Langton Capital – 2015-11-12 – Daily Wrap: Punch, sales trends, wage growth & 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:
Recent on-trade sales trends:
• Coffer Peach tells us that wet-sales had a good month on the back of the Rugby World Cup.
• That is not surprising and nor is the further suggestion that London was a hotbed of rugby activity.
• Hence the hit to casual diners was greater in London that it was elsewhere – see this morning’s email – but that should be temporary & we should return to longer-term trends this month.
• A more major issue remains capacity.
• Here the difference between LfL sales and total sales seems to suggest that the increase in capacity remains around 3.5% to 4.0% – at least across the operators that comprise the Peach survey.
Punch Full Year Results Analysts’ Meeting:
• Following the announcement of its FY numbers this morning, Punch Taverns hosted a meeting for analysts and our comments are set out below:
• Structure, outlook etc.:
• We would normally begin a secondary analysis by talking about trading but, as Punch is to evolve as regards its structure, it may be appropriate to invert coverage on this occasion
• Punch maintains it has made ‘significant progress’ in addressing fundamental issues re structure
• The core estate will be c95% of pub profits in FY16 vs around 80% two years ago. The group has sold around 75% of its original non-core pubs
• The group remains supportive re the Statutory Code but sees the MRO as a risk
• It is unclear to what extent shortfalls in beer profits would be made up by higher rents – but there would be a shortfall
• Details will be clear but the financial impact may not be apparent until, perhaps, the end of FY16
• The group is making clear to its publicans that there are many advantages to staying within a tied structure and these benefits, such as membership of the Punch Buying Club, are to be enhanced
• Nonetheless, the group expects to operate a ‘small’ managed business alongside Retail Agreement sites, existing tied units and a Free of Tie estate
• The group will also continue to sell pubs – although the pace of disposals is to slow
• A key area to be clarified re the MRO is the definition of ‘significant investment’. Punch is currently investing almost wholly in pubs where it has a degree of control either now or over the short term
• Trading etc.:
• Results are ‘in line’. Last year had a 53rd week and more than all of the EBITDA reduction is due to this and sold pubs.
• Operating cash flow is better, capex is being held back and the group has about 53% of its estate where it would target high-returning capex if the MRO legislation makes it worthwhile
• The group has seen a c20% uplift in sales in Retail sites and, though costs have also risen a little, returns have been net positive
• Punch will have benefitted from the Rugby World Cup but no specific figures were given
• Langton Comment: Punch points out that the MRO remains a major change within the tenanted & leased pub industry.
• It runs the risk of further reducing pub numbers and of pushing some publicans back into beer ties with the brewers via trade loans. Beer choice may be restricted and some pubs could become chronically under-invested (at least until Punch (or Enterprise) was able to take them back).
• In addition, a low-cost entry point to the industry may be closed off and non-tied operators would lose out when it came to help with utility buying, help with other costs, legal and other advice etc. that has been associated with being a tied pub.
• Punch’s response is to become more hands on. It will offer a more varied mix of business solutions and, though costs will rise modestly, returns should also increase. It will look to its estate & attempt to source value from 1st floors and excess land. It may even extend its franchise option to 3rd parties. The initiation of a REIT is not possible under the securitisation structure as it stands but, longer term, nothing is off the table.
• The group is husbanding its Matthew Clark cash and is to hold back on the sale of core pubs until it has a clearer view on the implications of the MRO and, in the latter case, is not restricted in the need to pre-pay super-senior debt.
• The group’s shares trade at 40% of book value, assets have been sold at a high multiple and at or in excess of book value & debt should fall further.
Random information, hopefully not all of it useless (re most leisure operators etc.):
• Interesting to see YNGA once again highlighting accommodation.
• RTN’s FY target for new openings suggests that (as was already known) it will be very, very busy in Q4.
• Real wage growth is a little slower. Perhaps the narrowing of the gap between nominal wage increases & the CPI is suggesting that employees/employers are accepting that inflation will remain lower for longer than perhaps previously anticipated?
• MERL strong. We were of the view some time ago (see prior emails) that the group’s shares could make up lost ground sooner rather than later
• Sterling strong (v $ & Euro) on the back of buoyant employment numbers & the feel that UK interest rate rises may be brought forward.
• Oil price weak though off the bottom. Challenging August lows (which were themselves multi-year lows)
• Other commodity prices. Same as yesterday, precious metals weak, non-ferrous metals weak, softs weak except for El Nino plays, sugar, cocoa and OJ.
We’re so 21st Century, this morning’s Tweets (diff. font size denotes importance):
1. Punch FY numbers ‘performance [was] in line with expectations’. EBITDA £196m (2014: £205m), core LfL net income +0.3%
a. Punch average EBITDA per pub is up 4% y-o-y reflecting disposals of non-core units. Balance sheet better, more debt off post year end
b. Punch to introduce managed + franchised (like) units in addition to arms-length rents. Says is making ‘significant steps’.
2. Coffer Peach Tracker has LfLs up 2.5% in Oct thanks to rugby, strong half term + good food sales (vs 1.2% in Sept)
a. Tracker: Says London outperforms rest of Britain. Total sales were up 6.1% (2.5% LfL) on back of new openings.
b. Tracker ‘managed pubs overall enjoyed a 2.7% LFL increase, with London contributing most of that with a 6.2% jump’.
c. Tracker says ‘drink-led pubs did a bit better than food-led establishments, but even then both drink and food sales benefitted.’
d. Tracker has casual diners doing less well, LfLs +2.2% with London flate + rest of country up by 3.4%.
3. SAB numbers out today but their importance has been diminished by events
4. Young’s has reported an 8.3% rise in revenue for the 26 weeks to 28 September ‘despite tough comparatives’
5. The Restaurant Group has commented on trading for the 45 weeks to 8 November, with LfL sales up 2% in the period.
6. Conviviality Retail saw revenue grow 4.4% in the 27 weeks to 1 November ex-sales from recently-acquired Matthew Clarke
7. Budget hotels make up half of the UK’s development pipeline for the first time and the trend looks set to continue
8. Park Resorts has merged with Parkdean Holidays and the new company, Parkdean Resorts, will be worth £960m.
9. UK unemployment rate dropped to a seven-year low of 5.3% in the three months to September, falling by 103,000 people to 1.75m
10. ONS figures also show the total earnings of workers, including bonuses, in the three months to September was up 3% y-o-y