Fulham Shore’s impressive results

I am talking about the AIM-listed Fulham Shore (LSE: FUL), which owns brands like Franco Manca and Real Greek. The UK based company owns 74 restaurants at present and in its latest results statement, has mentioned that it has plans to open up 21 more. This in itself is an achievement, in my view, at a time when many restaurants are still struggling. And there is more to like about it. 

The company’s performance for the six months ended 26 September 2021 was impressive. Its revenues more than doubled from the same period in 2020. And it even swung back into post-tax profit, compared to a loss suffered last year. I find this particularly encouraging considering that 2021 has also been a hard year for restaurants. As Fulham Shore said, it operated with no Covid-19 restrictions for only 10 of the 26 weeks of this latest half-year. Further, even if we consider that 2021 has still been comparatively better than 2020, the fact is that despite restrictions, its revenues are still 10% higher than the same six months in 2019. 

The company also has a positive outlook and it has seen revenues in October and November higher than those during the corresponding months in 2019. It now expects to perform ahead of both management’s and market expectations for this year. And it has expansion plans for the next year too. 

Strong share price performance

Its share price performance so far has also been encouraging. Even though recently it has moved sideways, over the past year, the stock is up almost 70%. Much of the increase was seen starting with the stock market rally of November, 2020. And the stock was broadly rising until September this year. But I reckon the fact that the last few months have been a bit challenging for broader stock markets has impacted it too. I think there is a possibility that after its good results, the company’s share price could start inching up again. 

My takeaway

Of course the spread of the Omicron virus could slow down the upward climb. It has created much uncertainty, which is more likely to impact the likes of restaurant stocks than others. Also, the company has not been consistently profitable over the past few years, which is something to be cautious about. Still, for now, it appears to be in a good place. And if the recovery continues, I feel this would be among the penny stocks to make a good portfolio addition for me in 2022. 

I also want to own stocks that have a plan for growth in the years ahead. 

UK growth shares 

My top pick is restaurants operator The Fulham Shore (LSE: FUL). This company’s performance over the past two years has been outstanding. The group immediately switched to takeaway service at the beginning of the pandemic, and it quickly opened up to consumers when restrictions were relaxed. Its competitive advantage is being able to offer high-quality food at a great price quickly.

Consumers love the offering and the brand. Profits are surging, and now the firm is looking to expand over the next few years.

Management wants to make the most of the distressed retail environment to move into high street locations, where landlords are offering attractive rental terms. 

I would buy the stock for the qualities outlined above. However, I am also wary that rising prices could cause the group some disruption. It may have to put up prices to consumers, which could ruin its low-cost reputation. 

Acquisition pipeline 

Halma (LSE: HLMA) specialises in the distribution of health and safety equipment. This is a relatively slow and steady industry, and the company compliments organic growth with acquisitions. 

Management has identified a pipeline of acquisition opportunities. These should enable the group to continue executing its growth strategy for the next couple of years at least. That is assuming no other potential acquisitions arrive. 

This is another business that reported an increase in growth last year, as the pandemic increased health and safety awareness. There is no guarantee this trend will repeat itself, but the provision of health and safety equipment will always be required. 

These are the reasons I would acquire the FTSE 100 stock, although I will be keeping an eye on rising prices, which could also impact the firm’s growth. Competition may also prove to be a headwind for the business. 

Pandemic shares to buy

The final organisation I would buy for my portfolio in the current environment is AstraZeneca (LSE: AZN). Not only does this company produce one of the world’s top coronavirus vaccines, but it also has a growing portfolio of cancer (oncology) treatments. 

While demand for the coronavirus vaccine may not remain elevated forever, demand for cancer treatments will likely continue to grow. This gives the business something to fall back on if or when the pandemic ends. 

These are not the only strings to the company’s bow. It also invests billions of pounds every year in research and development to discover new drugs. These initiatives should keep its pipeline full and revenues growing. 

Of course, if the research and development initiatives do not yield results, the company’s growth could slow. This is the most considerable risk to my investment thesis. 

That said, I’m aware this sector faces some significant challenges. As such, the companies below might not be suitable for all investors. 

Still, I’m comfortable with the risks involved. That’s why I’d buy all three. 

Penny stocks for my portfolio

I think the first company on my list is a must-buy hospitality business. The Fulham Shore (LSE: FUL) has defied the gloom in its sector over the past 12 months.

At the beginning of the pandemic, management swiftly switched the business to a takeaway model. This helped it navigate the uncertainty and primed the group for growth when the economy reopened.

According to its latest trading update, between 17 August and 5 September, sales across all group restaurants increased 27% compared to 2019 levels. 

This growth is fuelling the group’s expansion plans. Since March, it’s already opened two new restaurants, has a further two in development, and 15 in the pipeline. This growth potential is the main reason why I’d buy Fulham Shore for my portfolio of penny stocks today. 

Some risks the firm may face as we advance include higher labour and food costs and the possibility of further lockdowns. These could weigh on profit margins, and high prices could put consumers off. 

Eating and drinking

The other two hospitality stocks I’d buy for my portfolio of penny stocks are Marston’s (LSE: MARS) and Revolution Bars (LSE: RBG). 

Like Fulham Shore, both have reported a strong rebound in trading since the economy reopened.

However, unlike their peer, neither of these companies were able to rely on a takeaway service to keep the lights on throughout the repeated lockdowns of the past 18 months. 

As a result, neither are in the same advantageous position as Fulham, but they’re still making a comeback. 

In its latest trading update, Revolution reported that trading has improved to 86% of 2019 levels. Despite this growth, the company still expects to report a loss in its current financial year. Meanwhile, sales between 12 April and 24 July across Marston’s estate totalled 90% of 2019 levels. 

Clearly, both of these companies have their work cut out to return to growth. They also face an uphill struggle to reduce the debt they’ve accrued throughout the pandemic.

However, I think both companies have the potential to return to growth in the near future. That’s why I’d buy both for my portfolio of penny stocks. 

Both firms also face similar risks to Fulham. Rising wages and food costs could eat into profit margins, and another coronavirus wave could dent consumer confidence, which may lead to a significant sales slowdown.

However, I am comfortable buying and holding smaller businesses, and with that in mind, here are three penny stocks I would buy as recovery plays for my portfolio today. 

Penny stocks to buy for growth 

At the top of the pile is The Fulham Shore (LSE: FUL). Despite the disruption of the pandemic, this restaurant operator has been able to navigate the challenging environment quite successfully. Revenues decreased 41% for the year ended 28 March 2021, and the group reported an operating loss of £4.8m for the year. 

However, now all of its restaurants are back open again, management is plotting an expansion. It has identified 10 new locations, which it plans to open in the next financial year, with a further 150 additional sites on the cards. 

With management planning this sort of growth, I think the stock could be an excellent growth investment to add to my portfolio. 

Despite the opportunity here, I will be paying close attention to the company’s growth plans. Many restaurant owners have collapsed in the past due to over-expansion. The Fulham Shore is not going to be immune to this risk.

Reopening trade

As well as The Fulham Shore, I would also buy Revolution Bars (LSE: RBG) for my portfolio of penny stocks. With a market capitalisation of just £52m, this business is smaller than most and possibly riskier. Nevertheless, I believe it has substantial recovery potential. 

According to management’s latest trading update, the company is now trading ahead of expectations after the reopening. Trading between 17 May and 1 July was 86% of 2019 levels, which tells me the firm is heading in the right direction. 

It also implies consumers have been eager to return to its offering, which will be necessary for the recovery. 

Having said all of the above, Revolution Bars has been struggling with sluggish growth for some time. Before the pandemic, it had just undergone a significant restructuring. There is no guarantee it will be able to avoid ending up in the same position in the years ahead, especially after the events of the past 18 months. 

Delivery growth

DX (LSE: DX) provides a wide range of delivery services across the UK. Its services have been in demand over the past year.

Management expects the company to book a significant increase in profit before tax this year, as well as a considerable increase (37%) in the level of cash on its balance sheet. According to projections, it will end the financial year to 3 July with net cash of £16.8m. 

According to the company, the high demand for freight services means the group’s freight business will deliver substantial growth. It does not look as if the need for these services will let up anytime soon as the UK deals with its lorry driver shortage. 

With these tailwinds behind the enterprise, I would buy it for my portfolio of penny stocks. However, I will be keeping a close eye on DX’s growth. The delivery market is highly competitive, and if the firm fails to keep up with the competition, its growth could come grinding to a halt. 

While such a great result over such a short period is more based on luck than anything else, it does show how quickly small-cap shares can move upwards (although the reverse is also true). With this in mind, here are three more I’ve got my eye on. 

Seeing Machines

First on my list is Australia’s Seeing Machines (LSE: SEE). This AIM-listed company supplies systems that monitor drivers’ behaviour, thus reducing traffic accidents. 

Yesterday, Seeing announced that it had been appointed by another Tier 1 supplier to deliver its FOVIO tech to an additional North America-based OEM. Although only worth A$7m, this is another vote of confidence for the company. 

I’ve held SEE for many years now. While this hasn’t always been a comfortable ride, highlighting the risk involved, I haven’t sold and am now firmly in profit. The shares are up over 500% since markets around the world crashed. 

There’s no saying that the shares won’t dip again (there have been many ‘false dawns’), especially if investors continue to lose interest in tech stocks. However, given recent progress, I’d still buy at this level.

The Fulham Shore

A second UK penny share that warrants consideration in my view is The Fulham Shore (LSE: FUL).

Shares in the owner of Franco Manca and The Real Greek restaurants are now almost 250% above the low hit in March 2020. That’s a terrific result and shows the potential rewards of buying what everyone is selling in troubled times.

Based on last week’s trading update, I think there could be more to come.

Last Friday, Fulham Shore announced that sales in the week to 18 April had been “very encouraging“. In fact, they were ahead of the same week in 2019, far before the word ‘coronavirus’ was on everyone’s lips. Naturally, this performance was achieved without any indoor seating. No wonder management is interested in expanding the company’s estate!

Taking this into account, I’d be tempted to buy a slice of this UK penny share now. However, I certainly wouldn’t bet the farm. A third wave of the pandemic is still possible.

Brickability

A third stock trading for pennies (just!) is blocks and bricks manufacturer Brickability (LSE: BRCK). Like SEE and FUL, the shares have enjoyed a storming performance recently — up 160% in just over one year.

It’s not hard to see why. Earlier this month, Brickability said that it would reveal revenue of roughly £180m and adjusted EBITDA of more than £17m for the last financial year. This was ahead of previous expectations.

Looking ahead, BRCK believes that demand for housing should lead to another strong year of trading. Unfortunately, there’s no guarantee of this. Also, many of those already holding this UK penny share might begin taking profits, causing the shares to dip.

That said, BRCK still trades on less than 15 times forecast FY22 earnings. A price/earnings-to-growth ratio of 1.1 also suggests investors are getting a lot of bang (or brick) for their buck. I think there’s still time to build a position here.

However, this is probably unsuitable for all investors. Penny stocks can be incredibly volatile. These small businesses may also lack the resources available to larger organisations. 

Still, as a way to capitalise on the UK economic recovery over the next few years, I think buying these equities may yield results. 

Penny stocks to buy 

The first company I’d buy is Fulham Shore (LSE: FUL). This business owns the Real Greek and Franco Manca restaurant brands. 

Like most hospitality businesses, the pandemic has slammed Fulham’s top line. Sales are running at about 46% of normal levels. 

Nevertheless, Fulham is gearing up for the reopening. It has three new restaurants in the works to add to the existing portfolio of 72 properties.  When the economy reopens, I think the company could benefit from increased demand from hospitality-seeking consumers. That’s why I’d buy the stock as a recovery play today. 

That’s not to say the organisation is without risks. Hospitality businesses face many challenges such as high labour costs, rising ingredient costs and the possibility of yet more lockdowns. All of these could derail Fulham’s recovery. Still, I think it’s one of the best penny stocks to buy. 

Diversified investments

Mercia Asset Management (LSE: MERC) is an excellent way to invest in a basket of UK start-up businesses. The group manages around £872m of assets for clients around the world. It invests these funds in both early-stage and established UK companies.

In the six months to the end of September, the group invested £10.9m in 14 portfolio businesses. Mercia also divested The Native Antigen Company for £4.8m, realising a gain of £1.7m.

As penny stocks go, I think this organisation has many advantages. It’s a way for investors to own a diverse basket of UK companies at the click of a button. 

Of course, there are lots of risks with the strategy. Investing in early-stage businesses is incredibly risky, and Mercia is a also relatively small firm. If it struggles to achieve good returns for investors, they could pull their funds, damaging its reputation. Looking past these risks, I’d buy this stock for my portfolio today as a way to play the UK economic recovery.

Spending growth

As the economy recovers, I expect consumer spending to rebound as well. I’ve been looking for penny stocks that might benefit from this theme.

As a retailer of cars, bikes and commercial vehicles, Vertu Motors (LSE: VTU) fits this theme. I think the business should benefit if consumer confidence improves and vehicle sales increase. And if vehicle sales don’t increase, the company’s service revenues should provide a stable income stream. 

City analysts believe Vertu can earn 5p per share in 2021, putting the stock on a forward P/E of 7.4. However, these these are just estimates. There’s no guarantee the company will hit these projections.

Vertu faces a multitude of risks that could hold back growth. The economic recovery may not turn out to be as strong as expected. This could hit sales growth. New tech upstarts may also grab market share, which would dent profit potential in the medium to long term. 

Despite these challenges, I’d buy Vertu as part of a diversified basket of penny stocks today. 

Contrarian play

While the rest of the restaurant market is struggling, Fulham Shore (LSE: FUL), owner of the Franco Manca and The Real Greek brands, is powering ahead. 

Considering the state of the rest of the restaurant industry, I wouldn’t blame you for wanting to stay away from Fulham Shore. However, the firm seems to be firing on all cylinders. The shares jumped 10% in early deals this morning following a pre-AGM trading statement which states: “There have been encouraging revenue increases in both Franco Manca and The Real Greek in the first 21 weeks of the financial year.“

The trading update goes on to note that revenue has been rising thanks to “a slightly greater number of transactions” driven by “menu innovation, the quality of food, the value of our propositions and dedication of our team.” It speaks volumes about the company’s offering to customers that Fulham Shore is managing to grow at a time when the rest of the casual dining sector is struggling.

The question is, can the company keep this up? I believe it can. Unlike other operators, Fulham Shore is not rushing to expand. There has only been one net addition to the group’s restaurant portfolio so far in fiscal 2019. And while management is in “the final stages of negotiations” for several new locations, the development of these will be funded “largely through internally generated cash flow.“

Unsustainable debt burdens are one of the primary reasons why restaurants go out of business. It’s refreshing to see that Fulham Shore doesn’t want to make the same mistake. 

City analysts have the company reporting EPS of 0.7p for 2018, on a net profit of £3.1m. Revenue is expected to grow 29% year-on-year. Based on these figures, the stock trades at a forward P/E of 16.2 which, in my mind, is a price worth paying for such a fast-growing enterprise. 

Undervalued tech play

I’m equally bullish on project management software business, Elecosoft (LSE: ELCO). 

After several years of consolidation, City analysts have the company reporting earnings per share growth of 33% for 2018. Personally, I believe there’s a chance the firm could beat this number. In a trading update for the six months to 30 June, published the beginning of this month, management told investors unaudited profit before tax was up 45% year-on-year. 

Looking at these numbers, it’s no surprise to me that the stock is trading at a forward earnings multiple of 21. In my mind, this valuation undervalues the business’s potential. Analysts have earnings growing by another 20% in 2019, and that’s before the impact of any acquisitions. 

In July, the company acquired Shire Systems for £6.3m to boost its stable of products. And with a net cash balance of £2.3m, I wouldn’t rule out further deals in the months ahead. 

Put simply, I reckon it could be time to snap up this hidden gem before the rest of the market catches on.

The Real Deal?

As as a holder of stock in restaurant owner Fulham Shore (LSE: FUL) I was heartened by today’s final results and the market’s reaction to them. 

Thanks to a raft of new openings (13 Franco Manca pizzerias and three The Real Greek restaurants), total group revenue grew by just over 41% to £41.3m over the last year. Group Headline EBITDA rose 36% to £7.1m with operating profit rocketing 153% to £1.3m from £500,000 just one year ago. 

Of course, expanding any business costs money so it comes as no surprise that net debt levels at the company have also increased 80% to £5.9m. Nevertheless, I’m comforted by the company’s strategy to expand at a reasonable rather than breakneck pace by waiting for “the right sites with the right rents“. This also feels prudent given the recent increase in food costs, reduction in the availability of skilled European restaurant staff and the possibility of ongoing terrorist activity impacting on the number of tourists visiting London (where the vast majority of the company’s sites are).

At first glance, shares in Fulham Shore look rather expensive at 28 times earnings. However, a price-to-earnings growth (PEG) ratio of under one suggests that new investors would still be getting great value for money. There’s no dividend on offer but that’s to be expected.

With a 38% rise in earnings now expected in 2018, I also think Fulham Shore might be a better buy than pub giant JD Wetherspoon (LSE: JDW), which issued a trading statement this morning.

Rising debts

A beneficiary of the recent warm weather, total and like-for-like sales at the Watford-based business rose by 3.6% and 5.3% respectively in the 11 weeks to 9 July. This compares favourably to the numbers for the year to date (total sales up 1.9%, like-for-like sales up 3.9%).  

Trouble is, I struggle to be convinced that its stock — on a valuation of 17 times earnings — looks good value for a number of reasons.

First, the huge estate of over 900 pubs will always be a burden. Indeed, the company expects capital expenditure to hit around £65m this year as a result of renovation work at some of its older sites. Tellingly, it has already indicated that this level of expenditure will continue or be slightly higher “for the next few years“. With just over 50 restaurants to its name, a more nimble operator like Fulham Shore looks far more appealing in this respect.

Despite stating that it “remains in a sound financial position“, Wetherspoon’s net debt levels have also been steadily rising over the last five years, from £463m in 2012 to today’s figure of around £715m. When you consider that the company is only valued at just under £1.1bn, a rise of this magnitude would make me rather nervous as an investor.  

There’s also the issue of product differentiation. While selling pizzas is admittedly nothing new, Franco Manca’s low-price sourdough recipes have been generating huge amounts of positive feedback. In contrast,Wetherspoon fails to offer anything that visitors would struggle to get elsewhere. 

With barely any earnings growth now expected in 2018, I think most investors would do well to avoid the shares for now.

The problem however, is that rollouts can be pretty expensive. Profits often only kick-off once a rollout story becomes self-funding, or when the cash generated by its operations is greater than the capital required to open new locations. In this article I’m going to reveal three promising rollout stories and take a look at the respective funding situations.

Something Tasty For Everyone

Tasty (LSE: TAST) operates the Wildwood casual dining brand which sells a wide variety of food, though largely Italian. It aims to provide “something for everyone”, with choices that range from steaks to pizzas to risottos. It has 61 locations and expects to open a further 16 by the end of financial year 2017.

The company’s expansion is not yet self-funding, but I expect it to be so by the time it has around 95-100 restaurants. Therefore, it should reach this level in a couple of years. I believe the company could be worth well over double its current market cap in the next three or four years. The management team is top quality too. The Kaye family, the masterminds behind 10-bagger Prezzo, are leading the rollout which helps inspire confidence.

Viva la revolución

The Revolution and Revolución de Cuba bars operated by Revolution Bars Group (LSE: RBG) offer premium cocktails in a Cuban-styled setting. With an estate of 66 bars, the company is already self-funding. It spent £12.8m on rolling out new bars and upgrading old ones last year, but generated £14.2m in cash from its own operations.

The company’s 2% like-for-like sales growth isn’t all that exciting but if you include the four new sites opened last year, sales jumped 12.7%. Better yet, the company’s valuation looks rather undemanding. The PE is only 16 times last year’s earnings. For a debt-free, fast growing, self-funding roll-out with a reputable format, that seems a steal.

A Greek, an Italian and a Grill

The Fulham Shore (LSE: FUL) operates a number of London-based restaurant franchises, including The Real Greek, Bukowski Grill and sour-dough pizza chain Franco Manca. All of these franchises operate in the casual dining market, typically charging between £8 and £16 a head.

Admittedly I’m not as familiar with this company as the other two I’ve mentioned, but the Franco Manca brand is well-regarded in London. Recent financial results imply some success too, with revenue jumping 43% in the first half of this year and operating profit following suit with a 42% increase. The company says it must invest in its central operations, so I wouldn’t be surprised if margins take a little bit of a hit in the short term. The company generated £7.1m in cash last year and spent £9.3m on its estate. I believe the company will likely be self-funding in the next few years, although with a market cap of £119m, this is perhaps the most expensive rollout I’ve mentioned today.

None of these stocks look conventionally cheap, but if they can hit the point of self-funding and maintain success with their formats, I imagine future returns could be attractive.

On the Beach

Terrorist attacks, an air traffic control strike, a failed military coup and uncertainty over Brexit have all conspired to hammer travel stocks over the last year. Nevertheless, I’m still optimistic as far as On the Beach (LSE: OTB) is concerned. Its online-only business model and dynamic approach mean it can adjust its marketing budget to changes in demand at the drop of a sun hat and far quicker than its bigger rivals.

It has a price-to-earnings growth (PEG) ratio of only 0.43 and anything under one indicates investors are getting growth on the cheap. So I’ve taken recent weakness as an opportunity to grab a slice of the company. Things could/will stay volatile for some time yet, of course, but I suspect our love of sun and sand will persist and On the Beach will prove resilient.

McCarthy and Stone

No prizes for guessing retirement property developer McCarthy and Stone (LSE: MCS) was a victim of the post-referendum fallout. Its share price plunged by a third.

Looming recession or otherwise, I’m still convinced the company is a solid long-term investment. It has a 70% share in a niche market set to grow exponentially thanks to an ageing population. Baby boomers already sitting on sizeable assets and wishing/needing to downsize are unlikely to be put off by Brexit.

The shares currently trade on just over 9 times earnings. The PEG ratio is even lower than that offered by On the Beach at just 0.37. 

Conviviality

I’ve been bullish on drinks wholesaler and off-licence retailer Conviviality (LSE: CVR) for a while now and this appears justified. Last week, it released strong final results to the market. Revenue was up 137% to £864.5m with profit before tax soaring 124% to £21.7m. Elsewhere, free cash flow had doubled to £11.4m and debt reduction was “ahead of plan“. Even better, the full year dividend was increased by 14%.

The best part? On a forecast price-to-earnings (P/E) ratio of 10, the shares still look very reasonably-priced.

Cranswick

One for both income and growth investors, Hull-based meat supplier Cranswick (LSE: CWK) has now entered the FTSE 250 thanks to its rock-solid balance sheet, excellent free cash flow and investor-friendly dividend policy. Indeed, with payouts covered almost 2.5 times by earnings, Cranswick offers perhaps more stability than the listed supermarkets it supplies products to. The company shows no signs of resting on its laurels either, given its recent decision to enter the poultry market as well.

A forecast P/E of 20 suggests the shares are expensive but I think this may be a price worth paying.

The Fulham Shore

Small-cap enthusiasts happy to take on a little more risk may wish to consider The Fulham Shore (LSE: FUL), owner of The Real Greek and Franco Manca restaurant chains.  Known for its reasonably-priced, brick-oven-baked sourdough pizzas, the latter is becoming so popular that the company is beginning to open up sites outside of London. Like Cranswick, the shares are somewhat pricey (P/E of 22) but profits are predicted to soar over the medium term as a result of this expansion.

If you need further convincing, Fulham Shore’s chairman just happens to be David Page, the man behind Bombay Bicycle Club and Gourmet Burger Kitchen.