Last week there was worrying news on the health of the UK consumer.
Firstly, Tesco and Sainsbury released muted trading updates. Then the travel industry reported a fall in summer bookings, while Ernst & Young reported that the average UK household has a lower proportion of its monthly income to spend on discretionary items than at any time in the past five years.
All four blamed rising mortgage payments, council-tax bills, water rates, pension contributions and petrol costs. So in this more frugal climate, as many consumers cut back on non-essentials, where does this leave the restaurant trade?
On a knife edge, of course. Due to its high operational gearing, where rents and salaries are largely fixed, if the top-line softens, profits will quickly evaporate. In a weakening environment one would expect restaurant chains to cut back on store openings. Not this company:
Clapham House (CPH), tipped as a BUY by The Independent
The owner of the Gourmet Burger Kitchen, Real Greek, Bombay Bicycle Club and Tootsies chains, Clapham House is expected to increase the number of its outlets from 72 to 100 this year. In fact, the chief executive and chairman – both ex-directors of PizzaExpress – said last week that the group had “a very strong pipeline for organic expansion”. The main growth engine is Gourmet Burger Kitchen, an upmarket burger bar, whose brand is felt to have both UK and international appeal.
Historically, the shares have sizzled, rising nearly three-fold in the past two years. Much of its success has been down to a buoyant market and the trend for healthier eating. For example, according to the Office of National Statistics, we now spend more money eating out than we do on grocery shopping.
But this favourable back-drop can’t last forever, and in my opinion cracks will soon start to appear as further interest-rate hikes filter through to cash-strapped consumers. If I’m right, then expanding into an already-crowded market will cause chronic indigestion for Clapham’s shareholders.
Analysts predict the company will deliver underlying earnings per share of 11.4p and 19.9 respectively for this year and next – putting the shares on racy p/e multiples of 35 and 20. This is too overcooked for my value-orientated palette, especially as last year the group achieved earnings per share of just 7.0p.
Only time will tell whether the management team are seen as visionaries in bucking the headwind of a more austere consumer, or (more likely) as King Canutes, trying and failing to stem the economic tide. My advice would be to “sell while the going is still good”. In the past six months, both the chief executive and chairman have done exactly this, selling hefty stakes at between 283p and 318p. Sure, Clapham House could be taken over, but at these prices – and with around £5m of net debt – I think there are better bets out there.
Recommendation: SELL at 402.5p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments