I buy a collective membership group; Soho House parent company is undervalued (NYSE:MCG)
Collective Group Membership (NYSE: MCG) is undervalued. The London-based parent company of Soho House went public last year to little fanfare and against a stock market crash that cut its valuation by more than half. of its IPO price. It came on the heels of a flight of capital away from broadly unprofitable growth companies and as worries about a recession and falling real incomes caused investors to rethink their positions in more revenue-dependent companies. discretionary spending.
Soho House, founded in 1995, has grown into a global collection of 38 private clubs whose base comes primarily from the media, arts and fashion industries. The company’s parent company also owns a number of adjacent businesses, including coworking spaces, a high-end home furnishings retailer and a luxury hotel platform. Essentially, members use the MCG platform to work, socialize and connect across the company’s rapidly expanding global presence.
At the current common stock price of just over $5 and with 201 million basic weighted average shares outstanding, MCG has a market capitalization of approximately $1 billion. That’s a big discount on a company that grew revenue year-over-year by 96.5% for its most recent quarter and is on track to hit an annual revenue rate of $1 billion over the course of the year. of the current fiscal year. This puts its 1-year price against the sales multiple at less than 1x.
Strong growth versus pandemic-era stay-at-home orders
MCG is fundamentally an upscale hospitality company with a unique membership-based operating structure. This allows the company to create a flywheel-like vertical where it can layer new services that drive revenue growth from its current member base. For example, Soho Works, their coworking business is open to members only and in cities where the business has a high concentration of its clubs.
The collective last reported earnings for its second quarter of fiscal 2022, which saw revenue of $244 million, a 96.5% increase from the year-ago quarter. and an overrun of $3 million over consensus estimates. Total membership across the group increased 51.3% year-over-year to 193,370 and 171,927 in the first quarter of 2022. Soho House membership grew by 27% year-over-year to 142,250. The company’s waitlist hit an all-time high of 81,500 as new member retention rates remained high and at pre-existing levels the pandemic.
The company is expanding rapidly worldwide with a Soho House in Los Angeles and The Ned NoMad in New York opening during the quarter. After completion, the company also opened two more Soho Houses, in South London and Copenhagen. Overall, MCG has opened five Soho Houses since the start of the year and remains on track for nine Soho House openings by the end of its fiscal year 2022. In the long term, the company expects to triple the Soho House’s portfolio over the next 10 years from its IPO. Baseline. However, it remains to be seen to what extent a slowdown in the global economy would negatively impact membership rates. We have a comparison in the pandemic-era economic collapse where the company actually increased its membership when its clubs were closed. This perhaps highlights the sticky nature of its platform and the high value pulled by its members.
This strong growth dismissed worries about MCG’s post-pandemic future which faced an existential threat as governments instituted lockdown orders and shut down international air travel. Short to medium term risk still looms in the form of high energy prices which have disrupted hotel businesses in its main UK base and recent currency movements including the collapse of the pound sterling.
MCG is undervalued compared to Singapore’s sovereign wealth fund, GIC,’s recent acquisition of a majority stake in Mediterranean luxury resort operator Sani/Ikos Group. The investment valued Sani/Ikos at €2.3 billion, or 7.2 times its forecast revenue for fiscal year 2022. Although the comparison is not entirely perfect due to the profitability of Sani/Ikos Ikos, MCG has a clear path to generating consistent positive cash flow as new sites. mature and membership continues to grow. The company held cash and cash equivalents of $260 million in the last quarter of its report with $23.2 million of positive operating cash flow generated.
Use networking to create shareholder value
The network effect of MCG member clubs is an irrefutable divide that results in high member retention and has driven the waitlist to a new high. While the company forecasts fiscal 2022 revenue between $950 million and $1.025 billion, the current market capitalization should see strong support at the current price of $5.
MCG has a collection of very high quality luxury brands with strong adoption metrics, healthy revenue growth and a rapidly expanding international footprint. I intend to take a position in the company with a staggered buying plan as the market experiences increased volatility over the coming quarters.