Leading analyst Douglas Jack, of Peel Hunt, examines the Deltic Group’s latest trading figures and what it means for high street bar operators in general. He suggests that wet-led bar operators are now seeing the benefits of 10 years of hard work in cleansing the model – a process which he believes restaurant operators are only just beginning.
“Over the last 11 years, the nightclub, bar and wet-led pub sectors have all transformed themselves, benefiting from supply reduction of 40%, 11% and 32%, respectively.
Outdated perceptions (a decade out of date) still exist, but the ongoing positive LFL trading and high returns on investment at Deltic, Stonegate and Ei Group confirm that low/negative supply growth, cost control and clever, disciplined capex should be the cornerstones of investment in the sector.
These are the reasons why we view these three sub-sectors as well as bowling, cinemas and low-costs gyms as being superior investment propositions than restaurants. We do not believe old restaurant brands should be regaining previous valuations in a saturated market; as nightclub, bar and wet-led pub sectors have shown, the fall-out from oversupply takes many years to rectify, which they have come through; for restaurants, we believe this process is just beginning.
There are some other positive trends in Deltic’s update. These include: prebooked Christmas party bookings increasing by 20%; record New Year’s Eve trading; good returns from social media investment, achieving a reach of over 6m and engagement of 2.2m users, which on a per outlet basis, places Deltic comfortably at the top of the sector.
Deltic’s management attribute its success to the quality of its brands, investments, central sales/social media campaigns and customer service. We would add, as we would with its wet-led peers, 10 years of hard work, cleansing the model, to leave a core of assets that lead/dominate their subsectors in each location.
Most quoted operators will struggle to match Deltic (+8.2%) and Stonegate’s (+5.5%) LFL sales for December, partly due to lower towncentre exposure, and partly due to higher food exposure (which also means higher supply exposure). We believe the two operators with the best chance of achieving this are: JD Wetherspoon (Reduce; TP 1100p on 10.0x EV/EBITDA) and Revolution Bars Group (Buy; TP 240p on 4.8x EV/EBITDA). “
