Langton Capital – 2015-09-11 – Daily Wrap: More from JDW, August trading, travel companies & 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:
JD Wetherspoon’s FY analysts’ meeting:
FY Presentation: 52w to 26 July 2015:
JD Wetherspoon has hosted a presentation on its full year numbers for the 52w to 26 July 2015 and our additional comments thereon are set out below (see earlier email for more detail):
CEO John Hutson said that trade for the wider pub industry, including JDW, has slowed gradually since October 2014.
Its activity in the breakfast trade is seen as an investment for the future, rather than a present driver of profitability.
Its four pubs in the Republic of Ireland have been performing well, although it is still too early to value them on a cash basis (instead, management are looking at operational KPIs and sales growth). JDW is investing in infrastructure in order to continue expansion here.
More on Trading:
Hutson believes the firm is ahead of the curve with regards to the National Living Wage increase in April 2016. Wetherspoon could pay for a substantial chunk of wage rises to 2020 out of their bonus pot for employees – though it has not confirmed that this is what it intends to do.
However, as the pub group believes these bonuses are partly responsible for record high levels of staff retention and superior customer service, the group would rather retain its bonus structure as a point of differentiation.
JD Wetherspoon expects 2016 LfL sales to be somewhere between 0-2%, coming from a mix of volume and price.
Balance Sheet, Debt & Other:
The company opened 30 new pubs during the year and exited from 6, adding that returns on new pubs are the same or better than average. Some 80% of its new sites were freehold.
Year-end debt (including bank borrowings and finance leases, but excluding derivatives) was £601.1m versus £556.6m last year, while the group’s proportion of freeholds in its estate has risen to 49.1% of its 951 pubs (2014: 47% of 927).
JDW is unflustered by trickier trading conditions since October of last year and continues to invest significantly in its proposition.
Evidence of the success of this investment can be seen by the operator’s best-in-class levels of brand recognition in the UK, even if returns on capital may take a number of years to filter through – and we would expect to see this in a more heavily-freehold model.
The group was keen to add that its 0-2% LfL sales forecast was just that – a forecast, at the mercy of the wider trading environment.
The market has so far reacted benignly to JDW’s prelims following its share price correction earlier in the week. Many will be relieved that today’s numbers contained no negative surprises and, indeed, alluded to a better FY16.
Langton View: JD Wetherspoon has flagged that, while trading has become more competitive over the past year, the group has the brand presence and financial firepower to continue profitably growing its footprint and improving its existing estate.
Staff rooms have been improved, beer gardens redone and more accommodation has been added, indicative of the fact that the group intends to continue investing for the longer term.
The group has manageable debt levels and a solid expansion plan, backed by a strong focus on cash generation. It is this dependable level of free cash flow (2015: £109.7m) which allows it to invest in its brand and properties and ensure its long-term trading prospects.
Customers (CGA brand tracker) would like a JDW to open near to them and its competitors would not – that speaks volumes.
Margins may stay under pressure as the group’s investment in grabbing market share of the breakfast trade continues. The introduction of the New Living Wage may also hurt margins. However JDW is better placed for this than many of its competitors. Furthermore those consumers benefitting from a higher hourly wage might even find themselves spending a little of their additional spare cash in a Wetherspoon pub.
For those with a long-term investment horizon, we continue to be of the view that JD Wetherspoon is a good investment. It is structured to survive and prosper with little help from the economy and in five years’ time it will in all likelihood be a materially larger company. Share price weakness should be viewed as a buying opportunity.
Thomas Cook ,TUI, Dart Group & August – domestic v overseas leisure spend:
• The evidence suggesting that consumers travelled overseas more in August 2015 than they did last year is now pretty compelling.
• This week, we’ve had comments to that effect from WTB, GOAL, the Peach Tracker, Homebase & the BDO Retail Tracker.
• JDW this morning did not mention the lack of customers per se but it did accept that current trading (the 6wks to 6 Sept) had slowed a little further.
• Add to that the fact (see today’s email) that we have Gatwick, Stansted and Heathrow all saying that they had record months in August and it does look as though there was a bit of an exodus (of consumers and of their money) overseas this summer.
• This is not so good for the UK’s pubs & restaurants (though it may only be a return to more normal spending patterns after the staycation boom of recent years) but it is definitively good news for the tour operators, TCG, TUI and Dart Group.
• The latter, which is a March year end, has already updated on summer trading. It reported:
o “The good start to the financial year has continued with strong summer 2015 trading in our Leisure Travel business.
o “Demand for our package holiday products continues to grow and as a result the number of package holiday customers as a proportion of overall flown customer numbers has increased.
o “The business has also achieved higher airline ticket yields and load factors than in summer 2014. This performance is against a backdrop of slightly lower seat capacity.
o “Early indications for winter 15/16 Leisure Travel bookings are satisfactory.”
o Dart Group (Jet2) concludes “In view of the continued strong demand for our Leisure Travel package holiday and flight-only products, the Board is optimistic that Group performance for the financial year ending 31 March 2016 will materially exceed current market expectations.”
• With the above in mind, Langton is looking forward to hearing when TCG and TUI (both September year ends) update on Q4 trading later this month.
• The groups both have sizable Continental European business but, as far as their UK businesses are concerned, trading should have been good.
• Recent share price weakness has been caused by concerns re Tunisia and Greece. Some stock will have been moved from North Africa and the Eastern Med to the Western Med and the Canaries but, overall, we would hope to see that TCG and TUI have traded somewhere between ‘well’ and ‘very well’.
Credit crunch: US housing bubble officially over?
Date from the US Census Bureau shows that home ownership levels in the US are back down at 50yr lows:
Random information, hopefully not all of it useless (re most leisure operators etc.):
• Food costs: The UN reports that global food prices fell by 5.2% in August, the steepest drop in seven years. We’ve been commenting on food price falls for some time. Cocoa and OJ may currently be bucking the trend but food input costs should fall. JDW said as much today. This helps companies both through their own cost-line and because their customers have a little bit left over at the end of the week to spend down the pub.
• Morrison’s: Interesting to see Group CFO Trevor Strain putting some more money into the company whose beans he counts. Mr Strain yesterday bought 58,453 ordinary shares at 169.8p. His total shareholding following this purchase is a still relatively modest 97,794 shares.
We’re so 21st Century, this morning’s Tweets (diff. font size denotes importance):
1. JDW FY: LfL sales growth for the whole year has come in at 3.3% with total sales including new openings +7.4%. PBT £77.8m, down from £79.4m last year
a. JDW FY: EPS held at 47p, FY divi. also held (at 12p). Trading for the first 6wks of the current year are +1.4%
b. JDW FY: Wet sales +1.2% LfL, food was +7.3%, machine income down by 2.8%. Op. profit down 3.8%, operating margins down from 8.3% to 7.4%
c. JDW FY: Net interest covered 3.3x, 30 new pubs in year. Profits for FY16 should be in line with or slightly ahead of those just reported
d. JDW is ahead of curve re “living wage”, it could be a benefit. Calls again for VAT cut. Group could buy more shares back, looks attractive to us
2. Real ale is now being served in 70% of pubs in the UK thanks to growing numbers of micropubs, according to Campaign for Real Ale
3. Global food prices fell by 5.2% in August, the steepest drop in seven years, according to the UN’s Food and Agriculture Organization
4. Casual Dining Group has announced it is to remove all administration fees for customer tips made by credit card or cash
5. Krispy Kreme shares fall on warning of slow sales of packaged-food products. Revenues $127m v estimates of $132m.
6. McDonald’s Japan sales rose on a LfL basis in Aug for the first time since early 2014. Sales +2.8% LfL.
7. Travel spend grew 7% and transactions were up 28% in August as consumers booked more trips to escape the British washout
a. London Gatwick had the busiest month in its history in August, with more than 4.53 million passengers travelling through the airport
b. Average load factor at Stansted hit a record high of 93.5% in August as more than 2.2 million people used the airport.
c. Heathrow’s CEO has warned the government that delaying its decision on airport expansion is costing the UK £1bn a month
8. Bank reports re holding rate that ‘12mth CPI inflation rose slightly to 0.1% in July but remains well below the 2% target rate.’
9. Bank cautious on UK growth, says it ‘noted in the August Report that the risks to the growth outlook were skewed moderately to downside’.
10. RICS has suggested UK house price inflation could hit 6% this year. At the start of the year, it expected a 3% rise.