Hotel Chocolat Group PLC (LON: HOTC) – Accelerating digital initiatives to become the leading direct-to-consumer chocolate brand globally.

Hotel Chocolat Group PLC is a FTSE AIM listed omni-channel retailer and British chocolatier. It produces cocoa and premium chocolate related products and sells to consumers directly. It has a network of around 126 stores in the United Kingdom and abroad, besides selling its products online. It was founded in 1993 and started selling chocolates online. In the year 2004, the Company opened its first shop. The Company manufactures its products in the UK with its long-term partners and making prudent investments to maximise the long-term growth opportunity. It also has a cocoa roastery and flagship restaurant in London's Borough Market.

(Source: Company Presentation)

Growth Prospects and Risk Assessment

HOTC remained strong during the unprecedented period due to its multichannel expertise and online capabilities. Despite the Covid-19 disruption, excellent results were witnessed in the US, UK, and Japan, demonstrating the flexible business model and strong brand appeal. Adjacently, databases of active customers also increased considerably in all three markets during the first half of FY21, underpinning confidence for future growth. Moreover, the Company has accelerated its digital growth initiatives, which has huge potential ahead to deliver growth in the medium-term with the progress of Covid-19 vaccine rollouts.

However, the Company has been facing risks and uncertainties regarding customer demand, supply chain, and operational ability with the Covid-19 pandemic. Moreover, any negative publicity can also affect the consumer demand. Similarly, disruption to supply can affect the availability of products. Adjacently, inconsistent quality of products can also impact the demand. Further, the Group is now operating in new territories, which can increase the business complexities. Also, downturn in the macro-economy and government regulations can also affect the growth trajectory. 

Now will analyse some key fundamental and shareholders statistics of Hotel Chocolat Group PLC.

Financial and Operational Highlights (for the 26 weeks ended 27 December 2020, as on 2 March 2021)

 (Source: Company Presentation)

• During H1 FY21, revenue jumped 11% to £101.9 million against H1 FY20, while the underlying EBITDA increased by 2% year-on-year.
• Similarly, profit before tax surged 3% from £15.0 million in H1 FY20 to £15.5 million in H1 FY21.
• At the end of H1 FY21, the Company had net cash of £47.6 million, as compared to £24.3 million at the end of H1 FY20.
• Overall, the Company demonstrated solid sales growth, supported by growing brand appeal in the US, UK, and Japan.
• During the first half of FY21, UK customers also surged by 38%, while the Company made continued progress on sustainable business goals.
• Considering the Covid-19 uncertainties, the Company chose to pause its progressive dividend policy, which it is focusing on reinvesting profitability for future growth.

 Share Price Performance Analysis

 (Source: Refinitiv, Thomson Reuters)

On 20 April 2021, at 8:50 AM GMT, Hotel Chocolat Group PLC’s shares were trading at GBX 405.00, at par against the previous day closing price. Stock 52-week High and Low were GBX 475.00 and GBX 265.00, respectively.

HOTC's prices are hovering above a downward sloping trend line breakout for the past two weeks, indicating an upward direction for the stock. The leading indicator RSI (14-period) is trading at ~51.22 levels coupled with the 21-period SMA, trading below CMP and supporting a positive stance for the stock.

On the lower side, GBX 365.00 acting as a major support level and a breakout of the same might generate selling in the stock. Therefore, if the prices reach below the level, exit decisions should be made depending on an investors’ risk appetite.

In the last one year, Hotel Chocolat Group PLC’s stock price has delivered a return of ~36.67% return as compared to ~58.42% return of the FTSE AIM 100 index and ~19.37% return of the FTSE All Share Food Producers index, which shows that the stock has outperformed the benchmark sector but underperformed the benchmark index.

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Business Outlook Scenario

In a nutshell, HOTC continued to launch new products and deliver strong sales growth during the challenging trading period of the first half of FY21, underpinning the flexibility of the multichannel model and strength of brand appeal. The Company also witnessed a growth momentum in the US and Japan and made significant improvements in the operational platform for future growth. Moreover, HOTC has a substantial active customer base to remain resilient in the short-term, while the accelerated digital initiatives shall support the growth in the medium and long-term period. Furthermore, the Company is well-capitalised, significant liquidity position and planning prudently to improve resilience, enabling clear-sight investments, and pursuing further growth opportunities.

 (Source: Company Presentation)

Considering the resilient financial performance, robust liquidity, digital initiatives, strong pipeline, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Hotel Chocolat Group PLC at the current market price of GBX 405.00 (as on 20 April 2021 at 8:50 AM GMT) with lower double-digit upside potential based on 3.63x EV/NTM Sales(approx.) on FY21E Sales (approx.). 

 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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