Shore Capital sees significant upside at hospitality group Loungers

The cafe, bar and restaurant owner reported on Friday that trading in the first half has been strong, with like-for-like sales growth of 7.7%, up from 5.7% at the first-quarter stage and well ahead of Shore Capital's 5% forecast for the full year.

Inflationary pressures have continued to ease, while the roll-out of new sites has continued, with 16 new stores during the half, taking the portfolio to 238.

Shore Capital said that for every 1 percentage point of LFL upside is equal to an EBITDA lift of £1m, which the broker currently forecasts as £39.2m for the full year, and so there is "upside risk" to current market estimates after the first-half beat.

"Loungers has made material progress since its IPO, the group is operating an estate of 238 sites versus 146 at FY19A (so 63% larger) and is set to out turn (pre-IFRS) EBITDA of £39.2m vs FY19A £20.1m (95% higher).Yet, it’s share price remain broadly unchanged," the broker said.

The stock, which IPO'd at around the 200p level, has traded within a range of 100p to 300p over the past few years, but has remained close to the 200p level for the past 12 months. On Friday, it was up 2.4% at 191.4p, however Shore Capital estimates a fair value being close to 320p.

Analysts said that the recent offer for sector peer and Wagamama owner Restaurant Group (valued at 7.3x forward EBITDA) and the takeover of Franco Manca owner Fulham Shore (valued at 7x forward EBITDA) should be "supportive of upside risk to Loungers’ EV/EBITDA (pre-IFRS) of 4.7x-which we think in its own right should trade at a premium to peers".

"LGRS has sequentially accelerated its roll-out, and executed, whilst maintaining CROIC per site of >30% (top-end of peers)and now has signalled an inflection in its EBITDA margin trajectory. If the market does not respond, we sense other pools of capital will continue take advantage of record low valuations in the sector," Shore Capital said.