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27 May 2014

Summary company financials (m)

Year end June FY2012 FY2013 FY2014E FY2015E
Price 1.07 Revenue 217.1 221.1 225.5 231.6
Market cap (m) 77.8 -0.5% 1.8% 2.0% 2.7%
Enterprise value (m) 102.0 EBITDA 12.2 15.4 16.6 20.1
5.6% 7.0% 7.4% 8.7%
Free float 100% Net income -0.9 3.8 5.8 7.3
Daily val traded (m) 0.16 Net debt (cash) 29.1 27.5 24.2 18.5
EV/Sales 0.26 0.55 0.45 0.42
EV/EBITDA 4.6 7.9 6.1 4.8
PE -30.0 25.1 13.3 10.7
Thorntons PLC
Revenue growth
EBITDA margin
Thorntons Plc is the UK market leader in inlaid boxed chocolates, with a 35% market share (up from 33% in 2013). The company' s overall
market position in boxed chocolates is third, with a 12% market share (versus market leader Mondelez with a 27% share and number two
player Nestle with a 17% share). Thorntons has FY2014E revenue of 225m, a market capitalisation of 78m and net debt of 24m.
Thorntons trades at a June FY2014E rating of 0.45x Enterprise Value to Sales and 13x PE, with margin uplift potential in years going forward
as its higher margin FMCG division continues to grow.

Thorntons is in the midst of a transformation from primarily a bricks and mortar retailer of chocolate to an international Fast Moving
Consumer Goods (FMCG) company that sells its branded chocolates into other retailers. Thorntons' FMCG segment revenues have been
disclosed from 2004, and since the appointment of FMCG divisional head Barry Bloomer in 2005, the division has grown revenues at a
compound annual rate of 18% and now represents 50% of overall group revenues:

Year FMCG revenue % growth % of group total revenue
2004 10.0m 51%
2005 22.3m 123% 12%
2006 19.9m (11%) 11%
2007 37.0m 19% 20%
2008 49.5m 34% 24%
2009 56.8m 15% 26%
2010 62.6m 10% 29%
2011 78.8m 26% 36%
2012 85.0m 8% 39%
2013 101.1m 12% 46%

2014 Q1-Q3 99.1m 7% 50%

The opportunity to acquire shares in Thorntons at current levels, however, comes after a quarterly trading update that disappointed market
expectations relating to growth in Thorntons' FMCG division. Thorntons delivered Q3 FMCG growth of -8.6%, bringing year-to-date FMCG
growth down to +6.8% in a division which had been growing at double digit rates.

Looking back over the longer term FMCG historical quarterly trend at Thorntons, however, suggests individual negative quarters occur every
6 quarters or so, and the last quarterly update is not outside this trend. This may be characteristic of the chocolate sector, as for example
peak revenue periods such as Easter may fall into different quarters in different years. Lindt and Hershey's quarterly revenue growth
histories also show similar volatility with negative quarters occasionally punctuating an overall trend of positive growth, according to our
analysis. The UK food retail sector is also having a challenging year, with the big four supermarkets reporting negative like-for-like sales, so
Thorntons' still high single digit growth also needs to be considered within the context that its main customers are reporting negative growth
at current.

Outside of its FMCG activities, Thorntons' remaining revenue comes from its retail division. This division has left the group exposed to the
structural problems in many of the UK's high streets, and its rationalisation continues. In 2013 Thorntons posted retail sales of 120m from
296 stores, a figure little changed from the 136m of retail revenue posted 10 years before from 378 stores. The 2014 H1 results disclosed
Thorntons is now trading from 281 retail stores, and has eyed a longer term store portfolio of between 180 and 200 stores. However, with
retail now less than 50% of group revenue, the significance of its contribution to the group will diminish. Notwithstanding this, the
rationalisation of the store estate is beginning to show benefits, with retail like-for-like sales up 1.8% over the Q1-Q3 period. It should be
noted that maintaining some retail footprint gives Thorntons certain structural advantages against its FMCG-only competitors -- including
increased customer brand awareness and the ability to trial new lines in a protected and controlled environment before a full FMCG product

Thorntons' FMCG division has an 18% operating profit margin versus the retail division's sub 10% operating margin. As the FMCG division
grows, its higher underlying margin benefits group margin and group profitability. Furthermore, as the increasing contribution from FMCG
revenue growth drives group revenue growth, group profitability should benefit as fixed head office costs and some fixed factory costs
become a lower proportion of overall costs. Additionally, continuing retail store estate rationalisation should see gradual uplift in the retail

We see the FCMG division at Thorntons having the potential to deliver closer to two thirds of group revenue by year end 2016, which,
combined with further retail rationalisation, should lead to a group operating margin above 10%. This implies the group would be trading on
a single digit PE and greater than 10% free cashflow yield. Longer term, we believe investors should push Thorntons to target operating
margins higher - to the mid-to-high teens, benchmarking the company against peers such as Mondelez - where management have
announced 15-16% operating margin targets, Hershey: 20% operating margins, and Lindt: 15% operating margins.

announced 15-16% operating margin targets, Hershey: 20% operating margins, and Lindt: 15% operating margins.

Thorntons manufactures its own chocolates, and factory utilisation rates are understood to be at 70% capacity. With no blocking shareholder
(largest holder Crystal Amber has 10%), further undervaluation of Thorntons equity would leave the company's valuable brands and assets
potentially exposed to approaches from a trade buyer, private equity, a management-led-offer or shareholder activism. Indeed, in August
2005, when Thorntons' group revenue was 20% below current levels and its FMCG division was only a fifth of its current size, the then
management team (since replaced) made an unsuccessful buyout approach for the equity. A statement by Thorntons in February 2006
revealed the approach was at 130p - a 21% premium to the current share price.