We have followed The One Group Hospitality (STKS) on this website, as we follow every publicly held restaurant company. Our readers are well aware that STKS has been statistically very inexpensive (trading with an Enterprise Value of only 4-5x TTM Adjusted EBITDA), highly  dependent on the performance of their very successful STK concept.

Emanuel (“Manny”) Hilario has engineered an impressive improvement over the last five years within their STK concept and also successfully integrated their purchase, out of bankruptcy, of the best of the Kona Grill chain.

The bet now is that Benihana, a 60 year old (still relevant) experiential concept, which has been successfully managed in recent years by CEO, Tom Baldwin, has a great deal of remaining potential. STKS is paying just over 5x pro forma TTM Adjusted EBITDA, close to only 4x trailing Adjusted EBITDA when considering potential savings and synergies.

Considering that STKS has been trading at essentially the same valuation level, the combined company, on a pro forma basis, is trading (at $5.25/share) with an Enterprise Value of only 4.6x, far less expensive than other publicly traded single or multi-branded company operated dinner house companies. Bloomin’ Brands (with Starwood agitating) is the closest valuation at only 5.1x TTM EBITDA. Brinker and Dave & Buster’s are around 7.0x. Cracker Barrel is around 8x.  BJ’s is at about 9x. The Cheesecake Factory is at about 10x. Chuy’s is about 11x. “Best of Breed” Darden and Texas Roadhouse are at about 13x and 19x respectively. Each of these “comps” is obviously different from STKS, with the beauty often in the eye of the beholder, but the outlook for STKS seems to us as good or better than most.

Without delving into the fundamentals of STKS and Benihana, impossible to provide within only a couple of days of the merger announcement, the purpose of this piece is to point out the huge opportunity for STKS shareholders (of which we are one), IF Hilario and Company can continue to operate STK  and Kona productively and successfully build upon Benihana’s historical success. IF STKS management can produce the projected $137M of combined EBITDA, with synergies (the operative word being IF) every single EV turn relative to EBITDA will add $4.15/share to the STKS stock price, an obviously large percentage compared to the current $5.25 stock price.  Time will obviously tell, and while corporate liquidity seems manageable, there is a new level of debt to be serviced. Fundamentals aside, the table below shows the upside re-valuation potential. Our readers, many of whom are more than capable of making their own judgements, can follow along and make a bet (or not) on STKS.

Roger Lipton