Business Introduction
London headquartered City Pub Group Plc owns and manage an estate of first-rate pubs throughout the southern half of England and Wales. Its pubs' estate includes 50 free houses, among these 45 are operational, and five are in the pipeline. They have a portfolio of freehold pubs, managed pubs, offering a premium range of drinks and food customised to each of its pubs' customers. Their target market divided into five categories: Residents, Tourists, Office workers, Students and shoppers. Unicorn Asset Management Ltd., Hargreave Hale Ltd. and Franklin Templeton Fund Management Ltd. are the major shareholders in the group.

Key Statistics


Financial Performance – FY2018 (£ mn)
The company’s reported revenue for FY18 stood at £45.7 mnagainst £37.4 mn a year ago. The reported revenue was 22% above the reported revenue of the previous trading year FY17. On a like-for-like basis, the company achieved a sales growth of 1.6% over last year. Adjusted EBITDA on a YoY basis improved by 28% to £7.9 mnagainst £6.1 mn in 2017. Adjusted Pre-tax profit for FY18 was at £5.1 mn, up by 60.0% on a YoY basis. Reported profit stood at £2.0 mn against £0.7 mn in FY17. At the end of FY18, Net Debt of the group stood at £8.7 mn, which places the group at a comfortable position for expansion in a market where prices are weakening. Basic earnings per share were at 3.23 pence against per share loss of 2.45 pence in FY17. After reporting a decent performance, the board of the City Pub Group recommended a final dividend of 2.75 pence per share, which was 22% above the recommended dividend of 2.25 pence per share in FY17. During the year, the group opened 11 new pubs and focused on having an estate of 65-70 pubs by mid- 2021. Net Debt to EBITDA ratio for FY18 was 1.1x against 0x in FY17.
From the CAGR standpoint,in last three years, the group has grew its revenue with a CAGR of 31%, which is a decent growth for a company which is into a growth phase, pre-tax profit during the same period has surged with a CAGR of 44.9% and diluted earnings per share including extraordinary items have improved with a CAGR of 44.2% respectively.

Stock Performance – 1 Year

1 Year – Daily Price Chart (as on May 21, 2019), before the market close. (Source: Thomson Reuters)

After a decent performance reported by the group for FY18, the stock delivered on a year-to-date basis, return of 31.81 per cent.At the time of writing (before the market close at 12:20 PM GMT), shares of CPCwere quoting at GBX 225 and trading 5 points or 2.17 per cent lower against the previous day closing price. In the last year, shares have touched a 52w high of GBX 254.46 and a 52w low of GBX 170.0. At the current price, as quoted in the price chart, shares were trading 32.35 per cent above the 52w low price level and 11.57 per cent below the 52w high price level.

Valuation Methodology
 

Key Risks
Despite decent performance in FY18, the group remained laggard against the industry on some parameters like group's EBITDA margin for FY18 of 16.4 per cent was relatively lower against the industry median of 19.7 per cent, RoE of 2.6% was considerably below the industry average of 9.2%. Also, the group is exposed to several political, micro and macro-economic headwinds like Brexit, slow down in shoppers spending and inflationary pressures.

Conclusion
The Restaurant and bar group (CPC) has 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. With low debt contribution in the total capital, it places the group in a strong financial position to expand its reach in the new markets.  City Pubs’ earnings yield is around 1.33x of the 10-year UK Bond Yield, which draws shareholders attention for the stock. Also, the stock is trading considerably above the 200-day simple moving average price, which a bullish technical indicator and reflects the potential for further upside movement in the stock. 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 rational and the valuation done using the above methodology, we have given a “Speculative Buy” recommendation at the closing price of GBX 230 (as on May 20, 2019) with single digit upside potential, based on the 16x NTM Industry Median Price-to-Cash Flow Multiple (approx.) on the FY19E Cash Flow Per Share (approx.).
 
*The “Speculative Buy” recommendation is also valid for the current market price as on May-21-2019.

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