This little pub group's shares have put on 60% in six months. Is it time to sell or is there more to come?
When I last wrote about The Capital Pub Company (LSE: CPUB) six months ago to the day, the shares stood at a lowly 43.5p. Today, they're 70.5p, a gain of over 60%. So is it time to lock in a profit and enjoy a glass or two on the proceeds, or does today's valuation still not reflect the group's potential?
The basis of an investment in Capital Pub is that this is effectively a commercial property company -- in a manner of speaking -- that makes a decent profit (is on a current price-to-earnings ratio of around nine), and has a net tangible asset value per share (all property, and mainly freehold) of well over twice its share price.
The worry
The worry, on the other hand, is that the group is relatively highly geared -- around 95% -- which is a distinctly unfashionable trait these days. It also does what it says on the tin, running a string of pubs, mainly in the capital's trendy areas; again, not very fashionable in investment circles in these days of widespread pub closures.
Meanwhile, it seems likely that miniscule interest rates are giving a large artificial boost to consumer spending -- particularly from those with tracker mortgages. When rates rise any consumer-facing business with high gearing is likely to suffer.
The reassurance
So today's news that the company has paid £880,000 in cash for another pub was reassuring for shareholders. After all, it doesn't exactly speak of a company worried about gearing, cash preservation or current trading conditions.
It also seems like the company has struck a bargain to take advantage of pub market weakness, buying the new place out of administration and getting 2,000 square feet of trading space, an outside area, and 17 letting rooms for the price.
The latest acquisition takes Capital Pub's portfolio up to 26 pubs. We're also told that trading remains in line with expectations and the company continues to look for further pub bargains that match its criteria.
A successful formula
And it's those criteria that are vital to Capital's success. The company specialises in non-branded, un-themed, high-quality free houses, each of which has its own identity and serves food which is fresh and cooked to order, usually in visually accessible kitchens. Nearly all the pubs also have outside drinking areas, so the company has benefited from the smoking ban.
With the final results to the end of March, we were told that major refurbishment of the entire estate is now complete, there is no significant planned capex and the group is highly cash generative with significant headroom within its banking facilities.
Value
The net asset value (NAV) was over £30m, or over £1.50 per share, and is nearly all accounted for by freehold pubs. At today's mid price of 70.5p per share, the group is valued at just £14.3m.
Overall, Capital bears all the hallmarks of a solid business that's performed well despite the downturn. Today's acquisition will be earnings enhancing in time and the company expects to have paid off all debt by 2017. The dividend was waived last time to make progress towards this goal.
It looks to me like the company will continue to prosper and grow steadily, funding its expansion from profits, until such time as it's gobbled up by a bigger chain that wants to take advantage of the discount to NAV. Until that happens, I'm happy to hold on and let the price rise gradually towards that NAV and well beyond as the company steadily reduces its debt courtesy of the Londoners who still enjoy a night out.
More share ideas from David Holding:
David owns shares in The Capital Pub Co.
