Hotel Chocolat – Bitter Updates But Broker Upbeat

This is one company that I like very much.

The product and retail range is almost unique at Hotel Chocolat (LON:HOTC).

And after recent upsets, I am impressed that its management keeps on trucking away at re-shaping its business.

If its shares stay too low for too much longer I am convinced that any one of the global private equity players will strike in predation.

Trading Statement

Last week’s Trading Statement updated investors on its recent seasonal trading as well as its strategic progress. A poor Easter trading period has not helped.

The group now expects that its sales for its end June 2023 Trading Year to be slightly lower than market expectations, while it guides that its underlying pre-tax profit will be around the breakeven level.

The Business

The group is a premium British chocolate maker with a strong and distinctive brand.

The business, which was founded by Angus Thirlwell and Peter Harris, who are still executives within the company, has traded under the Hotel Chocolat brand since 2003. It floated in 2016.

The group considers itself to be unusual in being a grower (organic cacao farm in Saint Lucia), a manufacturer (in Cambridgeshire) and owning its extensive direct to consumer channels (branded stores, websites).

CEO Angus Thirlwell stated that:

“During this financial year, Hotel Chocolat has taken effective action to overcome the growing pains of rapid growth and scaling £200m in revenues.

We are now well set up for the next stage of growth both in the UK and overseas key markets. Getting through these barriers to growth are a real test of culture and, I am unceasingly impressed by the strength of the Hotel Chocolat culture, as we remodelled our way through FY23.

Our manufacturing and distribution is well invested now, with suitable headroom, liberating capital for future revenue growth. We can see more than 50 new locations for a Hotel Chocolat latest format store in the UK over the next few years and our adapted approach to international major markets is making sound progress.

We are very grateful to our growing base of loyal and new customers, who are signalling that ethical and higher cacao premium chocolate is definitely worth it.”

Broker’s View – Now Is The Time To Buy

Analyst Wayne Brown, who has a 300p a share Target Price out currently, rates the shares as an immediate Buy.

His estimate for the 2023 finals is £203m (£226m) in sales, while pre-tax profits will collapse to £0.2m (£21.7m).

However, for the coming year to end June 2024 he goes for a rebound to £224m revenues and £18.5m profits, worth 10.1p per share in earnings.

For the following year he sees the company doing even better with £235m takings and £30.7m profits, generating 16.7p in earnings per share.

It is sensible to also note that Peel Hunt suggest that the shares are a Hold.

Citywire commented that after a disappointing full-year update the group has a lot to prove.

“Analyst Jonathan Pritchard retained his ‘hold’ recommendation and target price of 175p on the stock, which fell 6.5%, or 11.3p, to 163.7p on Thursday.

The group saw profits of between £4-7m in March but after a tricky Easter a breakeven is expected, with the sales’ miss blamed on poor availability on certain ranges and lower online sales than planned due to lower marketing spend.

‘Management is adamant that full-year 2025 guidance of 20% Ebitda margins is intact,’ said Pritchard, but he has shaved £1m off earnings forecasts per year.

‘Full-year 2023 was always going to be a poor year but missing guidance by so far, having updated only seven weeks ago, is not ideal,’ he said.

‘We go most of the way to following guidance on margins but there is a lot to prove here, and while many of the cost savings are reportedly pretty much in the bag, the market will need reassurance.”

My View – Yes, These Shares Are For Buying

Valued now at £250m this group really is quite a special ingredient for most High Streets across the country. Its shops and cafes are different from others and they really attract.

I was too early in mid-March re-profiling the company, then 202p, the shares have subsequently been down to just 145p, that was on last Thursday. They have since then seen some cheap buyers taking advantage.

Give it some time and I do believe that its management will start to really show some cracking figures.

If that doesn’t happen then I am convinced that it will succumb to a private equity bid much higher than the current price.

Patient investors taking a small position will, I am sure, be well rewarded in due course. The shares, now at 172.5p, could quite quickly break upwards again through that 200p level and then even higher.

(Profile 21.03.19 @ 340p set a Target Price of 402p*)

(Asterisks * denote that Target Prices have been achieved since Profile publication)