Conviviality plc (LON:CVR) has this morning released a positive trading update for year ended 30 April 2017, with full year performance reassuringly in line with management and market expectations. Each of the three business divisions performed strongly, and management remain confident in the outlook and plan to deliver significant synergies following the transformational acquisitions of Matthew Clark and Bibendum, with integration plans continuing to progress well.
Despite the shares being up c.50% over the past six months, our view remains that the risks still lie to the upside as more synergies could emerge over time. The size and influence of CVR in the UK drinks market is not fully reflected in the valuation and the shares continue to trade at a discount to the peer group. Despite the Booker takeover premium of 24x P/E to December 17, in our view CVR trading on 13.0x to April 18 with a yield of 4.4% remains too cheap. If it were to trade on 16x this would imply a price of 380p, and 18x would imply a price of 404p.
* Group sales doubled to £1,560m in FY17 with results in line with expectations, no change to forecasts. Our FY17 EBITDA forecast of £57.9m is towards the bottom of the range and therefore we expect the actual number to be ahead. Net debt of £99m is slightly below our £103m forecast, and comfortably below the 2x EBITDA targeted by the company. We anticipate CVR will continue to deleverage throughout the next couple of years.
* Conviviality Direct is performing well with sales growth of 6.4%. Sales for the year was £1.0bn, driven by a 1.6% increase in the number of outlets served and an impressive increase in sales per outlet of 4.8%. There is strong indication that customers are switching towards CVR’s “one stop shop” model, realising the benefits of the combined range and expertise of Matthew Clark and Bibendum.
* Conviviality Retail business grew an impressive 6.1%, generating sales of £374m. Like for like sales (excluding tobacco) in the second half of the year improved to +1.5% (H2 2016 (1.3)%). The total number of stores was flat YoY, therefore the strong performance reflects the ongoing strategy to improve the quality of the estate and the benefit of a growing number of multisite Franchisees.
* Conviviality Trading sales of £146m are 1.0% above the prior year. Growth reflects the agency business benefitting from the wider reach the business has to offer, coupled with new customers recognising the differentiation they can access from Conviviality’s events and experimental marketing business.
* Outlook and significant valuation opportunity. 2017 has seen CVR established as the UK’s leading drinks wholesaler and distributor. It is very encouraging that the integration process remains on track and that management remain very confident that synergies will be delivered. The proposed Tesco-Booker deal values Booker on a CY17 P/E of 24.1x and EV/EBITDA of 16.5x. This should have positive read across for CVR which continues to trade at a significant discount on a FY18 P/E of 13.0x and 4.4% yield. Applying a 20% discount to the FY18 P/E multiple of the average of Booker and Majestic, i.e. 16.0x, we see an intrinsic value of 380p, a premium of 19% to the current share price.
The company provided the following update on trading for the 52 weeks to 30 April 2017 (FY16: 53 weeks to 1 May 2016):
The Company has traded well during the 52 week period, in line with the Board’s expectations, with total Group sales nearly doubling to £1,560m (FY16 £841m*). Net debt at 30 April 2017 was £99 million, comfortably below Conviviality’s Net Debt target of 2.0x net debt / EBITDA.
During the past financial year the transformation of Conviviality from its foundations as a franchised off licence business into the UK’s leading drinks wholesaler and distributor has been further underpinned with the acquisition of Bibendum PLB Group on the 20 May 2016. The integration of both Matthew Clark and Bibendum PLB Group is progressing well and the plan to deliver the stated synergies remains on track.
Conviviality has strengthened its management team and reorganised its activities into three business units; Conviviality Direct, Conviviality Retail and Conviviality Trading, enabling each to focus on serving its customers and suppliers. Underlying sales for each business unit have been strong throughout the year with good organic growth compared to the corresponding prior period:
· Conviviality Direct sales up 6.4%
· Conviviality Retail sales up 6.1%
· Conviviality Trading sales up 1.0%
· Sales of £1,040m in the 52 weeks to 30 April 2017; up 6.4% on the corresponding prior period
· Growth has been driven by both a 1.6% increase in outlets and an increase in sales per outlet of 4.8%; a strong indication of customers switching to a “one stop shop” model as they benefit from the combined range and expertise of Matthew Clark and Bibendum
· Sales of £374m in the 52 weeks to 30 April 2017 (FY 2016: £359m*); up 6.1% on the corresponding prior 52 week period
· Like for Like sales in the second half of the year (26 weeks to 30 April 2017) improved to +0.5% (H2 2016: (2.0)%)
· Like for Like sales (excluding tobacco) in the second half of the year (26 weeks to 30 April 2017) improved to +1.5% (H2 2016: excluding tobacco (2.3)%)
· Sales of £146m in the 52 weeks to 30 April 2017; up 1.0% on the corresponding prior period
· Growth reflects the agency business benefitting from the wider reach the Group has to offer, coupled with new customers recognising the differentiation they can access from Conviviality’s events and experiential marketing business.
Diana Hunter, Chief Executive Officer of Conviviality Plc said: “We have come to the end of an unprecedented year of change and I am pleased to report a strong trading performance for the Group and for each of its business units. It is encouraging to see our customers and suppliers benefiting from the skills and the expertise of the enlarged Group, its scale and reach and its positioning as the UK’s leading drinks wholesaler and distributor.
“We have made great progress on the integration of Matthew Clark and the acquisition and integration of Bibendum PLB Group. 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.
“I would like to thank our passionate and talented team, as well as our suppliers, our customers and our Franchisees, for their loyal support through what continues to be an exciting journey for Conviviality.”
*FY16 revenue has been restated to reclassify retrospective discounts given to customers and franchise fees earned from cost of goods sold to revenue and from operating costs to revenue respectively.