City Pub Group: Share Price should be double where it is currently

The City Pub Group ($CPC) announced their FY results for 2022. Below is our summary. My brief thesis on why this stock is so undervalued.

  • The City Pub Group, a company that operates 44 premium pubs in southern England and Wales, has announced a trading update for the fourth quarter and full year of 2022. 
  • They reported accelerated like-for-like sales growth of 7.8% in Q4 2022, compared to 2019, due to improved planning for events such as the World Cup and Christmas. However, the strikes by rail workers caused them to lose an estimated £0.75m in revenue.
  • The company’s annual turnover increased 63% from the prior year to £57.6m in 2022, reflecting a mostly normalised trading environment.
  • The City Pub Group (CPG) has strict criteria for acquiring pubs, as they expect pub prices to continue to soften shortly. However, since September 2022, the Group has acquired two pubs, Potters in Newport and The Bridge in Barnes. The acquisition of Potters further strengthens CPG’s presence in South Wales and The Bridge benefits from 8 letting rooms, increasing the total number of letting rooms across the estate to 225, now an important revenue stream for the Group.
  •  Net debt has been reduced to £5m at the end of 2022 and the company intends to maintain its low level of debt given the risk factors facing the industry currently. CPG continues to have one of the strongest balance sheets in the sector, with £35m total borrowing facilities until June 2024 and £152m of net assets as of December 25, 2022.

My initial thoughts:

Although this was what I expected from the results, the above just strengthens my resolve and investment case in the City Pubs, I bought some more yesterday ahead of the results and now make up around 40% of my portfolio. These are a solid set of results, the net debt and cash position, combined with the valuation of their portfolio has left CPC in a unique position in the sector. If everything was sold off for parts today, we would get at least double the current share price. I’m not a corporate raider, but I know that value like that doesn’t go unnoticed forever.

The group is actively turning down offers, which shows a careful and mature approach in this environment. The softening of valuations in the sector will affect them, but also allow them to pick up some amazing deals and add to their already undervalued portfolio.

When will the value come through?

Value triggers can come from anywhere, and at any time. But here is where they could come for CPC:

  •  Better than expected results might help, as would a long run of consistent results post-pandemic, pubs are still a scary proposition to some who have been burned in the past
  •  A resolution to the energy crisis, pubs have been hit hard and it’s turning a lot of would-be investors away from investing in the sector
  • Continuation or extension of buy-backs/dividends; I’d prefer buybacks in this instance as the shares are tightly held and buying their stock might be the best investment they can do with their current pile of cash they are also more tax-efficient (typically)

Our patience will be rewarded handsomely, it may take a 12 or 24 months but on an annualized basis this will still be an incredible return.

Please note the above is not financial advice, and I hold shares in City Pub Group Plc.

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