The Oliver's Real Food Ltd (ASX: OLI) share price fell a further 20% to $0.22 this morning after the company put out a pair of updates yesterday confirming greater than expected losses in its first year of operations. Oliver's shares are down 30% in the past 2 days.
Here's what the update said:
- Net profit after tax (NPAT) is expected to be a loss of $3.2 million instead of $2.4 million like forecast
- This is due to additional costs on store and franchise acquisitions that were not expected
- Also due to delays in opening new stores
This morning the company provided a further update to clarify that it has bought back the last of its franchised stores for $0.8m, or 4x earnings before interest, tax, depreciation and amortisation (EBITDA).
Oliver's is an interesting business because typically branded store chains, like Domino's Pizza Enterprises Ltd (ASX: DMP) and Retail Food Group Limited (ASX: RFG) use the franchise model. This outsources costs onto the franchisees and reduces the capital requirements for the operating company, making it more profitable and scalable.
By contrast, owning its stores will make it harder for Oliver's to expand because it will require more capital. It does, however, allow the company greater control over its business which may prove crucial as the company aims to build a brand and a reputation.
Yes but is it a buy?
I find Oliver's an interesting business and think that there is unquestionably a huge opportunity for healthier fast food. However, from a valuation perspective, I think about it this way:
- Initial Public Offerings (IPOs) are typically optimistically priced
- Oliver's debuted at 20 cents per share
- Losses are going to be greater than forecast during the IPO process, due to unforeseen costs
- Oliver's shares are trading for $0.22 at the time of writing; i.e., 10% more than their IPO despite the discovery of previously unknown issues
Though this is simplistic, I would suggest that Oliver's may be a touch overpriced today. Including escrowed shares and restricted securities, Oliver's has close to 210 million shares on issue, implying a market capitalisation of $46 million. Considering that the company is currently loss-making and has $7 million cash in the bank, it is also unclear how much it can grow without having to raise capital.
While Oliver's is an interesting company, at today's prices it is best left on the watch list in my opinion.
