Loungers — Happy eaters

Research: Consumer

Loungers — Happy eaters

Loungers continues to show that UK hospitality in the guise of an innovative, all-day value offer can deliver significant and sustained profit growth despite sector headwinds. H124 adjusted EBITDA (IAS 17) was 28% higher due to a like-for-like sales increase (+7.7%) and scale benefits from accelerated expansion (over 15% in the last year). Such momentum may only be reinforced by a burgeoning pipeline in a property market that management expects to remain favourable for the foreseeable future and thus conducive to a potential long-term trebling of the estate, which could be funded internally on the current model. A consensus FY24e EV/EBITDA (based on IAS 17 accounting standard) of 6.5x compares with a c 9x historical exit multiple for Restaurant Group, Loungers’ closest listed peer.

Richard Finch

Written by

Richard Finch

Analyst, Consumer

Consumer

Loungers

Happy eaters

Travel & leisure

QuickView

7 December 2023

Price

227p

Market cap

£235m

Share price graph

Share details

Code

LGRS

Listing

AIM

Shares in issue

103.7m

Business description

Loungers operates 244 all-day neighbourhood café/bars across England and Wales as Lounges, Cosy Clubs and Brightside, a new roadside brand. Notwithstanding brand similarities, Cosy Clubs (36) tend to be larger in terms of interiors and location and more formal, occasion led.

Bull

Proven, successful value offer with a well-invested estate and scalable brands suited to post COVID-19 conditions.

High-quality pipeline with openings on favourable terms (pandemic fallout). Potential trebling of the estate.

Solid finances with strong free cash flow funding growth internally.

Bear

Economic uncertainty mitigated by value and breadth of offering.

2024 increase in National Living Wage but 2023 rise absorbed with labour costs as % of sales maintained.

Execution risk in terms of planned expansion, although positive record of delivery.

Analysts

Richard Finch

+44 (0)20 3077 5700

Russell Pointon

+44 (0)20 3077 5700

Loungers continues to show that UK hospitality in the guise of an innovative, all-day value offer can deliver significant and sustained profit growth despite sector headwinds. H124 adjusted EBITDA (IAS 17) was 28% higher due to a like-for-like sales increase (+7.7%) and scale benefits from accelerated expansion (over 15% in the last year). Such momentum may only be reinforced by a burgeoning pipeline in a property market that management expects to remain favourable for the foreseeable future and thus conducive to a potential long-term trebling of the estate, which could be funded internally on the current model. A consensus FY24e EV/EBITDA (based on IAS 17 accounting standard) of 6.5x compares with a c 9x historical exit multiple for Restaurant Group, Loungers’ closest listed peer.

H124: Ticking all the boxes

Refreshingly clean of COVID-19 adjustments, the results for the 24 weeks to 1 October made clear the strength of appeal of the Loungers offer. Like-for-like sales up 7.7% exceeded pre-pandemic levels by 25%, which management believes is unmatched in the sector. Progress was across the board in terms of brands and geography, with impressive contributions from the oldest c 25% of sites pre-FY16 confirming their upkeep and relevance. Margin expansion (11.6% vs 11.0% for IAS 17 EBITDA) was driven by better purchasing (thanks to scale), pricing (still cheaper than the competition) and the leveraging of fixed property costs (rent to revenue down to an industry-leading 4.4%). Year-on-year net bank debt was up less than £5m at £14m despite £43m in capex (34 openings).

Way to go

With like-for-like growth in sales maintained and six openings in the first eight weeks of H224, more of the same may be expected in the traditionally stronger second half, allied with management’s confidence that it has ‘levers to pull’ to absorb costs, notably regarding the rise in the National Living Wage. It is similarly positive about a pathway to at least 600 Lounges and 65 Cosy Clubs. The variety and flexibility of the all-day offer as not just a restaurant business bring myriad opportunities in an amenable property market, while the company is now equipped to deliver c 35 openings per annum.

Valuation: Unflattering

On raised consensus forecasts after the H124 results and addition of a 53rd week, Loungers’ FY24e EV/EBITDA (IFRS 16) is 7.7x (7.1x if £4m pre-opening costs are added back), which is similar to that of its larger competitor J D Wetherspoon.

Consensus estimates (IFRS 16)

Year
end

Revenue
(£m)

EBITDA*
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

EV/EBITDA*
(x)

04/22

237.3

51.3

21.6

17.4

0.0

6.9

04/23

283.5

44.0

9.4

8.4

0.0

8.5

04/24e

337.0

52.2

12.4

9.1

0.0

7.7

04/25e

386.0

60.7

16.8

12.3

0.0

7.1

Source: Refinitiv. Note: *Excluding exceptionals but after pre-opening costs.

EDISON QUICKVIEWS ARE NORMALLY ONE-OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.

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General disclaimer and copyright

This report has been prepared and issued by Edison. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. Where Edison has used consensus estimates within this publication, we do not guarantee their accuracy or completeness.

Exclusion of liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

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This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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