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Is Loungers biting off more than it can chew with £300mln London IPO?

£300mln seems like a lot of money for a company that most people haven’t heard of, but Loungers is reportedly confident it can achieve that number, and some of its peers suggest it can too

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There are currently 146 Lounges and Cosy Clubs in the UK and Wales

Café-bar operator Loungers PLC unveiled plans to float on AIM earlier this morning.

The news was greeted with a few raised eyebrows in the Proactive office, not least because none of us have ever heard of Lounges or Cosy Club, let alone visited one.

READ: Loungers set for £250mln AIM IPO

The timing of the planned initial public offering (IPO) is just as surprising, given the wave of change sweeping the UK casual dining sector.

Established dining chains have taken a kicking over the past couple of years, with stiff competition, soaring costs and sluggish consumer confidence all hitting sales.

Times have been so tough that the likes of Jamie’s Italian, Byron and Gourmet Burger Kitchen have all had to seek company voluntary arrangements (CVAs) – a form of insolvency that sees troubled companies renegotiate rents and close sites.

Punchy valuation?

Most restaurant bosses would probably hold off on going public for fear that the negative sentiment engulfing the industry would weigh on their firms’ valuations.

But the mutterings coming out from Loungers seem to suggest that the company is eyeing a valuation of as much as £300mln.

Given that the company has been tipped to deliver adjusted earnings of £20mln for its current financial year, that would mean it would be trading on around 15x forward earnings.

That figure looks a little punchy when compared to some of its peers, with Marston's PLC (LON:MARS), Mitchells & Butlers PLC (LON:MAB) and Wagamama owner Restaurant Group PLC (LON:RTN) all under 10x forward earnings.

But two better comparisons might be JD Wetherspoon PLC (LON:JDW) and Fulham Shore PLC (LON:FUL), given Loungers’ “strong reputation for value for money” and the similarities it shares with Fulham’s growing Franco Manca brand.

Those two trade on forward earnings multiples of 17.4x and 21.8x, respectively, more than what Loungers is thought to be looking for.

Still, it can’t be denied that £300mln is a hefty price for a company that is yet to really enter the mainstream consciousness.

To put it into context, that is five times the size of Fulham Shore and not far off ten times the size of Wildwood owner Tasty PLC (LON:TAST).

25 openings a year, record Christmas trading

Management thinks it can justify the premium price tag by pointing to its relatively pacey growth: Loungers has opened 20-plus stores in each of the past three years, and it is on track to add another 25 this year.

The plan going forward is to keep on opening another 25 stores every year, with independent analysis reckoning there is room in the market for more than 400 Lounges and over 100 Cosy Clubs.

That might sound like a lot of restaurants and bars, especially when other chains are closing sites after years of overexpansion, but Loungers estimates that some of its peers have twice that amount.

The company’s two distinct brands will also help it to target different demographics, meaning its presence isn’t limited to one particular type of location like some others.

For example, Lounges are often found in smaller suburban high streets, while Cosy Clubs tend to be located in the country’s bigger towns and cities.

Cheap eats still in demand

Loungers’ value proposition is helping it out at a time when consumers are tightening their purse strings.

“The group is the only growing all-day operator of scale in the UK with a strong reputation for value for money, which, the directors believe, offers proven resilience in a tighter and more competitive consumer spending environment,” read Monday’s statement.

The numbers back that up, too, with like-for-like sales up 6.4% in the half-year to 7 October. That was followed up with a record Christmas, during which like-for-likes surged 11.0%.

It will need that growth to continue long into the future if it is to convince investors it is worth £300mln during the current sector malaise.

Quick facts: Loungers PLC

Price: 188.5 GBX

AIM:LGRS
Market: AIM
Market Cap: £174.36 m
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