City Pub Group deserves premium valuation, Liberum says, after better-than-expected results

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The City Pub Group PLC (LON:CPC) said trading has been encouraging since pubs were allowed to reopen for outdoor trading.

The pubs group has 24 of its 45 pubs open at present and despite not being able to serve thirsty customers indoors, trading is at 77% of 2019 (pre-pandemic) levels, the company said in its full-year results statement.

Although the 52 weeks to December 27, 2020, was a period characterised by prolonged periods when trading was not possible, the group took the opportunity to upgrade and refurbish some of its pubs and inns. Across the estate, The City Pub Group has added more than 600 outside covers to allow them to open under the current government-imposed restrictions. Executive chairman Clive Watson said these covers would also enable the group to take advantage of the forecast trend of increased domestic holidays.

With pubs soon to be allowed to have customers indoors, management is confident that trading will get back to 2019 levels over the course of the summer, especially due to the sporting programme, which includes the European 2021 football finals, the British and Irish Lions Tour of South Africa and the return of tennis at Wimbledon.

Revenue in 2020 fell to £25.82mln from £60.03mln the year before, resulting in a loss before tax of £7.63mln versus a profit of £2.20mln in 2019.

No dividend has been declared as the company prefers at present to plough money into the business but the board will consider the resumption of dividends once trading returns to normal and when the company is no longer receiving state aid.

“The business has been significantly improved over the past year placing us in an excellent position to take advantage of the pent-up demand as the country reopens,” Watson told investors.

“The early signs since we have been allowed to trade outdoors have been very heartening and it has been great to bring back our immensely talented staff and to see our customers enjoying our pubs once again,” the executive chairman continued.

“We are a streamlined, well-invested business with a first-rate customer offer. Our pub estate is unique in terms of quality and, with the step-change in the business, we have an ideal platform to grow successfully in the future,” he concluded.

Housee broker Liberum Capital Markets reiterated its ‘buy’ recommendation for The City Pub Groups after results that were slightly ahead of its expectations.

“The streamlining of operations, investment in central functions and recent board appointments provides us with confidence that the business can comfortably scale to 100+ pubs. The expansion potential is underpinned by having the lowest leverage across the pub space and a favourable acquisition market which play to management’s strengths.

“Alongside this, we expect steady margin accretion once trading conditions normalise, providing multiple levers for growth. We increase FY21E and FY22E EBITDA [underlying earnings] by 6.5% and 43.5% to reflect increased recovery potential and the significant margin improvements made to date,” Liberum said.

The broker is forecasting sales of £62.4mln for the current financial year, assuming no further lockdowns; that would represent a substantial increase on the £25.8mln of revenue in the pandemic-affected year just ended.

It is predicting an improvement in the margin to 20% from 17% due to the exclusion of loss-making leases and the benefits of cost-cutting during the lockdown.

Adjusted underlying earnings (EBITDA) are seen rising to £12.5mln from last year’s loss of £0.8mln.

Liberum said the stock deserves a premium valuation and has set a 12-month price target of 160p. Shares in The City Pub Group were up 2.3% at 132.5p in afternoon trading.

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