Langton Capital – 2015-10-14 – Marston’s Q4, Domino’s Q3, Diageo disposal & other:
A Day in the Life:
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So I’ve decided that, if you want to look smart and in control of a situation, you should never come between a dog and its food.
Yes, the experts will tell you, you should occasionally take the dog’s nosh away from it mid-munch in order to prove to it who’s boss but, at the end of the day, how many fingers have these people got left?
I think that, if you took a couple of dozen or so of them, the average would be less than ten and, whilst some will go all pedantic on me re thumbs not being fingers, I don’t want to have less than my starting number of digits any earlier than can be avoided and, at the end of the day, why run through a dynamite factory with a match, even if you think there’s only a one in a thousand chance you’ll stumble, pitch the blazing instrument into a pile of explosives and blow yourself to kingdom come?
Anyway, talking about conflicted emotions, the market doesn’t seem to know whether it’s in a bull or a bear phase at the moment. On to the news:
Marston’s Q4 & FY Trading Update: Year to 3 Oct 2015:
Marston’s has this morning updating on trading for its full year to 3 Octopber and our comments are set out below:
Destination & Premium:
In Destination and Premium, LfL sales were up 1.8% (a slight increase on the position at week 41)
LfL food sales were up 1.7% and drink sales were also up 1.7% suggesting that other income, accommodation & machines, performed well
Marston’s says ‘in the last 11 weeks of the period, like-for-like sales have grown 2.2%.’
The group says ‘operating margin is ahead of last year’
Marston’s adds ‘we completed 25 new pub-restaurants in the financial year just ended’
Marston’s concludes re the near future ‘in the 2016 Financial Year we plan to open at least 20 Destination pub-restaurants, two Revere sites and five Lodges.’
It adds ‘we have a good pipeline of sites to maintain similar levels of expansion for the foreseeable future.’
In Taverns Marston’s reports LfL sales for year were +2.0% and says it saw ‘growth of 3.1% in the last 11 weeks.’
‘in the last 10 weeks of the period, like-for-like sales were up 2.0%.’
The group says ‘our franchise business, which now operates around 550 sites, continues to perform strongly as we evolve and develop the business model’
In Leased Marston’s estimates profits to be +4% against last year
At w41, the group said leased profits were in line with last year, suggesting that the last 11wks or so have been very strong
In Brewing Marston’s is able to report ‘our strong brand portfolio, supplemented by the acquisition of the Thwaites’ beer brands, has performed well’.
Ex-Thwaites, own-brand beer volumes were +5% compared to last year. Including Thwaites, volumes are +15%.
Assets, Debt, Balance Sheet & Other:
Marston’s does not comment on net debt or cash flow
Re its pension liabilities, it is able to say post its triennial valuation that ‘we have agreed a reduction in cash contributions from the current £13m to £7.5m per annum.’
CEO Ralph Findlay reports ‘the Group has made good progress in the last year, with underlying growth in all of the business segments.’
He says ‘our new pub-restaurants, premium pubs and lodges have all performed well and we have good visibility over the site pipeline to underpin our future growth.’
The group is now through its disposal problem. It says ‘we have substantially completed our disposal programme of smaller wet-led pubs’ and adds ‘these actions, together with the success of franchise, have significantly transformed our pub business over the last three years.’
Mr Findlay adds ‘in brewing, the integration of the Thwaites’ brewing business has gone well, and we are well placed to continue to exploit the market growth in premium and craft beers and ongoing growth in the off-trade.’
The group will report FY numbers on 26 November
Langton Comment: Marston’s has confirmed that trading continues to be in line with expectations.
Indeed the group is performing somewhat more strongly than the industry as a whole (per the Peach Tracker) and it is able to 1) add that its margins are rising and 2) confirm that sales in the last 11wks of the period have been ahead of the prior 41wks.
We believe that the rugby is broadly neutral, that the cool weather over the summer has not been unduly damaging and that big days remain important.
That said, Marston’s has disposed of its bottom-end units and now operates a markedly better estate. It has evolved and remains relevant to and for its customers.
We see the balance sheet as robust and the new site pipeline in secure.
With that in mind, we would suggest that a PER of 12.1x falling to 11.2x is not overly demanding. The group’s shares yield 4.6% (rising to 4.8%) and we believe that Marston’s, transformed in terms of quality as it is, should be capable of delivering double-digit EPS growth into the medium term.
Pub, Restaurant & Drinks Producer News:
• Domino’s Q3 update, says ‘strong sales momentum continues’. Says is ‘building on the already successful first half.’
• Domino’s Q3: UK system sales +14.9%, y-t-d system sales +11.8%. Group sales in Q3 £214.5m (+19.4%).
• Domino’s Q3: Says ‘trading in our core UK business was particularly robust driven by our continued investment in digital, now focussed on mobile.’
• Domino’s revenue through digital +35% v Q3 last year with >75% of delivered sales in y-t-d have been online. More than half of digital orders are placed through the app on android or IOS devices. Says it has benefited from its sponsorship of Hollyoaks.
• Domino’s says ‘sales were also helped by relatively poor weather during the summer months’ It opened 12 new stores in Q3 and has opened 33 in the y-t-d. it will open a minimum of 50 in the full year.’ The group says ‘we are very encouraged by the third quarter results in Ireland where we are also seeing an increasing trend towards digital ordering and the benefits of the continued economic recovery.’ It adds ‘in Germany and Switzerland the Group has continued to focus its efforts on improving service to enhance store level performance. Whilst the results are encouraging there still remains a lot to do to improve the overall performance of these businesses.’
• Domino’s says ‘given the strong performance of the business in Q3 + solid start to Q4’ numbers will be ‘ahead of its expectations.’ CEO David Wild says ‘we are delighted by this performance as our UK business goes from strength to strength, reflecting the success of our strategic and marketing initiatives. It represents the eighth consecutive quarter of double digit like for like sales growth as we continue to focus on delivering great food with great service, using our best in class digital platforms.’ He goes on to say ‘our international businesses also continue to show encouraging signs of improvement’ and concludes ‘we enter the final quarter of the year with good momentum, are confident of beating our previous expectations for the full year and remain excited about our longer term growth prospects.’
• Diageo agrees to sell major wine interests to Treasury Wine Estates for $552m. Net proceeds c£320m after costs + taxes. Says ‘the transaction, which is subject to regulatory approval, is expected to complete around the end of the calendar year.’ CEO Ivan Menezes adds ‘Diageo’s strategy is to drive stronger, sustained performance through focus on our core portfolio and today’s announcement is another element of that strategy in action. Wine is no longer core to Diageo and this sale gives us greater focus.’ He adds ‘with the completion of this transaction Diageo will have released £1 billion from the sale of non-core assets since the start of the financial year. This proactive portfolio approach has focused the business, enhanced our financial strength, improved our returns and strengthened the business, positioning us even more firmly to deliver our
• Smashburger sells 40% stake to Jollibee Foods of Philipines for $100m. Values Smashburger at c$335m. The operator, which has 335 restaurants in 35 states and in seven countries, said that the agreement would help it accelerate its international expansion, but that the short term focus remained on US growth. Smashburger was started in Denver in 2007. The WSJ labels it as ‘among a group of relatively new chains that have been taking on established fast-food operators by touting fresh and natural ingredients.’ It is the second largest of the “better burger” companies in terms sites behind Five Guys, which has more than 1,000 outlets.
• Imbiba-backed Wright + Bell recruits Jayne Baker, former retail director at M+B, as managing director. M+C reports that the group is to comprise ‘a new restaurant, bar and bakery concept.’ A first outlet has been secured near Moorgate, which will feature a bar, restaurant, artisanal bakery and a coffee shop. Two further sites are said to be in the pipeline.
• LVMH, world-leading group in luxury products has recorded positive financial growth, reaching €25.3bn for the first nine months of 2015. Organic growth this quarter has been particularly strong in the Wines & Spirits category, with growth at +16% compared to a total first half reporting of +2%.
• Jason Myers-led Busaba Eathai has secured a site in Liverpool to join its other site in the north west in Manchester, reports M&C. The group, which currently has 12 units, will open at 53-55 Hanover Street.
• The M&C also writes that John Derkach, former chief executive of Tragus Group, has become chairman of Lyceum Capital-backed EAT.
• Scientists from the Ben-Gurion University of the Negev in Israel have said a glass of red wine a day could help fight type 2 diabetes.
• More than 300 people have invested in Square Pie on Crowdcube as the operator looks to open four new branches in 2016.
• Chris Snowdon, of the IEA, has argued that sugar taxes rarely work and that the market effectively addresses such issues on its own. Snowdon cited the proliferation of zero sugar fizzy drinks as an example of companies adapting to evolving consumer tastes.
Holidays & Leisure Travel:
• Some 23% of UK consumers expect to spend more on their holidays next year, according to a study of 2,000 UK adults for Abta. Abta chief executive Mark Tanzer said: ‘This summer saw some very difficult conditions with the appalling terrorist attack in Tunisia and the economic and political issues around the Mediterranean. It’s a reflection of the resilient nature of the British holidaymaker that these events don’t appear to have discouraged people from taking overseas holidays with consumer confidence continuing to return to the market as we look ahead to 2016.’
• Jeremy Corbyn reportedly expects Labour MPs to oppose a third runway at Heathrow, warning of the government’s ‘dreadful record on air quality’. The Independent reports that Corbyn has called for Labour to make air pollution a key campaign issue.
• The Cox & Kings Group has confirmed its acquisition of Tui’s LateRooms in a deal worth £8.5 million as part of its expansion strategy. LateRooms’ site draws from 54,800 properties around the world and has an active customer database of 3.5 million. In the year ending 30 September the group had around 93 million online visits generating total transaction value of £300m and net revenues of £50m.
Finance & Markets:
• ONS figures show CPI inflation fell to -0.1% in September as a result of smaller clothing price rises and falling fuel prices. The CPI rate has been at or close to zero for most of 2015 and was last in negative territory in April. The Retail Prices Index (RPI) fell to 0.8% in September, from 1.1% in August.
• Property prices in England rose by 5.6% in the 12 months to the end of August, compared to 2.9% in Northern Ireland, 0.8% in Wales and -0.9% in Scotland. The average UK house price has now risen to £284,000. Richard Snook, senior economist at accountants PwC, said: ‘The figures show a robust housing market, providing further ammunition for those calling for an interest rate rise in the near term. With inflation likely to rise over the coming months as last winter’s energy price decline drops out of the equation, we expect pressure to continue to build on the Monetary Policy Committee.’
• Fed may find it awkward to raise rates in Oct says St Louis Fed President James Bullard. Oct was never on the cards for most observers. Bullard sais ‘it is very tough for the committee to make a big decision and then change it after only one meeting. Roughly speaking the data has not been that different from what would have been expected, and the jobs report was weaker.’
• World markets: UK down yesterday, Europe also weaker. US markets down in later trade and Far East down in Weds trade
• Oil below $50 again, trading at around $48.30 per barrel. US inventory data is published later today
Retail Roundup from Nick Bubb:
Today’s Press and News: The main talking point in the papers today is the news that Asda has poached Roger Burnley from Sainsbury to be its new COO, and, though he will be kept out of the market for a year on gardening leave, the FT and Telegraph both flag that the move has been made with CEO succession in mind, with the beleaguered CEO Andy Clarke likely to be moved on in 2/3 years time. 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:
SAB / AB InBev:
• So that’s one uncertainty out of the way, SAB’s management has entered negotiations.
• That just leaves Altria & BevCo to agree (that’s likely) and the competition authorities to also okay the deal.
• The latter is not nailed down but – and AB InBev’s directors are betting $3bn of their shareholders’ money on this being the case – agreement (subject to acceptable disposals) is likely.
• Then there’s the time value of money for an uncertain period.
• All of the above suggests to us that a price of c£41 or so would be about right at the current time.
• SAB shares are trading at around £39.50 at the moment. The wheels could drop off, of course but, at this price, the shares could still be attractive.
• AB InBev did raise the question, we forget whether it was in its first, second, third, fourth or fifth approach to SAB – it certainly can’t be faulted for its persistence – as to what price SAB’s shares would trade at ex a bid.
• The latter have traded around £37.50 on a number of occasions and the wider market has since fallen by around 7%.
• Arithmetically, this would suggest around £35 but, if the bid were to fail, then by definition the largest potential purchaser (of SAB) would have been removed from the market and the latter’s shares could fall below this indicated level.
• Hence if there’s a 70% chance of £44 and a 30% chance of, say £33 – then the shares are ‘worth’ £40.70.
• But that, of course, is like saying the average height of a group comprising basketball player Shaquille O’Neal and my nine-year old daughter what’s-her-name is 5’6”. The answer is both 100% right and, arguably, 100% misleading.
Retail sales numbers; good, but not that good:
• September’s retail sales numbers are the best for nearly 2yrs.
• But, factoring in the ultra-late August Bank Holiday, which may have accounted for around a 2% to 3% pickup (see Mr Bubb’s comments this morning), the numbers are arguably a shade disappointing.
• If food retail was down by around 1.2% then non-food retail must have been up by between 6% and 6.5%, which is more gratifying.
Random information, hopefully not all of it useless (re most leisure operators etc.):
• Sterling down in recent weeks against the Euro. Perhaps those changing their holiday money at around 144c to the pound back in the summer had the best of it. Rate now hovering around 134c. The move is unlikely to put too many people off their holidays but, on the margin, it does make a difference.
• Markets a bit juvenile in the short term. Oil price down, price of Carnival and TUI up. It is what it is.
• The merged Park Resorts / Parkdean will be a big old beast, perhaps £1bn in equity value. Might an IPO be on the cards in due course?
• China imports have now fallen for 11mths in a row.
• Germany looks as though it is leading the Eurozone back into deflation.
• Tesco shares are up 20% on a fortnight. See our Langton FRI comments earlier.