The Fulham Shore

Britain’s restaurant operators like The Fulham Shore (LSE:FUL) face significant uncertainty in the near term. Consumers could continue to tighten their wallets as the economy wallows. And costs across the industry might also continue to soar.

Yet I believe this bad news could be baked into Fulham Shore’s ultra-low share price. At 11p per share the penny stock has lost a whopping 29% of its value in the last year.

Whats more, the business is a stronger position than many other UK leisure stocks. It has a robust balance sheet to help it ride through any fresh troubles with net cash of £700,000 as of mid-December.

I’m also encouraged by the company’s focus on more affluent regions of the UK. The majority of its Franco Manca restaurants are in London and all of its The Real Greek eateries in the capital and South-East England.

There are enough consumers in these regions who don’t feel pressure to tighten their purse strings when times get tough. This in part explains why Fulham Shore’s revenues shot 26% higher in the six months to September.

I think the business could generate strong long-term profits at it expands its restaurant estate. It opened 22 new sites in the 15 months to mid-December to take the total to 97. It has also recently inked a franchise agreement to open Franco Manca restaurants in Spain.

Finally, an agreement to sell Franco Manca-branded pizzas in supermarkets from last November could significantly boost the brand and give restaurant sales an extra boost.

European Metals Holdings

Rising energy costs are a huge threat to mining companies’ profitability. Expenses can also shoot through the roof if common problems at the exploration, development and production stages occur.

However, I still believe European Metals Holding Limited (LSE:EMH) is an attractive penny stock to buy for growth investors. As electric vehicle sales take off, demand for the product it pulls from its mining complex in Czechia could balloon.

You see the business produces lithium from the gigantic Cinovec asset in Central Europe. This puts the company at the heart of the continent’s carbuilding industry. It’s also located in a part of the world where legislators are making it increasingly easier to do business.

Cinovec was officially designated as a strategic project by the European Union in January, a move that boosts funding access. Then last week the European Commission announced its Green Deal Industrial Plan in a bid to boost production of key materials like lithium. This could make it easier for mining companies to obtain permits.

UK share investors have many companies to choose from to make cash from the green energy transition. I think European Metals Holding could prove one of the best.

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Although they have greater volatility risk than more established FTSE 100 shares, I think penny stocks deserve a place in my portfolio. After all, thanks to a low cost of entry and the possibility to benefit from big gains, I’m comfortable taking on additional risk at present.

One stock that currently trades under 11p has attracted my attention. I’m referring to restaurant chain operator The Fulham Shore (LSE:FUL), which owns Franco Manca and The Real Greek. Here’s my take on the outlook for this hospitality business.

A cheap valuation

The Fulham Shore share price fell nearly 26% over the past year. It currently has a market-cap under £69m. I think the stock is oversold, which means today’s price looks like an attractive entry point for me.

First, it’s important to acknowledge the reasons for the sell-off. Profitability is a concern. In the latest interim results to 25 September 2022, the group’s post-tax profit slumped to £0.3m, down from £2.4m the year before.

The company was buffeted by external factors that subdued trading activity. High inflation has negatively impacted consumer confidence and put pressure on the firm’s margins. In addition, train and tube disruption hurt the group’s sales, especially at its urban locations.

I’m optimistic that while risks remain, trading conditions will normalise as the year progresses. Inflation is expected to fall due to the Bank of England’s interest rate hikes and there’s potentially positive news regarding rail strikes as the RMT union is due to hold a membership vote on a new pay offer.

Overall, the difficulties facing the company appear to be easing, and I don’t think today’s valuation has fully priced that in yet.

An appetising outlook

I also believe there are plenty of robust numbers in the firm’s financials, despite disappointing profits. Revenues increased 26% to £49.9m and EBITDA remained flat at £10.5m. Plus, the company has a healthy cash flow and low debt levels.

What’s more, it’s encouraging that the business significantly expanded its footprint last year. During the interim period it opened 11 new Franco Manca pizzerias and two new The Real Greek restaurants. This brings the group’s total to 93 restaurants in operation as of 25 September.

International expansion is another compelling reason to invest. The Fulham Shore has secured a new franchise territory agreement for Spain, which it sees as a potential major market. This builds on the firm’s progress following a similar deal for Greece in November 2021.

In addition, Franco Manca cook-at-home pizzas are now available to purchase at over 500 Tesco supermarket shelves. I think this could be a lucrative revenue stream and it diversifies the business model, which I view as a big positive.

Why I’d buy this stock

Overall, I think this penny stock looks like a good buy for me. If I had some spare cash, I’d invest in the company today.

Recent financial results show underlying resilience in the face of macroeconomic challenges and the business continues to expand and evolve its offering.

Under 11p, The Fulham Shore shares look tasty to me.

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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. 

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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. 

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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.

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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. 

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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.

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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. 

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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.

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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.

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