This nightclub operator is priced to go under.
A nightclub owner struggling to make a decent profit in a record low interest rate environment with rising unemployment sounds like a ridiculous idea for an investment. And so it may prove to be -- so low-risk investors and the proverbial widows and orphans should stop reading now.
But for those of you still with me, Luminar Group (LSE: LMR) looks more or less priced to go bust, as yet it might, but the night is often darkest just before the dawn.
Cruise the club scene
Luminar, the UK's largest operator of licensed late-night venues, floated in 1996 with a market capitalisation of £30m. The group expanded with the purchase of 27 venues from Allied Leisure, then acquired its main competitor, Northern Leisure plc in July 2000.
Today, the company has 88 nightclubs in its portfolio -- most of which are under the brands of Oceana and Liquid. Perhaps this is one of those occasions where you should do your research at first hand? Or, if you'd feel like the oldest swinger in town, perhaps it's better to ask some late teenies /twenty-somethings about the clubs if there are any handy.
Down down
Luminar may have managed to expand its clubs by a mixture of organic growth and purchases, but from an investors' point of view, it has a horrible history. The share price has got down with the night-clubbers steadily falling from a high of 550p just over two years ago to 42p as I write; a 13-bagger in reverse no less.
Then yesterday, we learned that things have been going from bad to worse as the UK's club-goers have been staying away from Luminar's nite-spots in droves due to the cold snap. Youth unemployment isn't helping either. That said, Christmas and New Year were relatively successful, but not enough to stop profits coming in behind expectations, barring a miracle over the next few weeks.
What happens next?
Analysts now expect the company to post pre-tax profits of £6.5m on revenues of close to over £174m for the year to 25 February. Meanwhile, consensus earnings per share for next year currently stand at 6.7p, but the forecasts vary wildly. If the consensus is achieved, the shares stand on a forward price-to-earnings ratio of a little over six.
To be frank, shareholders must be more worried about any kind of sustainable net profit given the company's current valuation of just over £42m. This looks like a basket-case valuation to me. The company clearly feels the same, telling us yesterday that it has deferred its capital expenditure plans, meaning investment in the current year is now expected to be around £5m.
This may be good news short-term, but no club operator can afford to let its clubs' interiors slide whilst hoping maintain numbers in this competitive environment; it's a balancing act. On the other hand, the company has spent heavily in recent times, so may enjoy something of a capex honeymoon.
Cash is king
Luminar's borrowings were around £96m at the end of December -- well within its £175m borrowing facility. And this, of course, is crucial to the investment / recovery case. Companies go under because they can't pay their debts. And if Luminar can keep trading profitably, it may recover gradually and/or it may be a tempting takeover target for a predator that thinks it can extract value from the company's net tangible asset value of over £120m at the last count. The assets include 36 venues owned on a freehold or long lease basis
Encouragingly, the directors picked up a few shares at over three times the current price just five months ago. These were small purchases, but perhaps reflect some belief in the company's future.
Glass half full or half empty
And a recent rumour suggested a marketing tie-up with HMV (LSE: HMV) may lead to bigger things and possibly even a takeover. Perhaps, but as a potential investment, it depends if you see the glass as half full or half empty.
It's been pretty much all bad news for a long time at Luminar and it'll take a brave contrarian risk-taker to call the bottom. But the potential for profits, together with the assets, and low price-to-sales ratio -- make the nightclub operator a potentially exciting ride given any sustained recovery. In the last full year, Luminar made EBITDA of over £50m on sales of £193m.
This isn't a roller-coaster I'll be paying to get on just yet, but I'll certainly be watching it with interest for any further falls.
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