Is it the right time to buy Hotel Chocolat Group plc?

The Motley Fool
Hotel Chocolat
Hotel Chocolat

Premium British chocolatier and retailer Hotel Chocolat Group(LSE: HOTC) arrived on the FTSE AIM market during May 2016 and the stock was immediately swept up in the great momentum trade of the past few years that pushed many growth firms higher.

During its first year as a public limited company the share price elevated around 86%, but since May 2017, the trend has been down, and today's 290p share price represents a decline of almost 26% from the peak. But Hotel Chocolat is not the only recent high-flyer seeing a reversal. Names such as Purplebricks, Fevertree Drinks and System 1 also look like their momentum has stalled. Perhaps we are seeing the end of the momentum trade and a rotation into the next big thing - maybe a flight to value?

Good results

After the recent decline, is now the right time to buy shares in Hotel Chocolat? Today's full-year results are good. Compared to a year ago, revenue elevated by 12% and earnings per share doubled, which looks encouraging. The directors expressed their confidence in the outlook by declaring a maiden dividend of 1.6p, which throws up a dividend yield of almost 0.6%. That's a good start, but despite the falls in the share price, I think there's still an issue with the valuation that is keeping the yield lower than it need be.

City analysts following the firm expect both revenue and earnings to put on around 8% during the year to June 2018. That's a modest, workmanlike rate of growth and not a high-flying rate of growth worthy of a premium valuation, in my view. Yet the forward price-to-earnings rating runs at just over 34. If we are indeed seeing a rotation away from highly-rated momentum towards good value, I could easily imagine Hotel Chocolat's valuation dropping by 50% and still looking a bit pricey to value-focused investors.

Expansion rolls on

Yet expansion continues at pace. During the past 12 months, the firm opened 12 new stores taking the total to 94, some 15 of which trade as shops/cafe combinations. There's also the prospect of international growth and two stores were franchised in Hong Kong. There's no doubt that the directors expect higher volumes because a recent £4m upgrade to the truffle-making production line in Britain increases truffle capacity by 70% and the firm's overall manufacturing capacity by 20%. Looking forward, a new liquid chocolate storage and handling facility is due to enter service in 2018 and the firm has plans to extend its factory by 2020 in order to add further chocolate-making capacity "to support our growth, and continue to explore opportunities for further automation."

On top of the well-established online and store retail sales operation, the company set up wholesale relationships with six new customers during the year including Amazon, Ocado and Fenwicks department store, which will give end-customers more access to the firm's chocolates and could end up becoming a driver of increased overall sales.

The directors reckon that the strength of the brand drives customer loyalty, and I reckon the firm's long-term growth prospects are attractive. However, in the shorter term, I think it is possible that a better-value entry point could arrive, so I'm not jumping in and buying the shares just yet.

This could be a top FTSE 250 buy

I'm keeping an eye on Hotel Chocolat, but the Motley Fool analysts have focused in on a FTSE 250 firm set to deliver for investors.

This UK business with a well-known brand could rise by up to 200% if things go well with the firm's expansion plans. If you'd like full details of this potential buy, download A Top Growth Share From The Motley Fool today. This exclusive report is free and without obligation. To get your copy, just click here.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.