I recently made the 9th purchase for the portfolio, Oliver’s Real Food Ltd (ASX: OLI). As with the Just Group purchase, I think the shorter thesis length is a winner and I will stick to that format here.
Oliver’s has ~210m shares on issue including 2.7 million options. It has a market capitalisation of ~$46 million at the time I purchased, and a net cash position. It is priced at about 19x this year’s forecast earnings.
Here is a link to some of the qualitative research that underpinned this thesis.
The business opportunity:
Oliver’s operates healthy and organic restaurants at service station stops on major highways. It benefits from large and reliable amounts of vehicle traffic and its only competition at the moment is overwhelmingly McDonalds and KFC. My belief is that the Oliver’s benefits from some price elasticity and leverage over customers due to its healthy proposition and unhealthy competitors. That is, customers should be more willing to pay up for a healthy choice, and Oliver’s currently has a unique selling point/s via its gluten free, vegetarian, organic options etc. Competition is currently minimal and other healthy restaurant operators show no signs of targeting the same niche as Oliver’s…yet.
Here are some pictures of a typical Oliver’s, part of a paired setup at Wyong:
Oliver’s sites are generally high quality and in great locations (I have done extensive qualitative research on this, some of which I’ll publish separately) and I believe that the company is funded to get to approximately 30 restaurants (23 currently) in the next ~2 years, without additional debt or capital.
Management’s target of 60 restaurants looks very aspirational given how infrequently these roadside sites come up, and how expensive some have been, but if it can be achieved while maintaining restaurant standards and with minimal competition etc, Oliver’s is likely good value today.
The investment thesis:
Oliver’s is undervalued given the likely growth that it can achieve in the near term. I think it should be worth convincingly more in the next 2-3 years if it can get above 30 restaurants like I think. Over the longer term, I am not yet certain the business has what it takes to be a winner, but I am confident enough to take a position with a view to reassessing after a couple of years.
In addition to the usual concerns: Oliver’s has reportedly previous sold anti-vax books in stores and on the website (subsequently removed). There are possible supply chain issues (due to freshness) as the company expands, it may be difficult to maintain consistent staff, service quality, + speed as the business grows, etc.
Oliver’s is not a franchise, so expansion is capital intensive and growth will be slower, but this should enable greater consistency between restaurants which will be vital.
Specifically right now I believe there are 4 key risks:
- The company expands too aggressively, taking on too much debt/ making it hard to maintain quality + reputation etc. I take a ‘wait and see’ approach here. Currently there is no funding risk (net cash position) but if risks ramp up I will have time to sell and I do not think the price would be too punishing in this situation, if caught early.
- Uncertainty about management. Management appears well-aligned and skilled but potentially controversial things like antivax books mentioned above are literally a ticking bomb when trying to build a brand. I am encouraged by the fact that antivax books have been removed from shelves etc which suggests that mgmt is prioritising the brand and the business.
- Uncertainty about the company’s value proposition. Right now, all Oliver’s has to do is provide a attractive and viable alternative to McDonalds and KFC. I think it can do that. Over the medium term it may also have to face competition from cafes, Subway, sushi restaurants, etc, which I am not sure it can do.
- Uncertainty about price elasticity. Oliver’s food is not cheap in the way that McDonalds is cheap. I believe that health-focused consumers are willing to pay more, but how much more is a vital question and as yet unanswered. CEO Jason Gunn commented on Oliver’s pricing in an interview here. Same Store Sales growth might be an encouraging metric in this regards, at least if it is due to volume and not price increases. I don’t think Oliver’s has much room to lift prices so most SSS should be volume-related.
Overall I found management to be well aligned, salaries are reasonable, and they took payment for the Oliver’s brand (which they sold to Oliver’s the company) in Oliver’s shares. The founders are clearly passionate and have been with the business for 10+ years already. There is a good mix of business expertise on the board. I can’t figure out where Wolseley Private Equity fits in (the Chairman and Oliver’s CFO are from Wolseley) given their low shareholdings. This may or may not be important, given that the board presumably has the power to choose the CEO.
Midway through my research process, as I was googling Oliver’s restaurant reviews I discovered this post by The IPO Review. I found his/her research (and thoughts, which they kindly discussed with me via email), and the above interview with the CEO to be invaluable. I admire their critical thinking and decision-making process on a number of recent IPOs.
Longtime readers will know that 10foot doesn’t buy companies where he’s already seen a ‘Buy’ rec on it, because this blog is all about testing my own ideas + investing process with as little outside influence as possible. My Oliver’s research was well advanced before I stumbled upon The IPO Review, so I count the idea as ‘mine’, but that’s just an intellectual thing and irrelevant to the investment.
In a nutshell, there’s a nice little business here with a compelling value proposition for customers, and something of a moat. If well run, it could prove a nice earner over time.
On 5 October 2017, I bought 2,300 shares in Oliver’s Real Food for a total of $520.95, or $0.2265 per share including brokerage.
I own shares in Oliver’s Real Food. This is a disclosure and not a recommendation.