The environment for the hospitality sector over the last year has been inhospitable but that is set to change on Monday.
Britain’s pubs and restaurants will be able to open their doors to customers for a spot of al fresco dining and drinking as lockdown restrictions are loosened.
It has been a tough time for the sector but broker Berenberg believes the equity of these hard-hit companies ought to be worth more than they were before the pandemic.
That may seem counter-intuitive but Berenberg argues that many of the sector’s players now have less debt on board as a result of fundraising and belt-tightening while weaker competitors have fallen by the wayside.
Throw in pent-up demand and the supportive short- and medium-term tax outlook, and Berenberg had decided the time is right to upgrade its price targets across the board and upgrade Marston’s PLC (LON:MARS) to ‘buy’.
Price targets raised across the board
Its estimates are based on the assumptions that indoor areas will open on 17 May and all meaningful restrictions will be lifted from 21 June, in line with government guidance.
This, it has to be said, is at odds with this morning’s announcement from retailer Frasers Group PLC (LON:FRAS); Mike Ashley’s retail empire is working on the assumption that further restrictions are almost inevitable.
READ Frasers Group to make bigger Coronavirus impairments as further restrictions are almost certain
“Sales recovered to 2019 levels during August and early September last year – even while swathes of the population did not feel safe venturing out. Many of those individuals are now vaccinated, and likely to add further to demand this summer,” Berenberg noted.
“It seems increasingly likely that the business rates system will be reformed favourably one way or another, and there have also been murmurings about a potential reduction in alcohol duty for the on-trade. The timing, details and magnitude are difficult to second-guess, but we feel – directionally at least – that the relative tax treatment of the sector could become more favourable in the years ahead,” Berenberg said in a research note.
Fuller, Smith & Turner PLC (LON:FSTA), the “premium operator” in the sector according to Berenberg, sees its price target hoiked to 1,000p – or the price of two pints of bitter as it is known in my local Fuller’s pub – from 700p – or the price of two pints of Fuller’s London Pride as it is known in my local non-Fuller’s pub.
JD Wetherspoon PLC (LON:JDW) is “the low-cost leader” and sees its price target lifted to 1,650p from 1,200p while Loungers PLC (LON:LGRS), which today announced plans to open four new sites next month, is described by Berenberg as “the growth story” and sees its price target cranked up to 320p from 259p.
All stocks are rated a “buy” as are Marston’s (price target lifted to 140p from 90p) and Mitchells & Butlers PLC (LON:MAB), where the price target is now 430p, up from 280p previously.
The odd ones out
The odd ones out in Berenberg’s analysis are The City Pub Group PLC (LON:CPC) and Wagamamas owner The Restaurant Group PLC (LON:RTG).
The former is downgraded to “hold” after doubling in price over the last six months, although the price target has been hiked to 135p from 95p.
The latter is rated a ‘hold’, with a price target of 130p, up from 80p.
“The City Pub Group (CPC) has the best balance sheet of the pubs in our coverage and should be able to continue using its buy-and-build strategy to create value over the years ahead,” Berenberg said.
“Much of the recent rally in CPC’s shares has come since pub peer Marston’s revealed in January that it had received bids from Platinum Equity. Chairman (and founder) Clive Watson’s last business, The Capital Pub Company, was subject to a bidding war between Fuller, Smith & Turner and Greene King in 2011, before ultimately being sold to the latter. CPC is in many ways a similar collection of assets to the old Capital business and, interestingly, the former CEO of Greene King, Rooney Anand, has raised £500mln of debt and equity with the mandate to buy pub assets across the UK,” Berenberg noted.
Liberum Capital Markets lists City Pubs and The Restaurant Group among its top picks in the sector, so there is scope there if the Berenberg and Liberum research teams meet in a City hostelry at chucking out time.
Liberum has raised the price target (PT) for City Pubs to 160p from 135p. The Restaurant Group’s PT has been moved to 160p from 135p, while Loungers – another of Liberum’s top picks in the sector, along with The Gym Group PLC (LON:GYM) and bowling alleys operator Ten Entertainment Group PLC (LON:TEN) – has had its PT boosted to 300p from 250p.
“The first quarter of 2021 has seen many leisure companies raise additional equity funding, with the focus shifting away from pure survival towards balance sheet repair and growth capital. We have screened our coverage universe to assess relative financial strength and liquidity available as the sector re-opens this spring. We flag City Pubs, Ten Entertainment, Whitbread and Young’s as primed to hit the acquisition path; and Gym Group and Loungers as primed to restart and accelerate their rollouts. Restaurant Group is also now well-financed to restart both its roll-out (Wagamama) and site acquisition (Brunning & Price) strategy, in our view.” the Liberum team said.