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.
