Langton Capital – 2015-11-11 – Premier Foods, tipping, Diageo, Sharm & other:
A Day in the Life:
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Find previous emails at http://www.langtoncapital.co.uk/daily-notes/
So is there something politically incorrect about the name ‘dwarf hamsters’?
And does it tell you something that such a question even crosses my mind when referring to the two diminished stature rodents that became members of our household some few weeks ago?
Anyway, said domesticated vermin have taken to running around their wheel, which squeaks remorselessly, all night long. Nothing strange about that, you may say but, as the noise is both irritating and incessant, we were wondering whether we could rig it up to play a tune rather than simply squeak because how cool would that be, the proposer asked.
But no, on reflection it would be awful. I mean can you imagine having The Birdy Song, for example, played constantly but at different speeds and different volumes 24 hours of the day? It would be a nightmare. On to the news:
Pub, Restaurant & Drinks Producer News:
• Singles Day spending breaks records in China, Alibaba hits $10bn (no typo) in sales by 2pm. Last year was at $9.3bn. Alibaba shares had recently dipped below their $68 IPO price but are currently trading at around $81.
• ALMR has suggested that ‘wholesale tipping changes may undermine stability’. It adds HMG should proceed cautiously. ALMR CEO Kate Nicholls says ‘the ALMR has carried out a widespread survey of members, including leading casual dining businesses, and found extensive awareness of the current code and compliance with it. Much of the reporting of tipping practice has been inflammatory, based on anecdotal evidence and unhelpful in its effort to address any perceived problems.’ She adds ‘we have found no evidence of poor practice but there is a clear misunderstanding from consumers, the media and some staff members as to how tips are redistributed. The consultation presents us with a chance to modernise the code, to better reflect contemporary payment practices such as cashless, and clear up any grey areas.’
• Diageo is holding an investor conference today focusing on its North American business and the performance of its brands. CEO Ivan Menzies is expected to say: ‘The year has begun well. Momentum has improved and the changes we have made are now driving stronger volume growth with depletions ahead of shipments as we benefit from our focus on embedding our sell out culture.
• ‘Trading in the first four months is in line with our expectations and therefore we continue to believe that we can deliver improved top line growth, driven by stronger volume growth, and modest margin improvement for the full year. In the first half, as we outlined in our results presentation in July, we expect net sales in North America to be down 2% as the result of our move to a replenishment system for innovation launches. This will impact Diageo’s top line growth and margin in the first half with stronger performance in the second half.’
• Increasing wages and falling prices allowed year-on-year spending in pubs to grow 15.6% in August, while spending in restaurants was up 14.4%. However, while the number of transactions in restaurants grew 21.8% in October, average transaction value dropped 6%. The latest Barclaycard data shows consumer spending increased across a range of leisure pursuits, including cinema trips and airline tickets.
• Reports from China are claiming that orders of Greene King beers have exploded in the wake of president Xi Jinping’s visit to the UK. The pub and brewery group’s Chinese operation is struggling to keep up with demand after a photo opportunity with David Cameron saw Jinping sample Greene King’s flagship IPA in a UK pub.
• Chris Foss, head of the Wine Department at Plumpton College, has said that climate change and warmer weather is good for English winemaking. English vineyards have been growing 11% a year over the last 10 years and there are now 470 vineyards and 135 wineries producing on average 3.15 million bottles a year.
• The libertarian inclined IEA has argued that ‘end to 24hr licensing would not be in the public interest’. It says the ‘legislation has led to a fall in alcohol-related crime.’ It says ‘the IEA claims there is no evidence to suggest a return to old closing hours would be beneficial’ and Stephanie Lis, head of communications at the IEA, said: “Perhaps it would make the police’s job easier if everybody poured out of the pubs at 11.20pm but it would not be in the public’s interest.”
• McDonalds has increased its re-franchising target from 3,500 restaurants to 4,000 as part of its target to become 95% franchised. The group has also raised its fourth quarter dividend by 5% to 89 cents and is expecting positive Q4 sales.
• Sainsbury’s underlying group sales for the 28 weeks to 26 September fell 2% to £13.64bn as underlying PBT dropped 17.9% to £308m. The retailer quoted food deflation, lower like-for-like sales (-1.6%) and customers shopping across multiple channels as the main drivers behind the drop. Transaction growth increased almost 3% and volumes were up 1% thanks in part to a £150m investment in price.
• SBRY. Food sales continued to drop but the retailer’s clothing division performed well, with sales up 10%, and total income at Sainsbury’s Bank was up over 6%. However ‘continues to deliver good operational performance, with total income up over six per cent. Transition costs are now expected to be at the top end of the £340 million – £380 million range driven by a six to nine month delay in programme delivery.’
• SBRY. CEO Mike Coup commented: ‘We are making good progress against the strategy we outlined last November. We are delivering volume and transaction growth as customers value our quality improvements and our clearer, simpler message of lower regular prices… We are delivering on our strategy to expand our non-food businesses with further growth in clothing, general merchandise and Sainsbury’s Bank.
• SBRY. CEO adds ‘We continue to run the business efficiently and our cost savings programme is ahead of plan. We now expect savings of around £225 million by the end of this financial year and we are on track to deliver our target of £500 million cost savings over the next three years.’
• ASDA is to pour cold water on the Black Friday buzz in the UK this year. The US-owned chain was ‘credited’ with much of it in 2014.
• More on Black Friday. Still said to be set to be the biggest the UK has seen, with almost a quarter of the population looking to buy something on 27 November. Black Friday’s main customers are likely to be 18 to 35-year-olds, with 42% of the demographic planning a purchase, while the busiest retailers are expected to include John Lewis, Amazon, Argos and Asda. Figures from Conlumino suggest the average spend is estimated at £266 per person, and overall sales are expected to reach £1.6bn.
• French retail giant Carrefour has opened its first airport-based convenience store at Paris Orly airport in partnership with Aeroports de Paris.
• The SNP has decided to vote alongside opposition MPs and 20 Tory rebels against government plans to relax Sunday trading laws in England and Wales. Ministers are said to be considering whether proposals might have to be delayed or even dropped altogether.
• The head of Tesco, Dave Lewis, has warned that retailers face a ‘lethal cocktail’ of high business rate tax and costs at a time of declining profits. Lewis pointed to an estimated £14bn of extra costs to be paid by the retail industry over the next five years as a result of national living wage increases and other costs.
Travel & Hotels:
• The latest Hotel Bulletin from AlixPartners, AM:PM and HVS shows that third quarter RevPAR growth of 3% was the lowest since Q1 2013. Graeme Smith, Managing Director at AlixPartners, comments: ‘The UK market has enjoyed a continuous period of RevPAR growth. The rate of growth slowed this quarter but this is heavily influenced by sporting events. There will be a focus on performance in Q4 to see if this reduction in growth rates continues.’
• The report notes that the budget hotel sector continues to expand, with more than 1,500 rooms added during the quarter. The wider market continues to see an influx of Asian investment, while branded hotels represent 2,500 of the 3,000 new bedrooms in the pipeline.
• Meanwhile BDRC Continental has looked at brand margin (the difference in value each hotel brand achieves when compared with an unbranded hotel in the same tier). BDRC examined 92 hotel brands across the luxury, upscale, midscale and budget tiers, finding that the higher the tiers, the higher the consumer added value a brand brings to a hotel.
• Alton Towers is preparing to cut 190 jobs as it looks to provide a ‘reactive and customer focused approach’ following reduced numbers of visitors. A spokesperson for the theme park commented: ‘This was an incredibly difficult decision to make and it has not been taken lightly or easily. However, we believe that this reorganisation now, together with a continuous programme of capital investment, will not only ensure the resort’s long term growth, which is so vital to the local economy, but also protect the jobs of the bulk of its employees for the future.’ Trade at the theme park took a hit earlier this year in the wake of a fatal crash on one of its rides.
• EasyJet says that passengers left in Sharm el-Sheikh can expect to be airlifted out by the end of next weekend. CEO Carolyn McCall also suggested that security needs to be stepped up at some airports around the world following last month’s crash, adding that improved security must be ‘a global thing – not just an Egyptian or North African thing.’
• Sportech updates on Q3 trading, says ‘revenues across our Racing and Digital business are slightly above prior year’. It adds co has ‘recently received more than one preliminary proposal in respect of The Football Pools and will be reviewing the terms of these proposals in due course.’ It says ‘we remain focused on developing the growth opportunities for each of the Group’s divisions and on maximising value for shareholders.’ Re pools trading, it says ‘the Football Pools continues to trade in line with management expectations. In the subscription channel, and importantly in our drive for stability this year and then growth in the business, revenues remain broadly in line with prior year, driven by an increase in spend per head, together with improved retention in core player numbers, following the successful roll out of an improved CRM
Finance & Markets:
• UK markets down yesterday on miners’ weakness. Europe up, US up yesterday + Far East up on Weds trade
• Oil price down a little further at $47.20 per barrel.
Premier Foods Reports Return to Growth:
Premier Foods H1 analysts’ meeting:
• See summary notes under Tuesday Wrap below:
First Half Results Presentation: 10 Nov 2015:
• First new brand in 20yrs with Paul Hollywood.
• Excited about the top line. First growth in 2yrs. Non-branded sales were actually very strong, up 10.6% in Q2.
• Underlying trading profit up around 2.5%. Headline a little higher due to the phasing of consumer marketing. Q3 spend will be circa Q1 + Q2 combined.
• Grocery was +3.2%. Bisto & Oxo strong. Sauces good. Even Batchelors. Latter still negative but trends better.
• Sweet treats was actually down 2.6% in Q2 but this is against tough comps & there is some ‘promotional phasing’. Q3 should be very good. Non-branded was +18.7% in Q2. E.g. mince pies. Good for margin & utilisation. Margin gone from 5.2% to 7.8%. Should get to double digits by year end.
• Healthy swing in underlying profits, better yet in headline. EPS 2.2p to 2.7p.
• Debt flat over H1 at £585m. Small working capital outflow (£14m) in H1. Should reverse in H2. Still expect ‘significant debt reduction’ in H2.
• Pension deficit now only £33m. Surplus in RHM & deficit in Premier. It doesn’t impact the cash payments. Discount rate 3.3% to 3.7%.
• De-leveraging. Working capital neutral on the year as a whole. Put p12 through models & debt reduction is ‘significant’.
• Deflation exists yet the business is in growth. Group is taking share. Strong volume growth:
• More marketing investment. Innovation up. Sales from innovation up. Will rise further. Different marketing methods. Testing day-time marketing on TV, for example.
• Themes 1) foodiness. Moving Oxo from dry stock to wet stock. Also 2) healthiness, taken 1k tonnes of salt out over last few years.
• New brand, Paul Hollywood. In market Feb 16. Home baking. Sleepy category. Will be ‘agile’.
• Sweet treats trends. Snacking, togetherness, reward.
• Sweet treats outlook. Margin 7.8% & aiming for double-digit in FY16. Capex paying off.
• Sweet treats health + nutrition. Sugar isn’t per se bad. Calorie caps. Investing in portion controls. Will deal with it as it dealt with salt.
• International sales, small base but sales +22% in H1. Australia strong, US in cake trial. Australasia sales +74% in H1. Group had 9 people dedicated to international & is now 27. Ireland sales +7.5% in constant currency.
• Delivery channels. Group beat the market with supermarkets. Sales outperforming in convenience & bargain stores. Less so in discounters as they are predominantly unbranded.
• Overall SKUs reduced. Down 43% between 2012 and 2014.
• Attracting good people as PFD becomes an exciting place to work.
• Innovation continues.
• Summary. Strategy was ambitious & is working. Q3 will be good. FY17 will see growth in sales 1% to 2%. Debt will be down ‘significantly’ in H1.
Questions & Answers:
• Debt level? Not given a forecast. Estimates are £525m to £535m. The declines in debt will then reduce as pension payments will kick in. Capital investment will also have an impact. There are still some very attractive projects out there.
• Behaviour of supermarkets? Been tough for the customers. They’ve had to adapt to 2% deflation (from 2% inflation).
• Advertising to sales? ULVR suggests 15%. PFD will spend ‘mid-teens’ more (in % terms on existing spend). High £30ms. It will continue to rise at that rate. Interesting to look at it as a % of spend of rivals – e.g. Kipling may by 90% of cake advertising – so why spend more?
• What’s your outlook re deflation? It’s stopped getting worse. Ingredients (dairy & sugar) may have turned. He thinks prices may remain flat. Opportunities to raise prices will be scarce (or absent).
• Will branded sweet treats be >1.6% growth in Q3? Won’t give sales forecast but say that treats will pick up the mantle from grocery.
• Sweet treats margin? How will you hit ‘double-digits’ for year as a whole if it was 7.8% in H1? H2 margins, including Xmas, are better anyway. Operational gearing is material. So >10% is a genuine FY margin estimate.
Langton Comment: Well so much for perfect markets.
The shares are worth 20% more within minutes because the co stated what we have known to be true for some time. Supermarket demand was stabilising, the interests of the group and its customers was aligned, the weather had not been unhelpful, capital and marketing spending was beginning to bear fruit and exports were growing nicely.
Nothing unexpected there but there could have been a credibility issue (best to avoid the heavily-loaded + unfair word ‘problem’) and it has clearly been a relief to the market to see the co actually deliver rather than muster up some new reasons as to why it hadn’t.
That said, we are where we are.
And that place is considerably better than any position in which PFD has found itself for many a year. H2 margins are set to rise sharply – particularly in sweet treats – and debt will ‘fall significantly’. Sales thereafter, the group refers to FY17, should rise by between 1% and 2% per annum, debt should fall further (though less significantly) and a dividend may be on the cards for FY18 or even FY17.
The Press has been generally supportive this morning. Various comments re Paul Hollywood, apparently he’s on that Bake-Off programme, I won’t pretend to know any more, and on low-calorie treats. The FT says factually ‘Premier Foods shares jump on strong sales’ whilst The Telegraph goes with a variant of the more colourful ‘Big British Zombie shows Signs of Life’.
Fair comment, I suppose but, with the indicators now pointing in broadly the right direction and numbers likely to come under upward rather than downward pressure, a PER of c5x still looks far too low.
Retail Roundup from Nick Bubb:
Darty: Today is FNAC’s “put up or shut up” bid deadline for Darty and there is no news yet, but they have until 5pm, so the day is yet young…
Marks & Spencer:
Fashion Recovery Stocks:
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:
Premier Foods – shares still far too cheap:
• Premier Foods presented its H1 numbers ‘like a normal company’.
• This is because, essentially, the group is now a normal company.
• This will take a while to sink in but, on a PER this morning of c4x and this afternoon c4.5x, it’s shares would appear to be trading at completely the wrong level.
• Tick off the issues:
o Supermarket demand stabilising
o B2B customers cutting back on SKUs and focusing on the bigger branded suppliers
o Cooler weather being helpful
o Marketing & capital spending bearing fruit
o Overseas sales rising by 22%
o Directors have recently bought stock
o Share overhangs in the market looking as though they may have been cleared
o Debt will fall markedly (c£60m) in H2
o The pension fund deficit, at the moment, is negligible.
o Margins should rise materially in H2. Sweet treats will see its FY margin >10% from a 7.8% in H1
• The problem, perhaps, could be share of voice. There are 000s of shares out there, who needs one that has disappointed? But if you change the handle on an axe – and then you change the head, you have a new axe. Management has changed, the balance sheet has changed & products are evolving.
• Fuller meeting notes at the foot of this email.
• Crisis developing as might be expected. Get the holidaymakers back & then a deadly hush will descend over Egyptian resorts.
• This is unhelpful for tour operators – as it leads to a rescheduling of brochures etc. and ultimately it restricts choice – but it is a bigger deal for operators in resort (hoteliers, restaurateurs and the like) than it is for tour operators in general.
• Overall it’s an ill wind but hoteliers in the Canaries are likely to see a material boost to their business.
Random information, hopefully not all of it useless (re most leisure operators etc.):
• VW offering to put $500 in the pockets of ‘cheated’ diesel car buyers. Some say too little, too late. Not sure if the offer extends to Europe at this point.
• Sterling up against the Euro, down against the US$. Betting of a Dec rate hike Stateside now firming up.
• Oil price & precious metals down. Most soft commodity prices weak, protein prices under renewed pressure. Cattle prices now down 23% over last 12mths & hog prices some 42% down.
• Soybean prices down some 22% over last year (input product & cattle food) but OJ up 6% on the last year on back of El Nino & other concerns.
• Fed rate rise in Dec now said to be firmly baked in.
• Action re Yo Sushi & potentially Gaucho Grill suggests that PE houses are ready, willing and able to fund secondary & tertiary buyouts.
• Hotel stocks down yesterday on the back of Sharm issues. Not surprising.