Opportunity to play the rebound in the hospitality sector

I wrote a few weeks ago (‘Be wary of trading market reactions’, 2 June 2021) that we should be wary of a potential U-turn on the easing of the pandemic restrictions. That has now come to pass, and restrictions will continue well into the summer until 19 July.

It doesn’t affect me too much as I’m now free to go out to lunch, many management calls are done via Zoom (a trend I hope will continue) and, as I’m getting on a bit, my days of clubbing are long gone.

But it does affect the hospitality sector. Hopes of a restriction-free European football tournament have been crushed. It was an opportunity for many struggling outfits to keep the wolves from the door and stay open. As always, those with capital will benefit and those without will not. That is one advantage, at least, of a stock market listing.

Industry titans such as Wetherspoon JD (JDW) and Mitchell & Butlers (MAB) took advantage of this availability, with the former raising £141m at 900p in April 2020 and coming back in January this year to raise another £93.74m at 1,120p. This was a fantastic result for the company in terms of dilution given that the shares traded below 500p at one point (I was short Wetherspoon heavily) but it also gives them a war chest with which to scope out potential acquisitions. It’s hard to believe, but Wetherspoon is not yet in every single town. Many more towns may fall to the juggernaut because without shareholders, smaller operators have found it difficult to access liquidity.

That bodes well for newly listed Nightcap (NGHT). The company was launched to take advantage of what is believes is the exceptional opportunity to buy and organically grow drinks-led businesses. The last two years have battered many and worn owners down. Many will be fed-up, but also forced sellers. Nightcap is aiming to buy brands they can scale up and roll out across the country.

Their bars are typically small and in basements (cheaper rent). It could be argued that Nightcap is offering an experience as these bars are often themed, and by not selling beer on draught this means margins are higher, not to mention no hassle with kegs and less room needed for storage. Any beer sold is bottled and is at the higher end of the market. Nightcap does offer food, but this is not its main offering. Wet-led businesses typically carry higher gross margins, and are more efficient due to the ease of training people behind a bar rather than training someone to be a chef.

Nightcap has former Dragon and entrepreneur Sarah Willingham at the helm. The company has London Cocktail Club in its portfolio and recently acquired Adventure Bar Group following fundraise through Allenby Capital, which I was able to take part in. This was heavily oversubscribed even after the placing price had risen to 23p from 21p when I was inside.

The acquisition added nine bars to the group’s portfolio – almost doubling it to 19. Allenby has forecasted revenues to increase by 143 percent, plus the company still retains £6 million of cash on its balance sheet as firepower for any other accretive deals. The Adventure Bar Group was acquired on a four times 2022 EV/Ebitda multiple, compared with Nightcap’s pre-acquisition multiple of 26 times at the 23p issue price.

There is an argument that after this acquisition the current valuation of Nightcap is still too rich. At the current price of 22.5p and a market cap of £41.7m, each site is currently priced in at just over £2m. Revolution Bars Group is worth £49.7m at a price of 21.6p and has a lot more sites – but it also has a lot more debt (plus management who are more than happy to dilute shareholders in deeply discounted placings). The problem with valuations is that you can pull and tug the numbers this way and that way to argue a point, but at the end of the day the only thing that changes your P&L is the price.

Chart 1 shows the trend is clearly up since the IPO in January. Regretfully, I turned this deal down because it didn’t look terribly exciting and so I spent less than a minute making a decision. The number of IPOs and secondary placings has increased hugely since the stock market rebound and there isn’t time to evaluate all of them sufficiently. We can see in Chart 1 the price is holding up around the placing price and has bounced from the 200-exponential moving average.

The latest U-turn on restriction is good news for Nightcap. Adventure Bar Group was a steal and although it’s unlikely in my opinion we’ll see such a cheap acquisition again, it does buy time to identify more acquisitions. Bars and pubs are seeing huge demand and this is a tailwind likely to continue throughout the rest of the year. This can be seen in Nightcap’s recent trading update on 8 June where Adventure Bar Group posted revenue growth of 46 per cent on a like-for-like basis, compared with the same weeks in 2019 (many companies use 2020 in a pathetic attempt to make themselves look better but last year is not a real comparison) alongside an all-time weekly sales record.

I believe the stock price may consolidate for a while until there is another acquisition. Management is actively looking and whilst acquisition multiples have grown, they are nowhere near pre-pandemic levels. Should there be another driver for growth announced I would like to add to my position at 36p and follow the trend.

Chart 2 shows Revolution Bars Group from December 2019. We can see that it’s been a good share to trade if you can pick the buy and sell points – but investors were blindsided by a 20p placing in recent weeks when the price was pushing 40p.

I believe there is upside from 20p but I have sold my placing shares and prefer the more exciting buy-and-build strategy of Nightcap.

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