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Consumer Cyclical

Restaurants

FAT Brands Inc.

Thoughts on Valuation
We continue to believe FAT shares are undervalued. At the current price of $11.00, FAT shares trade at 12.2x normalized 2022 adjusted EBITDA of roughly $103 million, once all acquisitions are completed. At our $25 price target, FAT shares would trade at 14.7x normalized 2022 adjusted EBITDA. This compares to a peer group that trades at 21.6x consensus 2022 EBITDA, or 16.3x if we exclude two outliers: Wingstop and Shake Shack. In either case, FAT shares trade at a significant discount to the peer group.
 The valuation discrepancy comes into even sharper relief when we look at the recent IPOs in the restaurant space, especially given the dramatic stock performance of some since their IPOs. For example, breakfast and lunch focused First Watch (FWRG) recently came public. First Watch operates 428 locations, of which 337 are company owned, with an AUV of $1.6 million per store. Using an estimated annualized 2021 EBITDA, FRWG shares are trading at 17.5x on an EV/EBITDA basis. Similarly, Chicago area Portillos, operator of 67 locations with an AUV of $7.7 million currently trades at n EV/estimated annualized EBITDA of 21.2x. And Sweetgreens does not even generate positive EBITDA, although the 140-store, healthy eating concept trades at over 11 times revenue.
While we have heard concerns of the amount of insider ownership at FAT Brands, we would point out that each of the three recent IPOs remain controlled by their respective former owners, in each case with over 50% of the voting power.
We also would remind readers of the overlooked potential, in our opinion, of the contribution possible through new store development and refinancing of the whole business securitization. As we have mentioned in previous reports, each 100 new locations will generate approximately $6 million of annual adjusted EBITDA for FAT Brands. With a pipeline now exceeding 800 locations, this alone translates into nearly $50 million of increased adjusted EBITDA, or a 50% increase from the current normalized adjusted EBITDA run rate. While we concede not all of the existing pipeline will be built out, the contribution of those stores built is all incremental to the Company.
Again, we previously have mentioned the savings potential from a debt refinancing. We estimate the current interest cost to be somewhere in the $65 million range. If in a refinancing FAT can lower its current weighted average interest rate by 100 basis points, this results in about $9 million of annual interest savings.
Combine the new store opening potential with potential interest cost savings and there is a relatively easy path to increase adjusted EBITDA by $15 million, or almost 15%, from the current normalized level.

FAT Brands Inc. (FAT)

Another Order of Chicken Wings

Fundamental Analysis:

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More Development Deals (FAT)

Reports Fourth Quarter Results (FAT)

Company Receives Wells Notice (FAT)

Another Year of Store Growth (FAT)

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