Bargain Booze operator Conviviality (LSE: CVR) has reported sales growth of 211% in its first half trading update. Although this is mostly due to the impact of acquisitions, Conviviality’s financial performance has been strong on an organic basis. As such, I’m bullish about its long-term growth potential.
Conviviality’s acquisitions of Matthew Clark, Peppermint and Bibendum PLB have transformed its financial performance, Sales of £783m were significantly higher than the £252m recorded in the previous year. Conviviality’s new business structure has the potential to continue to deliver strong growth. This follows the organic sales growth of 5.2% in its Direct division, 2.5% in its Retail division and 5.1% in Conviviality’s Trading segment in the first half of the year.
Furthermore, the integration of the recent acquisitions is ahead of plan and Conviviality is on track to deliver the expected synergies from the deals. Not only do the acquisitions equate to higher potential sales and profit growth, they also help to diversify Conviviality. This provides the company with additional revenue streams beyond its Bargain Booze stores, with it having the potential to grow into a major food and drinks service operator.
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Strong growth ahead
Looking ahead, Conviviality is forecast to increase its bottom line by 38% in the current year and by a further 17% next year. These are stunning rates of growth and show that even with an uncertain outlook for the wider UK economy, demand for alcoholic beverages is likely to remain high. This means that Conviviality could appeal as a relatively defensive stock that’s less affected by the potential impacts of Brexit than for many of its index peers.
Alongside its high growth rate is a valuation that has significant appeal. Conviviality trades on a price-to-earnings (P/E) ratio of just 10.5. When combined with its growth rate, this equates to a price-to-earnings growth (PEG) ratio of only 0.4, which shows that Conviviality has substantial upward rerating potential. It also shows that it has a wide margin of safety that could offer downside protection in case the wider market falls.
In terms of relative appeal, Conviviality’s growth rate and valuation are far superior to those of sector peer Total Produce (LSE: TOT). It trades on a P/E ratio of 14.9 and yet is forecast to grow its earnings by 7% this year and by a further 4% next year. While this growth rate is encouraging, it’s far below that of Conviviality and translates into a PEG ratio of 2.7, which is relatively unappealing.
Conviviality also has a superior yield to Total Produce. Conviviality yields 5.9% from a dividend covered a healthy 1.6 times by profit. This compares to Total Produce’s yield of 1.7%, which is covered 3.8 times by profit. Certainly, Conviviality’s acquisition spree may make it slightly riskier as a business than Total Produce, but its lower valuation, higher growth rate and superior income prospects make it a star buy for the long term.
