Leading analyst Anna Barnfather at Panmure Gordon has said that the combined operational, entrepreneurial and financial backgrounds of team behind Brighton Pier Group (formerly Eclectic) make the group well placed to execute on the strategy to optimize performance of existing venues and identify other acquisition targets – “of which there are plenty”.
Barnfather said: The new enlarged group has more robust and stable cash flows with significant scope for growth through expanding its catering offer, investing in new attractions and through leveraging scale and experience.
“We believe that the current multiple of 7.4x 2017E EV/EBITDA is attractive versus the sector (which trades on an average of 9.6x) and undemanding given the strong cash generation, rapid de-leveraging and significant scope for both organic and acquisition growth. We rate the stock Buy with a target price of 120p, 22% upside to the current level.”
Barnfather said that Brighton Pier itself is seasonally complementary to the bars and offers scope for operational improvement through optimizing space and food offer, as well as cost synergies through leveraging scale and overheads. The business was acquired for £18m representing 5.1x EV/EBITDA and is “immediately earnings accretive”.
She said: “As well as diversifying the business across ‘experiential leisure venues’, the transaction brings together a skilled management team with extensive experience across the sector, led by Luke Johnson.
“Significant work has been done to stabilize performance with cost improvements being made at both head office and site level. The 2.25% margin saving from re-negotiating liquor supply contracts neatly illustrates the scale advantages of an enlarged group. However, the trading environment remains competitive and discussions are still on-going to dispose of non-operating sites.”
The analyst said she believed that there were development opportunities to improve and widen the F&B offer on the pier and use under-utilised space more effectively. She said: “Two examples include adding an additional Fish & Chip restaurant and installing a soft play area in the roof/ceiling space of an arcade, both of which require modest levels of capex (£60k-80k) and quick payback (14-18 months).
“We do not expect an increase to central overheads from the current level of £1.8m and believe that there could be some cost savings from scale across the Brighton locations which now consist of Brighton Pier, Lola Lo and Dirty Blonde. The Bar business recent margin saving of 2.25% on purchasing neatly illustrates the benefits of scale from supplier rationalisation and contract re-negotiation.
“The Bar business is focused on the premium end of the student market and consequently is highly influenced by university and college term dates, particularly in September - Christmas. The Pier business is heavily weighted towards the Spring-Summer holiday season with approximately 2/3rd profits made in July/August, and a loss November to March. Thus, the combined businesses are seasonally complementary from both an earnings and cash flow point of view, reducing volatility and improving working capital management.”
Barnfather said that unlike the Bars business, Brighton Pier faces little competition or substitution threat given its unique and iconic nature. Additionally, the Pier should benefit from investment in the Brighton area such as the development of the British Airways i360 and Soho House development, which should help to drive more visitors to the area.
She points out that the UK leisure attraction market is highly fragmented, being largely independent and family owned. She said: “We believe that there are significant consolidation opportunities and economies of scale to be harnessed from sharing best practice (marketing, pricing, HR, F&B) and leveraging scale (overhead and purchasing). BPG has the management expertise, cash flow and investor support to be a consolidator in this attractive, highly cash generative sub sector.”
The company’s Bar division now has 18 venues trading plus Manchester Sakura which is currently closed due to water damage. Additionally, negotiations to dispose of the remaining Liverpool lease and Sheffield venues are progressing.
Barnfather said: “Crucially, trading has improved at the Derby Lola Lo, which is now profitable, and Brighton Dirty Blonde although mid-week sales are still challenging. Options for this venue (which is on the same site at Lola Lo) are being considered. Additionally, the ground floor of the Reading Sakura has been developed and recently opened as ‘Smash Reading’.
“Management has been exploring new concepts as a way of revitalising existing sites and underutilised spaces. A recent example is the recent opening of ‘Smash Reading’ a ping pong bar specialising in craft beer and fresh dough pizza bar. The bar, below Sakura Reading, should broaden the customer appeal and also extend the trading into daytime (food) and early evening. The bar will also have televisions showing major sporting events. Other ‘experiential’ type concepts are being considered including Pinball.”