City analysts following drinks and impulse purchase goods wholesaler, distributor and retailer Conviviality (LSE: CVR) predict the firm will increase its earnings by 15% during the trading year to April 2018 and by 8% the year after.
Those expectations seem robust and in a trading update released this morning, they confirmed that current trading is strong. So why is the company’s valuation so modest?
Emerging growth
At today’s share price around 325p, Conviviality trades on a forward price-to-earnings ratio of just under 13 for the year to April 2019 and the forward dividend yield runs at almost 4.4%. Those predicted forward earnings should cover the payout a comfortable 1.8 times, making the firm look like a good candidate for those seeking a decent income from their investments as well as a shot at share price growth driven by rising earnings.
What I like most about Conviviality is the way the firm is transforming itself from its origins as a franchised off-licence business into a drinks wholesaler and distributor. Driven by a focused strategy, new growth appears to be emerging from the seedbed of the old business, which looks set to boost investor returns in the years to come.
The firm took bold action to enter the market by acquiring Mathew Clark in October 2015 and Bibendum PLB Group in May 2016. Today’s update suggests the integration of both firms is progressing well.
The new divisions each delivered sales growth over the 52 weeks to April. The Direct division delivered a 6.4% sales uplift compared to the year before driven by a 1.6% increase in outlets and a 4.8% uplift in sales per outlet. Retail pushed sales up 6.1% and Trading managed a 1% increase, which the directors put down to new customers recognising “the differentiation they can access from Conviviality’s events and experiential marketing business.”
Positive change
Chief executive Diana Hunter said in today’s update that after coming to the end of an unprecedented year of change “our focus will continue to be on improving the business and ensuring that benefits are realised from our greater scale, as we drive efficiencies for the Group and greater service for our customers.”
As well as entering the distribution arena and reshaping itself, Conviviality also made several key management appointments over the previous year, to bolster its new strategy for growth. Positives are encouraging and I think investors could benefit from Conviviality’s increasing size driving growth and momentum in its markets.
Much of the recent acquisition activity was funded by raising money on the stock market by issuing new shares. However, net debt on 30 April stood at £99m, which the firm says is “comfortably below Conviviality’s net debt target of twice the value of annual earnings before interest, tax, depreciation and amortisation (EBITDA).” Borrowings seem to be under control, but it’s worth keeping an eye on debt levels if any more acquisitions materialise.
