“There are few worse investments than a growth stock that fails to deliver the rapid increase in sales and earnings that analysts are expecting, and a disappointing trading update means that a few investors are getting their fingers burned by commercial kitchen services supplier Filta,” says Russ Mould, AJ Bell Investment Director.
“The AIM-quoted company, which specialists in the treatment of fryers and cooking oils across restaurants, hospitals and sports stadia, had been trading on around 30 times forward earnings for 2019, based on the consensus analysts’ forecast of a 35% advance in profits to 6.54p a share.
“That was a chunky multiple but perhaps a defensible one given the forecast earnings progress and a price-to-earnings-growth ratio that was still below one time (a PE of 30 divided by earnings per share growth of 35).
“However, those growth forecasts will now not be met, according to today’s trading alert. CEO Jason Sayers has acknowledged that cost savings from an acquisition at the Fat, Oils and Grease operation have come through more slowly than hoped, as extra costs have been incurred to meet a backlog of orders. Filta has also added more staff to drive growth in the UK market.
“As a result, second-half profits on the company’s preferred metric of ‘adjusted EBITDA,’ will now come in no higher than they did in the first, when Filta earned £1.7 million on this basis,
Source: Company accounts
“In plain English, Mr Sayers’ forecast suggests that ‘adjusted EBITDA’ for the year will be £3.4 million, against £2.6 million a year ago. While still implying good growth, the new forecast is around a fifth below forecasts and earnings per share may now drop sharply, owing to operational gearing in the business, interest costs and tax.
“This explains the sharp share price fall. The 30-times plus forward earnings multiple left little margin of safety if anything went wrong (which it now has). Before today, Filta had a market cap of £56 million even though last year’s pre-tax profit was just £1.7 million on a stated basis, so Filta had to generate very rapid profit increases simply to justify its price tag.
“It is now up to Filta’s management to show that this is just a blip and that the company can return to its growth trajectory in 2020 and beyond, thanks to its strong competitive position and capital-light franchise model in what remains a growth market.”
