The City Pub Group – Cheering news

The recent AGM for this £82m group was extremely positive, underlining market hopes of a significant recovery in this current year’s trading.

Like all businesses within its sector The City Pub Group (LON:CPC) was hit for six by Covid-19 and the subsequent effects.

However, now, after the restrictions have been lifted, it is becoming very evident the company’s customers are beginning to return to ‘prop up its bars’.

The Business

This company was set up in 2011 and its first pub began trading in March 2012. Its aim was to create and progress a quality portfolio of pub assets in main towns and cities across the UK.

By the end of 2012 its estate had built up to six.

Thereafter the group acquired an average of another six outlets a year.

By November 2017, when it went public and gained a place on AIM, it was up to 34 pubs.

The enlarged group was trading increasingly profitably up until March 2020 and Covid.

The orders saw all pubs and restaurants across the country being closed down until further notice.

That played havoc with the City Pub business.

It saw revenues more than halve from £60.0m in 2019 to just £25.8m in 2020, with the previous £5.3m adjusted pre-tax profit being replaced by a £5.1m loss in 2020.

Remedial action was put into play by the group’s Management, leading to a significant improvement in 2021.

Supply Chain Logistics

It has been very much to the group’s advantage that it has always adopted a long-term approach with its suppliers, since inception having maintained relationships with its major suppliers, such as contractors, professional advisers, designers and property agents, as well as food and drink suppliers.

It is understood that some 70% of the group’s drink products have now been signed up on a three-year fixed price deal.

Such agreements help to mitigate higher costings, while assisting margin improvements.

Furthermore, the group has centralised its food purchasing function and significantly reduced the number of its suppliers. That resulted in improvements in its purchasing terms and that will enable greater economies of scale as the pub estate grows.

The Estate

Its premium, wet-led offer and flexible approach give it broad customer appeal across residents, workers, students, shoppers and tourists.

Today the group has a portfolio of 44 free-of-tie pubs in Cathedral cities and market towns across the southern half of England and Wales, including seventeen in London, eight in Cambridge, four in Norfolk, three in South Wales, three in Bath, and two in each of Oxford, Norwich, Bath, Cardiff, Exeter and Winchester.

The spread across the country is quite impressive for its size.

Additionally, it also has sites in Bristol, Exeter, Reading, and Bury St Edmunds in Suffolk.

Of the total of 44 sites nearly 61% are freehold.

For those sites that are rented, it operates on a low annual rent charge compared to its turnover, which was circa 3.4% as at 26 December 2021 

The company also a strong pipeline for future development, with a number of others currently being appraised, reports are that there are some 70 under consideration.

The Acquisition Strategy

The group also reviews the existing portfolio to see if any of the sites should be considered for disposal and has sold six sites in 2022.

These include Inn on the Beach, The Walrus, The Lion and Lobster, Brighton Beach Club, Travellers Friend and the London Road Brew House, for £17.1m.

The group’s strategy, which is to enhance existing sites rather than redesign to a set formula, creates substantial opportunity for it to increase its estate.

It has five main areas when identifying potential expansion sites – it goes for existing pubs, pubs that need redirection, closed pubs requiring refurbishment, unlicenced premises capable of reinvigoration, and finally, through investing in EIS companies within the sector.

The Equity

There are some 105.8m shares in issue.

The larger holders include Otus Capital Management (10.9%), BlackRock Investment Management (UK) (9.97%), Canaccord Genuity Wealth (7.56%), Gresham House Asset Management (5.43%), Unicorn Asset Management (4.89%), Royal London Asset Management (3.40%), Clive Watson, Chmn (3.35%), BGF Investment Management (2.98%), Franklin Advisers Inc (2.84%) and Franklin Templeton Fund Management (2.84%).

The Recent AGM Statement

On Wednesday 8 June, Executive Chairman Clive Watson informed shareholders that like-for-like sales had continued to strengthen faster than predicted, with May 2022 being some 5% ahead of May 2019.

He stated that:

“We continue to see our sales growth reflecting the quality of our pubs and customer offering. With a strong foundation to build on, and momentum that has been created through investment in – and opening of – our development sites, we look forward to an uninterrupted Summer’s trading for the first time in two years.

Despite the macro-economic headwinds, recent openings, tight cost control and a low net debt position leave us well positioned to continue to develop our business both organically and through selective high-quality acquisitions during the rest of the year as opportunities arise.”

Broker’s Views

Analyst Anna Barnfather, at the group’s NOMAD and joint-broker Liberum Capital, estimates that the group is confident of a strong second half year, while its low debt offers it flexibility to move quickly on acquisitions.

She estimates revenues increasing to £58.2m (£35.4m) for the year to end December. She sees adjusted pre-tax profits rising six times to £5.4m (£0.9m), lifting earnings up to 5.1p (1.1p) and enabling a return to dividends this year of 1.5p (nil).

Going forward into 2023, cautiously she estimates £62.5m sales, £8.8m profits, 6.3p earnings and a 1.7p per share dividend.

Interesting to note is the fact that Liberum Capital have a ‘buy’ note out on the shares, with a 145p valuation figure, based upon current asset revaluation.

Over at Peel Hunt, the other joint-broker, their analyst Douglas Jack also has a ‘buy’ recommendation on the stock, and similarly with a 145p price objective.

He is seeing an improvement in trading and ongoing expansion that could prove to be an accelerator for the shares.

My View

I like the feel of this stock.

Backed by a 145p valuation the shares, which were up to 133p this time last year, are now at 80.50p and look to be attractive value.

The Interim results in September could well help to boost the share price back over the 100p level inside 2022.

My Target Price is now set at 100p.