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Membership Collective Group (NYSE:MCG) is undervalued. The London-based parent company of Soho House went public last year to little fanfare and against a stock market collapse that has cut its valuation by more than half from its IPO price. This came on the back of a flight of capital away from broadly unprofitable growth companies and as concerns around a recession and falling real incomes pushed investors to rethink positions in companies more dependent on discretionary spending.
Soho House, founded in 1995, has grown to become a global collection of 38 private members’ clubs whose base has been drawn mainly from the media, arts, and fashion industries. The company’s parent also holds a number of adjacent businesses including coworking spaces, an upscale home-furnishings retailer, and a luxury hotel platform. Essentially, members use the MCG platform to work, socialize, and connect across the company’s fast-expanding global presence.
At the current common share price of just over $5 and with 201 million basic weighted average shares outstanding, MCG has a market cap of around $1 billion. This represents a significant discount on a company that grew year-over-year revenues for its last reported quarter by 96.5% and is on track to hit a $1 billion annual revenue run rate within the current fiscal year. This places its 1-year price to sales multiple at less than 1x.
Strong Growth From Pandemic Era Stay-At-Home Orders
MCG is fundamentally a high-end hospitality company with a unique membership-based operational structure. This allows the company to create a flywheel-type vertical where it can layer on new services that drive revenue growth from its current membership base. For example, Soho Works, their coworking venture is open to just members and in cities where the company has a high concentration of its clubs.
The collective last reported earnings for its fiscal 2022 second quarter which saw revenue come in at $244 million, a 96.5% increase versus the year-ago quarter and a $3 million beat on consensus estimates. Total members across the group grew by 51.3% year-over-year to 193,370 and from 171,927 in the first quarter of 2022. Soho House members grew by 27% year-over-year to reach 142,250. The company’s waitlist reached a record high of 81,500 as retention rates of new members remained strong and at pre-pandemic levels.
The company is fast expanding around the world with a Soho House in Los Angeles and The Ned NoMad in New York City opened during the quarter. Post-end the company also opened two more Soho Houses, in South London and Copenhagen. Overall, MCG has opened five Soho Houses year-to-date and remains on track for nine Soho House openings by the end of its fiscal 2022. Long-term the company expects to triple the Soho House portfolio over the next 10 years from its IPO baseline. However, to what extent a slowing global economy would negatively impact membership rates is yet to be seen. We have a comparison in the pandemic-era economic collapse where the company actually grew memberships when its clubs were shut down. This perhaps highlights the sticky nature of its platform and the high value derived by its members.
This strong growth has dismissed concerns around the post-pandemic future of MCG which faced an existential threat when governments instituted lockdown orders and shut international air travel. Near-to-medium term risk still looms in the form of high energy prices that have disrupted hospitality companies in its core UK base and recent FX movements including the collapse of the Pound sterling.
MCG is undervalued when compared to the recent acquisition by the Singaporean sovereign wealth fund, GIC, of a majority stake in Mediterranean luxury resort operator Sani/Ikos Group. The investment valued Sani/Ikos at €2.3 billion, 7.2x times its forward revenue for fiscal 2022. Whilst the comparison is not entirely perfect due to Sani/Ikos being profitable, MCG has a clear pathway to generating consistent positive cash flows as new sites mature and memberships continue to grow. The company held cash and equivalents of $260 million as of its last reported quarter with $23.2 million in positive operational cash flow generated.
Using Networking To Create Shareholder Value
The network effect of MCG members’ clubs is an irrefutable moat that drives high membership retention and has led the waitlist to a new high. With the company guiding for fiscal 2022 revenue between $950 million to $1.025 billion, the current market cap is likely to have a strong level of support at the current $5 price.
MCG has a collection of extremely high-quality luxury brands with strong adoption metrics, healthy revenue growth, and a fast-expanding international footprint. I intend to take a position in the company with a staggered purchasing plan as the market experiences further volatility over the next few quarters.
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