Langton Capital – 2015-10-07 – AB & SAB, Diageo, YUM Brands, Tesco & other:
A Day in the Life:
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Sometimes I think that technology has gone too far.
Just because you can introduce traffic lights rather than a roundabout, you do. You feel that you have to introduce Windows 10 just because you can and, even the humble sink plug has come in for something of a makeover with those pushy down and click plugs taking over from the humble rubber bung.
And that’s all well and good. I mean you won’t lose the plug as it’s now built into the sink itself but what if the thing sticks?
And what if you have a sink full of lukewarm, soapy and hair-filled water after you’ve had a shave at stupid o’clock in the morning, what are you going to do then?
Are you going to pull the front of the sink off, go get your toolbox and try to mend the thing by unscrewing the mechanism and get a face full of water into the bargain? Or are you going to slope off to work, pretend it never happened?
Answers on a postcard and take heart, it’s not that you’re a bad person, circumstances just contrived to make you that way. On to the news:
Pub, Restaurant & Drinks Producer News:
• Anheuser-Busch InBev proposes new terms for SAB Miller takeover, says will ‘Build the First Truly Global Beer Company’.
• AB bid: Says ‘Combination Would Create One of the World’s Leading Consumer Products Companies’. Plenty of capital letters there
• AB bid: Proposes paying 44% premium (to pre-rumour price) with a partial share (some cash alternative) at 28% premium
• AB bid: Had approached at £38 and £40. Has organised financing, proposes paying £42.15 per share in cash. AB says ‘the combination of AB InBev and SABMiller would result in a truly global brewer that would take its place as one of the world’s leading consumer products companies. Given the largely complementary geographical footprints and brand portfolios of AB InBev and SABMiller, the combined group would have operations in virtually every major beer market, including key emerging regions with strong growth prospects such as Africa, Asia, and Central and South America.’
• AB continues ‘as a combined company, the group would generate revenues of USD 64 billion and EBITDA of USD 24 billion1. AB InBev believes that this transaction would be in the best interests of both companies’ consumers, shareholders, employees, wholesalers, business partners and the communities they serve. It adds ‘we have the highest respect for SABMiller, its employees and its leadership, and believe that a combination of our two great companies would build the first truly global beer company.’ Carlos Brito, Chief Executive Officer of Anheuser-Busch InBev adds ‘both companies have deep roots in some of the most historic beer cultures around the world and share a strong passion for brewing as well as a deep seated tradition of quality. By bringing together our rich heritage, brands and people we would provide more opportunities for consumers to taste and
• Diageo: Sells interest in Desnoes + Geddes and in Guinness Anchor Berhad to Heineken + bought additional shares in Ghana Breweries. Specifically, the group has announced ‘the sale of Diageo’s 57.87% shareholding in Desnoes & Geddes Limited…the sale of Diageo’s 49.99% stake in GAPL Pte Limited (GAPL) to Heineken [and] the acquisition by Diageo of Heineken’s 20% shareholding in Guinness Ghana Breweries Limited (GGBL) which will increase Diageo’s shareholding in GGBL to 72.42%.’ It says ‘the net cash consideration receivable for the transaction is $780.5 million (approximately £515 million). Payment to Diageo will be substantially settled today and will be used to reduce borrowings. The transaction will result in an exceptional profit on disposal of approximately £440 million after tax.’ CEO Ivan Menezes says ‘the transaction we have announced today
• Re-run stories yesterday suggesting that M+B should merge with Restaurant Group. Certainly the former is at something of a crossroads
• YUM Brands’ shares, owner of KFC, Pizza Hut, Taco Bell, fell by >17% last night after a Q3 numbers miss. Co reported $1 per share in earnings, up 14% from last year but below expectations of around $1.07. Revenues increased to $3.43bn from $3.35bn. The Street had been looking for sales of around $3.67bn.
• YUM misses numbers. Says now expects LfL sales in China to be ‘low-single-digit negative’ + FY EPS growth low-single-digit positive. China downturn is having an impact. Nonetheless, the group says ‘we’re pleased same-store sales turned positive and we achieved restaurant margins of nearly 20% in our China business.’ Group CEO Greg Creed went on to say ‘however, the pace of recovery in our China division is below our expectations. Outside of China, our Taco Bell and KFC divisions continued to sustain their positive sales momentum while Pizza Hut was relatively flat.’
• YUM Q3: Basically hit by slowing China and negative currency comps. Recovery from food scandal overwhelmed thereby. CEO Creed says ‘while it remains difficult to forecast China sales, we are now estimating full-year same-store sales to be low single-digit negative.’ He was forced to conclude ‘given our lower full-year expectations in China, combined with additional foreign exchange impact, we now expect 2015 EPS growth to be well below our target of at least 10%.’
• BBPA re rates reform, says ‘much work will need to be done on detail of this new policy + we have no timetable for its introduction’. CEO Brigid Simmonds says ‘in the meantime BBPA will be concentrating on asking the Chancellor to freeze business rates in the Autumn Statement, continue retail relief (currently £1,500 for retail properties with a rateable value under £50,000) which helps 75 per cent of pubs, continue Small Business Rate Relief and review Rural Rate Relief.’ She continues ‘if the Treasury insists on raising the same total sum after the revaluation in 2017, some pubs will find that their business rates bill rises. There is a real need to look at how other businesses, such as those who operate online can contribute through the business rates system – at present, pubs are operating at a real disadvantage and paying far more than they
• Argos has intensified delivery competition with a move to offer same-day delivery up to 10pm, 7dys per week. John Walden, Home Retail CEO, reports ‘Argos led the way with click & collect 15 years ago. And customers can continue to shop with us in the traditional ways if they choose to. But we believe Fast Track is the next big innovation and brings shopping into the digital age for customers, allowing them to get up to 20,000 products in their hands faster than ever before. No other retailer can offer the breadth of products immediately or at that speed.
• Matthew Clark: Both Punch Taverns + Conviviality Retail have reported that the transaction has completed
• PepsiCo saw organic revenue rise 7.4% although net revenue fell 5% due to adverse currency translations in its Q3. Core EPS was $1.35 as the group oversaw a 120bps gross margin expansion, adding that it is on track to deliver approximately $1 billion productivity savings and $9 billion cash returns to shareholders.
• Chairman and CEO Indra Nooyi commented: ‘Our year-to-date mid-single-digit organic revenue growth and double-digit core constant currency EPS growth reflect our focus on managing those things that are in our control in a challenging environment, namely innovation, brand building, marketplace execution, and productivity. Productivity, in particular, continues to simultaneously fund investments in our business and contribute to margin enhancement, and we remain on track to deliver our five-year, $5 billion productivity savings target through 2019.’
• The BBPA has called for the exclusion of small businesses from the Government’s proposals for an Apprenticeship Levy. BBPA Chief Executive Brigid Simmonds said: ‘Apprenticeships are vital for our industry. We need the new Levy system to provide flexibility to allow the large number of apprenticeships offered in our industry to develop and grow, so we need legislation that encourages this process that is not too burdensome for smaller businesses. The potential cost of the Living Wage makes it all the more important that the Government retain a strong focus on tax cuts and other regulatory burdens.’
• Eclectic Bars reports has cancelled some options + re-granted at ‘an exercise price commensurate with the existing price’.
• BRC shop price index registered drop of 1.9% on an annual basis in Sept. Was down 1.4% in Aug
• Greene King has extended Old Speckled Hen into the speers (spirit beers) market with the launch of a Halloween limited edition. The Old Spirited Hen is a toffee apple beer that blends ‘rich toffee flavour with crisp fruit’ is now available in Tesco.
• Hovis has launched a new £5m integrated campaign based around its ‘boy on a bike’ advertising.
Tesco H1 numbers:
• Tesco has released its first half results today with LfL sales down 1.1% and signs of improvement in Q2, a week on from Sainsbury’s well-received update. UK transactions rose 1.5% and volumes were up 1.4%. The group delivered a £354m operating profit (H1 2014: £779m) on close to £24bn of sales exc. Fuel, and is on track to deliver £400m annual cost savings. Diluted EPS is now down to 1.13p (2014: 6.11p).
• The group has pushed on with operational reform, commenting: ‘We have made permanent reductions to our cost base, fundamentally changed the way we do business with our suppliers and have started to generate positive operating leverage through increasing volumes. The progress we have made so far, combined with improved productivity as we continue our work to simplify our ranges, will enable us to fund further improvements for customers in the second half.’
• International profits declined by 26% at constant rates to £102m, following investments in the customer offer and legislative changes in Hungary. The restructure of the teams in Czech Republic, Hungary, Poland and Slovakia has been completed, with the areas now ready to work as one regional team. Tesco has identified potential synergies in buying, marketing and operations across the markets, which should help drive efficiencies.
• Tesco’s Homeplus sale should help to strengthen the group’s balance sheet to the tune of £4.2bn, although in the meantime net debt has risen from £7.5bn to £8.6bn. There is a further £9.1bn of discounted operating lease commitments and a £4.2bn pension deficit, meaning that Tesco’s total indebtedness post-Homeplus sale will stand at around £17.7bn.
• Dave Lewis, Chief Executive, commented: ‘We have delivered an unprecedented level of change in our business over the last twelve months and it is working. The first half results show sustained improvement across a broad range of key indicators. In the UK, we continue to improve all aspects of our offer for customers, resulting in volume growth which is allowing us to create a virtuous circle of investment.
• ‘The market remains challenging. In the second half we will continue to benefit from initiatives already undertaken to improve our competitive position and reduce our cost base, leaving our full year expectations unchanged. Our focus remains on doing the right thing for customers and we are prepared to invest further if we see additional opportunity or need to enhance the long-term competitive position of the business.’ Jack Brumby – firstname.lastname@example.org
Holidays & Leisure Travel:
• The boss of Parkdean, is to become chief executive of the combined Parkdean/Park Resorts UK holiday parks business. John Waterworth will take over on completion of the merger, while CEO of Park Resorts, David Boden, will retire. Parkdean operates 24 parks and had turnover of £142 million and EBITDA of £33.7m for the year ended January 31, 2015. The combined business will generate EBITDA of more than £100m.
• London City Airport (LCY) is enjoying record growth and is on track to reach 4.2m passengers, up from 3.65m in 2014. With business travellers accounting for almost 60 per cent of LCY’s passengers, the figures suggest a healthy appetite for business travel in the UK.
• Easy Hotel has updated on FY trading saying year ended with trading in line with the Board’s expectations. Additions mean revenues for the year ended 30 September 2015 will be ‘materially ahead of the prior year’. Underlying EBITDA will be in the region of £1.4 – £1.5 million for the year. CEO Guy Parsons reports ‘in the two months I have been with the Group I am pleased with its progress and direction of travel. Whilst the strategy is sound, I am currently having a hard look at how we can accelerate the growth of both the owned and franchised hotels as well as how we can improve the Group’s core operational disciplines.’
• Marriott has said that it would like to add around 60 hotels in its Caribbean + Latin American territories
• Samsung has upped guidance saying Q3 operating profits will be up by around 80% on last year
Finance & Markets:
• World markets: UK markets higher yesterday, Europe ditto. Wall Street down in later trading but Far East higher on eased fears re slowdown
• Oil price sharply higher. Trading at $52.20 on lower US stockpiles + reduced concerns re China slowdown
Retail Roundup from Nick Bubb:
Today’s Press and News: With Greggs and Ted Baker to look at from yesterday, the papers have plenty of Retail stories, but Tesco also forces itself into the limelight, ahead of today’s saturation coverage: the Times flags that Tesco is restructuring its supplier payment terms whilst the Telegraph and the Daily Mail flag that Tesco is close to cutting a deal with the SFO over the accounting scandal. We can’t see any notes about the news that Argos is pioneering a same-day UK-wide home delivery service, but Sports Direct is in the headlines again, on the back of the news that it is buying out its Irish sports retail partner, Heatons. Nick Bubb – email@example.com
This was produced for distribution yesterday afternoon: 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:
• Red meat prices had been relatively firm whilst white meat (pork & chicken often move in tandem as foodstuff prices for the two animals tend to be linked) slipped in the period to around the beginning of this year
• Red meat prices then began to weaken. Recently white meat prices have been rising.
• Feeder cattle prices are now down by 19.2% over the last 12mths whilst pork prices, though they are down by 34.3% over the last 12mths, are actually a little firmer on a 6mth view.
• Elsewhere, wheat and corn prices are off their lows. Indeed such is the nature of the bounces (and the arbitrary 12mth time period) that wheat is up 3.5% on 12mths and corn prices are actually 17.6% up on very depressed prices a year ago. Soybean prices are still down by around 4.5% over the last year.
• The sugar price (along with the price of milk) has been terrible. Sugar is an ingredient in a number of processed foods. There has been a bounce, recently however and this has led Rabobank (they’re good at this stuff) to speculate that the ‘worst’ may be over.
• Of course if you’re a user of sugar, as most food processors and on-trade retailers are, then the decline in prices has been helpful. Nonetheless, Rabobank says ‘raw sugar prices reached their lowest levels since late 2008, continuing the downward trend in Q3 2015 [and this] heaps further pressure on a market already groaning under the weight of stocks accumulated over the last five years’. It says ‘prices rebounded during September, amid a growing consensus that the 2015/16 international crop year should see a swing to a global deficit (currently projected by Rabobank at 4.8 million tonnes), putting an end to an unprecedented five consecutive years of surplus and stock build-up.’ Rabobank’s Andy Duff says ‘the fundamentals of supply and demand seem to be telling us that, from a producer´s point of view, the worst of the current price cycle
• So buy your cheap sugar while you can.
Random information, hopefully not all of it useless (re most leisure operators etc.):
• Markets in buoyant mood, what was all the fuss about? BTW China markets shut at the moment, back on stream shortly. They will either have some catching up (on the upside) to do or may try to take global markets in the opposite direction. Betting is very much on the former.
• Oil price creeping a shade higher.
• Sterling up a little against the greenback as US rate rise expectations push out to March 2016.
• SAB update is pretty good. The group does well to remind us that it has a ‘unique global footprint’. Talks with ABInBev are ongoing.
• Greggs’ shares responding well to today’s upbeat statement. We said back at 1360p that, good though Greggs is, it’s just a chain of pie shops and the shares have settled back since. Nonetheless (and after today’s share price rise), the group’s shares are trading at a relatively stretched 21.4x this year’s earnings falling to around 20.2x next year’s c56p of earnings.
• Halifax has reported that house prices in the UK fell by 0.9% in the month of September. The market had been looking for a rise of around 0.1%. In the 3mths to end-September, they are up 2.0% and in the year to that date they are some 8.6% higher.