City broker Peel Hunt has initiated coverage of Hotel Chocolat Group PLC (LON:HOTC) with a ‘buy’ rating, saying the chocolatier has carved out a strong niche in the market while also scaling into international expansion.
Analysts said that the AIM 100 group had a well-known and accessible brand with a “strong niche” in the luxury chocolate market that, “crucially”, had barriers to entry.
READ: Hotel Chocolat shares gain as full year results exceed estimates
The broker also cited the firm’s “swift” pace of expansion, with around 15 new stores and cafes opening each year and a “pleasing” 18-month store payback in addition to an online offering that they expect would keep growing from 20% of the sales mix.
The group’s increasing scale would also bring material improvements to production speed and cut costs, the broker said, adding that HC’s management was confident that scaling would widen gross and operating margins.
Analysts added that the “long term vision” is that the company could run a mid-70s gross margin which would filter down to around a 20% underlying (EBITDA) margin.
International expansion, with a successful trial in Denmark, was the next growth angle, but the broker warned that expansion into Japan and the US “won’t be a cakewalk”, with the firm having already misfired a US launch previously.
Peel Hunt also pegged the company with a 300p target price, saying that it was “a core holding” that offered “high quality growth”.
In late-morning trading Wednesday, Hotel Chocolat shares were up 1.1% at 265p.