Shares in Hotel Chocolat Group PLC (LON:HOTC) slipped on Wednesday as Berenberg said the shares are not worth buying, despite a strong trading update.
The UK-based manufacturer and retailer of premium chocolate and cocoa-related products said revenue in the financial year just ended was slightly ahead of market expectations.
In the 53 weeks to 2 July 2017, revenue was £105mln, while stripping out the 53rd week for comparison purposes saw revenue rise 12% year-on-year in constant currency terms to £104mln.
The chocolatier said its spring seasonal ranges delivered encouraging results and, following successful trials, its cocoa-infused ice cream - modestly branded Ice Cream of the Gods - is now on sale in 37 locations.
Trading in the current financial year has been in line with management expectations.
"Hotel Chocolat has had another good year, with encouraging growth. We are excited about the progress made with our new shop+café format stores and our seasonal ranges continue to perform well," said Angus Thirlwell, chief executive of Hotel Chocolat.
Liberum lifts price target
The update was enough to persuade house broker Liberum to lift its price target to 365p from 340p; the shares currently trade at 315.25p, down 6.2% on the day.
Liberum has upgraded its forecasts four times already this year, prompted by stronger top-line and gearing benefits, but its argument is that many of the drivers supporting the company’s strong performance will actually annualise into the current financial year.
As alluded to by company boss Thirlwell, the company is rolling out a café model and has launched an interesting flavour of ice cream, while it continues to open new outlets - 12 in the financial year just ended. The company has also souped up - if that’s the right term - its web site.
“The digital performance in particular has been encouraging and we look towards FY18E for the new website powered off the DemandWare platform to generate incremental growth,” Liberum said.
It also expects the company to pay a maiden dividend of 1.5p.
Relatively low free cash flow, says Berenberg
Berenberg, which has initiated coverage on the stock, acknowledges that the company is generating strong revenue growth on the back of new store opening and increasing online openings.
It expects profitability will “improve considerably” during this expansion phase, but this will be accompanied by the need to plough profits back into the company, resulting in relatively low free cash flow.
With Hotel Chocolat trading on almost 41 times projected earnings per share for the current year, Berenberg reckons the shares are no more than a hold. It has a 12-month target price of 330p.
“Tasty, but too rich,” is its verdict.