LON:RTN | ELTA - Share Idea - An Off-the-radar (and Cheap) Way Into TGI Fridays & Hotter Shoes

28th Apr '21 by Paul Scott

43 comments 4702 reads

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…

Unlock with Email

Unlock with Google

Already have an account?
Login here

Bouden54

30th Apr '21

Thanks, not quite mystery shopping but I did try to book a table (in various locations) through the site and everything seemed to be booked up for next couple of weeks so that's surely a good sign.

Chrisfarrell21

2nd May '21

This is really great Paul (and Ed for the encouragement/order). You already do a huge amount to help the PI community, you’ve no need to do more like this, but it is a wonderful help.
Have a good BH weekend.
Chris.

RomanShare

4th May '21

Hi Paul, This is great content.

I recently came across similar opportunity in Uls Technology (LON:ULS) . £53M market cap having divested one of their businesses for £27m. Remaining business should be valued more than this based on EBITDA comparison. The significant upside that I see is the market is currently completely ignoring their rollout of their new DigitalMove platform that was built to disrupt and transform the home moving and home owning experience for consumers. It seems to be getting good traction with reported 40k transactions processed since relatively recent rollout.

Stafford

15th May '21

Bear in mind that this stock distributes cash by special dividends - retail investors pay tax on the whole amount distributed

Bear in mind that this stock distributes cash as special dividends - retail investors pay income tax on the whole amount unless you hold in an ISA or similar

gus 1065

21st May '21

Reposting of comment on SCVR of May 21st.

——————————

Update from Electra Private Equity (LON:ELTA).

https://www.investegate.co.uk/...

Looks like they intend to IPO TGI Friday’s in Q3 and then list the final holding in Hotter using the existing Electra vehicle in Q4. Looks a good way to maximise sale value if markets are still benign and possibly give holders a chance to continue the ride in these two entities. NAV per share updated to March 31st of 514p, (so Ken Mitchell you can buy more at today’s 510p a share with an easy conscience if you want to!).

Gus.

JohnEustace

Jim Armitage in the Evening Standard has TGI float at £275m and Hotter at £45m.

https://www.standard.co.uk/bus...

on_27

22nd May '21

Question for the accountants out there - wrt Fridays, given the adoption of IFRS 16 and with rent therefore being recognised through depreciation of the ROU asset is it accurate to value off the reported adjusted EBITDA? Surely rent charges need to be taken into consideration? Thanks in advance

Surrey Steve

24th May '21

Hi Claudia

There is no single way of doing this, the important thing is to be consistent between the definitions of EBITDA(R) and debt which I think is the point that you are seeking to emphasize. Many will apply a multiple to EBITDA less lease rentals and then deduct the debt excluding leases. Others will take a multiple of EBITDA and then deduct the debt including the capitalised value of leases..

28th May '21

HSBC Research rate Electra Private Equity (LON:ELTA) a buy with a target price of 840p.

https://www.electraequity.com/...

Will S

15th Jun '21

Any thoughts on the half year report released yesterday? Seems to have spooked some people

timarr

I don't think yesterday's RNS spooked anyone unless they have an irrational fear of databases:

A copy of the Half Year Report for the six months ended to 31 March 2021 has been submitted to the FCA's National Storage Mechanism and will shortly be available for inspection at: https://data.fca.org.uk/#/nsm/... and the Company's website, www.electraequity.com

Presumably the share price has fallen because of the delay to reopening which has a knock on effect on TGI Fridays. Whether that matters or not is part of the investing decision, as we could see a series of rolling restrictions for some time to come. Or not.

The report did state:

"Following today’s announcement of our intention to demerge
Fridays onto the FTSE Main Market and subsequently to bring
Hotter onto AIM through reclassification of the Electra entity in
the second half of 2021, the Board intends to ensure that both
companies are adequately capitalised to face the future with
confidence and to optimise shareholder value. The possibility
of further cash distributions will be assessed in conjunction
with the implementation of these transactions."

I'm wondering how much that changes the valuation if the cash from disposals isn't distributed

Not distributing the disposal cash makes no intrinsic difference to the valuation. Either way shareholders end up with the same assets - it's just a different combination of equity, debt and cash. It does, however, possibly make a difference to the viability of the companies after they're floated - personally I'd prefer they retain cash and ensure that they're well capitalised to take advantage of the opportunities ahead.

Note that the actual half-year report was released on 21st May after which the price rose from 510p to nearly 670p. It's given some of that back in the last few days, but if that's a response to the AR then it's a very delayed one. The price fall is probably a combination of general market jitters along with a bunch of quick-hit momentum investors getting out.

But share prices move all over the place for all kinds of reasons. Trying to figure out what they are is usually a fruitless task.

timarr

Thanks, I'm just weighing up increasing my holdings at the moment and trying to make sense of what the report released on the 14th June said:

16th Jun '21

More meaningful update from Electra Private Equity (LON:ELTA) this morning including plans/strategy for floating the TGI’s spin off.

https://www.investegate.co.uk/...

As a private equity firm, Electra will know how to play this game to maximise exit value so subject to market conditions execution should be well managed.

It's a good update. In terms of overall valuation any delays to reopening do have some impact on Fridays (aka Hostmore):

In light of this and of the announcement of the delay to lock down easing to 19 July, Electra will continue to assess the optimal capital structure for both businesses and the potential sources of capital.

On the other hand there's no funding issue here and where other companies are on the verge of collapse or forced to raise funds at huge discounts - aka Revolution Bars (LON:RBG) - Hostmore should be a well capitalised company with refurbished outlets able to pick and choose new sites.

As long as lockdown doesn't turn out to be a permanent condition it would be an achievement from the management team to muck this up.

Zipmanpeter

Does anyone have a good source of ACTUAL closures within the retail and hospitality to date (not just a Daily mail list of major outlets closing, nor a 30% more closures due to lockdown extension. Any thoughts on how to research closures to come? In my view, long term supply is more important than any short term demand surge.

Historically, many/most fitted out restaurants that go bust return to being fitted out restaurants under new brands or owners. If this occurs again, we are back to discounting etc just with with a different group of players.

Finally, interesting Paul's throwaway comment that TGIF are now looking to push a "Friday's" vs TGIF branding - indication they don't think the M-F culture is coming back or meaningful for a clientele that they expect to use their casual restaurants?

CGA Market Recovery Monitor is often cited as being as close to the horse’s mouth as you will get in terms of accuracy and timeliness for the state of the U.K. hospitality sector. You will need to register to get the full report, but the headline figures as of March 2021 can be found via this link:-

https://info.cga.co.uk/market-....

The latest edition of the Market Recovery Monitor is here:

https://www.alixpartners.com/m...

It shows that by May 7.4% of hospitality sector venues had shut during the pandemic, rising to 9.7% for drink led venues.

The restaurant sector in particular has low barriers to entry - but you'd imagine that lenders won't be very keen to help new entrants and that the oversupply of mediocre chains that was prevalent before the pandemic struck will have been somewhat winnowed. And a lot of the survivors will be cash strapped.

It's not exactly a sector I favour but if there was ever a time to get in it's probably about now, if you can do so at the right price. But another CV-19 lockdown could still scupper all that.

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

Share Idea

Unlock the rest of this article with a 14 day trial

About the Author

Paul Scott

43 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...