Conviviality set to re-rate

Conviviality's most recent acquisition was the £40m purchase of Bibendum PLB, which it part-funded with a £32m placing at 205p. Bibendum is one of the largest private wine distribution businesses in the UK, serving 8,000 outlets in both the on- and off- trade, with a particular strength in premium and old world wines. That's not dissimilar to Conviviality's other big acquisition of the past 12 months, Matthew Clark. The integration of Clark has gone well and a similar strategy will be used to bed in Bibendum. Broker Investec believes the Bibendum deal alone has the potential to add 17 per cent to earnings growth, helped in part by roughly £4m in deal synergies. These largely relate to better buying patterns and operating cost efficiencies. But additional savings could also come from distribution network efficiencies.

Strategically, Bibendum fills two important gaps. First, Conviviality has previously been under-represented in the largest and most lucrative UK drinks market - London - as well as generally across the south-east region. Secondly, the deal is in keeping with management's intention of building a more meaningful presence in the wine category.

The group now looks very different to when it floated as the operator of the Bargain Booze franchise chain in July 2013. Indeed, only 27 per cent of pro-forma turnover in 2016 is expected to come from retail, along with a third of cash profit. Most of the business - 65 per cent of pro-forma sales and 62 per cent of cash profit - is forecast to come from on-trade wholesale, where growth opportunities and earnings quality are generally considered to be more attractive. The agency and events business accounts for the rest of the expanded group.

Recent trading at Conviviality has been good. The group's year-end trading update, which includes contributions from Matthew Clark, came in comfortably ahead of analysts' expectations. Sales at Matthew Clark rose by 4.9 per cent, which was an encouraging indication of the business's potential as part of Conviviality. The growth reflected a 2.9 per cent increase in the number of outlets supplied and a 2.9 per cent rise in customer numbers. At the group level sales rose by a whopping 137 per cent and cash profit should now come in ahead of previous estimates, while net debt should settle somewhere around £87m.

Importantly, while the retail operation is becoming a smaller part of Conviviality's business, the decline in like-for-like sales slowed between the 2015 and 2016 financial year from 1.7 per cent to 1.3 per cent, suggesting the group is putting up a decent fight in the face of ongoing price deflation in the food and drink retail market. Wine Rack, the group's premium retail chain, acquired soon after float, actually managed to grow like-for-like sales by 3.2 per cent, suggesting this end of the market has remained robust.