Loungers Plc: Equity Development
Loungers is an award winning, uniquely positioned all day café-bar group that has grown revenues an impressive 22.5% CAGR FY16-FY23. Comprising of Lounges, Cosy Club and Brightside, the 257-site group still has huge scope to grow towards its conservative ambition of over 650 sites. Loungers is profitable with improving margins and we forecast will generate over £100m free cashflow (pre-expansion capex) FY24E-FY26E. This, we estimate, will fully fund c.100 new site openings over the next three years driving 16% CAGR in Revenues, 18% CAGR in Adj. EBITDA and 20% CAGR in Adj. EPS FY23-FY26E. This high growth is not reflected in the group’s valuation, in our view. We initiate coverage with a Fair Value of 360p, based on 8.0x cal 2025 EV/Adj. EBITDA.
Menu diversity and value driving 25% increase in LFL sales since FY19
Loungers was established as a great value-for-money neighbourhood café-bar that is as good for coffee as it is for breakfast, lunch, dinner or evening cocktails. By offering an inventive and diverse menu that appeals to all ages, Loungers has consistently outperformed peers with LFL sales growth accelerating to an impressive 7.7% in 1H24. With high average weekly sales densities and low rents to sales ratios, Loungers has successfully navigated cost headwinds and has seen Adj. EBITDA margin return to 12.1% (IAS 17 metric) in FY23 and is on track to recover to pre-COVID levels of 13.5%.
Accelerated new site openings and 30%+ CROCCI returns
Opening new sites is part of Lounger’s DNA and the group is on track to open 36 (more than one a fortnight) in FY24E. With a property market in Loungers’ favour and a versatile approach to new locations, Loungers is driving highly attractive cash returns on cash invested of more than 30%.
Growth prospects undervalued, 360p Fair Value
Offering higher organic growth than sector peers, operating cashflow to re-invest in growth and a strong balance sheet, we initiate coverage of Loungers with a Fair Value of 360p based on c.8.0x calendar (“cal”) 2025 EV/EBITDA and equating to c.1.3x cal 2025 EV/Sales and 29x cal 2025 PER, approximately 1.5x our forecast 20% CAGR in EPS FY23-FY26E.
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