Tortilla Mexican Grill — Cracking on

Research: Consumer

Tortilla Mexican Grill — Cracking on

Notwithstanding its sector ‘sweet spot’ (a healthy, customisable product at a competitive price), Tortilla Mexican Grill (Tortilla) has taken the opportunity of a change in management to refine its strategy to address challenges since its successful IPO in 2021 as well as expedite growth. Significant benefit is expected from a new delivery structure to mitigate commission charges in an important part of the business (c 30% of sales), from enhanced marketing to tackle surprisingly low brand awareness and from an initial director of food to bolster menu development. With a new FY24 target of self-funded roll-out (down from 12 to eight), franchising will drive expansion as capital light and has been so successful to date. A near-doubling in H223 pre-IFRS 16 adjusted EBITDA, if from a low base, is testament to Tortilla’s recovering financials and initiatives already in place.

Richard Finch

Written by

Richard Finch

Analyst, Consumer

Consumer

Tortilla Mexican Grill

Cracking on

Travel and leisure

QuickView

30 April 2024

Price

50p

Market cap

£19m

Share price graph

Share details

Code

MEX

Listing

AIM

Shares in issue

38.7m

Business description

Founded in 2007, Tortilla Mexican Grill is clearly the UK’s largest fast-casual Mexican restaurant group with 69 sites, including 10 franchised by SSP Group and Compass Group. It also has eight international franchised sites (mostly in Dubai). Tortilla was listed on AIM in 2021.

Bull

Popular value-for-money proposition in buoyant sectors of the fast-casual restaurant market.

Highly scalable brand with flexibility in locations and formats and a central kitchen infrastructure, ensuring product supply and quality.

In pole position to exploit fast-growing Mexican food segment across Europe.

Bear

Economic uncertainty mitigated by customisable value offering with particular appeal to the core 16–34 demographic.

Staffing, supply chain and cost challenges eased by operational flexibility and simplicity.

Execution risk of site roll-out but experienced management with good record.

Analysts

Richard Finch

+44 (0)20 3077 5700

Russell Pointon

+44 (0)20 3077 5700

Notwithstanding its sector ‘sweet spot’ (a healthy, customisable product at a competitive price), Tortilla Mexican Grill (Tortilla) has taken the opportunity of a change in management to refine its strategy to address challenges since its successful IPO in 2021 as well as expedite growth. Significant benefit is expected from a new delivery structure to mitigate commission charges in an important part of the business (c 30% of sales), from enhanced marketing to tackle surprisingly low brand awareness and from an initial director of food to bolster menu development. With a new FY24 target of self-funded roll-out (down from 12 to eight), franchising will drive expansion as capital light and has been so successful to date. A near-doubling in H223 pre-IFRS 16 adjusted EBITDA, if from a low base, is testament to Tortilla’s recovering financials and initiatives already in place.

Evolution, not revolution

The recent coincidence of changes in CEO and CFO should not disquiet as this is simply a function of Andy Naylor, longstanding CFO and latterly also UK MD, taking over as CEO as part of an orderly transition on the retirement of Richard Morris. Founder and CEO until 2014, Brandon Stephens remains on the board as a non-executive. This is complemented by the appointment as CFO of Maria Denny from outside the hospitality sector, bringing food and retail experience. The message is one of reacting to identified weaknesses, as mentioned above, while building on Tortilla’s key strengths, which have only heightened since the IPO, notably the popularity of Mexican food across Europe, where the company is ‘in pole position to win the race’ as it is more than twice the size of its nearest competitor. Replication of the UK model with a single central kitchen unit, which de-risks and curbs costs by removing the need for skilled staff and extraction on site, would allow control of the supply chain and offer proof of concept to franchisees, the preferred route.

FY23: Back to health

Despite continued headwinds, a 70% rise in year-on-year adjusted EBITDA without COVID-19 related VAT and rates benefit and H223 margin of 8% ahead of pre-pandemic confirm the efficacy of multiple new cost control measures. Year-end leverage was just 0.3x despite free cash flow funding only 60% of new site capex.

Valuation: Disbelieving

On pre-IFRS 16 EBITDA, FY24 consensus forecasts of £5.6m give 3.6x EV/EBITDA, which is low. Profit conversion is ‘improving’ with trading as management expects (ytd like-for-like sales down 4.7% reflect delivery model change and are at a better margin).

Consensus estimates

Year
end

Revenue
(£m)

Adjusted
EBITDA*(£m)

PBT
(£m)

EPS
(p)

DPS
(p)

EV/Adjusted
EBITDA*(x)

12/22

57.7

4.0

(0.9)

(1.7)

0.0

4.9

12/23

65.7

4.6

(1.1)

(2.8)

0.0

4.4

12/24e

73.8

5.6

0.7

1.3

0.0

3.6

12/25e

83.7

7.0

1.5

3.1

0.0

2.7

Source: LSEG. Note: *Pre-IFRS 16 and excluding exceptional items and pre-opening costs.

EDISON QUICKVIEWS ARE NORMALLY ONE-OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.

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General disclaimer and copyright

This report has been prepared and issued by Edison. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. Where Edison has used consensus estimates within this publication, we do not guarantee their accuracy or completeness.

Exclusion of liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

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The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

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This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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