Description

The ONE Group Hospitality, Inc. is a global hospitality company that develops, owns and operates, manages and licenses upscale and polished casual, high-energy restaurants and lounges and provides turn-key food and beverage services for hospitality venues including hotels, casinos and other high-end locations. The Company’s primary restaurant brands are STK, a multi-unit steakhouse concept that combines a high-energy, social atmosphere with the quality and service of a traditional upscale steakhouse, and Kona Grill, a polished casual bar-centric grill concept featuring American favorites, award-winning sushi, and specialty cocktails in a polished casual atmosphere.

As of September 30, 2021, the Company-owned, operated, managed, or licensed 60 venues, including 23 STKs and 24 Kona Grills in major metropolitan cities in North America, Europe and the Middle East and 13 F&B venues in six hotels and casinos in the United States and Europe. For those restaurants that are managed or licensed, the Company generates management fee revenue based on top-line revenues and incentive fee revenue based on a percentage of the location’s revenues and profits.

STKS will generate $44M in adj EBITDA in 2021, and this is while restaurants faced significant capacity restrictions in 1H21 (and lack of corporate business in 2021). STKS will likely open the following company owned venues in 2022 - ~6 STKs and ~6 Kona Grills. We believe Kona Grills will contribute $1M in EBITDA and STKs to contribute $1.5M per annum.

Assuming a regular cadence of openings at 1 venue per month, these locations will contribute $10.5M in adj EBITDA in 2022. Royalty and managed income growth will grow by ~$2.5M next year as well.

We believe STKS will generate ~$60M in adj EBITDA in 2022.

INDUSTRY LEADING COMPARABLE STORE SALES GROWTH NORTH OF 50% VS 2019

STKS has been comping extremely well and demonstrating that it is one of if not the best stories, brands and management teams in the restaurant space. Versus 2019, STK comped up 63.8% in Q3 and 73.7% for the month of October. Kona Grill comped up 26.9% in Q3 and 42.9% in October, both versus 2019.

STKS posted HSD comps in both 2018 and 2019 – which were the first full two years following Hilario becoming CEO.  Hilario also pulled off a great deal purchasing Kona Grill for ~$30M, Hilario and company have significantly improved the operations – this is now a thriving high growth concept that will continue to generate high ROIC for STKS.

Despite Hilario and STKS showing a consistent stellar track record of SSS growth, unit growth, and adj EBITDA growth – STKS trades at just 7x 2022 EBITDA. The market has yet to understand that STKS now has a very strong balance sheet and FCF generation that will afford them the opportunity to grow company owned venues much faster – allowing greater contribution than previous asset light royalty and management deals. STKS is also witnessing high demand from renowned hospitality partners – STKS can continue to do capital light managed or royalty openings as well.

BOTH STK AND KONA HAVE MASSIVE WHITESPACE AND PIPELINE FOR GROWTH

STKS has stated their goal is reaching at least 400+ venues, including 200+ STK locations globally, and another 200 Kona Grill locations in the US. STKS is in the second inning and is far from reaching its potential. We believe STKS can grow revenue and EBITDA at a 20% CAGR over the next 7+ years. Additionally, as STKS executes it will see multiple expansion off of the ridiculously low 7x EBITDA it currently trades at.

STKS generates 40-50%+ cash on cash returns with its new venue openings.

The average EV/EBITDA takeout multiple for restaurants with a portion of its income from fee generation – has historically been ~12-14x EBITDA. Also, recent restaurant IPO’s have been coming in at >20x EBITDA. These include SweetGreen (20x revenue), Portillo’s (30x EBITDA), Krispy Kreme (18x EBITDA), and Dutch Bro’s (100x EBITDA), amongst others.

We believe it is almost undisputable that STKS is one of the best concepts and stories in restaurants and that it deserves a sizeable premium to the 12-14x EV/EBITDA take private transactions, and should trade on par or above the multiples of where recent restaurant IPOs are coming in at.

POTENTIAL FOR SIGNIFICANT RERATING WHEN COMPANY “RE-IPO’S" SHORTLY

We believe STKS can essentially re-IPO. The founder of STKS, Jonathan Segal owns 17% of the company and appears to want to diversify by selling some STKS if he can receive a fair valuation. STKS has filed an S-3 of which STKS won’t get any proceeds but opens the door for Segal to participate in a secondary accompanied by a potential roadshow with some brokerage firms who will attract institutional investors to this former microcap. This will improve the liquidity, get the story out to some real players (the same institutions buying recent restaurant growth IPOs at >20x EBITDA) and correct the huge valuation gap to both peers and the intrinsic value of one of if not the best stories in restaurants.

Although, if STKS’s huge valuation mismatch doesn’t correct, we are happy to join Hilario and STKS in the second inning of its highly effective growth plan, for which we expect 25% CAGR on our investment over 7 years (20% EBITDA growth, 5% multiple expansion/return of capital). This would lead to a $63 stock in 7 years, or a $2B valuation. At an exit multiple of 11.5x EBITDA this would mean STKS would need to be generating $165M in EBITDA in 2028, assuming in 2028 STK locations do $1.7M in EBITDA and Kona’s $1.2M in EBITDA by then, STKS would need to get to 60 company owned STK locations, and 50 company owned Kona’s, we believe they will get there with ease.  Plus, the licensed and managed fee income will more than cover STKS’s corporate expenses. CEO Manny Hilario and Chair Jonathan Segal have significant alignment with shareholders.

Catalyst

upcoming "re-IPO" roadshow and improved institutional investors and liquidity. STKS continuing to show its in a league of its own with SSS growth, unit growth, and ROIC all far outpacing peers.