City Pub Group PLC – Reflecting Strong Business Model, with Sustainable Growth in Long Run

City Pub Group Plc (LON: CPC) is a London, the United Kingdom-based company, which owns and manage an estate of first-rate pubs throughout the southern half of England and Wales.

CPC’s Strength
Scalable platform with a strong pipeline of potential acquisitions; the group is asset-backed; impressive financial performance and growth; experienced management team, motivated staff and strong culture.

Recent News
On 27 March 2020,the Company released a proposed Open Offer to raise additional funding of around £7 million (both amounts before expenses) and Placing to raise GBP 15 million through the issue of up to 44,015,634 New Ordinary Shares, which gives an issue price per New Ordinary Share of 50 pence. In the General Meeting, all of the Resolutions were duly passed, which is set out in the circular published on 30 March 2020. In respect of Open Offer and Placing, the Company can now confirm that it be will raising around £22 million.

COVID-19 Update (as on 17^th March 2020) – Reflecting Strong Balance Sheet
During the first eleven weeks to 15 March 2020, total turnover is up 11 per cent against the same period last year, while LFL sales tumbled 4.5 per cent in the same period.  Recently, the Group’s trading has been wedged by COVID-19. Its impact was seen on sport, and on certain sites, where reductions in trade were witnessed. The Group didn’t mention the exact impact of Coronavirus on its trading performance as well as a financial performance at this time; However it anticipated a material decrease to its expectations for 2020. CPC's balance sheet is robust with £32 million of current net debt against a portfolio consisting predominantly of freehold assets with a 116 million pounds of net book value as at 29 December 2019.

Share Price Performance
 
Daily Chart as at May-07-20, after the market closed (Source: Refinitiv, Thomson Reuters)

City Pub Group PLC’s shares closed at GBX 80 on 7th May 2020 and were down by 3.03% versus the previous day closing price. Stock 52 weeks High and Low are GBX 221.33 /GBX 36.25.

Valuation Methodology

*Peers: Ten Entertainment Group Plc, Hollywood Bowl Group Plc, On The Beach Group Plc, and J D Wetherspoon Plc.

Risk Assessments and Growth Prospects
The company operates in a highly regulated sector where government laws impact the business environment. Market uncertainty and increasing demand lead to cost pressures in several areas, most significantly food and drink production, utilities and staff costs. The Restaurant and bar group have recorded decent growth in the past several years. The group has made several strategic acquisitions in the last year, which are imperative for its further growth. The strong balance sheet places the group in a strong financial position to expand its reach in the new markets. Over the course of 4 years (FY14 - FY18), the company’s revenue surged from £15.26 million in FY14 to £45.67 million in FY18. Compounded annual growth rate (CAGR) stood at 31.53 per cent.

Conclusion
The company cannot ignore the uncertainty in the market as created due to Brexit and Coronavirus. The group is exposed to several political, micro and macro-economic headwinds like the slowdown in shoppers spending and inflationary pressures. As the development sites begin trading in the current year, the company will drive the performance going forward. Their performance has been driven by both organic growth and the new pubs coming on stream, and the group is well placed to take advantage of the softening market for acquisitions.

Based on the above rationale and the valuation done using the above methodology, we have given a “Speculative Buy” recommendation at the closing price of GBX 80 (as on 7^th May 2020) with lower double-digit upside potential, based on the 17.09x Peers Average NTM Price/Earnings Multiple (approx.) on the FY20E earnings per share (approx.).
 
*All forecasted figures and Peers information has been taken from Refinitiv, Thomson Reuters.
*The “Speculative Buy” recommendation is valid for the current price as covered in the report (as on 11th May 2020).

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