There’s more to come at this big Foolish winner.
It seems Londoners and visitors to our nation’s capital still enjoy a drink no matter what the economy, the weather, terrorists or anything else throws at them.
Judging by the continued excellent performance of AIM-listed Capital Pub Co. (LSE: CPUB), pretty much nothing will stop us in our search for a decent pub. And Capital’s 31 unbranded free houses are certainly decent ones.
Each of Capital’s pubs has its own identity and serves food which is fresh and cooked to order, usually in visually accessible kitchens. In fact, the company is London’s largest independent free house operator. Nearly all the pubs also have outside drinking areas, so Capital has generally benefited from the smoking ban.
Real estate or pub group?
It doesn’t really matter whether you view the company as one which operates pubs it happens to own, or as essentially a landlord which happens to run its own pubs in its buildings. Either way, it’s excellent value.
But when you put the two businesses together, you have the best of both worlds; a growing pub group on a very undemanding rating whose balance sheet is stuffed full of assets.
It’s been quite a busy six months since I last wrote Capital Pub.
The company bought Tomahawk Pubs Ltd, the owner of two freehold pubs — the ‘Morgan Arms’ in Bow, London E3 and the ‘Black Swan’ in Ockham, Surrey, for just over £5m. This was slightly below net asset value and the purchase was financed in part via a placing to raise £2.9m.
At the end of September, ‘The Actress’ pub in East Dulwich (acquired in January 2010) was opened and is reportedly trading well.
Then, earlier this month, Capital acquired the leasehold interest of ‘The Goldsmiths Tavern’, in New Cross, adjacent to Goldsmiths College, with completion due next February. The company has an option to acquire the freehold of the pub — which will be extensively refurbished and is due to open after Easter 2011 — for £1.5m.
Going great guns
We’re also told that trading at ‘The Victoria Inn’, Peckham Rye, has increased five-fold since its opening in June after an extensive refurbishment.
The interim results for the 26 weeks ended 25 September were nothing short of excellent. Capital posted a 34% rise in first-half pre-tax profits to £1.7m, while increased sales of £13m.
The company tells us it is now in a position to self-finance further acquisitions using internally generated cash flow. Its aim is to have between 45 and 50 pubs by the end of 2013 — an aim which will surely be given a welcome boost by the London 2012 Olympics.
Over the last six months, the shares have put on 5%; a poor performance when compared to the 160% rise since the shares looked a real bargain back in April 2009 when pretty much everything and anything was a wonderful buy in hindsight.
Too cheap
But today’s price is all that really matters and on that score, I still believe the shares have a lot further to go, given time. The current mid price of 111.5p values the group at £28m which compares very favourably with the net tangible assets (mainly the freeholds) of 140p per share.
The company also has healthy cash flow, generating £2.7m from first-half operations, while half-year earnings extrapolated over a year puts Capital’s shares on price-to-earnings ratio of 8.2.
The big downside for those of us who like to be able to pay for a night out from dividends now and again is the lack of income. Capital Pub pays no dividend and is much more intent on capital growth than providing an income as yet. But the business model is clearly working exceedingly well in a tough market — so why not expand?
Steadily increasing earnings, cash generation to fund further expansion, and steadily reducing debt should make Capital an excellent capital investment from here; given its discount to net assets it has to be worth a good deal more in the long run.
More share ideas:
David owns shares in Capital Pub Co.
Open all references in tabs: [1 – 10]