Buy City Pub Group to invest in your future local

City Pub Group listed on the Alternative Investment Market (Aim) in late November 2017 at 170p, raising £35m to clear pre-existing debt and leave it with about £50m of acquisition firepower. The company has already built an estate of 38 pubs in high-footfall areas in London and affluent cathedral cities in the south-east. At float, the majority freehold estate, then 33 pubs, was independently valued at £74m and broker Liberum estimates that including openings in the pipeline the value is now closer to £94m.

The pubs themselves have a 'hyper-local', high-end focus that tries to combine the flexibility of a managed establishment with the entrepreneurialism of a tenanted pub – the performance of Capital Pub Group suggests management knows what it is doing on this front. The group also aims to take advantage of the recent outperformance of pubs that concentrate on serving drinks rather than food. Food is lower-margin and in recent years has become highly competitive.

Based only on the existing pubs, broker Liberum expects that as the estate matures the group can generate a compound annual growth rate (CAGR) between 2017 and 2020 of 30 per cent in post-tax profit and 10 per cent in revenue. However, should the group fully capitalise on opportunities to grow through acquisition, the broker estimates post-tax profit CAGR could be as high as 51 per cent over the period, with top-line CAGR running at 26 per cent. Meanwhile, given the group has historically achieved a return on invested capital of about 15 per cent on freeholds and 25 per cent on leaseholds, the broker is forecasting that return on capital employed will increase from 5.9 per cent in 2017 to 9.2 per cent by 2020.

So far City Pub Group is off to a good start. Like-for-like sales were up 3.8 per cent in the year to the end of December, while total turnover for the year was up 34 per cent to £37.4m. And the company is on track to beat the 2017 cash profits forecast of £6m.