The leisure sector has been through a tough time since the start of the pandemic and with inflation rising faster than a well-prepared soufflé, it’s not out of the woods yet.
Nevertheless, Liberum Capital Markets has identified some stocks in the sector that it believes will be winners in inflationary times.
“After a slow start to 2022, the sector is gathering momentum as final COVID restrictions are lifted and supply chain issues ease. While inflationary pressures continue to present significant challenges, especially in light of the Ukraine conflict, we believe consumer demand will remain resilient, with a reduction in supply helping to rebalance the equation. In particular, we expect the more experiential focused operators to outperform as consumer priorities are re-set,” the broker said in a lengthy research note.
The broker’s Leisure Index is down 15% in 2022 and off 30% over the last 12 months but Liberum believes there is a significant upside, especially among the well-capitalised, higher-growth roll-out models.
It highlights Hollywood Bowl Group PLC (LSE:BOWL), City Pub Group PLC (AIM:CPC), The Gym Group PLC (LSE:GYM), Loungers PLC (AIM:LGRS), SSP Group plc (LSE:SSPG), The Restaurant Group PLC and Ten Entertainment Group PLC (LSE:TEG) as being particularly attractive.
The two ten-pin bowling companies – Hollywood Bowl and Ten Entertainment – are benefiting from the boom in what Liberum calls competitive socialising.
“This tailwind was evident during 2021, with the exceptional revenue growth at Ten Entertainment being fully volume-driven, and the majority at Hollywood Bowl being volume-driven,” Liberum said.
It has a target price (TP) of 280p for Hollywood Bowl (current price is 222p) and a TP of 340p for Ten Entertainment (238.5p).
As restrictions have eased, consumers have returned to the gym but virtual classes and home work-outs remain popular; nevertheless, the continued appeal of working out at home does not appear to be hitting attendance levels at Gym Group, which has seen visitor levels bounce back to pre-COVID levels while the total membership base was just 2% below its pre-pandemic level back in January.
Liberum has a 340p price target for Gym Group, well above the current price of 201.5p.
For those more interested in exercising their right arm, Liberum has turned even more bullish on City Pubs, lifting its target price to 180p from 160p; the shares currently trade at 89.5p.
A full reappraisal of operations during COVID identified £6.8mln of cost savings, Liberum noted, and the company is firmly on the acquisition trail.
With its enterprise value – essentially the market capitalisation adjusted for cash and debt – just 6.8 times projected underlying earnings (EBITDA) for 2023 compared to the historic average of 13.3, the shares look undervalued.
In the restaurant sector, Loungers (TP of 400p versus the current price of 236p) is expanding at pace; the business can comfortably self-finance 25 new site openings a year, the broker believes.
As for The Restaurant Group, its target price has been raised to 160p from 125p; the shares currently trade at around 67p.
Liberum believes the group has all bases covered with a rebalanced estate benefiting from flexibility across different segments and channels.
“We expect delivery sales to hold at c.2x pre-COVID levels, with its flagship Wagamama brand and food-led Brunning & Price business strategically well set for consistent outperformance,” Liberum believes,
Lastly, SSP Group, which currently trades some 135p below Liberum's target price, offers an attractive way to play the recovery in travel.
The broker believes momentum in like-for-like sales growth should return in the second half of this year. There are £150mln of deferred payments set to clear in the current financial year while the shares trade at a 39% discount to their pre-Covid average enterprise value/EBITDA multiple.