Langton Capital – 2015-10-12 – Daily Wrap: SAB bid, VAT & gym fees, inflation, drinking stats & 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:
SAB Miller / AB InBev:
• We’re guaranteed more news this week. AB InBev must make a formal offer by end-trading Wednesday or walk away for 6mths.
• Press suggests it will sweeten offer & that SAB directors will at that point engage in conversation.
• Risks both ways. A 6mth cooling off period would see the shares fall & directors come under increasing pressure to cut costs & boost earnings – or at the very least to re-solicit an approach at higher levels. A raised bid, on the other hand, would (perhaps) force SAB Miller to come to the table.
• Risks, perhaps on balance, weighted to the upside.
VAT reductions for leisure services:
• Asking HMRC to cut VAT to as little as 5% on all licensed retail sales was always an extremely ambitious request.
• Even asking it to cut VAT on pub & restaurant food to 5% looked tricky.
• Supermarkets (and Greggs etc.) after all have to charge 20% VAT on hot food and licensed retailers add a lot more service, all of which is elsewhere fully VATable.
• But there’s something about asking for a VAT reduction on gym membership that feels somehow more achievable.
• Time will tell but, at relatively little cost, HMRC could make a gesture that would benefit health & fitness operators (almost all of which are currently privately owned) greatly
• Good question as numbers out in the UK tomorrow (elsewhere later in the week) are likely to show that inflation is most notable for its absence.
• Low inflation makes it more necessary for companies to work for their living.
• Various books, papers etc. are now suggesting that, with the exception of the 70s and part of the 80s, deflation (excluding also wartime) – or at least stable prices – was the norm over the last 100yrs or so.
• The absence of inflation makes the National Living Wage a bit more of an issue. It presumably wasn’t struck at and RPI-plus target for political reasons – that is, it sounds more impressive if you decline to mention that you are talking about future prices.
Is the UK really still binge drinking?
• We mentioned this morning that media agency Maxus reported Britons drink more heavily than their fellow-Europeans.
• Whilst this was the impression that the Maxus comment gave, what it actually said was that consumers in the UK are more likely to binge drink, go to the pub or drink at home than were respondents in Germany, Australia, America and China.
• Some 66% of Brits admit to drinking at home at least 2x per week compared with 63% in China, 62% in Australia, 57% in Germany and 55% in the US.
• It says 15% reported that they had at least one “high energy” night of drinking per week and author of the report Nick Vale says ‘from the malmsey wine of the 14th century to the craft gin producers of today, we Brits have a long and distinguished heritage of creating, sourcing and enjoying the best drink in the world.’
• Whilst the reported spin is negative, Vale says ‘we British are a hugely sociable nation, we love to chat, and booze facilitates that. The pub gives us somewhere to meet and alcohol helps lubricate our conversation.’
• Recent hard statistics suggest that UK drinking per capita peaked in 2004 – here
• The UK is not in the top 10 in Europe (although Europe, perhaps not to its credit) does supply all of the top 10 drinking nations in the world – here
• Brits drink about as much as the Swiss – here (links worked in 11am, client version of this email)
• Heavy drinking is not a positive but, to put the above in context, Brits drink 1) less than their neighbours and 2) less than they did 10yrs ago
Food Retail Index:
• The FRI has had another strong seven days, again thanks to a rebounding supermarket sector. While Tesco’s H1 results and Sainsbury’s Q2 figures powered the index ahead, Ocado was also a strong riser in a week in which its chairman was announced as the head of the UK’s pro-EU campaign.
• Grocers: The main move of the week was undoubtedly Tesco, up 13.34% to 203.84p on the back of its mixed H1 results. While Tesco has continued to reduce prices, increase availability and strengthen its balance sheet, its operational investments have come at the cost of a 55% drop in first half operating profit to £354m. The group will not be paying an interim dividend.
• However its buoyant share price performance (up by over 20% in two weeks) has been fuelled by a renewed optimism in the sector. Tesco’s comment on the group’s recent trading and outlook shows more hints of recovery, with Q2 UK LfL sales down a less-than-expected 1% compared to a 1.5% LfL decline in Q1.
• The moderating sales downtrend chimes with Sainsbury’s Q2 results on 30 September, in which the grocer noted a ‘moderate uptick’ across its KPIs and an improved LfL sales performance of -1.1% for the 16 weeks to 26 September.
• Although the £4.2bn sale of Homeplus provides Tesco with breathing space, the failure to sell Dunhumby for the mooted c.£2bn and the ruling out of a sale of its Central European business means that the retailer is running out of meaningful non-core operations to offload. The Serious Fraud Office (SFO) investigation also rumbles on in the background and certain US pensions are said to be tooling up to sue Tesco over its £250m+ profit misstatement last year.
• Since its H1, CEO Dave Lewis has signalled a u-turn in management policy by buying Tesco shares in a show of faith for his ‘new caring, sharing supermarket’. The group has also followed in Morrisons’ recent footsteps by ditching its price matching scheme, and is today launching a brand guarantee scheme which will give shoppers instant discounts at the till rather than convoluted coupon alternatives.
• However, with its SFO investigation ongoing, Aldi and Lidl’s market raid continuing apace, the additional costs from the upcoming National Living Wage, and unspectacular progress on the group’s balance sheet, it remains to be seen whether the modestly improved LfL sales trends is enough to jumpstart what remains a very ambitious turnaround project. Jack Brumby – firstname.lastname@example.org
Random information, hopefully not all of it useless (re most leisure operators etc.):
• Hard commodities on the up, Zinc has best trading period in 6yrs (on back of Glencore capacity reduction).
• Oil price firmly anchored above $50.
• Soft commodities yet to follow suit. Only Corn, Cocoa & Wheat noticeably up. Some others bumping along the bottom (and soon will be up y-o-y as comps get increasingly easy).
• Risk on kind of day on Friday. Indices firmly above their 50dy moving averages. Miners up strongly. Week ending Friday, basic materials companies +16.7%, oil & gas +12.3%.
• Re grocery deliveries, Nick Bubb this morning quotes The Grocer as trialling Amazon Fresh’s offer in Birmingham. It says 33 item basket was delivered in perfect order in just 46 minutes. This could prove to be something of a problem for the existing delivery companies.
We’re so 21st Century, this morning’s Tweets (diff. font size denotes importance):
1. SABMiller is to meet with investors to discuss recent trading and to comment on its revised cost and efficiency savings target.
a. Sunday Times reports AB InBev is ready to increase its £65bn offer for SAB from £42.15 a share to a possible £43-£44.
2. Media agency Maxus says Britons drink more heavily than their fellow-Europeans. This despite fact consumption here peaked in 2004
3. Soho House has pulled its planned £200m high-yield bond. Investors were thought to have been put off by the company’s high leverage
4. Daily Mail points out Costa Coffee has the most stores rated less than satisfactory re cleanliness across large UK coffee chains
5. Lyceum Capital-backed EAT plans to open 20 sites next year and will target airport and railway station locations, writes M&C
6. Italy has overtaken France as the largest wine producer in the world and is on course for a 50.37m hectolitre harvest this year
7. Stonegate Pub Company has put four central London freehold pubs from the recently-acquired TCG estate on the market.
8. Sportech announced Friday put up or shut up re bid from Contagious Gaming has been pushed out to 5pm 6 November.
9. NHS urges a cut on VAT on gym membership in a move to combat obesity. VAT is currently charged at the standard rate of 20%
10. Former BoE member Andrew Sentence has said the US and UK central banks ‘need to be courageous’ and raise interest rates
a. ONS figures show UK construction output fell 4.3% in August, while the trade deficit narrowed by £1.2bn to £3.3bn
b. London market had eighth straight day of gains on Friday, with Glencore on the rise after it said it was cutting its zinc output
c. IMF chief Christine Lagarde has said outlook for China’s economy is not all “doom and gloom”. So that’s all right then