Discover one of the most exciting small cap stories

Dan Coatsworth

Archived article

Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

Franchise group Filta (FLTA:AIM) looks poised to accelerate its geographical expansion, making now an ideal time to buy the shares. It has just made its first move into Canada and we understand a deal to crack mainland Europe could be imminent.

It’s a really simple business to understand. It owns FiltaFry which provides services to commercial kitchens. It has 182 franchisees which pay Filta a monthly royalty for each mobile filtration unit supplied by the plc company.

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Filta also earns a margin on waste oil sales and providing supplies such as chemicals to franchisees, as well as charging an administration fee on some of the larger accounts.

The franchisees clean deep fryers and filter the oil used to cook food. One of the biggest markets is sports arenas and stadiums in the US. It also serves schools, hospitals, universities, casinos, hotels and corporations. Many of the contracts involve being an approved vendor for some of the world’s biggest catering companies including Compass (CPG) and Sodexo.

We alerted readers to the stock’s potential three months ago. Since then, Filta has issued a positive trading update (7 Aug), bought a drain services business which strengthens its position in the UK and reported very strong half year results (7 Sep).

It boosted underlying operating profit for the six months to 30 June by 62% and lifted gross profit margins from 43% to 46%, year-on-year.

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Cashed up, ready to go

The company allocated £2.9m from its November 2016 IPO (initial public offering) fundraising to enter new local markets including Canada and Europe, as well as launch new services in existing markets (UK and US) and as working capital.

Chief executive Jason Sayers reveals to Shares that Filta is talking to two master franchise holders in Germany and Benelux ‘about a different way of doing Europe between us’. He says Europe expansion would still be done as a franchise model.

Its first franchise agreement in Canada was signed in June and trading began in August. The franchisee already has 300 customers to whom it delivers groceries, so it is hoped that persuading them to also have fryer cleaning services should be an easy win.

Filta trades on 23.3 times forecast earnings for 2018 which we don’t see as excessive given low capital expenditure requirements, high margins, lots of recurring revenue and strong cash flow potential.

It is forecast to pay 2.3p dividend next year, implying a 1.4% yield. We expect the yield to increase significantly as the business gains scale and its franchisees start providing more services to customers.

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