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Morning Briefing for pub, restaurant and food wervice operators

Tue 4th Jun 2019 - Update: Peel Hunt on Loungers, Vianet results
Douglas Jack – Loungers is ‘UK’s leading hospitality business’: Peel Hunt leisure analyst Douglas Jack has said cafe bar group Loungers is the “UK’s leading hospitality business”. Issuing a ‘Buy’ note on the shares with a target price of 285p ahead of the company’s full-year trading update this week, Jack said: “Loungers’ estate has grown at a 31% compound annual growth rate over the past four years, during which it has generated strong volume-led like-for-likes sales and cash returns. The largest brand, Lounge, (in 112 sites as at 21 April 2019), has an average return on capital invested of 39.3% and Cosy Club (in 24 sites) averages 29.2%. We estimate group like-for-likes sales averaged 6.3% over the past 36 months, on a rising trend. Loungers’ success is built on its ability to trade well throughout the day, week and year, with a broad product range and customer base. Its all-day trading model is based on warm hospitality in an attractive environment, selling quality products at good value prices. As a result, its high returns and like-for-likes sales are unaffected by weather, politics and sport, and are almost uniform across the estate, in secondary towns, regardless of age or size. Location planning consultant CACI estimates there is potential for more than 400 Lounge and more than 100 Cosy Clubs, based on its extensive analysis. We believe this is conservative, given Lounge’s ability to work in towns with populations as little as 10,000 (due to its all-day trading model and low rents). Others have tried and failed to copy Lounge’s all-day model. The company trades well alongside Wetherspoon pubs and coffee shops and does not lose trade when competitors open near it. Pubs and restaurants’ limited expansion is oriented to premium formats in city centres; their economics are not suited to locations in which a Lounge thrives. We forecast profit before tax to grow at a 27% compound annual growth rate between 2019-21E, based on what we view as being conservative assumptions. For example, for the year to April 2020 we assume like-for-likes sales grow by 3.5% in comparison with an average of 6.3% over the past three years, by our estimates. Our forecasts take no account of numerous opportunities, including differentiated pricing. Based on arguably conservative forecast assumptions, we estimate Loungers’ expansion and like-for-likes sales should generate 29% growth in equity value in 2020E, followed by 26% in 2021E. This is reflected in our 285p 12-month target price, which assumes the 10.3 times EV/Ebitda rating holds.”
Vianet Group reports revenue and profit boost, 2,500 pubs in pipeline for technology upgrade: Vianet Group, the international provider of actionable data and business insight through devices connected to its Internet of Things platform, has reported revenue increased 7.7% to £15.68m for the year ending 31 March 2019, compared with £14.56m the previous year. Operating profit pre-amortisation of intangibles, share options and exceptional costs was up 6.4% to £3.85m, compared with £3.62m the year before. Profit before tax rose 29.8% to £2.66m after exceptional items, compared with £2.05m the previous year. Smart Zones technology was upgraded in 1,901 pubs, with a further 2,497 in the pipeline for 2019-20. The company stated: “Recurring revenues remain strong at 94% (2018: 90%), helped by the Vendman acquisition in October 2017 and transition from capital to annuity based sales in Smart Machines. Smart Machines adjusted operating profit grew 31.8% to £1.41m, including Vendman contribution of £0.42m. The Smart Machines division added 10,285 new connected devices (2018: 4,490) – helped by the highly encouraging roll-out of cloud-based contactless payment solutions. Smart Zones adjusted operating profit grew to £4.48m (2018: £4.53m) – a positive result given the headwinds in the UK pub sector. A total of £3.0m was invested in cloud and mobile technology to modernise the Smart Zones platform and support growth in the Smart Machines division.” Chairman James Dickson said: “Vianet has made very good progress towards delivery of earnings breakthrough and continues to benefit from the focus on exploiting growth opportunities in the Smart Machines division while managing performance back towards growth in the Smart Zones division. In the year, the historic Smart Zones contribution was broadly maintained while Smart Machines would have nearly doubled its operating profit had the group not moved to an annuity-based model for new sales. Smart Machines leading end-to-end product suite and established presence is continuing to create strong growth opportunities across the UK and Europe. The combined business capability and potential of Vianet and Vendman and the roll-out of the global coffee contract will be transformational for this division. In the coming years, Smart Zones will aim to maintain contribution from the UK pub market while taking advantage of growth prospects in the significant US hospitality sector. Our recent £3.0m investment in cloud infrastructure and mobile technology will help develop existing revenues in both Smart Zones and Smart Machines, and also provide the scalability, flexibility and speed to support rapid growth in existing and potential new verticals. The group is in good shape to deliver strong earnings growth and enters FY2020 with solid momentum and focus on our exciting opportunities.”

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