Langton Capital – 2015-10-26 – Daily Wrap: Cheaper holidays, sugar, micro-shops& 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:
Currency movements favour tour operators:
• M. Draghi maintained his mercurial reputation last week when he said that interest rates across the Eurozone could go up or they could go down.
• His comments have since been followed by suggestions that more QE was needed in the Eurozone and that, with the Swiss currently experimenting with negative interest rates, such a move was not out of the question across Europe.
• Hence the Euro has plunged.
• This makes UK holidays on the Continent cheaper for holidaymakers & it cuts the cost of beds for the UK-based suppliers
• Historically, windfall benefits (cheap oil etc.) have had to be passed on in the most part to customers. Thomas Cook, for example, said recently that c70% of any oil price reduction has to be passed on in the short term (and pretty much all of it over the longer term)
• And cheaper bed prices may be similar but, as the consumer will feel the benefit as soon as he/she leaves the airport, there could be an impact on demand as well as supply costs – and this too should be positive
• Whilst currencies tend to move in both directions, recent ECB comments have been generally helpful to holiday companies TCG and TUI
Sugar vs tax credits:
• So if HM Government needs to back down on either tax credits (cost £4bn to £6bn) or sugar (cost £nil), which is most likely?
• Jamie Oliver may come out of this looking like and individual with the ability to change government policy
Merlin & Parques Reunidos:
• Surely the former would have been the natural buyer for the latter.
• But that’s not happening suggesting that PE was willing to pay a higher price.
• That is what it is but, at the very end of the day, PE owners need to either IPO their businesses or find a trade buyer and, the more iterations the thing goes through, the higher the price needed in order to make the transaction work.
Sainsbury & micro-convenience stores:
• See also comments on Friday.
• SBRY may be about to follow the opposite policy to MRW.
• Units of 1,000 square feet are pretty small.
• If that’s the gross area, then strip out the tills, the loos and the warehouse (a.k.a. the ware cupboard) and you might have 400 feet.
• Surely this would be an area best franchised to outside operators?
Stock market expectations:
• So we have no inflation.
• We have GDP growth of around 2% (if we’re lucky).
• And we might be nearer the next recession than we are past the last.
• Yet we have double digit forecast earnings growth for many operators going off into the distant future.
• And this off the back of mid-teens PE ratings.
• Hence we have just one question, how’s that going to work?
Random information, hopefully not all of it useless (re most leisure operators etc.):
• Evolution continues at a pace. SBRY is trying to find value in micro-units & Debenhams want to derive 10% of sales from food. See earlier email.
• Oil unchanged, orange juice getting more expensive, ditto red meat. Sugar price also off the bottom. Precious metal prices up a bit.
• Friday saw some ‘Day II’ movers. Often share prices react sufficiently on the day of their numbers (or profit warning, or whatever). Last week, however, this did not seem to be the case with ARM (up) and Pearson, Home Retail & Sheffield Insulation (all down) following through for a second trading session.
• Profit warnings coming through in a steady flow.
• China rate cut; 6th in a year.
We’re so 21st Century, this morning’s Tweets (diff. font size denotes importance):
1. Sugar tax row rumbles on, health bodies + public said to back a tax, David Cameron looking a little hasty in saying it was not helpful
2. Report by Schools + Student Health Education Unit suggests youngsters are online more + drink + smoke less
3. Aldi hikes wages. Says ‘just as Aldi won’t be beaten on the low prices of our products, we are also committed to offering the best pay’
4. Suntory is considering move into premium UK beer market as it looks to remain competitive following SABMiller / AB InBev’s merger
5. Lidl is increasing its core wine range by more than a third, from 60 wines to c80, as well as focusing more on premium spirits.
6. Vietnamese restaurant group Pho is on track for c£20m of sales and EBITDA growth of over 25% in the year to the end of Feb 2016
7. International Agency for Research on Cancer (IARC) publishes conclusions on cancer risks posed by red and processed meat
8. Diageo launches Hop House 13, a 5% ABV ‘full-flavoured, hoppy lager’ + the first lager to emerge from Guinness Brewers Project
9. Ed’s likely to change hands. Bowmark Capital, which owns Drake + Morgan and TPG are vying for control.
10. Sainsbury’s could triple the number of c-stores if its ‘micro’ supermarket format proves successful
11. Debenhams wants food sales to make up 10% of its sales in the medium term after introducing concessions for a range of operators
12. TUI Group announces will reduce its equity holding in TUI Russia from 49% to 25%. Severgroup will increase holding to 75%
13. Royal Caribbean reported ‘Strong Third Quarter Results’ on Friday. Group raised adjusted EPS guidance to 480c per share.
a. RCL Q3: Net yields +5.1% in constant currencies + costs excluding fuel down 1.8% on the same basis. Net income was $228.8m, 103c per share.
b. RCL outlook: Says ‘is experiencing good early booking trends for 2016’ and early booking cycle is ‘encouraging’ for 2016.
14. Spanish theme park operator Parques Reunidos set to change hands. Two UK & two US PE houses said to have made bids
15. Bank of Italy deputy Fabio Panetta reports Europe’s economy needs more monetary stimulus to support inflation.