It’s a well known fact that we British enjoy a drink. Whether it’s to help us unwind at the end of a hard day at work, relax in a social surrounding or simply enjoy a tipple at home.
It’s also well documented that we are among the top nations in the world for alcohol consumption. That’s according to the World Health Organisation who rank Britain within the top 25 countries in the world.
What’s become more prevalent, particularly of late is the reduction in the amount of alcohol we are drinking as a nation. Now, everyone has their theory on the reasons behind this. Alcohol is more expensive since the UK’s vote to leave the European Union as the Pound’s value drops and inflationary pressures take hold, the UK is becoming ever more culturally diverse and greater awareness of the health risks associated with alcohol consumption may be factors contributing to it’s decline.
So, it’s against this downward trend in consumer spend that AIM listed drinks retailer, Conviviality, is enjoying a stellar 2017. The UK based business has seen its share price rise 77% this year on the back of a diverse revenue stream and strong sales performance.
Who are Conviviality, and what do they do?
Formed in 1810, it’s a business that has over 200 years worth of history. It was originally founded in the City of London as Matthew Clark & Sons, helping foreign producers to sell their products in the UK.
Conviviality has undergone a series of transformations through its history with the most significant happening in the 1980’s as the business began selling products directly to its customers and opening franchise stores.
Today, the business is structured in three parts; Conviviality Retail, Conviviality Direct and Conviviality Trading.
Through their Bargain Booze and Wine Rack brands, the business services more than 370 franchises and more than 700 stores nationwide selling products directly to consumers. In 2016, this equated to 24% of the Group’s full year turnover.
The Conviviality Direct business serves over 23,000 outlets from national prestige hotel chains to independent food-led pubs and restaurants trading through its two businesses, Matthew Clark and Bibendum. As the largest segment, the Direct business accounted for 67% of all turnover at year end.
Using the experience gained over many years, Conviviality Trading has been developed to create new products for customers, from concept through to delivery and marketing – a one-stop service for drinks brands. This segment contributed 9% of full year turnover.
Conviviality PLC: The fundamentals
The business has been growing consistently over the last 5 years. Turnover has seen a positive upward trend since 2014 and its acquisition strategy has seen turnover jump from £841m in 2016 to £1560m in 2017.
That has seen pretax profits surge too, with £18.9m in 2016 boosted to £33.1m in 2017. That equates to an EPS rise from 12.7p in 2016 to 16.5p in 2017.
Looking at the Broker Consensus, a collective recommendation of BUY and continued pretax profit growth for next year of £53.1m suggests more healthy returns for the business in 2018.
These positive numbers, combined with an impressive 12 months performance from its share price, suggest the business is on a forward P/E ratio of 17 and a PEG of 0.67.
Graph Source: Hargreaves Lansdown
There’s an attractive dividend too. A yield of 2.75% over the full year is forecast to increase to 3.27% in 2018 and 3.43 in 2019 will find favour with income hunters.
In addition, Conviviality has been maximising output with a Return On Capital Employed of 67.7% while their Margin of 2.70%, while not that impressive when compared to the market as a whole, compares favourably with their peers.
There is a note of caution, however, amid the positivity surrounding this stock. The Group’s recent acquisition strategy means that borrowings are relatively high. While the business is comfortably able to maintain its interest payments, gearing, while relatively cheap with today’s historically low interest rates, may put off some investors.
With a broad client base, ranging from franchises, hotels, bars, restaurants and major supermarket retailers, and in light of an inflationary squeeze on UK consumers pockets, the question is, can Conviviality continue their positive growth beyond 2017?
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Do bear in mind this isn’t a recommendation to buy this stock. The above constitutes my opinion based on the research undertaken. I urge you to do your own research before you invest.
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