ShoreCap starts Loungers at ‘buy’

ShoreCap said the group exhibits "exceptional and consistent" cash returns on invested capital per site of over 30% and in its view, "has the runway to replicate these returns on an estate more than double today’s size".

"We argue that: (1) the structural shift towards hybrid working, (2) evidence sites can achieve more than 30% CROIC (cash return on capital invested) in multi-site cities and towns with less than 30k population (3) significant capacity withdrawal in the hospitality sector and, the group’s hyper-localisation and refurb strategy are all supportive of high-quality site replication," it said.

"At 195p and on a 5.5 EV/EBITDA (pre-IFRS) we do not believe these qualities are reflected and in fact we believe the market has effectively priced a whole peak of trade dropping out, or in other words a robust deterioration of site returns to a level of circa 22%."

Shore said this is unrealistic given the strength of current trading, supportive secular trends and measures in place to control costs.

"At our fair value of 300p, the group would trade on a CY23F EV/EBITDA of 8.5x (pre-IFRS) and thus be more in line with operators Greggs and Tortilla which yield a similar CROIC per site of over 30% and exhibit an equally compelling growth story," it added.