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Loungers’ chair Alex Reilley’s cri de coeur in its annual results, urging the investment community to look again at the casual dining sector, was an interesting one.
The failure of some “overleveraged” casual dining brands does not mean the industry is broken, he argued.
He has a point. The casual dining sector was fertile hunting ground for private equity before the pandemic but the heavier debt burden this model placed on these businesses means many have struggled since reopening. Some have fallen into administration and others have used company voluntary arrangements to shed lossmaking sites. Prezzo recently gained approval for its third restructuring in five years.
Although Loungers touts its “value for money” focus as a differentiator that has allowed it to continue its growth, the company might have found itself in a similarly tight spot had its former private equity owner opted to sell to a competitor rather than float the business in 2019.
Reilley, who co-founded Loungers in Bristol 21 years ago, had two private equity backers that helped to fund separate stages of the company’s growth. The latter, Lion Capital, bought a majority stake for £137mn in 2016.
The company’s IPO document shows that six months before the float, Loungers owed more than £160mn in loans. Thankfully, the listing helped it to raise more than £80mn — £61.6mn of which was used to reduce debt. Reilley and co-founder Jake Bishop also each earned £4.4mn through share sales.
Last week’s results flagged milestones it has made since. Revenue has grown by 85 per cent since flotation on the back of 76 new site openings and borrowings (excluding leases) have been cut to just £32mn. Profitability has weakened, though, given higher food, energy and labour costs. This might go some way to explain why the shares haven’t made much ground — they closed last week at 199p, 1p below their listing price.
Post-results, Reilley sold 200,000 shares, making £380,000. He retains 6.7mn shares, or 6.5 per cent of the company.
CentralNic director cuts stake
Up to this point CentralNic has been immune from the wider digital advertising downturn. The internet domain broker, which also connects buyers and sellers of online advertising space, has maintained its rapid organic growth despite the wider stagnation of the marketing industry in the last year.
The company started out by buying domain names and offering hosting services to companies that wished to use them. However, in the past few years it has focused more broadly on digital marketing, using the visibility of its domains to match buyers and sellers of advertising.
CentralNic’s selling point is the use of contextual marketing: knowing the type of websites people tend to visit. This sort of marketing became a lot more popular after Apple updated privacy settings for iPhones, preventing companies from tracking people across the web.
Marketing revenue grew by 120 per cent to $575mn (£460mn) last year and now makes up 79 per cent of the total. Organic revenue grew by 86 per cent, with the remainder coming from the acquisitions of four smaller digital marketing firms.
Across the whole business, organic revenue growth was 60 per cent but there is evidence this is starting to slow as the rest of the economy tightens. In the first quarter of this year, CentralNic reported year-on-year organic growth of 46 per cent. Still impressive, but momentum seems to be slowing.
Given the state of the wider market it seemed inevitable this would happen sooner or later. This might have contributed to non-executive director Horst Siffrin’s decision to sell £2.76mn worth of shares. Siffrin became a shareholder in the company after CentralNic acquired KeyDrive — a business he chaired — for $35.8mn in 2018.
Trading on a price-to-free cash flow ratio of seven, CentralNic appears inexpensive, and a recent partnership agreed with Microsoft looks promising. The rationale for the price is that investors expect the marketing outlook to get worse. Logic suggests there is only so long CentralNic can maintain its outlier status.
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