Author Topic: KONA - Kona Grill  (Read 7376 times)

ebdem

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Re: KONA - Kona Grill
« Reply #40 on: March 20, 2017, 01:42:45 PM »
@peridotcapital
In your first post on KONA you made the assumption of a mainentance capex of 3 million. Today I started struggling with that assumption, cause we are running in a remodel circle for the old restaurants of KONA. They are remodeling their restaurants after 8 till 15 years. In the average numbers indicate restaurants are remodeled after 11-12 years. Based on this historical pattern, there are 12 restaurants with the "need" to be remodeled till 2019/20.

For 2017 the guidance for capital expenditures is 16 - 18 million. I take the higher range of 18 million. If I substract 9 million for the three planned openings and 3 million mentioned by you, 6 million remain for the remodelings. So every remodeling might cost around 1,5 million - I hope this is a fair estimate.

So till 2019/20 around 18 million will be needed for remodeling. They are flexible in doing this remodeling, but they need to do it someday, otherwise customers will choose other stores. In my eyes, it is therefore more realistic to estimate with a maintenance capex of 7,5 till 9,0 mio $ a year. This reduces free cashflow.

peridotcapital

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Re: KONA - Kona Grill
« Reply #41 on: March 20, 2017, 02:40:18 PM »
@peridotcapital
In your first post on KONA you made the assumption of a mainentance capex of 3 million. Today I started struggling with that assumption, cause we are running in a remodel circle for the old restaurants of KONA. They are remodeling their restaurants after 8 till 15 years. In the average numbers indicate restaurants are remodeled after 11-12 years. Based on this historical pattern, there are 12 restaurants with the "need" to be remodeled till 2019/20.

For 2017 the guidance for capital expenditures is 16 - 18 million. I take the higher range of 18 million. If I substract 9 million for the three planned openings and 3 million mentioned by you, 6 million remain for the remodelings. So every remodeling might cost around 1,5 million - I hope this is a fair estimate.

So till 2019/20 around 18 million will be needed for remodeling. They are flexible in doing this remodeling, but they need to do it someday, otherwise customers will choose other stores. In my eyes, it is therefore more realistic to estimate with a maintenance capex of 7,5 till 9,0 mio $ a year. This reduces free cashflow.

I would probably differentiate between maintenance capex and a full remodel. With a full remodel they are actually investing a large amount of money and expecting a return on that investment (i.e. incremental sales). For instance, their recent Las Vegas remodel added additional seats, so that really isn't simply maintenance spending. But obviously we can all disagree on that.

Honestly, whether we use $3M or $5M or $10M for maintenance capex, it does not really impact things that much considering how low the stock price is. They just generated $21M of operating cash flow in 2016. If they can duplicate that over the next few years, on average, the stock would nearly triple even if we use your highest $9M mandatory capex figure (assuming a 15x FCF multiple). It really all comes down to average unit volumes and four-wall margins going forward.

NBL0303

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Re: KONA - Kona Grill
« Reply #42 on: March 22, 2017, 07:20:14 PM »
One other thought about KONA:

Think about this....Book value today is about $3/share.

There are several analysts covering KONA.  Every project for current year earnings is NEGATIVE, there is variation amongst how negative it will be.

Every analyst also thinks next years earnings will also be NEGATIVE.

Of course, I am somewhat skeptical of analysts estimates...and of course book value is simply one metric...but I still think it valuable to gauge your estimation of return and probability of achieving it.

Two thoughts about this post: first, book value is generally not at all illustrative of the intrinsic value of a restaurant.  I would look to the earnings power of a restaurant and not to the book value.  Not that I am that smart and figured this out, I learned this lesson from Warren Buffett at a Berkshire annual meeting years ago.  He described certain types of businesses like restaurants and the verbatim quote was essentially: "Look to earnings power, not to book value."

Secondly, sometimes analysts having a negative opinion of a stock - I view as a very good thing.  We are trying to buy undervalued securities and for a company to be undervalued there generally has to be some kind of misunderstanding or some element of the company that is unloved.  Negative analyst sentiment in the case of many undervalued securities not only reflects that misunderstanding but also contributes to it.  I believe that may be the case with this one; this is a micro cap company where the numbers tell a misleading story (negative EPS due to buildout, while operationally the company is significantly profitable).  In this circumstance, it is not surprising to me that value-oriented deep-dive investors would have a different viewpoint than public analysts.

DTEJD1997

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Re: KONA - Kona Grill
« Reply #43 on: March 22, 2017, 07:56:08 PM »
One other thought about KONA:

Think about this....Book value today is about $3/share.

There are several analysts covering KONA.  Every project for current year earnings is NEGATIVE, there is variation amongst how negative it will be.

Every analyst also thinks next years earnings will also be NEGATIVE.

Of course, I am somewhat skeptical of analysts estimates...and of course book value is simply one metric...but I still think it valuable to gauge your estimation of return and probability of achieving it.

Two thoughts about this post: first, book value is generally not at all illustrative of the intrinsic value of a restaurant.  I would look to the earnings power of a restaurant and not to the book value.  Not that I am that smart and figured this out, I learned this lesson from Warren Buffett at a Berkshire annual meeting years ago.  He described certain types of businesses like restaurants and the verbatim quote was essentially: "Look to earnings power, not to book value."

Secondly, sometimes analysts having a negative opinion of a stock - I view as a very good thing.  We are trying to buy undervalued securities and for a company to be undervalued there generally has to be some kind of misunderstanding or some element of the company that is unloved.  Negative analyst sentiment in the case of many undervalued securities not only reflects that misunderstanding but also contributes to it.  I believe that may be the case with this one; this is a micro cap company where the numbers tell a misleading story (negative EPS due to buildout, while operationally the company is significantly profitable).  In this circumstance, it is not surprising to me that value-oriented deep-dive investors would have a different viewpoint than public analysts.

I think there are several members that do not understand what I am trying to convey about book value in relation to the restaurant industry.

A). Book Value is not the single best "valuation" method for restaurants, NO DOUBT.  HOWEVER, you've got to look at the asset base and the leverage.  Book value will allow you to get a handle on that. 

Are you seriously going to tell me that book value has no weight or relevance in valuing a restaurant?

With KONA hitting new 52 week lows, the stock is still trading for something like a 14X EV/EBITDA valuation!

They've got about $26MM in debt.  Then they've got a bunch of leases. Leverage aplenty!


B). I would argue the single most important metric is sales.  Everything else flows from sales....

C). You've also got to look at margins and profitability.  This is generally a low margin industry...Some of the best operators (company owned locations with NO or few franchisees) are getting about a 6% NET on sales.  A lot of restaurants simply don't make ANY money at the end of the quarter, end of the year...Maybe 25% of the industry (maybe more) is not making and money at all.  The next 25% is making money, but just barely...below 1% to maybe 2% NET on their sales.  Move up another 25% and you are maybe looking at 3% or 4%.  Go to the TOP QUARTILE of companies and you are looking at 5,6,7 percent NET on sales.


KONA is doing about $15.75 a share in sales today.  Fast forward a couple of years, assume they can execute their plan AND assume that the economy doesn't go back in the ditch, AND assume that they don't dilute existing equity holders (?book value?) and they are doing about $20/share in sales.

If KONA can execute their plan successfully, let us assume that they move into the top quartile of companies.  They are then making about 5% or 6% net on sales.  They are then netting about $1/share.  Maybe a bit more, maybe just a bit less, but about $1.

HOWEVER, you've got to discount the chance that they can't execute, OR that the economy goes south, AND you've still got to wait 2-3 years to get there.

So what I'm arguing here is that while KONA very well may execute AND it may turn out to be a good investment, THERE IS A LOT OF RISK HERE that I don't think is being adequately assessed.  As a shareholder, are you being adequately compensated for that risk? 


peridotcapital

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Re: KONA - Kona Grill
« Reply #44 on: March 23, 2017, 06:38:26 AM »
Yes, I am saying that book value is meaningless for a restaurant. Like I said before, they could sell equity today and book value would go up, but that would have zero impact on my analysis of the stock as an investment.

We aren't going to agree on KONA, which is fine. I value stocks on free cash flow, you prefer GAAP net income. You care about book value, I don't. You are using EV/EBITDA multiples based on current EBITDA, I am looking at their future EBITDA.

The one place I do agree is that KONA comes with plenty of risk (it is a micro cap restaurant after all). I just feel like I am getting a good price (enough so to take that risk) because the current stock price is discounting financial results far worse than they have been able to produce over the last 10-15 years, and more importantly, I don't think their business model is broken. Only time will tell!

NBL0303

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Re: KONA - Kona Grill
« Reply #45 on: March 23, 2017, 08:47:53 AM »

Are you seriously going to tell me that book value has no weight or relevance in valuing a restaurant?


Yes I am saying that.  But, more importantly, Warren Buffett is saying that (or said that at previous Berkshire meeting).

When another lens is superior in every way to analyzing a business or asset, then I would abandon the inferior lens.  This is the concept of lesser included.

Update: Peridot beat me to it - I fully agree with Peridot's post.

ebdem

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Re: KONA - Kona Grill
« Reply #46 on: March 24, 2017, 11:12:41 AM »
I would probably differentiate between maintenance capex and a full remodel. With a full remodel they are actually investing a large amount of money and expecting a return on that investment (i.e. incremental sales). For instance, their recent Las Vegas remodel added additional seats, so that really isn't simply maintenance spending. But obviously we can all disagree on that.

Honestly, whether we use $3M or $5M or $10M for maintenance capex, it does not really impact things that much considering how low the stock price is. They just generated $21M of operating cash flow in 2016. If they can duplicate that over the next few years, on average, the stock would nearly triple even if we use your highest $9M mandatory capex figure (assuming a 15x FCF multiple). It really all comes down to average unit volumes and four-wall margins going forward.

Thanks for the reply. My aim is to get a clearer picture of the business and future cashflows. It's sad that just can't walk out of the door and visit one of the restaurants - it will take some hours of flying to do that  ;). It's good to know that remodelings have also an investment part/character. My concern about the remodelings is, that they might run in a circle of remodeling needs, which might affect freecashflow significantly. As you said, if restaurant operation margins grow again back to 18%, this won't be a huge problem.

I crunched some numbers to see how growth and remodeling made their impact on the cashflow. Looks good, but I don't understand the bump in 2015 (cash provided...).