Berenberg on City Pub Group

This morning, The City Pub Group (CPC) released a full-year trading update, noting that due to a series of largely one-off issues, 2019 earnings are expected to be modestly below prior expectations. While we only reduce our 2019 sales numbers by c1%, the impact of operational gearing means that our 2019 EPS forecasts come down by c12%. The impact on outer years is far more modest and we continue to believe in CPC’s expansion plans – so while we reduce our price target to 220p, we maintain our Buy rating.

● 2019 issues: The small top line miss has been attributed to a combination of external and internal factors. Externally, the company notes that it believes the December general election, the poorer weather towards the end of the year and train strikes all served to dampen sales, where it was also up against tough comparatives (ie c7% lfl sales growth over the festive period in 2018). Internally, management has acknowledged that delayed refurbishments at its two Jam Tree sites led to lost Christmas bookings. Furthermore, the position of two underperforming sites within the group is being evaluated. We think that 1.7% lfl sales growth in 2019 is not a bad outcome considering those factors, and management has re-doubled its focus to avoid any recurrence of such issues in 2020 and beyond.

● Optimistic for 2020: Our 2020 estimates are only modestly reduced, and we think there are plenty of areas for improvement on 2019, namely: 1) CPC will benefit from a number of sizeable openings in 2019 annualising (Aragon House, Parsons Green; The Hoste, Burnham Market; The Market House, Reading); 2) it also has a series of large assets opening in 2020 (The Turks Head, Exeter; Tivoli, Cambridge; the former Nest site, Bath); 3) its main drink contracts (where we suspect terms can be improved) are due for renewal in 2020; and 4) two sites which have previously been flagged as struggling have been put up for sale, which should boost margins once they are disposed.

● Looking at the big picture: CPC is a collection of c50 pub assets across affluent towns and cities in the UK, including a series of freehold “golden bricks” such as Aragon House, The Hoste and The Phene (Chelsea). While earnings multiples may appear high at present, that overlooks the value currently tied up in development assets set to open and be refined over the next two to three years. Fundamentally, we continue to believe that CPC is a unique asset that warrants a premium multiple, which should also be supported by recent transactions in the sector demonstrating the appeal of freehold pub assets to trade, private equity and international buyers.

● Valuation: At our new price target, CPC would be trading at c13x 2021E EV/EBITDA with a c4.5% FCF yield.