The Capital Pub Company Plc's finals show another strong year

Aim listed The Capital Pub Company Plc(LON:CPUB); the London focused pub operator, has released their prelims which show that they have had another strong year, with the chairman James Bruxner CBE stating:

‘I am pleased to report another year of achievement and excellent trading performance.  The estate, which is London based, largely freehold and free of tie, has been grown to 28 high quality pubs; the quality of which has been a major factor in driving the continued improved performance.’

Let's look at why the chairman sounds so buoyant. For the year, revenue increased 11% to £22m, with adjusted EBITDA up 19% to £5.8m. However, thanks to some large non-cash impairment costs they made a net loss year of £1.3m, which is against last year’s net profit of £0.5m.  But if you take away the £3.8m of impairment charges (of which they had none of last year), they would have achieved a net profit of £2.5m.  In terms of the impairment charges, they were mainly in relation to thedecrease in profit multiples applied to pub profits for valuation purposes as a result of the general economic conditions.

Due to this big increase in adjusted profits this year, cash flow has also increased substantially, with it rising 113% to £3.7m.  This increase added to a placing in which they raised £1.7m at 100p, and the sale of the Marquis of Granby pub allowed them to reduce net debt to £24m from £28m last year, in the process reducing gearing to 70% from near 100%.  In terms of what all of this has done for their NAV, their net asset position is pretty much unchanged with assets over liabilities currently standing at £31m, which is an increase of £0.6m from last year.  If this is converted to a price per share NAV, then thanks to the placing there has been a slight deterioration, with the current NAV at 137p per share, which is down slightly from last year’s 144p.

This drop in NAV is not a bad thing as they are now in a much stronger position than last year which, due to the credit crunch, had a large effect on most companies NAV’s (with property and pubs groups’ some of the worst hit).  Thus the fact that they have come out of this crisis a more profitable company then they went in, with NAV largely unaffected, arguably just shows the strength of their portfolio of pubs.

In terms of how they achieved such a good performance for the year, the Chairman states:

‘The Group has benefited from its focused strategy to operate pubs solely in London which continues to thrive and display more buoyant characteristics than elsewhere in the UK. Aside from this the significant uplift in the financial performance of the Group is as a result of better retailing, improving the quality of the estate and tight cost control throughout the Group.’

And:

‘The Group continues to focus on wet-led operations which account for nearly 80% of total sales. It has been able to further improve its margins on both liquor and food as a result of better purchasing and also by being able to increase sales without resorting to discounting strategies that many of our competitors are now employing.’

To elaborate a little, what the Chairman is relating to when he mentions improving the quality of the estate is the fact that over the last year rather than just sit back, they have had their entire estate of pubs fully refurbished (with the exception of the newly acquired Uplands which will be renovated over the summer), with the benefits only now starting to become apparent.  For clarification, a 'wet-led' pub is a pub focused on drink rather than food. Pubs focused more on food are 'food-led' pubs'.

Conclusion

To conclude, the future appears to be looking bright. At present, there are plans to open up another three pubs over this year with plans to increase their estate to 45-50 pubs in three years.  Their very strong position and apparent competitive advantage is summed up well via the following:

‘The Group benefits from a high quality portfolio of well established, neighbourhood pubs which serve well their local customers.  One of the key differentiators from other multiple managed operators is that the Group offers its pub managers a high degree of autonomy and the opportunity to run each pub in an individual, entrepreneurial style which caters to the local market. This together with the attractive performance-related bonus packages offered to the managers has helped the business to attract and retain excellent calibre pub managers which is essential for the continued successful growth of the business and the strong trading performance of our pubs.’

It's worth noting the strength of the balance sheet and the continued proven track record of the management who own a combined 20% of the company (the CEO owns near 10% alone). They trade on a discount to NAV of 27%, and on a P/E ratio of 9 on an adjusted basis (ignoring the impairments) seems unwarranted.  There are, of course, still risks involved, like for example the London property market suffering, or of course another consumer recession. However, the strength of their portfolio and management mean that they still warrant a place in the value section of ‘Grays Stocks to Watch’.

Disclosure of Interest:Gray has an interest in Capital Pub Company PLC (LON:CPUB)