City Pub Group PLC

City Pub Group Plc (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. Its pubs' estate includes 50 free houses, among these 45 are operational, and five are in the pipeline. Their target market is divided into five categories: Residents, Tourists, Office workers, Students and Shoppers.

Financial Highlights (for the 26-weeks period ending 30 June 2019, £’000)

(Source: Interim Results, Company Website)

In H1 FY19, the company’s reported revenue increased by 36 per cent to £27,107 thousand as against £19,965 thousand in H1 FY2018. Sales increased by 2.6 per cent on Like-for-like basis. The company’s adjusted EBITDA stood at £3.6 million in H1 FY2019, an increase of 20 per cent from the previous year same period data. In H1 FY2019, due to a significant increase in the administrative expenses, the company’s reported operating profit declined to £1,032 thousand in H1 FY2019 versus an operating profit of £1,106 thousand in H1 FY2018. The basic earnings per share stood at 0.86 pence in H1 FY2019 against the 1.34 pence in H1 FY2018.

Share Price Performance

Daily Chart as at November-06-19, before the market closed (Source: Thomson Reuters)

On 6^th November 2019, City Pub Group PLC shares were trading at GBX 194.50 at the time of writing before the market close (at 8:20 AM GMT) and remained the same against the previous day closing price. Stock's 52 weeks High and Low are GBX 240/GBX 170. The company's stock beta was 0.99, reflecting almost the same volatility as compared to the benchmark index.

Valuation Methodology

*Peers: Marston’s PLC, Ten Entertainment Group PLC, EI Group PLC, Hollywood Bowl Group PLC, Fuller Smith & Turner PLC, On The Beach Group PLC, and GYM Group PLC.

Key Risks
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.

Conclusion
The targeted expansion of high-quality larger pubs with letting rooms has provided robust progress for the company in H1 FY19.In the face of strong comparatives, the company has delivered excellent like for like growth too. As the development sites begin trading during 2020, the company will drive the performance going forward. In the first half of the financial year 2019, strong sales growth has provided momentum in the second half of 2019.

The group is exposed to several political, micro and macro-economic headwinds like the slowdown in shoppers spending and inflationary pressures. The company cannot ignore the uncertainty in the market as created due to Brexit. Instead, the company will focus on getting the development sites trading, developing the existing estate, reducing the debt and improving the dividends for the shareholders. This will further improve the position and minimise the effect of any headwinds while continuing to deliver substantial growth into the future.

The Restaurant and bar group have recorded a 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. 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.

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.

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 194.50 (as on 5th November 2019) with lower double-digit upside potential, based on the 2.62x Peers Median NTM EV/Sales Multiple (approx.) on the FY19E sales (approx.).
 

Hostelworld Group PLC

Hostelworld Group Plc (HSW) is engaged in an online hostel-focused booking platform internationally. The group’s websites operate in more than 19 different languages by linking young travellers with hostels across the world through its Hostelworld brands, subsidiary brands Hostels.com and Hostel bookers.

Financial Highlights (for the six months ended 30 June 2019, €’000)

(Source: Interim Presentation, Company Website)

For the first half of the financial year 2019, the company’s revenue stood at €38.8 millionas against €42.6 million in H1 FY2018. The total gross bookings for H1 FY2019 declined to 3.8 million from 4 million in H1 FY2018, driven by a decline from the supporting brands’ bookings.

The company ABV (average booking value) increased by 6 per cent to €12.8 in H1 FY2019as compared to €12.2 in H1 FY2018 and 2 per cent rise on a constant currency basis. The basic earnings per share were at 6.82 cents in H1 FY2019 versus 2.14 cents in H1 FY2018.

Over the course of 4 years (FY14 - FY18), the company’s revenue surged from EUR 79.27 million in FY14 to EUR 82.09 million in FY18. Compounded annual growth rate (CAGR) stood at 0.88 per cent.

Share Price Performance

Daily Chart as at November-06-19, before the market closed (Source: Thomson Reuters)

On 6^th November 2019, Hostelworld Group PLC shares were trading at GBX 116.40 at the time of writing before the market close (at 9:30 AM GMT), up by 0.518% against the previous day closing price. Stock's 52 weeks High and Low are GBX 253.98/GBX 105. The company's stock beta was 0.77, reflecting the lower volatility as compared to the benchmark index.

Valuation Methodology

*Peers: Restaurant Group PLC, J D Wetherspoon PLC, Fuller Smith & Turner PLC, Marston’s PLC, On The Beach Group PLC, Whitbread PLC, and QI Group PLC.

Key Risks
Macroeconomic conditions, the impact of terrorism threat on leisure travel, consumer trust in the brand is essential to ongoing revenue growth, and the company is exposed to Brexit-related risks and uncertainties in relation to its continued impact on global markets and currency exchange rate fluctuations.  The Group manages FX translation risk through matching foreign currency cash outflows and foreign currency cash inflows and by minimising holdings of excess noneuro currency above anticipated outflow requirements.

Conclusion
The company’s financial performance has declined in the first half of the financial year 2019 as compared to H1 FY2018 data. The company’s top-line performance has declined, and the bottom-line performance improved due to tax rebate received by the company in the current period. The company operates in a highly competitive market. The group’s main area of focus in FY2019 is on enhancing the capacity of the main platform to improve the experience and its flexibility for the consumers. The company is progressing well as per its “Roadmap for Growth” programme and investing in its core platform. The company has announced a strategic investment in Tipi Pty Ltd, which will further benefit the hostel partners and customers. The company remained confident in capitalising the growth opportunities and expects its business to return to volume growth in the FY2020.

Based on above rationale and the valuation done using the above method, we have given a “Speculative Buy” recommendation at the closing price of GBX 115.80 (as on 5^th November 2019) with single-digit upside potential based on 8.17x NTM Price/Cash Flow (approx.) on FY19E cash flow per share (approx.). 
 
*All forecasted figures and peers have been taken from Thomson Reuters.Currency exchange rate taken for 1 EUR = 0.861017 GBP.
*The “Speculative Buy” recommendation is also valid for the current price as covered in the report (as on 6^th November 2019).

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