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If you liked Booker, you’ll love Conviviality
The drinks wholesaler and franchised off-licence operator looks an ideal alternative to Booker and provides exposure to similar end markets. It has compelling cash generation and income characteristics, as we now explain.
Vastly improved numbers
Convivality’s half year results published on 31 January 2017 illustrate how the business has changed over the past year.
Pre-tax profit was 295% higher at £15.4m on a sales surge to £782.5m (H1 2016: £252m).
This reflected the transformation of the business through two significant acquisitions. It bought the UK’s largest drinks distributor to the on-trade, Matthew Clark; and wines and spirits wholesaler Bibendum.
These deals are already delivering cost synergies and cross-selling benefits, with the numbers also buoyed by robust organic growth.
Conviviality reported positive like-for-like sales in retail, where it trades as Bargain Booze, Bargain Booze Select Convenience and Wine Rack, for the six weeks ended 1 January 2017.
Management also doubled the interim dividend to 4.2p which signals strong confidence in Conviviality’s future cash flow.
Is Tesco/Booker a major threat?
At this stage, it is hard to determine how much of a competitive threat Tesco/Booker will specifically present to Conviviality.
Booker is a wholesaler and distributor like Conviviality, but has a bias towards food, household goods and catering rather than alcohol, where Conviviality is a leading player.
Conviviality’s chief executive Diana Hunter stresses the competitive advantage of the business: ‘As a result of the acquisitions of Matthew Clark and Bibendum PLB we are now in a truly unrivalled position.’
She says the business has access to over 25,000 restaurants, hotels, bars in the UK; over 700 franchise retail outlets; and approximately 400 independent specialists.
Conviviality also serves major supermarkets drawing from more than 10,000 alcohol products sourced globally from specialist producers and brand owners.
For the retail division, the combination of Booker’s Premier, Londis and Budgens convenience brands with Tesco’s One Stop will give enlarged Tesco greater buying power and the ability to hold down prices. That is cause for concern in a part of the sector where operating margins are skinny at best.
We believe off-licence Bargain Booze should be able to more than hold its own.
More reasons why Conviviality will survive
An alcohol specialist rather than a general convenience store, its low prices will chime with cash-strapped consumers if the economy turns down. Conviviality’s reliance on Bargain Booze as a profit centre has also been reduced through its acquisition-led expansion.
Post-Bibendum, Conviviality supplies Tesco with fine wines through its PLB brand agency business. It will be tough to unseat, since this is a specialist category in which Booker does not currently play.
Conviviality’s Catalyst business, an agency for spirits and brand owners to help them increase product distribution, also currently supplies Booker and Tesco.
Broker N+1 Singer is reassuring: ‘The fundamental point is that Conviviality has significant capabilities in consumer insight, sourcing, ranging and supply that can add value to its customers by reducing the complexity of the wine category in large multiple national chains.
‘This expertise is valued by the likes of Tesco/Booker and we thus do not envisage the proposed tie-up as having a major negative impact on the relationship.’
In addition, the deal serves to highlight how Conviviality is undervalued by the market.
Booker is being taken over on a prospective price to earnings multiple of 24.5 times and an EV/EBITDA (enterprise value to earnings before interest, tax, depreciation and amortisation) of 16.7 times.
For the financial year to April 2017, N+1 Singer forecasts pre-tax profits of £46.1m (2016: £21.7m) for earnings of 21.2p, placing Conviviality on an undemanding prospective PE of 12.8, a material discount.
Forecast to pay a 12.6p dividend, supported by forecast free cash flow of £32.1m, Conviviality offers a yield north of 4.6%. Dividends of 13.6p and 14.4p are predicted for 2018 and 2019.
Zeus Capital sees an ‘intrinsic value’ of 380p for Conviviality, arguing the current valuation fails to fully reflect its size and influence in the UK drinks market.
Meanwhile, Investec Securities reiterates its ‘buy’ rating and has raised its price target from 280p to 300p, ‘reflecting increased visibility in delivery of synergies and falling execution risks’.
We believe the shares will keep rising so long as Conviviality can secure further market share gains and deliver on the cost synergies promised following its ambitious M&A moves.
We’re positive on Conviviality at 272.25p for its robust cash flow and the compelling read across from the Tesco/Booker merger valuation.