FY19 interim results

Filta Group (Filta) provides cleaning services to commercial kitchens in North America, the UK and, more recently, mainland Europe. The company reported EBITDA for 1H19 marginally below our expectations – it has taken a little longer to get the benefit of cost savings following the Watbio acquisition. Our EBITDA expectations for 2020 are scarcely altered. At the EPS level, we have put through some additional non-cash related costs: share-based payments, IFRS16 impacts and higher amortisation than expected.

• Forecast changes: We have cut our FY19E EBITDA expectations from £4.85m to £4.2m and trimmed FY20E from £5.35m to £5.25m. The cuts to EPS – FY19E 5.1p (from 9.9p) and FY20E 8.1p (11.2p) – are more substantial, taking account of higher non-operating costs below the EBITDA line. The cuts do not reflect any weakening in the business prospects, which we still see as very attractive.
• 1H19 results and outlook: Filta delivered adjusted EBITDA of £1.7m, up on £1.3m in 1H18. PBT was £0.5m down from £1m last year due to higher growth-related costs and before the full benefits of the Watbio acquisition have begun to flow. The 1p interim dividend was up 39% and reflects management’s confidence in the prospects for the business.
• Valuation: Filta has no directly comparable companies. We have used a DCF to derive a value range of 219p to 285p per share, using a 10% discount rate and a mid-term (2021-25) growth rate of between 6% and 12%. Our central estimate is 262p. No account is taken of future added-value acquisitions.
• Risks: In addition to normal commercial risks, Filta is dependent on the behaviour of its franchisees, which it cannot control but can help to influence by means of thorough training. The risks in the Watbio acquisition are now fully understood but any future deals will inevitably involve managing some unknowns. It is exposed to FX risk, too, although most costs are local.
• Investment summary: Filta is an attractive business, in our view, combining the capital-light franchise model in North America and Europe with company-owned operations in the UK. With only a tiny proportion of the market currently served and with little or no competition, we see potential for years of profitable growth ahead.