All-day café-bar chain Loungers PLC (LON:LGRS) floated in London last month and broker Peel Hunt sees a “unique” concept and business model, so has begun covering the stock with a ‘buy’ recommendation and a share price target of 285p.
Under the Lounge and Cosy Club brands, the all-day concept offers “different operating characteristics and growth potential to other leisure companies”, analysts at the company's 'house' broker said in a note to clients on Tuesday, ahead of Thursday's maiden trading update.
READ: Loungers could triple in size, says Liberum as it initiates at ‘buy’
“Loungers’ success is built on its ability to trade well throughout the day, week and year, with a broad product range and customer base,” the analysts said, noting that the all-day trading model is accompanied by warm hospitality, an attractive environment, quality products at good value prices.
“As a result, its high returns and LFL sales are unaffected by weather, politics and sport, and are almost uniform across the estate, in secondary towns, regardless of age or size,” they added.
Having expanded the estate at a 31% compound annual growth rate (CAGR) over the last four years, while making strong volume-led sales and cash returns, industry calculations point to potential to grow the current 122 Lounge sites to 400 throughout the UK, with capacity for Cosy Club to grow from 24 present sites to above 100.
Peel Hunt, which is joint broker to Loungers along with Liberum, reckons this is conservative, however. With "one of the strongest balance sheets in the licensed retail sector" and based on forecast assumptions for profit before tax to grow at a 27% CAGR between 2019 and 2021, the broker estimated that Loungers’ expansion and LFL sales should generate 29% growth in equity value in 2020, followed by 26% in 2021.
This results in the City broker setting a share price target of 285p, compared to a price of 222p on Tuesday morning, which were up almost 1% on the day and 11% above last month's 200p placing level.