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Chanticleer Holdings, Inc. (NASDAQ: HOTR, Target Price: $5.00)
Investment Highlights Proposed acquisition of The Burger Joint
(BGR) drives growth Chanticleer Holdings, Inc. (NASDAQ: HOTR,
Chanticleer), a fast-growing restaurant operator headquartered in
Charlotte, NC, announced its intention to acquire BGR: The Burger
Joint (BGR), a better burger concept well-known in the Maryland /
Washington DC / Virginia area. The is the latest in a series of
strategic moves increasing Chanticleers presence in the better
burger category an area we see as both having high growth potential
and being-well matched for the companys experience. The better
burger space is a high growth segment within the $34.5Bn fast
casual restaurant industry, with an estimated market size of
$2.4Bn. Upon closing, the acquisition will increase Chanticleers
restaurant holdings by approximately 20 locations with 80 franchise
locations under development, providing a scale that should enable
continued cash flow leverage for the company. Chanticleer a unique
high growth restaurant business Chanticleer owns and operates 26
restaurants from multiple restaurant brands domestically and
internationally, including the Hooters brand, American Burger
Company, and Just Fresh. Led by highly experienced management team,
Chanticleer has executed on its plan to grow its Hooters footprint
at home and abroad while making steady improvements to core
profitability. Indeed, in 3Q14 Chanticleer reported revenues that
were up over 472% from the year-ago period while achieving its
first quarter of management-defined adjusted EBITDA profitability,
which includes management fees and dividends to related to its
ownership in Hooters of America. Chanticleer is the only publicly
traded equity offering exposure to Hooters of America, which has
approximately $1Bn in annual revenues operating 430 Hooters
restaurants within 28 countries. Chanticleer controls a 3% minority
interest in Hooters of America, and received a $0.5mn distribution
last August from its interest in Hooters of America. Further, HOTR
CEO Mike Pruitt sits on the Hooters of America Board of Directors.
We see the companys interest in Hooters of America as a strategic
asset, and think that it could be a hidden asset representing just
under half of the companys market capitalization. 2015 off to a
powerful start Chanticleer has begun 2015 with a flourish. The
company has been one of the best performing stocks in our coverage
universe, with shares up 22.5% year to date after closing at $2.12
on February 28, 2015. After news was reported of a possible sale of
Hooters of America in January, Chanticleer has added several key
milestones of its own making, including a capital raise via of
rights offering at $2.00 per share, and a bold announcement that
the company sought to reach 50 locations by year-end 2015. The
company began accepting subscriptions for its rights offering for
holders of record on February 26, 2015 and will continue to do so
through March 13, 2015. On the unit growth front, with the pending
acquisition of BGR, the company is well on its way to achieving its
goal of at least 50 units by year-end 2015. We note that our 2015E
estimates do not include the acquisition of BGR; which we believe
could add at least $10mn to the top line.
Maintaining estimates and price target We are maintaining our
price target for Chanticleer at this time. We plan on revisiting
our valuation and forecast after the company completes its rights
offering, releases 4Q14 results, issues guidance for 2015, and
finalizes the BGR acquisition. Our price target of $5.00 represents
potential upside of 135.8% from the recent price of $2.12 on March
2, 2015.
Equity |Services/ Res tauran ts
Stock Details (3/2/2015) NASDAQ HOTR
Sector / Industry Services / Restaurants
Price Target $5.00 Recent share price $2.12
Shares o/s (mn) 7.2
Market cap (in $ mn) $15.3
52-week high/low $5.24/$1.40 Source: Bloomberg, SeeThruEquity
Research
Key Financials ($mn, unless specified)
FY13 FY14E FY15E
Revenues 8.2 32.2 43.6 EBITDA (4.0) (2.6) 1.4
EBIT (4.6) (4.3) (1.0)
Reported net income (5.2) (5.0) (2.4)
GAAP EPS (1.19) (0.77) (0.28)
Source: SeeThruEquity Research Key Ratios
FY13 FY14E FY15E
Gross margin (%) 63.2 66.6 67.1 Operating Margin (%) (55.9)
(13.2) (2.2)
EBITDA margin (%) (48.3) (8.0) 3.3
Net margin (%) (63.2) (15.6) (5.5)
P/Revenue (x) 1.9 0.5 0.4
EV/EBITDA (x) NM NM 16.4
EV/Revenue (x) 2.8 0.7 0.5 Source: SeeThruEquity Research
Share Price Performance ($, LTM)
Source: Reuters
Special Update: Chanticleer Holdings, Inc.
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Powerful Synergies from proposed acquisition of The Burger Joint
(BGR) On February 18, 2015, Chanticleer announced plans to acquire
The Burger Joint (BGR), a better burger concept
known for its proprietary blend of prime dry-aged burgers
frilled over an open flame. BGR was voted the #7 burger chain in
the United States by The Daily Meal and MSN.com, and the Number 1
Burger Patty by The Washington Post. In addition to its proprietary
patty blend, BGR uses buns bakes fresh by local bakers, and fresh
vegetables prepared in the store.
With 20 locations and 80 franchise locations under development,
the acquisition of BGR would go a long way towards Chanticleers
goal of surpassing 50 corporate locations during 2015. The company
currently has nine corporate-owned locations, with a heavy presence
in the Maryland / Washington / Virginia area, as well as eleven
franchises including one international franchise in Kuwait, and 80
franchises in development, roughly an even split between
international and domestic locations.
Chanticleer will purchase BGR for approximately $5mn consisting
of cash and stock. The deal is expected to close by the end of
March, and BGRs chief executive will stay on with the combined
company. The purchase price will be comprised of $4mn in cash and
shares of Chanticleer stock equal to $1mn in aggregate.
In our view, BGRs business profile complements Chanticleer
extremely well, as Chanticleer has experience taking America
concepts abroad as well as growing exposure in the better category
through its prior acquisitions of American Burger Company and The
Burger Company. The better burger category has performed well for
Chanticleer thus far, with sales in its six existing burger
restaurant units representing approximately 20% YoY of the companys
sales in the past year and contributing positively to Chanticleers
pro forma operating profits. Our estimates do not include BGR, but
we expect given the unit count and size of the company that it
would have the potential to add at least $10mn to the top line.
The market opportunity for better burgers is large and growing
quickly. The better burger space is a high growth segment within
the $34.5Bn fast casual restaurant industry, with an estimated
market size of $2.4Bn. Fast Casual dining blends high quality food
with convenience in a more upscale environment than fast-food, at
affordable prices. Recent IPOs in the space including Habit Burger
(HABT) and Shake Shack (SHAK) prices at greater than 15x 2015E
projected EBITDA, and in our view Chanticleer should justify at
least these multiples given its powerful growth prospects.
Rights Offering to Fund Dramatic Growth as Chanticleer doubles
its restaurant count in 2015
Chanticleer began the subscription period for its rights
offering last Thursday, February 26. Eligible shareholders of
record will be able to purchase up to 8.5mn shares of Chanticleer
stock through the rights offering subscription period, which
expires Friday, March 13, 2015. The rights offering price is $2.00,
a 10% discount to the recent close of $2.20 on February 28,
2014.
In our view, a successful rights offering would be a
significant, positive milestone for the company, as we have felt
the biggest potential hurdle for the companys growth plans would be
access to continued growth capital enabling Chanticleer management
to execute as the company scales.
If fully subscribed, Chanticleer plans to use the proceeds to
increase its restaurant unit count from 26 at the end of 2014 to
over 50 locations over the next twelve months which would nearly
double the total count. This is a significant increase for
Chanticleer, one that has the potential to enable the company to
expand margins meaningfully as it reaps the benefits of scale.
Although the current valuation appears low for Chanticleer to
offer new equity, in our opinion, the offering will enable to
aggressively pursue what appears to be very attractive
opportunities to invest growth capital. Further, by pursuing a
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rights offering, the company should be able to raise up to $17mn
in new capital while preserving its healthy net operating tax loss
carry-forward (NOL) balance of $18mn.
Potential proceeds from rights offering to accelerate growth
Gross Proceeds from the rights offering could possibly be as
much as $17mn for Chanticleer, assuming an additional 8.5mn shares
with an exercise price of $2.00. We calculate the new shares
outstanding after the offering will be approximately 16.1mn.
We expect the proceeds will most likely be used to fund the BGR
acquisition, for general corporate purposes, to fund internal
growth opportunities, and to make future acquisitions.
We note that according to its S-1, if HOTR is able to raise at
least $7.5mn from the rights offering, then management expects it
will have sufficient proceeds to make an additional, smaller
acquisition in the better burger space, as well as opening costs
for at least three new international Hooters locations. We would
expect any proceeds beyond that to be directed towards reducing
debt.
Chanticleer ended the year with 26 restaurant locations, up from
18 in 2013 and six in 2012, per the chart included. But with
estimated proceeds from a fully subscribed rights offering, we
expect Chanticleer can meet its plans to nearly double its
restaurant unit count to 50 over the next twelve months.
We were pleased with the companys selection of BGR as a
potential acquisition target. Given the success the company has had
in the better burger space which now represents 20% of sales we
think the acquisition dovetails nicely with Chanticleers internal
efforts, and will serve to accelerate the companys presence in this
attractive category. This is a profitable and growing space for
Chanticleer, and we believe the acquisition will add scale and
earnings leverage for the company. We note that the company has
already proven it can digest acquisition in this space, and has a
best in breed division head in Rich Adams, who previously held
senior executive roles at Bojangles. Moreover the better burger
category is the fastest growing section of the $72Bn burger market
and is well-suited for Chanticleers expertise.
We would also expect Chanticleer to use proceeds from the
offering to increase its presence in its core international Hooters
restaurant brand. The company has new locations planned in
Brisbane, Australia, Port Elizabeth, South Africa, and New Castle,
United Kingdom.
Maintaining target of $5.00 Our target remains unchanged at
$5.00 per share. This represents upside of 135.8% from the recent
price of $2.12 on
March 2, 2015. Our 2015E estimates do not include the impact of
the proposed BGR acquisition. We plan to review our forecast for
HOTR following 4Q14 results, the completion of the rights offering,
and management guidance.
HOTR stock has been a strong performer in our coverage universe
thus far during 2015, with shares up 22.5% to $2.12 versus $1.73 at
2014 year end.
We view the companys fundraising and proposed acquisition of BGR
as significant positive milestones for the company and expect to
revisit our price target and estimates when the company reports
fiscal 2014 results and issues guidance for 2015.
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Management Team Michael Pruitt Chairman, Chief Executive Officer
and President Michael Pruitt, a long-time entrepreneur with a
proven track record, possesses the expertise to evaluate potential
investments, form key relationships and recognize a strong
management team. Mr. Pruitt founded Avenel Financial Group, a
boutique financial services firm concentrating on emerging
technology company investments. The business succeeded immediately,
and in order to grow Avenel Financial Group to its full potential
and better represent the company's ongoing business model, he
formed Avenel Ventures, an innovative technology investment and
business development company. In the late 1980s, Mr. Pruitt owned
Southern Cartridge, Inc., which he eventually sold to
MicroMagnetic, Inc., where he continued working as Executive Vice
President and a Board member until the company was sold to Carolina
Ribbon in 1992. From 1992 to 1996, Mr. Pruitt worked in a trucking
firm where he was instrumental in increasing revenues from $6
million to $30 million. Between 1997 and 2000, Mr. Pruitt assisted
several public and private companies in raising capital, recruiting
management and preparing companies to go public or be sold. He was
the CEO and President of RCG Companies, Inc. (later changed to One
Travel), a publicly traded holding company listed on the AMEX. Mr.
Pruitt received a Bachelor of Arts degree from Coastal Carolina
University in Conway, South Carolina, where he sits on the Board of
Visitors of the Wall School of Business, the Coastal Education
Foundation Board and the Athletic Committee of the Board of
Trustees. He also sits on the Board of Chanticleer Holdings, Inc.
(HOTR). Alex Hemingway Director of Chanticleer Europe Alex brings
domestic and international executive management experience to the
team and a proven track record of success in the Central European
QSR industry. Between 19992005, Alex was President and Chief
Executive of Central European Franchise Group (CEFG), the owner and
operator of the Pizza Hut and Kentucky Fried Chicken brands in
Hungary as well as three local national brands. Both brands boasted
the highest customer feedback scores in the region for YUM!
Restaurants International. While managing CEFG, Mr. Hemingway was
approached by Orient Rt., Central Europes largest restaurant
company with 130+ operating units based in Budapest, to be its
Chief Executive Officer. Between the two companies Alex has had
over 180 units and 5000 people under his employ. Alex founded and
served as the Director of the Fast Food Association of Hungary. He
currently serves on the Board of Supervisors of the Budapest Honved
Football Club and local charitable foundations. Eric Lederer Chief
Financial Officer Eric joined Chanticleer Holdings in February
2011. Mr. Lederer has served as the Companys Controller since
February, 2011 and was appointed CFO in June 2012. From December
2005 through January 2011, Eric was the Controller of PokerTek,
Inc. (NASDAQ, PTEK), a licensed gaming company that develops and
distributes electronic table games, where he was responsible for
day-to-day accounting functions and preparing SEC filings. Richard
Adams President and COO of American Burger Company Richard Adams
serves as President and COO of American Burger Company for
Chanticleer. Rich has over 35 years of experience in the restaurant
industry. He is a former Regional Vice President of Bojangles'
Restaurants, where he was instrumental in driving successful a
turnaround. Rich also served as a former area Vice President for a
leading Burger King Franchisee with over 100 locations.
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About Chanticleer Holdings, Inc. Headquartered in Charlotte, NC,
Chanticleer Holdings, Inc. (HOTR), together with its subsidiaries,
owns and operates restaurant brands in the United States and
internationally. The Company is a franchisee owner of Hooters
restaurants in international markets including Australia, South
Africa, and Europe, and two Hooters restaurants in the United
States. The company also owns and operates American Burger Company
and owns a majority stake in Just Fresh Restaurants in the US.
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Contact:
Ajay Tandon Director of Research SeeThruEquity, LLC
www.seethruequity.com (646) 495-0939 [email protected]
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