Leading analyst Douglas Jack at Numis says he expects Revolution Bar Group (RBG) to add five sites each year from 2017 to bring reach 140 venues in 16 years with an initial weighting towards Revolución de Cuba.
Numis has set a target price of 265p and issued a Buy recommendation based on continued like for like sales growth and a position of no debt or pension deficit combined with low average rental costs.
Jack said: “Since 2004, RBG has grown its estate by 59% and its average sales by 60%. EBITDA grew by 21% in 2014 and by 14.5% in H1 2015, even without the benefit of new openings in H1 2015. It has a track record for generating LFL sales that are c.2% above the sector. This continued during the six weeks to 3 January 2015, when LFL sales grew by 5.6%, versus a 5.4% comp, with gross margins up 60bps.
“Our 2015E forecasts cautiously assume LFL sales slowing from 3.7% in H1 to 2.5% over the full year. We forecast 46% self-financed PBT growth over the three years to June 2017, based on cautious assumptions of slowing LFL sales, gross margins no longer growing, and expansion including just one large opening pa.
“With a track record for generating sector top-quartile LFL sales growth and cash returns, the company now targets stepping up expansion. Given this and a valuation that is at a material discount to the peer group, we initiate our coverage with a Buy recommendation and a 265p target price.”
The valuation is the lowest in the licensed retail sector, even though its lease-adjusted CROIC is the highest, which Numis believes reflects historic concerns about the bar market. “In our view, these should be rectified by the company continuing to build its track record for delivering strong growth and returns.
It currently has 58 managed outlets located in city/town centres, of which 53 are branded as Revolution and five are Revolución de Cuba. These two brands have many similarities (c.60% female customer base; premium product range; and a c.£30 average spend per head). Half of all sales before 10pm relate to dining, and 74.6% of all sales are before 11pm.
