A small cap stock that could prove a gem for investors

recently came across a company which listed on the AIM (a stock exchange for small cap businesses) in November 2017, called the City Pub Group. Having researched this company it looks like an attractive prospect, and I have decided to acquire some shares.

At the time of listing the group owned an estate of 34 freehold pubs across southern England. It is being managed by a group of directors with a proven track record, having built a previous pub group called The Capital Pub Company from its startup in 2000 to listing on the AIM, prior to its subsequent acquisition by Greene King for £93m in 2011.

City Pub Group has a primary focus on drinks, which typically forms 70% of sales, with the remaining 30% on food.  The latter is proving to be a highly competitive space, more so now due to the increased ease of ordering at home  with the rise of apps like Just Eat and Deliveroo. Drinks on the other hand have a higher predictability of sales and also command higher margins, and hence this strategy seems sensible to me.

The group also aims to expand in future, looking to double the size of the estate in 3-4 years’ time. The directors are targeting pubs which they believe will produce higher earnings. This will be done by assessing each pub on 5 factors: residents, office workers, students, tourists and shoppers; each potential location will need to score highly on at least 4 out of these 5 factors.

The growth of the estate is planned through the acquisition of operating pubs, as well as through 3 other methods listed below:

i) Acquiring pubs that require refurbishment. An example the directors have provided in their prospectus is The Phene in Chelsea, which looks like a very attractive place to visit according to their website.

ii) Acquiring closed down pubs that will need extensive refurbishment. City Pub Group have already done this with The Walrus, situated in Brighton. I have to say this place looks marvellous and I’d definitely pay a visit, see website link here.

iii) Acquiring unlicensed pubs, such as The Old Bicycle Shop in Cambridge, which as the name suggests was previously a bicycle shop. See the website for some truly impressive photos.

Liberum, the brokerage firm which analyses City Pub Group, is forecasting 2018 pre-tax profits of £5.4m, up from an expected £3.2m in 2017 prior to their results. Liberum is also forecasting earnings per share in 2018 to hit £6.9m in 2018, up from £3.2m in 2017. Based on the share price of last Friday of 171.5p this gives a PEG rating of a very appealing 0.1! As you know from my previous article, I’m a huge fan of this metric.

In addition to this, investors could also profit from rising dividends over time as the company is aiming to put in place a progressive dividend policy, which should be perfectly feasible should the expansion described above go well. With forecasts for inflation in the UK to subside this year, and wages to rise, this could translate to an increase in drinks sales, particularly in the more affluent southern England which should help with the dividend payout plans in the near future. I’ll be watching this stock intently, with great anticipation for its results at year end!

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