ELTA - Share Idea - an off-the-radar (and cheap) way into TGI Fridays & Hotter Shoes

Share Idea

(by Paul Scott)

Electra Private Equity (ELTA)

Share price: 410p
No. shares: 38.28m
Market cap: £157m

I’ve recently been looking for new ways of buying into the re-opening trade, of retailers, restaurants/bars, travel, etc, but most things look too expensive now, with upside already priced-in.

However, I’ve found something a bit obscure that looks cracking value, for 2 very nice businesses. The main one being the UK operation of TGI Fridays, the well-known casual dining chain. The other business is called Hotter Shoes - a now mainly online comfortable shoes company for the over-50’s. Both are owned by listed investment trust, Electra Private Equity (ELTA). Both businesses restructured during the pandemic, and seem to have promising futures.

ELTA was flagged to me by a friend who has demonstrated a long track record of being a highly successful investor in special situations, hence why I was keen to take a look.

After doing my own research, I found that ELTA is a simple share to understand, and I’ve bought an opening position myself, with the intention of holding until c.end 2021, when the winding up of this company is planned to complete. Add on mabe another 6 months to be safe, as many such things take longer than expected.

I think ELTA could deliver a potentially very good return, with little downside risk, in a reasonable timescale (circa end of 2021) through asset disposals & distribution of cash to shareholders. It’s an orderly winding up situation, of the remaining 2 investments in an investment trust ( a closed ended, listed investment fund) called Electra Private Equity.

Electra has already disposed of most of its assets, and distributed c.£2bn to shareholders via buybacks & dividends. What we have here are the last remaining 2 significant investments, TGI Fridays, and Hotter Shoes, both of which I think look really good businesses, that could attract sale prices well above the modest book values shown in ELTA’s accounts.

Electra would then be closed down, and cash distributed to shareholders - that is the stated strategy. Things look well-progressed, and the market for M&A (especially private equity deals) is very buoyant. So I think these asset sales have a good chance of succeeding in a timescale of c.1 year.

As always, please ensure you do your own research, this is not a recommendation, it’s just my personal opinions, backed up by facts & figures in the public domain. The future is inherently uncertain, so it may not pan out as we anticipate. Also I might have got something wrong, or overlooked something important, hence it's vital to check everything yourself.

Summary of the main investments -

TGI Fridays (“Fridays”) - the well-known casual dining chain.

Electra owns the UK (franchised) business, with 87 restaurant sites. 32 have re-opened recently (with outside space), the rest are due to re-open in May 2021. Hence this share is mainly about the upside value on Fridays.

In current buoyant conditions, I think Fridays could be sold for £290-400m - potentially more than double the market cap of Electra as a whole (which also has cash, and other investments on top).

That estimate is based on £30-40m EBITDA (management forecasts in Edison research note) rated at 11 times EBITDA - the typical private equity buyout ratio in this sector, less c.£40m debt.

The Edison notes give much more detail, and it’s noteworthy that Fridays has ambitious management that are looking at expanding into new sites. This is a wonderful time to be rolling out a restaurant format, because already fitted out sites are available in quantity due to CVAs & restructuring, and on cheap rent deals.

Management is also imminently launching a second format, a US-loft style cocktails-focused format. A second way to take advantage of (smaller) fitted out sites on cheap rents.

Hotter Shoes - this is a footwear manufacturer (in the UK) and retailer, specialising in comfort & specialist fit for the lucrative over 50’s market (think Saga, for feet).

A CVA was implemented during the pandemic, to ditch nearly all of its shops. What is left is a handful of stores, and a successful internet eCommerce business.

I reckon Hotter could be worth £50-100m on a disposal, because it is forecast to make £6-7m EBITDA this year, and private equity are typically paying about 11 times EBITDA for businesses in the consumer discretionary sector. That implies £66-77m proceeds from a disposal. There might be a bit of debt to come off that figure, I need to double-check that, but it's not material to the overall outcome. Stifel have already been appointed to find a buyer.

Other investments - have now mostly been sold, leaving £23.5m cash at the group level, plus a few other scraps of investments, so let’s say (at least) £25m cash in the bank, once everything has been sold off, plus the proceeds from selling TGI and Hotter.

Sum of the parts - this is the most appropriate way to value a winding up situation like this. I get to these numbers:

Fridays: £290-400m - my estimate of disposal proceeds

Hotter Shoes: £50-100m - my estimate

Cash + Other: £25m

Total: £365m - £525m

Total per share (38.28m in issue) = 953p - 1,371p per share (previous miscalculation here now corrected. My apologies)

The current share price is 410p. Therefore if my figures turn out to be correct, then the upside could be 132-234%, (previous error here now corrected) with a targeted return to shareholders of less than a year.

It sounds too good to be true, but I can’t see any problems with this, other than possible delays. If delays happen, so what? Electra has two great investments, both of which have a very strong outlook, having restructured during the pandemic.

A really cheap way into a good restaurant chain - this is how I see Electra shares. The gulf in valuation between ELTA, and Restaurant (LON:RTN) or Fulham Shore (LON:FUL) is really striking. Note also that the valuation comparison within the main Edison research note, showed comparator valuations on RTN and FUL some time ago, and their share prices have almost doubled since then. Although ELTA's share price has also risen a fair bit too.

Last week, I reviewed the positive trading update from Fulham Shore (FUL), and concluded that it looks rather expensive.

FUL is valued by the stock market on an EV/EBITDA of about 11 times pre-covid earnings. However, if we assume the restaurant sector bounces back strongly, with pent-up consumer demand, then post-covid EBITDA could be higher than that - plus FUL is planning on opening new sites, on attractive rents. So maybe this valuation does stack up?

This provides a benchmark for my valuation estimates above, and 11 times EV/EBITDA is also the valuation multiple suggested by Edison, in its 2 research notes on ELTA, which are essential reading for the detail here.

My opinion - this is one of the best special situations I’ve seen in a long time.

It provides an obscure, off the radar way of buying 2 smashing businesses (TGI Fridays & Hotter Shoes) at a very significant under-valuation compared with their likely disposal values, or what they would be valued at, if listed separately on the stock market.

I can’t see any obvious downside risks here, other than if covid takes off again and a 4th lockdown is needed. Fridays does have some debt, about £40m, but if it got into trouble, ELTA has £23.5m in cash doing nothing on its group balance sheet, so could support a refinancing if required. A refinancing isn’t likely, now Fridays is about to open the doors & probably be mobbed by customers wanting to eat out again (many sector peers are reporting they’re booked up for weeks to come).

If the disposals of Fridays and Hotter Shoes are delayed, so what? They’re only likely to go up in value, so I would be quite happy if there are delays. Actually, I would prefer it if ELTA listed them, and gave us shares in them, rather than selling them. I might write to ELTA to suggest this.

I’m making the assumption that ELTA owns 100% of its investments (implied in the Edison notes), and that no capital gains tax would be payable on disposals. You might want to make your own enquiries on that point, because I’m not 100% certain that is the case, but have asked other shareholders, who have confirmed they believe that is the case. Edison must have checked that too, so I’m fairly sure that’s OK. Shareholders might have to pay tax on dividends, so best to put this share in a tax-free wrapper like an ISA, SIPP, or even a Spread Bet, in my view, that’s what I’ve done.

The other point I haven't yet confirmed, is what the franchise contract is for Fridays. How much does it cost, and what duration? I need to look into that. If anyone knows, please leave a comment.

This share can be illiquid, although with a bit of patience I did manage to pick up some stock personally at 410p - a bit late to the party, but still good upside I reckon. As already disclosed, obviously I’m talking my own book here, as everyone does when telling people about their favourite shares. I confirm that I have no current plans to sell any of my shares - my intention is to hold until the winding up, planned for end 2021. Although I reserve the right to top-slice some of my position at any point, but that wouldn’t be under 600p. Unless of course some new information came out which changed the fundamentals.

I’d be interested in your views, so do please leave a comment below.

As always, please DYOR! (Do Your Own Research) - I'm not infallible, some of my investment do well, others do badly.

Best wishes, Paul.