Spin-offs, Debt Reduction And New Locations Will Drive Hospitality Success

Key Takeaways

• The spin-off of Twin Hospitality Group and debt reduction plans aim to enhance investor confidence and strengthen financial health.
  
• Growth strategies focus on robust expansion, co-branding, and operational capacity to drive revenue and improve margins.
  
• Suspension of dividends, debt challenges, and asset impairments impact FAT Brands' cash flow, profitability, and ability to maintain shareholder returns.

Catalysts

A multi-brand restaurant franchising company, acquires, develops, markets, and manages quick service, fast casual, casual dining, and polished casual dining restaurant concepts in the United States and internationally.

• The spin-off and public listing of Twin Hospitality Group provides a separate growth runway for the Twin Peaks brand, potentially bolstering investor confidence and enhancing shareholder value. This could lead to increased revenue and earnings through improved operational transparency and focused growth strategies.
  
• FAT Brands' commitment to significant debt reduction in 2025, including a $75 million decrease in debt and raising equity, is expected to strengthen its financial position and reduce interest expenses, ultimately impacting net margins and earnings positively.
  
• A robust development pipeline, with signed agreements for approximately 1,000 new locations, is poised to drive substantial organic growth through increased franchise fees and sales royalties, which will have a direct positive impact on revenue and operating cash flow.
  
• Expansion of manufacturing capabilities in the Georgia facility, aiming to increase operational capacity, could enhance profitability through higher-margin revenue streams from sales to franchisees, thus improving overall net margins.
  
• The strategic focus on co-branding and opening new international locations supports diversified revenue streams and leverages existing brand strength, potentially leading to increased system-wide sales and improved economy of scale advantages, thereby positively affecting revenue growth and net margins.

FAT Brands Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming FAT Brands's revenue will grow by 4.6% annually over the next 3 years.
• Analysts are not forecasting that FAT Brands will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate FAT Brands's profit margin will increase from -33.3% to the average US Hospitality industry of 7.0% in 3 years.
• If FAT Brands's profit margin were to converge on the industry average, you could expect earnings to reach $47.3 million (and earnings per share of $2.36) by about May 2028, up from $-197.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.4x on those 2028 earnings, up from -0.2x today. This future PE is lower than the current PE for the US Hospitality industry at 22.6x.
• Analysts expect the number of shares outstanding to grow by 4.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.01%, as per the Simply Wall St company report.

FAT Brands Future Earnings Per Share Growth

Risks

• The decision to suspend FAT Brands' dividends until the $25 million debt is paid indicates a constraint on cash flow, affecting the company's ability to distribute profits to shareholders and potentially impacting net earnings.
  
• The 8.4% revenue decline for the fourth quarter due to a reduced operational period highlights vulnerability to systemic disruptions, which can lead to decreased revenues.
  
• The company recognized significant non-cash goodwill and other intangible asset impairments of $30.6 million, suggesting challenges in maintaining asset value, possibly impacting net earnings.
  
• Legal and litigation costs, though reduced, remain unpredictable and could still burden financials, potentially impacting net margins and earnings.
  
• High net debt of approximately $850 million and the need to raise substantial equity to manage this may affect profitability due to high interest expenses, influencing net margins and earnings.

Valuation

• The analysts have a consensus price target of $13.5 for FAT Brands based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $15.0, and the most bearish reporting a price target of just $12.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $679.1 million, earnings will come to $47.3 million, and it would be trading on a PE ratio of 7.4x, assuming you use a discount rate of 9.0%.
• Given the current share price of $2.68, the analyst price target of $13.5 is 80.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.