City Pub Group PLC (LON:CPC) has the potential to increase its operating margins by six percentage points, according to broker Peel Hunt, which initiated coverage of the stock with a ‘buy’ recommendation and 160p price target.
In a 29-page note entitled ‘buy, build and burgeon’, clients were told the chain has one of the sector’s strongest balance sheets, “with minimal debt”.
It also pointed out that CPC is usually able to add around a third to the value of the pubs it acquires and redevelops.
“This justifies a premium valuation versus true net asset value, but only if it is expanding,” Peel Hunt said.
“Thus, less expansion is largely why the premium has fallen from 34% at IPO to almost parity.”
The group is coming out the other end of lockdown with a “sizeable expansion pipeline”, investors were told.
Not only that, CPC is now at the point where there is potentially significant margin upside moving forward.
The broker expects to see an improvement in the gross margin, while it should also be able to eke out labour and central cost efficiencies while exiting loss-making sites will also help improve the bottom line.
Success in hitting the 600 basis-point target increase would push the EBITDAR margins above those of industry heavyweights Mitchells & Butlers (LON:MAB) and Marstons (LON:MAR), the research note pointed out. EBITDAR is a measure of underlying earnings that excludes rent and restructuring charges from the calculation.
In early afternoon trade, the shares were changing hands for 118.5p each, meaning they would have to rise 35% to hit the Peel Hunt target price.