It is a good time to revisit the investment thesis of UK hospitality chain Loungers PLC (AIM:LGRS), according to Berenberg.
Analysts pointed to recent takeovers in the hospitality space, most notably Wagamama’s parent The Restaurant Group and Franco Manca-owner Fulham Shore, as evidence that the sector is currently undervalued.
A unique bar/cafe/restaurant hybrid, Loungers has fared exceptionally well in the underwhelming post-Covid hospitality recovery, and has since achieved 7.7% growth in like-for-like sales in the first half of its 2024 financial year.
The company has achieved like-for-like growth of around 6.6% per year since 2014.
Margins are also recovering, no doubt due to a pass down to clientele of inflation-linked operating expenses, and Berenberg reckons Loungers could achieve its 18.7% pre-Covid EBITDA margin “sooner than the market expects, through both short-term external tailwinds, such as easing cost pressures, and internal levers, such as menu reorganisation”.
Site rollout continues to march ahead across the UK, with management continuing to upgrade guidance of the company’s potential scale, from 400 to 500 sites, and now up to 600.
There are currently 206 sites across the Lounge and Cosy Club divisions.
In terms of valuation, Loungers has traded at a 15% discount to The Restaurant Group on a price-to-earnings (PE) basis since November 2022.
Fulham Shore was trading at a 31-times PE ratio before delisting in July compared to Loungers’ 15-times PE ratio today.
Apollo’s bid for The Restaurant Group valued the company on a nine-times EV/EBITDA ratio against Loungers’ circa eight-times ratio, although Fulham Shore was taken private at a bargain 4.5-times EV/EBITDA.
Nonetheless, given its “superior top line… we believe Loungers should likely be trading on higher multiples than 15-times PE and 8x EV/EBITDA”, said Berenberg.