Langton Capital – 2015-11-06 – Daily Wrap: Leisure travel, property costs, rents, Black Friday & 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:
Terrorism & leisure travel:
• The BBC reports it has learned that UK investigators looking at what caused a Russian airliner to crash in Egypt believe a bomb was put in the hold prior to take-off
• The UK government suspended all flights to and from Sharm el-Sheikh on Wednesday
• Repatriating UK holidaymakers will be the first priority – and then tour operators will have to take a view on how long the suspension may remain in force & adjust their stock accordingly
• This is expensive and worrisome for customers
• It’s not been a good year as regards disruption and, coming only four years after the Arab Spring, events in Tunisia and now in Egypt will have done little to rehabilitate North Africa as a leisure destination
• The BBC reports the UK government (despite Egyptian & Russian criticism) as saying the incident was likely to be have been caused by terrorism. It says the government received intelligence based communications between militants in Sinai.
• Thomas Cook shares fell by 7% yesterday and, whilst this is understandable, it is perhaps a little severe
• Because leisure travel will remain a growth industry. It is aspirational and there are other destinations. The Canaries, Florida and even Thailand could see something of a continued (post Tunisia) boost in the Winter Sun market and the market will stabilise.
• And in the medium term, Thomas Cook’s tie-up with Fosun could be very interesting indeed. The group has said that it has commenced operations (re inbound and outbound Chinese tourism) and Fosun is yet to buy more TCG shares in the market.
• Longer term, it would not be surprising to see Fosun acquire more shares or even to take control of the Thomas Cook group completely.
• TCG shares are currently trading on a (partly recovered) FY16 PER of 10.4x earnings.
UK interest rates:
• Bank has held rates, talk now of increase being delayed further.
• Only a few weeks ago, talk of delaying a UK rate increase into 2017 would have been dismissed as foolish.
• But now it is gaining traction as talk of the global slowdown takes a hold.
• Interestingly, the UK market did not react positively to yesterday’s dovish comments and today we have Savills saying that delaying a rate rise runs the risk of distorting the property market.
UK property market:
• House prices in London are bonkers. UBS said the London property market is the biggest bubble in the world. Savills, whose financial interests may be said to lie on the opposite side of the argument, has said that delaying rate increases runs the risk of puffing up asset prices too high.
• Foxton’s share price moved from 400p to 150p. We missed a trick, there. It then rallied to 280p but is now 180p.
• London A3 & A4 rents are similarly ludicrous. Coffer Corporate Leisure, whose financial interest may also lie on the bull side of the argument, has said that ‘even tall trees do not grow to the sky’ and operators may struggle to pay higher rents.
• We are aware of premiums of up to £12m being asked for restaurant leases. In another case, a £700k premium is being asked for 1k square feet of ground floor space.
• Small restaurant (c1,500 feet) rents may run to £130k or £150k. Rents in hot spots will be much higher but in order to justify £150k of rent (say £250k of occupancy costs) a unit may need to turn over perhaps £30k to £50k per week.
• The list of 1,500 foot units doing £2.5m per annum could arguably be written on the back of a (small) envelope.
Housing in the big-ticket, small-ticket debate:
• We’ve suggested for a while that big-ticket spending has eclipsed spending on affordable treats.
• This should be temporary & may have worked its way through the system by as soon as the end of this year.
• When we’ve mentioned big-ticket items, we’ve typically meant houses, furniture, carpets & holidays but, arguably, the biggest ticket of all is housing – be it mortgage payments or rent.
• And here, despite interest costs being low, overall costs have been rising on the back of a strong housing market and rising rents.
• The above represents enforced savings and, as long as the recipients of the house proceeds do not blow it all on consumption, it represents a withdrawal from the economy.
• This ‘enforced savings’ may not be an altogether bad thing. But it could be part of the reason as to why higher wages etc. are not feeding through immediately to higher levels of spending.
Random information, hopefully not all of it useless (re most leisure operators etc.):
• At the time of writing (c10am) the market is holding its breath ahead of US non-farm payroll numbers due at lunchtime.
• Sterling down on rate-delay concerns. The arguments re higher commodity prices, imported inflation, holiday costs etc. are well-rehearsed.
• Interestingly property owner Intu this morning says ‘the economic recovery is now more obviously rippling out from London and the South East to other regions of the UK and our prime centres across the country are seeing strengthening underlying retailer sales performance.’
• Re Black Friday, Retail Week reports ‘Asda in radical rethink over Black Friday plans.’ It is being suggested that Asda, part of the Walmart Group, will make much less of a fuss this year.
We’re so 21st Century, this morning’s Tweets (diff. font size denotes importance):
1. Miller Coors Q3. Reports 8.6% lower underlying net income but higher net revenue per barrel.
2. Diageo has sold its wine interests in Argentina to Grupo Peñaflor for an undisclosed amount.
3. Ruby Tuesday says it will sell 8 corporate-owned locations + close its remaining 11 own-restaurants to concentrate on franchising
4. Sharm disruption + bomb fears set to hit Egypt’s struggling tourism industry, which had been struggling to recover post Arab spring
a. PM David Cameron has said it could be “some time” before all UK tourists are repatriated from Sharm el-Sheikh
5. IATA says global airline industry should finish the year in positive territory. Passenger numbers +7.3% y-o-y in Sept.
6. Disney yesterday reported Sept quarter numbers ahead of market expectations on back of strong cable earnings.
7. Bank England holds rates at 0.5% amid comment it may hold rates throughout 2016. Prospect of inflation picking up is a distant one
a. UK house price growth picked up in Oct per Halifax. Says prices +9.7% in the year to Oct vs an annualised 8.6% in Sept.
b. Savills has suggested that delaying interest rate rises for too long could allow house prices to grow at an unsustainable pace
8. EU forecasts economic recovery within European Union + Eurozone should continue at “a modest pace” next year, suggests 2.0%