AIM-listed Nightcap Plc. [LSE:NGHT] is a company that focuses on acquiring, recapitalising, and developing drinks-led bars with potential and synergy throughout the UK. Nightcap released their most recent interim result on Monday, the 13th of March. Before diving into the jaw-dropping growth rate, let us get to know Nightcap a little bit more.
Nightcap recognises the fundamental shifts in the hospitality industry and consumer preferences in recent years, which have resulted in reduced competition, lower rents, and greater availability of qualified and talented hospitality staff in the job market. Targeting robust millennial audiences, Nightcap’s strategy is centred on simple, scalable business concepts with potential for national roll outs.
Nightcap aims to build a major drinks-led hospitality group by making selective and targeted acquisitions of individual sites and brands, capitalising on the compelling opportunity in the market.
Hospitality industry analysis
Nightcap operates in the drink-led hospitality industry. This industry has been facing difficult operating conditions over the past few years, for a few reasons: declining alcohol consumption, increased price competition from supermarkets, high wage costs, national lockdowns and the cost of living crisis. COVID and the Russia-Ukraine war have severely affected the industry’s revenue, leading to repeated closures, less household disposable income and higher energy costs.
Although the industry is expected to keep recovering over the next few years, rising business rates, wage costs, and competition from supermarkets are expected to limit revenue and margin growth. Establishment numbers are expected to fall over the next five years, as many independent pubs struggle in bleak economic conditions.
In this environment, Nightcap’s strategy could help the company in overcoming the industry’s challenges and further capitalise on the opportunities in the market. The company management team’s expertise in acquisition-related activities should help in making acquisitions of ‘undervalued’ individual sites and brands, to unite bars that align with the group and develop Nightcap towards a strong drinks-led hospitality group.
What makes Nightcap different?
Nightcap’s management team really understand hospitality. They recognise that the fundamental value of the service industry is to satisfy the client and provide exceptional experiences, and Nightcap has done an amazing job in this respect. They train their staff to the highest standard, decorate all the subsidiaries’ bars into an environment you can immerse yourself in, and play the most suitable songs, to make sure customers are having an unforgettable time.
Also, the experienced management team have significantly increased Nightcap’s overall efficiency:
Sarah Willingham, Founder and CEO of Nightcap, is a prominent hospitality entrepreneur and investor who has achieved success in the industry through co-owning, developing, and exiting the Bombay Bicycle Club, the UK’s largest chain of Indian restaurants. She also served as the Executive Director for AIM-listed Clapham House Group, where she led a 47 restaurant estate across three brands.
Michael Toxvaerd is the Founder and Executive Director of Nightcap. With over 15 years of experience in M&A, he has an extensive background in finance and investment banking. He also founded and led AIM-listed NeutraHealth, taking it from inception to a turnover of £34.6 million and £2.3 million EBITDA over five years.
Toby Rolph is the CFO of the company, with over 20 years of experience in the hospitality sector. He played a crucial role in expanding the Be At One cocktail bar chain from 12 to 33 sites and co-led its successful exit to Stonegate in July 2018. His extensive experience in the hospitality sector, particularly in growing and scaling businesses, will be valuable to Nightcap as it continues to expand its portfolio of bars.
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Apart from making sure the front end is as high quality as possible, Nightcap has integrated its subsidiaries into one group structure from January 2023. Having bigger groups means that they will have higher bargaining power against suppliers, a more efficient management style, and can learn and adapt from the experiences of each subsidiary. According to Nightcap’s presentation, ‘(the subsidiaries) share areas of excellence across the brands whilst maintaining their individual identities.’ There is also a £1.4m anticipated annual efficiency savings from the integration of subsidiaries into one group.
How to evidence these synergy benefits? The subsidiaries have opened close to each other, and this makes it easier to direct the customers toward each other. On occasions that one bar is fully booked, staff can suggest another bar that falls under the Nightcap’s management, to connect demand and supply more efficiently. Humans sometimes love variation, and being able to taste the top-quality cocktail but in a completely different environment just down the street, means that customers can spend across the combination of Nightcap bars in their locality. This is particularly useful for the company at busy times.
Risk and mitigations
As mentioned previously, the sector still faces some risks and challenges. What are Nightcap’s strategies to combat these challenges? For energy price-related issues, most of the estate is on fixed electricity rates and the group’s gas consumption is low. As electricity prices are reduced, Nightcap will be able to fix new contracts below their forecasted rates. To manage supply chain price pressures, the group has entered fixed supplier contracts, protecting profit margins. The significant increase in Nightcap’s size has improved the group’s negotiating position with key suppliers. However, rail strikes have had the most significant short-term impact on bar sales. Nightcap is now better positioned and has learnt to manage labour costs on strike days.
Financial and operational highlights
Nightcap has reported a 48.7% revenue growth, to £23.5 million, with a 4.7% like-for-like revenue increase for Q2 FY2023, driven by the openings of six new sites. However, H1 FY2023 saw a 5.8% like-for-like decrease due to rail strikes. The adjusted EBITDA rose 25% to £2.0 million, despite rail strikes, and cash generated from operations increased by 273% to £4.1 million.Nightcap’s net debt as of 1 January 2023 was £4.1 million, with £0.75 million of the group’s total bank debt scheduled for repayment during FY2023.
Bear in mind, 13 new sites have traded on average just over six months at the end of the period under review, with an early trading and maturity profile. It was reported that they are on track to deliver Nightcap’s target of 75% annual return on investment (ROI) on total capital invested in new bars in their third year of operation. Several sites are on track to beat the 75% ROI target in their first year of operation.
Sarah Willingham, CEO of Nightcap, commented: “Nightcap has had a fantastic half year. Our incredible team opened six bars in six weeks across the country, whilst also delivering a Christmas that exceeded expectations and records in terms of corporate parties, pre-sold events and a nearly sold out New Year’s Eve across all 36 sites. This was followed by a significant business integration and streamlining process, resulting in expected group savings of £1.4 million annually, whilst preserving the much loved individual identities of our brands.”
Share price and shareholders
Nightcap is trading now at 10.5p, in the lower half of the 52 weeks range (high: 20.85, low: 6.5). Nearly 20% of Nightcap is held by institutional investors, and nearly 60% is held by individual insiders. There is also 5.6% held by a VC called Octopus Investments Limited. The major shareholder structure is looking for a long-term return.