Recently, U.S. restaurant chains operator Landry’s has offered to buy Ark Restaurants Corp. (NASDAQ:ARKR) for about $22 per share, with a total transaction value of $71 million. However, Ark has rejected Landry’s offer as it considered the offer to be “inadequate, not compelling and not in the best interests of Ark Restaurants shareholders.” So how much is Ark worth? Let’s dig deeper to find out.
Ark Restaurants Corp. (NASDAQ:ARKR) Restaurants, formed in 1983, is the owner and operator for 21 restaurants and bars, 22 fast food concepts and catering operations in New York, Las Vegas, Atlantic City and Washington D.C. Each of Ark’s restaurants is managed by its own manager and it has its own chef while its food products supply operation is controlled by the company’s headquarters. It is quite a seasonal business. The company reported that the second quarter of its fiscal year was the least performing quarter with the cold weather in New York and Washington while warm weather normally delivered the best operating results.
In 2009, Ark began to experience growth in its top line. Revenue has increased from $115 million in 2009 to $138 million 2012 while operating income jumped from $3 million to $10 million in the same period. In 2012, net income reached $5 million, or $1.65 per share. Income investors might like Ark as it has paid consistent dividends since 2005. The 2012 dividend was $1 per share. Thus, the 2012 payout ratio, 57.8%, is quite reasonable.
An improving business that consistently generates cash flow
There are two factors that make me interested in Ark Restaurants Corp. (NASDAQ:ARKR). First is the improvement in its operating margin and second is the consistent positive cash flow over time. The operating margin has jumped from 1.4% in 2011 to 7.2% in 2012, thanks to the decrease in food & beverage cost of sales and lower payroll and occupancy expenses. Since 2003, its operating cash flow has fluctuated in the range of $6 million – $12 million while the free cash flow has stayed in the range of $3 million – $9 million in the same period. Furthermore, Ark has quite a conservative capital structure. As of Dec. 2012, it had $30.2 million in total stockholders’ equity, $5.4 million in cash and only nearly $2 million in debt.
With a current offer of $22 per share, Ark is valued at around 4.8 times EV/EBITDA. Compared to its peers including Einstein Noah Restaurant Group, Inc. (NASDAQ:BAGL) and Darden Restaurants, Inc. (NYSE:DRI), Ark is the smallest company and has the cheapest valuation. Einstein Noah, at around $15 per share, is worth about $256 million on the market. The market values the company at 7.74 times EV/EBITDA. Darden Restaurants, Inc. (NYSE:DRI) is the biggest company, with $6.1 billion in total market cap. At around $47 per share, Darden is the most expensively valued, at 8.15 times EV/EBITDA.