Langton Capital – 2015-09-09 – Daily Wrap: Punch, NLW, August trading, JDW & other:
Leisure Wrap & Other:
So the trading day is grinding to a close. We’re another day older but are we any wiser? After a day of intensive head-scratching, pen flipping and gossip, we have been considering the following. As always, contact us if you’d like further details:
Punch Taverns; post Q4 & M Clark disposal & ahead of FY numbers & strategy update:
• Punch reassured last week that Q4 was in line with expectations & that FY EBITDA should be within the previously guided range
• Yesterday it confirmed the disposal of its 50% share in Matthew Clark for c£100m or around 2x book value or a PER of 13x
• Hence the shares are left trading at around 40% of book. Debt was £1.41bn pre the Matthew Clark sale & some £1.31bn after.
• EV is therefore around £1.59bn (including c£286m of equity).
• EBITDA for FY15 will be around £198m – or some £188m if we remove the Matthew Clark EBITDA (this amounted to £6.2m in FY14 and 50% of an ‘adjusted’ (for unknown reasons) £25.3m in the year to Feb 15 per Conviviality Retail’s IMS).
• On the basis that EBITDA could come in around £195m for the current year (some growth but also some disposals, the New River disposal, for example, generated around £7.3m in EBIT), the group is trading on around 8x EBITDA and debt is a little under 7x EBITDA.
• For the record, the group’s shares are trading on a PER of c5x EPS.
• Hence – and as always – the shares are cheap unless they are not. Issues remain as follows:
o Debt: This could (but should not) balloon. The Oct 14 refinancing saw to that. Debt is high but it is reducing and is (or should be) manageable.
o Trading: This had stabilised – but August is beginning to look as though it was helpful & more importantly see below.
o The Market Rent Only option: We have written at length about the MRO but this does remain something of an issue. Earnings will reduce but, arguably, the quality of those earnings will increase. There are still some unknowns. We would expect an update as to strategy (managed option, franchises, arms-length properties, increased disposals etc.) with the group’s FY numbers on 12 Nov.
• Hence it’s always tempting to present an ‘on the one hand but on the other hand’ analysis. But that adds limited value. We would suggest that, for those able to tolerate the risk, Punch’s equity offers potentially very good value indeed.
National Living Wage – the economic (libertarian) argument gets an airing:
• The Institute of Economic Affairs has said variously that the NLW will ‘backfire’, is ‘unsustainable’ and posits that it will distort the labour market (by reducing differentials).
• The IEA says that employment levels will decrease but, to some extent, it may be missing one of the main points.
• And that is that the NLW, at no cost to the government, helps to head off deflation. That may lead to inflation over the longer run but, as many politicians have said before, there are only two sorts of government, those that get it wrong and those that get out in time.
August, what happened?
• Whitbread and now Goals Soccer have said that August trading was poor.
• WTB suggested that more would-be customers were travelling abroad for their holidays (shares in Thomas Cook rose by only 2.5%) and today GOAL reports ‘sales for the first nine weeks of the period [i.e. July & August] have been challenging in the UK with like-for-like sales over the summer holiday period declining by 10%.’ It says ‘this is due to tough comparable trading in the weeks following last year’s successful World Cup and a significant increase in both league and casual teams cancelling over the holiday period. The board consider this to be market-driven, as team organisers struggled to find sufficient players for their game to go ahead, as players took advantage of the strong pound during a period of poor UK weather to holiday abroad.’
• Summer’s over now but, nonetheless, we await JDW’s Friday update with interest.
• An outlier at this early stage would appear to be Greene King as it yesterday commented that the last 10wks (of the 18wk period to 6 Sept) had been stronger than the first 8wks. It says ‘in the first 18 weeks of the year, like-for-like (LFL) sales in Greene King Retail grew by 1.3% with growth of 1.9% in the last ten weeks.’
• It may be too early to sell pubs & buy tour operators but, as regards the latter, a strong Lates market can make all the difference between an acceptable and a very good year.
Random information, hopefully not all of it useless (re most leisure operators etc.):
• Commodity prices, currencies etc. Small rally in oil, Sterling up a touch, commodities still very low with exception of cocoa.
• Whitbread. Interesting to see the scale of the rally following yesterday’s sell off.
• Wetherspoon. Some negative broker comment ahead of FY numbers on Friday. Expect vitriol re NMW, NLW, VAT & other TLAs (three-letter-acronyms) from Chairman Tim Martin. Could be ‘hurt’ by NLW but JDW (there, you see, another TLA) is ahead of the curve on pay and it should also be a major beneficiary if its would-be customers see their pay rise. It would not be surprising to see 1) the group’s shares fall on Friday and 2) the group re-commencing its share buy-back programme.
• Interesting to see the BRC-KPMG August Retail Sales survey yesterday suggest “light at the end of the tunnel” for Food Retailers. Interesting also that the rate of growth of the discounters appears to be slowing and that Waitrose is currently reporting negative LfL sales.
We’re so 21st Century, this morning’s Tweets (diff. font size denotes importance):
1. MillerCoors (SAB/Molson JV) appoints Gavin Hattersley as CEO following retirement of former CEO Tom Long.
2. In a week that may see Morrison’s dispose of its C-store business, the Association of C-Stores has valued the sector at £37.7bn
3. Brewdog’s fifth round of crowdfunding has now exceeded £1m. The round, offering a 6.5% bond, has 37 days to go.
4. Managing director of KFC Western Europe, Ivan Schofield, will replace the retiring Andrew Guy as new CEO of Ed’s Easy Diner
5. IEA’s Education Director, Stephen Davies, says implications of the new minimum wage are at odds with economic principles.
6. KFC UK has posted full year sales of £478m in the year to 30 November 2014, while pre-tax profit rose to £47.3m from £40.1m
7. PE house Blackstone is to buy REIT Strategic Hotels + Resorts in a deal valuing the business at $6bn
8. The CEO of IAG has called on George Osborne to scrap APD, calling it ‘the highest tax of its kind anywhere in the world’
9. Uber plans to expand into 100 Chinese cities over the next 12 months according to the group’s CEO, Travis Kalanick.
10. Rather shutting the stable door after the horse has bolted, Bwin reports this morning that it is no longer in discussions with 888
11. World markets: UK up yesterday as financials rose, Europe higher, US also up (after closure day before) + Asia higher in Weds trade
12. Eurostat has upgraded its forecast for economic growth in the 19 countries that make up the Eurozone