Any info on this one?

Buy Carluccios at 128p
Says Monisha Varadan of Allnewissues.com
Popular delicatessen, Carluccoi's listed its shares on 14th December. Although technically, this does not qualify as a new issue, we believe, it probably was one of the few quality IPOs to come to market in December. The store, famous for its rich presentation of Italian food in its shop windows, runs 24 outlets across south of England. Having managed the stores for over five years, founders Anthony and Priscilla Carluccio decided to cash in their chips netting nearly 10 million in the process. This profitable business chose not to raise any new money but instead placed around 50% of the equity with institutional shareholders. With no debts and a bank balance of just over 2 million pounds, Carluccios is looking to open a 100 more restaurants over the next 5 - 10 years. At 128p, the business is valued at 73 million.

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Operations and Business Development

The Carluccios opened their first restaurant at Neal Street in Covent Garden in 1991. A seed fundraising was carried out in 1999 to support the opening of three new sites at Bond Street, St. Christophers Place and in 2001, the couple announced a second rights issue which enabled the speedy rollout of stores, pushing the total number up to 21 in the same year. The group's stores now operate an unusual format combining a deli, a cafe and a restaurant. As a result, it sees a constant footfall during the traditionally quiet mid morning and mid afternoon periods. Revenues are split in a 78:22 mix between the cafe and the deli. With 22 stores open at the year end to September 05 and two more established in the current year, the plan is to open three more by the end of September 2006. The business earns its revenues from the cafes, the stores selling premium Italian products and outdoor catering contracts. The stores stock authentic imported products from Italy. It estimates that on an average, a customer spends around 11.5 pounds which moves the group into the 'value for money' category of restaurants. Carluccio's serves at least 65,000 customers a week. The only other significant float in this sector has been La Tasca.

Carluccio's has no bank borrowings, claims that all stores trade profitably from the first day and all store openings are supported by internal cash balances. So, all in all, Carluccio's is a well run chain. The potential for growth in the future is significant. Research says that the meals market is set to grow by 25% from 12 billion pounds in 2004 to 15 billion pounds in 2009. Coffee shops are increasingly being positioned as 'social hubs', according to the company. Carluccio's believes it can open at least a 100 more stores and has identified specific regions it wishes to operate in. At the moment, it's stores are positioned in affluent neighbourhoods of Kensington, Oxford, Islington and St. Johns Wood. The last two stores were opened in Oxford and at Westbourne Corner in London. With a new, experienced management team on board, the intention is to pursue a measured roll out strategy and continue to grow the store portfolio. The company has a strong pipeline of potential sites and will open three more in the current year. In the year to September 2005, the group announced operating profits of 3.5 million pounds on turnover of 36.8 million pounds. A huge jump from sales of 19.7 million pounds and profits of 1.7 million pounds in 2003. Carluccio's boasts of uninterrupted turnover over a five year period with consistent profits growth and this equates to a 36% return on investment.

Anthony and Priscilla Carluccio will step down as directors but will continue to act as consultants designing new menus and responsible for introducing new products. They will continue to own 3% of the equity. David Bernstein, more famously known as an ex-director of Pentland group and Chairman of Manchester City has been hired as non-executive Director. Three existing directors will take control at the board level. Stephen Gee, Peter Webber and Simon Kossoff have worked with My Kinda Town, a London listed group which was taken over at 190p after having listed at 100p. My Kinda Town developed a number of ground breaking restaurants and bar brands and established more than 50 outlets in 16 countries. Institutions hold 49% of the equity which directors own 21.7% of the company.

Investment Conclusion - Restaurant chains are always tricky investments as food markets are one of the first to be hit when the economy suffers. There is an obvious fear that the retail slow down will affect the group. But Carluccio is confident of maintaining moment in store openings and consistent profitability. In fact analysts are forecasting post tax profits of 2.9 million pounds in 2006 and 3.6 million pounds in 2007. At 128p, the stock traded on a forward PE of 25 falling to 20 in 2007. And they estimate that the group could comfortably open 5 - 8 stores a year and still pay dividends. The rating equals some of its peers but investors have to bear in mind that the business shows tremendous growth potential and there is nothing stopping Carluccios from beating market forecasts. The founders have chosen the right exit route replacing the board with experienced management. What strikes us is the self funding nature of the company's expansion program. This business is not going to raise fresh equity any time soon. We think the stock looks interesting but everything has a price: if you can help yourself to a portion of the shares, do so. Buy at 128p.