, and the milkshakes – generous, multi-flavoured, served in a proper silver milk shaker – were to die for.

“This joint, The Gourmet Burger Kitchen, is going to be huge,” quoth I. “If I ever got the chance to invest in something like this, I would in a flash.”

A short while later I got to invest in something exactly like The Gourmet Burger Kitchen (GBK), when it was acquired by The Clapham House Group, a new London-listed company headed up by David Page, the former bigwig behind the hugely successful (and once quoted) Pizza Express. Page was going to make The Gourmet Burger Kitchen the new Pizza Express, with a Gourmet Burger bar in every town in the country and so on.

For some reason, Clapham House also bought an Indian delivery chain called The Bombay Bicycle Club (nice, but overpriced) and The Real Greek (mezze food, which I never fancy myself). Neither set the world alight. It also bought Tootsies, a sort of family-friendly rival to GBK, frequented to my eye mainly by estranged parents putting on a brave face for Sunday breakfast with the kids.

I bought some shares on a dip, the expansion rolled on, and for a while the shares did very nicely, netting me a three-bagger, if I remember correctly, when I sold out most of my holding at around £2.50. I was prompted to do by a new GBK I spotted in the Brunswick centre in London, which was tucked away down a side alley, whereas previous sites had occupied good positions for passing trade.

As recession fears mounted, the shares have kept falling, particularly after a profit warning at the start of the year.

Today: Slimmed down, and selling well

Fast-forward to today, and the shares now look on the surface a bargain. The loss-making Bombay Bicycle Club has been sold off for £4.4million. The long-term aim is still 150 Gourmet Burger Kitchens. And the latest AGM statement outlines the new Clapham House:

Your Board is pleased to report that trading has continued to be satisfactory in the second quarter of our financial year. Today we operate from 82 locations: 53 Gourmet Burger Kitchen (“GBK”) restaurants (45 in the UK and 8 under franchise internationally), 23 Tootsies / Dexters restaurants and 6 The Real Greek (“TRG”) restaurants.

Over the last three months, a number of marketing initiatives have been introduced. Sales at our GBK restaurants have responded particularly well; sales at Tootsies have been satisfactory with the impact of the poor summer weather on the 23% of covers outside mitigated by an improved performance at several of the shopping centre restaurants; TRG’s central London locations have traded well.

We believe that recent trading in the current economic climate confirms that the positioning and price point of our brands remains very attractive to a wide range of customers, offering high quality products but at affordable prices.

In addition to executing ongoing marketing campaigns across the portfolio, we have intensified the management of our supply chain and have revisited all arrangements with a view to achieving increased efficiency and scale savings whilst protecting the quality of our products. We monitor all costs extremely carefully on a continual basis.

Thanks largely to GBK, The Clapham House Group turned profitable in 2007 (by some measures, and it’s still loss-making by others). Forecast earnings (according to Digital Look) for the year to the end of March 2009 are 6.33p per share, rising to 8p to March 2010: a lot of earnings for just 53.5p, putting it on a prospective PE of 6.6. How much you choose to believe such estimates going into a fierce recession is another matter.

Tucking into the Annual Report (from March 2008)

I decided to download the latest annual report, which is current for trading until the end of March 2008 and outlines some details until the end of August, for a closer look (remember these figures will include takings from The Bombay Bicycle Club, which makes comparisons difficult):

Financial highlights:

• Revenue up 30% for the year to £59.5m (2007: £45.9m) driven by strong organic growth
• Headline EBITDA up 52% for the year to £8.9m (2007: £5.9m)
• Headline profit before taxation up 30% for the year to £4.7m (2007: £3.7m)
• Headline diluted EPS up 27% to 11.8p (2007 : 9.3p)
• Restaurants operated at year end up to 96 (2007: 72)
• Net debt as at 30 March 2008 of £16.0m (2007: £9.5m)
• Statutory loss before taxation of £1.0m (2007: profit £1.5m)
• Statutory diluted loss per share of 4.6p (2007: EPS 3.2p)

Operational highlights:

• Continued successful expansion of the GBK business – 21 new restaurants
  opened in the UK in FY08
• Tootsies sales stabilised following introduction of new management,
  new menus and sales promotions

Director-speak:

• “We are pleased to observe that rental and premium prices are now becoming more realistic than they were six months ago. However, we believe that over the next year there will be further realignment in property costs and it will remain our policy not to enter into over-rented leases. “
• “We remain convinced of the strong and profitable expansion potential for GBK in the UK, with our latest restaurant at Baker Street, London, performing very well since opening in May 2008. Our openings this year for GBK will be focused on major UK cities and high footfall developments such as Liverpool and Westfield London in White City. “
• “In December 2007, we made the strategic decision to reduce our opening programme for the financial year 2008/09. Whilst we are continuing to grow and expand of our businesses we believe that this cautious approach is wise in the current economic climate. We do remain highly positive about the mid term market prospects for our brands and the UK eating out market. “

Big negative: Clapham House’s debt

The most glaring problem, and the reason perhaps for the low share price, is Clapham’s debt burden, which currently stands at £12 million, according to the AGM statement of September 2008, following the disposal for £4.4 million of the Bombay Bicycle Club. Debt is not what you want in a credit crisis.

According to section 19 of the accounts (which were compiled before the Bicycle Club sale, remember), Clapham House then had £19 million in bank loans, which will mature between 1 and 5 years from now.

The next page explains that 50% of the long-term loans are on fixed rates, up from 0% last year, which suggests management is sensibly looking to lock down its exposure in today’s difficult climate. On the other hand, average interest rates paid went from 6.07% to 7.64%.

As mentioned, debt has been reduced by £4.4 million, but I still see two risks going forward:

1. Some proportion of these loans become due during the credit crisis, and Clapham House finds it difficult to refinance them
2. Trading turns down due to the recession, and company struggles to meet its debt commitments

This is the horror of debt in difficult times (everyone wants it when the going is good).

That said, well-managed companies with good cashflow can usually carry a fair bit of debt in normal times, which means (2) isn’t too much of a worry for me, personally, when it comes to Clapham House. But I have no idea as to the likelihood of (1) being a problem. This is a serious mark against the company when it comes to my investing in the current environment.

Positives: Youth market, director options, rolling out the right brand, Nandos

All this talk about debt, not burgers, is not fun. The reality is I think it’s very difficult for a private investor to judge the danger of debt held by a company right now, which means the safest policy is to shun it! (I may drop an email to the finance director and ask about it; I’ll update here if I do).

While I won’t be investing in Clapham House for now due to the debt, I see many positives:

• The 50-odd GBKs in existence should now pump money into the company for minimal capital expenditure.
• GBK targets a younger market with more affordable food. It’s my view that unless unemployment turns substantially higher, this demographic will be least affected by the credit crunch. (They don’t own houses, or shares). That said, it’ll be interesting to watch the progress of the City branches to see if the fallout there affects trading.
• The burgers are still great, and the spate of imitators could fall away once the recession kicks in.
• Management says rental leases are becoming more realistic, which should help it secure better sites.
• I think the directors are at last realizing GBK is really where the money is. (Get rid of the other two chains and we’re away!)
• The directors have been granted a tonne of options, which is normally not something I like (I’d rather they simply owned shares, which indeed the Chairman David Page does). In this case, however, as best I can tell the options are generally deeply underwater due to the big fall in the share price, which may encourage management to row harder.
• The baby steps towards international franchises could give two bits of the cherry from the same brand development.
• Ignoring debt, the fundamentals look great from a PE and PEG perspective. Though there’s not even a token dividend, which I like even in growth shares.
• Food and fuel costs coming down.
• Finally, it’s worth noting that Capricorn Ventures International, the owner of Nando’s, held 24.93% of the shares at the time of the annual report, making it by far the biggest shareholder. At what level would bid potential support the price?
• The Telegraph seems to like Clapham House: “In difficult times shareholders should welcome a cautious approach and the experience of Clapham’s management (Page ran the Pizza Express chain for 10 years) suggests investors are in good hands.” It says buy.

Negatives: It’s the economy, stupid

Besides that debt, I see the vague but substantial problems:

• Clapham House Group is a consumer facing stock when we could be entering a 1930s depression, according to some (it’s certainly going to be tough)
• The brand could grow tired during a recession before its potential is achieved (I remember queuing for ‘all you can eat pizza’ in the early 1990s – yes, youngsters, queing in the street! Things change)
• Aggressive promotions between restaurants will hurt margins – I barely go a day without getting emailed a special offer from Yo Sushi!, for instance

I won’t be buying Clapham House Group just now

Restaurants are tricky – for every McDonalds or Kentucky Fried Chicken there’s hundreds who come and go over the years. GBK, the key franchise under consideration, is more in the upmarket Pizza Express mould, but even therein is a cautionary tale, with that company ultimately coming a cropper when lean growth was replaced by bloated costs several years ago. (It’s no longer a listed company).

I’d like to get into Clapham House again though, at the right price. Without the debt, I’d be happy to risk buying now, even in the face of a recession, and look to exit if/when the shares were re-rated to a PE of about 15 (a share price of about £1, on current earnings), unless I saw excellent and predictable growth prospects in the future.

To my mind, management should divert cashflow to paying down debt for 12 months or so, and forget about expansion for a while. Certainly, until the credit crisis abates and we see headlines of banks lending freely to businesses, if not customers, this burger is going on the back burner for me.

Note: Monevator takes no responsibility for the accuracy of this post. Read my disclaimer.