Nightcap – Worth a Shot?

In these current times of macroeconomic gloom, it must be a hard task for Nightcap (LON:NGHT) to carry on building the UK’s leading bar group.

The company was created during a distressed time for the hospitality industry, having endured the first Covid lockdown and well ahead of the national roll out of the vaccines.

The 53-week period to 3 July this year, the group’s first full year of trading, was described by founder Sarah Willingham, as having been “eventful, fun and, at all times, rewarding.”

The group, only came to the AIM market in January last year, since when it has grown substantially in size.

AIM IPO January 2021

The float saw the group Placing 40m new shares at 10p each, representing 29.57% of the enlarged equity, valuing the company at £13.5m and raising a net £3m of fresh capital for its corporate expansion.

Part of its float process was the acquisition of London Cocktail Club, owner and operator of ten individually themed cocktail bars, nine in London and one in Bristol.

Nightcap’s strategy was and continue to be the acquisition and growth of ‘drinks-led’ hospitality concepts – and LCC fitted the bill, targeting customers aged between 26 to 40 years old.

In May last year the group raised another £4m and acquired the Adventure Bar Group, operator of nine cocktail-oriented drinks bars, variously trading under the ‘Tonight Josephine’, ‘Bar Elba’, ‘Luna Springs’ and ‘Blame Gloria’ brands.

Within months the enlarged grouping opened more sites, with the aim of crossing the UK.

By late October last year, operating under its various brands, it was up to 22 sites, with another 11 under legal negotiation, plus 10 more under offer.

Late November saw the acquisition of Barrio Familia, operators of four Latin American inspired bars and a ‘60s themed bar.

By February of this year new bars had been opened in Exeter, Cardiff and London. It was then up to 27 existing sites, with another 24 under offer or in legal negotiations.

In early August the group announced the launch of its Camden Market located Nightcap Bar Academy training hub for both new and existing teams.

By that time the group was up to 34 operating sites, with another possible 22 in ‘process’.

Later that month the company completed the signing off for a £10m debt refinancing facility with HSBC.

The first year’s results

Revenues, derived from the sale of food and drink together with a small amount of admission income, grew markedly from £5.97m to £35.94m, while the group expanded its adjusted EBITDA from £0.2m to £3.3m reflected that impressive growth.

On a statutory profit before tax basis the year to end June 2021 saw a £5.3m loss. This year it has shown a £24,000 profit, which after a tax credit took the after-tax figure up to £297,000.

Continued expansion but exterior factors will slow down roll-outs

The group’s focus continues to be expansion through both organic and acquired growth.

It is now up to 36 sites, having opened more since the year end.

Trading in the first 13 weeks of the current year, to 2 October, has suffered a number of hassles – like warm weather, inflation, energy cost, supply chain shortages, train strikes and the cost-of-living crisis.

Against such a scenario, understandably, the new opening programme will be tempered during the rest of the trading year to end June 2023.

That strategy now leaves the group’s management concentrating upon driving its revenues and profits from the existing estate.

The roll-out progress will be renewed when better conditions become apparent.

The Equity

There are some 191,157,801 shares in issue.

Sarah Willingham and her Director husband hold 18.23% of the equity, while a non-exec director Tobias van der Meer holds 4.56%.

Notable private holders include Mark Ward (14.6%), John Goodman (8.08%), James Hopkins (4.09%), Raymond Blanc (3.79%) and Greg Le Tocq (3.74%).

Canaccord Genuity Wealth have 5.96%, while Octopus Investments hold 5.72%.

Broker’s View

Analyst Matt Butlin at Allenby Capital has reduced his estimates for the current and coming years, due to the exterior pressures.

Even so he sees current year takings to end June 2023 of £49.30m, with £3.67m EBITDA, profits before tax of £399,000 and earnings of 0.55p per share.

For the next year his figures show £58.00m revenues, EBITDA of £5.01m, pre-tax profits of £1.67m, with earnings of 1.04p per share.

Considering that the group’s shares currently have ‘a painfully low valuation’ Allenby concludes that:

“We see the 2023 EV/EBITDA multiple of 6.0x (5.0x on a calendarised basis) as particularly attractive given the Company has now proven the move to healthy profitability and has the balance sheet strength to dispel any concerns of an equity raise.“

My View

The group’s shares, which touched 35.5p in April last year, have subsequently eased back to the current 9.5p valuing it at only £18.5m, which is a valuation that will surely rise again as conditions improve.

Now that the new site opening programme has been put on hold until the environment improves, the company’s management will be concentrating on getting good returns out of the existing estate, despite rising prices generally.

Turning over £1m a week across its bars should respond to such attention and the result will fall impressively to the bottom line.

I now set a Target Price for the shares to rise to 12p fairly soon, before seeing further strength in 2023.

NB: There will be an Investor Presentation being held by the company at 2.30pm on Wednesday 16 November.