There’s no stopping the Kotipizza Group Oyj (HEL:PIZZA) growth train, with analysts forecasting high top-line growth in the near future. I will touched on some key aspects you should know on a high level, around its financials and growth prospects going forward.
Firstly, a quick intro on the company – Kotipizza Group Oyj, together with its subsidiaries, engages in the franchising, wholesale, and fast casual restaurant businesses in Finland. Started in 1987, it operates in Finland and is recently valued at €98.44m.
The company is growing incredibly fast, with a year-on-year revenue growth of 22.33% over the past financial year , and a net income growth of 27.20%. Over the past five years, sales has increased by 11.50%, boosted by prior years of higher capital expenditure, which most recently reached €34.00k. With continual reinvestment into business operations, a return on investment of 21.48% is forecasted for the upcoming three years, according to the consensus of broker analysts covering the stock. Net income is expected to reach €5.45m over the next year, and over the next five years, earnings are expected to rise at an annual rate of 18.65% on average, compared to the industry average growth of 8.54%. These numbers tell me that PIZZA has a robust history of delivering profit to shareholders, with a disciplined approach to reinvesting into the company, and a bright future relative to its competitors in the industry.
Minimizing the downside is arguably more important than maximizing the upside. Generally the first check to meet is financial health – a strong indicator of an investment’s risk. Kotipizza Group Oyj has an enviable balance sheet, with high levels of cash generated from its core operating activities (0.35x debt) able to service its borrowings. Although its debt level relative to equity is high at 49.96%, it has been declining over the past five years from 568.25%. PIZZA also generates a sufficient level of earnings which amply covers its annual interest payment 12.67x. The company shows the ability to manage its capital requirements well, increasing my conviction of the sustainability of the business going forward. PIZZA has high near term liquidity, with short term assets (cash and other liquid assets) amply covering upcoming one-year liabilities, as well as long-term commitments. A reason I like PIZZA as a business is its low level of fixed assets on its balance sheet (8.18% of total assets) . When I think about the worst-case scenario in order to assess the downside, such as a downturn or bankruptcy, physical assets and inventory will be hard to liquidate and redistribute back to investors. PIZZA has virtually no fixed assets, which minimizes its downside risk.
PIZZA currently trades at €15.50 per share. With 6.35 million shares, that’s a €98.44m market cap – which is too high for a company that has a 5-year cumulative average growth rate (CAGR) of 13.25% (source: analyst consensus). With an upcoming 2018 free cash flow figure of €2.95m, the target price for PIZZA is €12.81. This means the stock is currently trading at a massive premium of 20.98%. However, comparing PIZZA’s current share price to its peers based on its industry and earnings level, it’s trading at a fair value, with a PE ratio of 21.86x vs. the industry average of 19.27x.
PIZZA’s investment thesis is a positive one. The stock is appealing because of its strong fundamentals – financial health, future outlook and track record. However, at its current share price, right now may not be the best time to invest. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I’ve taken my data from.