Last Time This Stock Was Tipped It Went Up 40%
In January 2023, I wrote an article on why I thought this stock was undervalued. Since that article the share price increased by 40% at its peak, but has now come back down. If you’d bought when I published the below article and held to today, you would have made 21%.
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My underlying thesis has not changed, you can read the below article if you’d like the detailed version but I will summarize my position here too.
They announce results on Thursday, so its a good time to look at this stock.
Here are the numbers:
Share price: 86.50p (as of 19 September 2023)
Market capitalization: £104.5m
Net debt: £4m
Annual turnover: £57.6m
Book Value: £160million (an increase of circa 55% from these levels).
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Investment Thesis:
The City Pub Group (CPC) is a premium pub operator with a strong track record of growth. The company has a well-managed portfolio of pubs in desirable locations across southern England and Wales.
CPC sold a few underperforming pubs as per their last results, which gave them a much stronger balance sheet (net debt of just £4m, very low by industry standards). This is so they can be fast and take up opportunity to buy cheaper assets as real-estate goes down, and interest rates go up.
Cashflow: The group is cashflow generative, and only borrows to buy new assets, meaning even at a break even on the main business, the assets appreciate over time (and are the business trades far below its current assets).
Intrinsic Value Gap: The value of CPC’s estate in March 2022 was valued at £160million. The stock trades at around £100million today. You can argue for a fall in real estate prices of as high as 25% and it would still be significantly undervalued. You could probably argue this value has actually gone up since March 2022 in some of these locations. It should also be noted that because the company operates in “premium” markets, such as Oxford, Cambridge, Bristol and the City of London there is a great resistance to real estate prices. These place tend to be short of space and have earnings that allow people to go to the pub.
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Headwinds Fading: Most of the problems faced by the group in the past few years have subsided from cost of energy (not entirely, I will grant you), the pandemic. There are new taxes coming in but I feel pricing power is fairly intact. People in these locations are currently shelling out £7 for a pint and I don’t see this changing much.
Risk: Recession is the big one. We know its coming, people tend to carry on drinking in a recession, and I don’t see this time being different. But there is a worry that that it’s going to get a lot worse in the UK before things get better.
Buy Backs: The company got rid of their dividend and switched to buy backs, this has seen their share prices increase. I did some maths. The company has been buying back around £5,600 of shares a day since their first buy back in April. This works out at around a 2.8% yield but is far more efficient than a dividend, especially if you agree that the business is significantly undervalued. They have not gone heavy on the buybacks just yet, as they want to keep gearing low. Makes sense, it will be interesting to see what they say about the valuation after the results on Thursday.
Potential Value Triggers:
- Results this week – 21st September City Pub Group will announce results, I personally think these will be better than expected if what I have seen in Cambridge and London is replicated across the portfolio.
- A resolution to the energy crisis: The rising cost of energy is a major headwind for the pub industry. However, if the energy crisis can be resolved, this will be a positive for CPC and other pub operators. It is somewhat improved this year vs last but it’s hard to say where things will go. An end to the war in Ukraine may very well help.
- Continuation or extension (increase) of buy-backs/dividends: CPC has a track record of returning capital to shareholders through buy-backs and dividends. If the company continues or extends these programs, this will also help to boost the share price.
If you like this form of content, consider sharing. I’d love to do more individual stock analysis and share it with the world. I do dive deeper than this, but I didn’t want to overload my usual readers.
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