New Position: Comptoir Group (COM)
Previously a struggling Lebanese restaurant group that now is being turned around and has some interesting growth prospects
Buy dates : various in late January 2024
Buy price : c 7.5p
I started following Comptoir in the depths of COVID during 2020. Back then, it was more of a boredom driven fascination about whether it would go bankrupt and cease to exist. I’d dined at their restaurants a few times before COVID, and always thought they were mediocre. Indeed, their financial performance for 2018 and 2019 bears that out.
So I was surprised when I saw in 2023 that they were still alive and kicking. They came back on my radar when I read about the founder (still controlling 45%+ of shares) ousting the CEO and Chairman, quite publicly. Surely, if they managed to keep Comptoir surviving through the pandemic, they’d done a good job?
I also decided to check out their food again. I believe they rolled out substantially refreshed new menus in 2023, so this was a chance to see if things had changed. I visited one Comptoir Libanais and one Yalla Yalla in the second half of 2023. Both times I got an above average meal, and thought them decent value for the prices paid. Nothing to shout from the rooftops, mind you, but solid enough for a chain. I’m somewhat of a food snob, so my expectations/tastes are higher. Think Coal Office in Kings Cross as my standard for Middle Eastern style food. But I can see this being a dependable, reliable chain for the masses.
The other thing is that I have noticed, in foodie circles, an increase in interest in Middle Eastern food. Mainly Israeli restaurants capitalising on this, but it wouldn’t be too difficult to imagine Comptoir and Yalla Yalla capitalising on this trend, given their similarity in dishes and cuisine.
The fresh new management
I always like situations where new management comes in, especially in a share that investors have dismissed in the past and either bargepoled or lost interest. Comptoir is definitely under the radar - tiny small cap (£8m), big disappointment in the past, and in an unloved sector at the moment.
Last summer, the founder ousted the CEO and Chairman, and installed new people. Both of them seem the right type of calibre to execute a turnaround, having worked on growing successful food formats in the past. The sweep-out has just been complete, with the old CFO departing Jan24, still to be replaced.
Does the business model work
So far, the jury is still out. The HY23 results still showed an LBT, but not major at -£0.8m. I suspect H2 would see sequentially better trading, especially as it seems that the all important December season has done rather well for the industry, and also the lack of train strikes (Comptoir is very concentrated in city centre locations). I wouldn’t be surprised if they had a profitable second half.
The first half was also impacted by huge rises in utilities, raw ingredient inflation, wage inflation. But second half has been more stable, with some reversals in inflation. Looking forward, the living wage increase in Apr24 will be an issue though.
While the company hasn’t issued a trading update for H2 yet, the fact that they pulled the trigger on a new flagship branch on the Southbank in London (Dec23) suggests that internally, they are happy with their operational performance in H2.
I’m expecting plenty of closures in the mass-market dining space in the next few months. The overall industry has been suffering in the past year; you can see it from the various industry stats published. Comptoir has managed to survive, and in fact management seem to think they have outperformed the market in H1. If that is the case, then the going will be easier in 2024, with less competition, and inflation less of a threat.
Growth Opportunities
On their existing estate, they are taking the opportunity to exit underperforming sites. And there are probably a few more of them, given the difference between lease liabilities and right-of-use estimates on their balance sheet. It seems that they have been able to exit a couple of leases over the past two years, but nothing to indicate they can accelerate this in the coming year or two. The last annual report stated that they have leases ranging from 1 year to 19 years, but no indication of the distribution/breakdown which would have been useful.
However, I was intrigued to see that they are confident enough to have opened a new branch in H2-23 (Ealing), and bold plans for a big new flagship branch on Southbank in Easter-24. If they were truly struggling to get their ship in shape, expansion plans would be on the back-burner. Management must think they are on the right track and have momentum on their existing estate to get back to profitability, to even think about new openings.
The other major growth engine which excites me, is the franchise opportunities. Their longstanding partner, HMHost, opened a few new ones in 2022-2023, and they seem to be doing very well. They have also signed up a new franchising partner, AREAS, with the first site opened (Milan Airport). This could be a high-margin way for Comptoir to get growth over the next few years, as it looks like the initial outlets (6 in total) have been successful enough as a case study.
The downsides?
Comptoir is not all roses though. I do have some serious doubts still, but the bull case and opportunity for me outweighs the risks by a margin.
Comptoir has low liquidity, high concentration of shareholders. There will be a risk of a take-private, delisting. However, the founder hasn’t done so, even when the share price was lower in the depths of COVID. There is now a decent sized institution, Dowgate, which I don’t think would be happy with a delisting and holding private shares.
While I’m bullish that the H2-23 results will show potentially a return to profitability, this is still an open question mark on the business model. Have they done enough to get them back to a thriving business, rather than the struggling one pre-COVID?
Expansion will require capital, but luckily they have somewhat of a decent pile of cash available for capex, and a solid NTAV (5.5p+ per share) balance sheet to convince landlords they are credit-worthy. So I think the risk of equity dilution is low, but if they decide to really go gung-ho on new venues, they might tap the markets for a discounted placing.
Opportunity
Really hard to calculate, given we do not know what level of profitability they can achieve, and how big their estate can grow to. For this type of situation, I typically think of back-of-the-envelope calculations. Say they get back to profitability, provide on a site-level basis a healthy EBITDA. Investors buy into the growth story - that they can roll out new units every year. There is value in the brand. I take Franco Manca (Fulham Shore) as a case study. In the peak of the mania around them, their market cap valued each existing site at well over £1m each. At Comptoir, it is only c£400k at the moment (excluding franchises for simplicity). Even if I assume a ceiling of £600k/site valuation, which seems very conservative in a bull sentiment situation, that is still a 50% return entering at the current market cap.
I’ve decided to take a small position here, given the low liquidity and the dominant shareholder risk. c2% of my total funds.
Update 02/Mar:
Had a chance to refresh my analysis, digesting the Trading Update at the end of Jan. It was very brief on details, but here are my two cents:
- H2 revenues increased a nice +13% YoY. Probably boosted from a non-disrupted xmas trading period.
- Net cash at £5.4m lower than at HY, which shouldn't be given H2 is operationally more profitable, and just after the Xmas period. However, they have spent capex on the new Ealing restaurant, and also probably spent some money on the new Southbank flagship too. Need to see full results to know operating cashflow.
- Management still stating "confidence" and "expand and grow" for the year. Which suggests that they are still very comfortable with trading
- No mention of upcoming minimum wage increase in April and implications. IMO it will take a sustained revenue YoY growth rate of 5-10% per site, to adequately mitigate. A tall ask as the overall dining out sector is still struggling, according to industry stats.
- No mention at all of progress with franchising, ROW. Which I think is one of the key opportunities for Comptoir.
Conclusion: I'm happy with my position sizing for now. No urge to buy more, and no urge to sell based on current knowledge. Nicely NTAV backed, 5-6p worth. Think they have a format that could exploit increasing desire for middle-eastern food, modern style, that is mass-market accessible. I'm continuing to hold till results!