Urbium will jump higher than a tiger

Shares are at a new all time low of 6p mid as a result of the demerger and the markets ..... I think the selling is overdone and not alone in this thinking .......


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Urbium is a leading operator of late-night bars and nightclubs aimed at the affluent 25 - 40 age group. The company currently operates 21 bars, but it hopes to roughly triple the size of its estate over the next three years by investing around £20m a year in new sites, in order to reach a total of 60 venues by 2005.

The company began trading on AIM in May 2002 following its de-merger from Chorion. It now trades separately on AIM as an intellectual property business.

To maintain a flexible approach, Urbium, led by executive chairman and leisure industry veteran, John Conlan, operates through four different formats, all of which hold valuable late night licenses. The anchor is the Tiger Tiger format, which first opened in London's Haymarket in sites of up to 20,000 sq ft which can accommodate as many as 2,000 customers. Usually open all day until the early hours, it offers bars, restaurants and dancing within a single venue.

Urbium's strategy is to "cluster" a number of small bars - formatted as lounge bars, nightclubs or restaurants - around the growing number of Tiger Tiger venues. The idea is to tailor outlets to the local market while securing economies of scale in purchasing, management and staffing. To retain a degree of individuality, branding is "soft", although some marketing is carried out through a central website.

Tiger Tiger has so far been introduced into Birmingham, Leeds, Manchester, Portsmouth, Croydon and Glasgow with an opening planned in Newcastle this November. Further opportunities are seen within the M25 and although cautious about the expansion into Europe, Urbium is negotiating sites in Dublin and Madrid.

Current Trading

In the three years prior to demerger, turnover in the Urbium bar business grew by 172pc and operating profits by 110pc reflecting both organic growth and new openings in the West End of London and Tiger Tiger in the provinces.

The maiden interim results, covering the first half of 2002, were released on 10 September. It is important to point out that the business is seasonally biased towards the second half of the year, given its attractions for the Christmas party trade. This time the first half results were also distorted by the inclusion of trading in the intellectual property side of the old Chorion for the period until de-merger in May, and by the inflated overheads for the same period and substantial exceptional items to reflect the costs of the demerger. In spite of this Urbium reported turnover of £24.9m, up 46% on last year, PBT of £2.5m and adjusted EPS of 0.32p.

Opportunities And Threats

The initial success of Urbium's Tiger Tiger format in the Haymarket, which paid back its £3m investment costs within 18 months, suggests that the company's target market has been largely unserved. Many club operators have focussed on the 18-25 year old market, charging at the door and offering little else. However Urbium's target market is large, making up a third of the UK population, mostly in two to three person households with a growing appetite for celebrity-like entertainment. Urbium itself reckons that there is room for another eight Tiger Tiger venues in the UK beyond its current portfolio, together with an associated cluster of smaller bars.

But not everyone is keen on late night bars, particularly if you live near them. Spurred on by the concerns of residents, Westminster Council has, for example, adopted a policy aimed at restricting the opening of new later night bars and nightclubs in the residential areas of Soho and Covent Garden.

Wearing its Chorion hat, the company has since previously mounted successful challenges to this new policy in the High Court. While clearly a threat to the expansion in the West End of London, this fight against late nightclubs has also increased the value of Urbium's existing licenses. Indeed, it is obvious that Urbium's strong position in the West End, where licenses are now very hard to obtain, gives it a commanding competitive position.

The company tries hard to avoid the pitfall of changing fashions by operating a range of bar formats, segmenting the market and deliberately striking a mid-market note, avoiding extremes of presentation. But it will be a key task to keep the various formats up to speed with changing consumer demand.

In an overheated consumer market, and a faltering economy with threats of redundancies, there is clearly the risk that spending will come off the boil, even though a wholesale shift in fashion to a cup of cocoa and an early night looks improbable.

RedSky's Comment

The strategic case for Urbium is that it is a leader with few significant competitors in a niche market. Its strong position in the West End of London, where new late night licences are very hard to secure, gives it a strong competitive advantage. Returns on investment in the existing business and new openings have been high, backed by substantial turnover and high operating margins of well over 20pc, despite the use of high rent locations.

In addition, Urbium has well formed plans for a significant further expansion of the business, taking turnover up from annualised turnover of around £50m to about £120m by the end of 2002. It has £50m of bank facilities under its belt, which, together with a strong cash flow, should finance the expansion. Net debt could approach 150pc of shareholders funds at the peak, but interest cover ought to be several times. And, if all goes to plan, this will provide strongly geared returns to shareholders over time as rates of return comfortably exceed associated interest costs.

The group is also headed by an experienced management team. John Conlan, chairman, is the former chief executive of First Leisure, with managing director Robert Cohen and finance director Steve Palmer both with good backgrounds in leisure.

Investors remain cautious about the merits of this growth story. At the current share price Urbium, based on a Teather & Greenwood forecast for profits of £9.3m in 2002, rising to over £12m in 2003, is trading on a price: earnings multiple of ten this year falling to seven next year. This is not only cheap in absolute terms, given expected earnings growth of 30pc. It also represents a noticeable discount to the rating given to Luminar (prospective price: earnings multiple of ten for 2003) and the bulk of managed retail leisure sector.

Clearly the economic scene is not reassuring for consumer-led businesses but we think that there is more than enough caution built into this rating.

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