Langton Capital – 2015-11-12 – Punch, Restaurant Group, SAB, Conviv. & other:
A Day in the Life:
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Find previous emails at http://www.langtoncapital.co.uk/daily-notes/
So Langton, being the international mega-corporation that it is, deals with its admin problems promptly and has launched a Fridge Replacement Task Force
This because our existing fridge seemed to be warming food up and adding a level of toxicity to it that would be frowned upon in the shanty towns of any self-respecting third world country and, over time, that is likely to have a deleterious effect on our output.
Hence, the task force has been convened and, in the interests of inclusiveness, it includes everyone in the firm and it will meet at 5pm down the pub every day until the matter is sorted. That could be some time. On to the news:
Punch Taverns – Full Year Results:
Punch Taverns has this morning reported full year numbers for the 52wks to 22 August 2015 and our comments are set out below:
Punch Taverns has this morning reported full year numbers for the 52wks to 22 August saying that its ‘performance [was] in line with expectations’
EBITDA was £196m million (2014: £205m) and the statutory loss is £105m. The latter is inclusive of £166m of one-off charges re refinancing & property valuations
Core LfL net income grew by 0.3% (the core estate will account for 95% of outlet in FY16)
Average EBITDA per pub is up 4% y-o-y reflecting disposals of non-core units
Balance sheet, debt etc.:
The group says ‘property estate [has been] externally valued at £2,097 million; £692 million in excess of nominal net debt’
It says nominal net debt is down by £513 million in the year to £1,406 million
This puts consolidated nominal net debt at 7.2 times EBITDA vs 9.5 times last year
The group adds that ‘post year end disposal of non-core assets (including the disposal of our 50% investment in Matthew Clark for gross proceeds of £100.7 million; and pub disposals of £53.5 million) further enhance our ability to pursue our strategic objectives.’
Strategy, development, restructuring etc.:
The group has reviewed its strategy in the light of legislative changes and says:
It will present a ‘consistent consumer offer’. That is it will improve its operations
It will offer a ‘broad range of operating models’ in response to changes re the beer tie. It has introduced three new operating formats ‘including the Retail contract, our first managed pub, and commercial free-of-tie arrangements’
The group will ‘drive operational delivery’
It will enhance the value offered through the Punch Buying Club
And it will continue releasing additional value from its property portfolio
The group says ‘in summary, our strategic plan enables us to maximise the value in our properties through a phased, lower risk approach to addressing an evolving pub market, taking greater control of the property and retail offer, without the risk of added overhead that comes with directly employing pub staff.’
CEO Duncan Garrood reports ‘since joining in June, I have undertaken a detailed review of the business and today I set out a clear plan for the future.’
He adds ‘in recent years, Punch has been at the forefront of change within the leased and tenanted pub sector’ and says ‘the conclusions announced today represent an evolution of our existing plan. It is also designed to address the many structural and regulatory changes impacting our market.’
Mr Garrood says ‘our strategy enables us to maximise the value in our properties through a phased, lower risk approach to addressing an evolving pub market, taking greater control of the property and retail offer, but without the added overhead that comes with directly employing pub staff.’
He concludes ‘we have already made significant steps towards evolving our operating model and financial position, and while we have a lot to do, we are well placed to deliver on our plan.’
Langton Comment: FY15 is to some extent historic with added value in today’s statement coming via the group’s comments on its changing business model.
Here the group, for understandable reasons, is following broadly the same course as Enterprise Inns in that it will introduce managed and retail units as well as FoT lease.
Though we still have no firm news re the FoT option that will be introduced under legislation now in its secondary phase in the House of Commons, uncertainty should begin to clear over the coming months both with regard to the legislation (exemptions for ‘significant investment’ etc.) and with regard to the corporate response.
As regards trading, this appears to have stabilised. In FY16, the group should already have benefitted from the Rugby World Cup and its estate is in a better shape than it was this time last year.
We remain of the view that shareholders’ funds are the difference between freeholds and debt. A bout of inflation, whilst this is some way off, could move this number materially and the group should also be able to de-gear under its own steam.
Whilst many will be put off by the remaining lack of clarity with regard to the MRO, we believe that this is clearing. Punch’s shares will comprise a large part of the small cap index and, as such, the upside represents a risk to those non-holders who are benchmarked against it. We would suggest that the shares are worth a look.
Pub, Restaurant & Drinks Producer News:
• Coffer Peach Tracker has LfLs up 2.5% in Oct thanks to rugby, strong half term + good food sales (vs 1.2% in Sept)
• Tracker: Says London outperforms rest of Britain. Total sales were up 6.1% (2.5% LfL) on back of new openings.
• Tracker says London LfLs +3.8% whilst sales outside M25 were +2.1%. Peter Martin comments ‘it looks like a combination of the school half-term break and the final stages of the Rugby World Cup lifted sales, with London overall benefitting most.’
• Tracker ‘managed pubs overall enjoyed a 2.7% LFL increase, with London contributing most of that with a 6.2% jump’. Peter Martin says pubs outside London were +1.6%. He says ‘much of that [the London increase] will undoubtedly be down to the rugby.’
• Tracker says ‘drink-led pubs did a bit better than food-led establishments, but even then both drink and food sales benefitted.’
• Tracker has casual diners doing less well, LfLs +2.2% with London flate + rest of country up by 3.4%. Coffer Corporate Leisure reports ‘these like for likes are exceptional, when you consider the enormous impact the Rugby World Cup has had on the eating out market. Despite very low undying inflation we are seeing eating and drinking out operators trading well and the market expanding.’ It adds ‘the next few months, as consumers enjoy the festive period, will be crucial for the leisure industry and we expect further growth on last year’s spending levels, with operators continuing to outperform inflation.’
• AB + SAB agree merger terms, offer formally launched at 4400p. Shares rise on the news but still sit at discount. AB InBev’s Carlos Brito says ‘we are excited about our agreement on the terms of a recommended acquisition of SABMiller to build the world’s first truly global brewer. We believe this combination will generate significant growth opportunities and create enhanced value to the benefit of all stakeholders.’
• SAB comments: ‘SABMiller has an unmatched footprint in fast-growing developing markets, underpinned by our portfolio of iconic national and global brands. However, AB InBev’s offer represents an attractive premium and cash return for our shareholders, and secures earlier delivery of our long-term value potential, which is why the Board of SABMiller has unanimously recommended AB InBev’s offer.’
• SAB numbers out today but their importance has been diminished by events
• UK beer sales improved 3.9% year-on-year in Q3, according to the latest BBPA figures, as the off-trade stocked up in preparation for the Rugby World Cup. BBPA CEO Brigid Simmonds commented: ‘Congratulations to Britain’s brewers on a very strong quarter of sales in what is one of the UK’s most vital manufactured goods. There is a real opportunity to build on these strong figures and secure future growth, with continued action to reduce beer duty. Despite positive action from the Government, with three, one penny duty cuts in recent years, duty still places far too great a burden on British brewers and beer drinkers when compared to our main competitors in the European Union.’
• A £9.4m rescue programme funded by some of the UK’s leading retailers has helped reduce the number of vacant shops in deprived towns. Figures released by the charity Business in the Community (BITC) claim the Healthy High Streets scheme, which launched a year ago and is backed by retailers including Boots, the Co-operative Group, Greggs and M&S, has also helped create nearly 2,000 new jobs. Towns involved in the initiative reported a 5% drop in vacant units since the start of the programme compared to a 0.3% drop elsewhere.
• Carlsberg has been criticised for its ‘grossly unfair’ new supplier terms that extends the brewer’s payment deadline to 93 days. The new terms have been slammed by the Forum of Private Business, which has added the Danish brewer to its ‘Hall of Shame’ over the extended payment deadline, which appears to be a breach of EU directives.
• The rise of fast-casual, hybrid international cuisines, the growing importance of vegetables, evolving key trading hours and new drinks are the top UK trends. The findings, from Technomic, indicates that millennials expect a higher quality and healthier fast-casual offering from the likes of Smashburger, while Korean, Mexican and Thai cuisines are just some of the styles being mixed and matched at outlets.
• British foods and locally grown vegetables now demand higher billing on menus, with main-course salads and more varied greens becoming the norm. Consumers are also less likely to stick to the three main meal times and are instead turning to formats that can integrate into their time-poor lifestyle, such as salad bars.
• Meanwhile, the desire for deeper, more complex flavour profiles is inspiring more innovative drinks, with ‘robust-flavoured cold brews’ cited as the next big thing in coffee. Housemade bitters, sour IPAs and more varied cocktails are also being provided by operators.
• Nielsen notes that millennials comprise nearly a quarter of the population who are optimistic about their financial futures and already spend c$200bn in the US. The figure will grow as the generation ages although at present millennials continue to be affected by the 2008 recession, resulting in savvy shopping habits and an unerring focus on value.
Reports from Young & Co, Restaurant Group & Conviviality.
• Young’s has reported an 8.3% rise in revenue for the 26 weeks to 28 September ‘despite tough comparatives’, driving a 10.3% growth in PBT to £20.3m. Managed house LfL revenue was up 5.5% and hotel RevPAR was up 5.6% and the group notes ‘Promising trading since the period end with managed house total sales for the first six weeks up 13.0% and 9.6% on a like-for- like basis.’
• CEO Stephen Goodyear commented on Youngs’ recent trading and outlook: ‘The second half will benefit from a full contribution from five recent acquisitions including most recently the Canonbury in Islington and the Grocer in Spitalfields Market, two scheduled new openings and the re-opening of a number of our London pubs currently under development. Momentum has continued into the autumn. Many of our pubs, in south west London in particular, have a deep rooted rugby heritage and have thrown themselves into the World Cup. Despite England’s early demise, they have generated good business from both local and visiting rugby fans alike.’
• The Restaurant Group has commented on trading for the 45 weeks to 8 November, with LfL sales up 2% in the period. The group has opened 25 restaurants in the year to date and expects to have opened 43 to 45 sites by the end of the year, adding: ‘Our pipeline of new sites is strong and we anticipate opening at least as many sites in 2016… We are confident that the business will continue to make good progress during the remainder of the year and expect to report full year results in line with market expectations.’
• Conviviality Retail saw revenue grow 4.4% in the 27 weeks to 1 November ex-sales from recently-acquired Matthew Clarke, with total revenue jumping 38% to £252m. The group says it continues to perform in line with market expectations.
• Matthew Clark supplies 17,000 hotels, bars, restaurants and venues, generating revenue of £61m from 7 October 2015 to 1 November 2015 compared to £59m in the same period last year and Conviviality notes that ‘good progress is being made with the integration of Matthew Clark and the plan to deliver synergies is on track.’
• Diana Hunter, Chief Executive Officer of Conviviality, said: ‘We have had a transformational first half of the year which culminated in the successful acquisition of Matthew Clark. It is still early days in our ownership of this business however the integration is progressing well and we are pleased to have gained such a passionate and talented team.
• ‘Our Franchisee and Retail business has also had a strong start to the year and we will continue to help our Franchisees grow their businesses while also working to attract new Franchisees to the Group.’
Travel & Hotels:
• Budget hotels make up half of the UK’s development pipeline for the first time and the trend looks set to continue. HVS chairman Russell Kett commented: ‘The low-cost budget sector continues to be popular with both leisure and corporate guests who appreciate their emphasis on the basic necessities of a decent bed, quality shower, free wifi and a TV. With the development of sub-brands such as hub by Premier Inn, the budget offer is becoming even more pared down and cost-efficient.
• ‘While the economy is now much stronger, cheaper hotel stays have become the new norm and guests are reluctant to go back to spending more. Budget hotels are popular with operators as they are cheaper to build and run. With the check-in and check-out function becoming increasingly.’
• Park Resorts has merged with Parkdean Holidays and the new company, Parkdean Resorts, will be worth £960m.
• UK airports enjoyed another record breaking month for passenger traffic in October, with Heathrow, Stansted and Manchester airports all seeing passenger numbers grow. A record 2.08 million people travelled through Manchester in October in what proved to be its busiest ever month, while Stansted reported its 19th month of growth in a row. Heathrow CEO John Holland-Kaye took the opportunity to renew calls for runway expansion.
• Poker Stars’ owner Amaya’s shares fell 28% after the group warned on profits yesterday
Finance & Markets:
• The 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 according to the ONS. There were 31.21 million people in work, 177,000 more than for the April-to-June quarter and 419,000 more than in the same period a year earlier.
• ONS figures also show the total earnings of workers, including bonuses, in the three months to September was up 3% from a year earlier.
• Mortgage lending is on an ‘upward trajectory’ following a slow start to the year as borrowers continue to benefit from low costs and rates. Mark Harris, chief executive of mortgage broker SPF Private Clients, said: ‘With summer out of the way, lenders have an eye on year-end targets, and with the Bank of England hinting that interest rates might not rise next year, there are some very competitive deals to tempt borrowers.’
• RICS has said that property will become “even more unaffordable” over next 5yrs
• World markets: UK and Europe up yesterday but US down. Far East mostly higher in Thurs trade
• Oil price markedly lower at $46.10 per barrel. Touched around $45.80 yesterday, a low since August
Langton deserves a drink…
Langton went out after work for some much-needed ‘field research’ at a couple of city centre bars the other night and was struck by the difference between the two.
This boasted a stylish assortment of characterful chairs and discreet designer lighting. Pre-booking appeared to make up a good chunk of the trade – almost all of the sleek wooden tables were reserved for meals and various parties. Knives and forks were set out in rustic containers atop each table and all the menus came on clipboards.
A Christmas tree stood proudly by the door, next to a staircase bedecked in festive fairy lights. The atmosphere was buzzing, the trendy-looking bar staff were rushed off their feet, new boys such as Meantime sat on tap and the mix of men to women was close to 50:50. Langton bought pints at £5.10 a pop and received its change in a twee little tray. It didn’t leave a tip but this was the very definition of a 2010’s City of London bar.
Wobbling over to Site #2, less than a minute’s walk away, was as close to time travelling as Langton is ever likely to get. This unit was more akin to an old-school 1980’s wet-led boozer. It was Del Boy chic, replete with resident ruffle-haired alcoholic. Unlike Site #1, the very idea of pre-booking for a quality meal felt like a concept from the future.
A lonely bartender stood behind a sticky bar with a limited selection of five or so generic drinks, of which the two good ones were off. The beers we selected were slightly cheaper, but only by 5% or so. The chairs were worn, and not in the designer way, and the clientele was almost exclusively guys (Langton settled on a not-so-scientific figure of 80% male).
The lighting was dim, but not dim enough to disguise the fact that the walls could do with another lick of paint – any capex spent on this site would most likely be catch-up spend, rather than the profit-driving kind and, as this looked to have cumulated over the years, the first few tens of thousands would go nowhere.
Langton couldn’t help but conclude these neglected, throwback units are a wasted opportunity, particularly in the Capital where skyrocketing rents mean that opportunity costs are highest.
So, go on then, have a guess – which sites are we talking about? Answers on the back of a post card… Jack Brumby – firstname.lastname@example.org
Retail Roundup from Nick Bubb:
Halfords: Today’s interims from Halfords also contain a lengthy strategy review from the new CEO Jill McDonald, which sounds remarkably like the old strategy, except with a slightly different name: “Getting Into Gear” has evolved into “Moving Up A Gear”. The big surprise is that appears to be no reference to store closures. The nub of the message is that Halfords will continue to invest to modernise the business to sustain long-term growth and profit in FY17 is expected to be broadly unchanged on FY16, “with growth thereafter”, although the target is to grow the dividend every year. Meeting 9.15am.
Sainsbury: Given the useful beat to City expectations for yesterday’s interim results from Sainsbury, it was no surprise to see the shares up c1% first thing, but as soon as the analysts meeting started at 9.30am the share price began to come under pressure and they ended the day over 7% down! The problems seemed to be the cautious H2 guidance about sales and cost growth, meaning that full-year profit forecasts didn’t move up, with the main dampener on sentiment the view from management that there is no sign of price deflation abating and that H2 LFL sales will be no better than in H1…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:
Franchise versus company operated units:
• McDonald’s has increased its re-franchising target from 3,500 restaurants to 4,000 as part of its target to become 95% franchised.
• Intercontinental Hotels and more recently a number of US restaurateurs have pushed the ‘capital-light’ model hard & have returned cash to shareholders
• Looking at the pros and cons re the franchised model, we see that it 1) allows for a capital-light structure and 2) it can therefore allow faster expansion or the return of capital to investors as units are transferred from company-owned to franchise.
• In addition 3) it involves less company risk. One may see a group owning its assets (say Whitbread with Premier Inn in Germany) in some territories but franchising them in others (for example Whitbread in India or the Gulf).
• Franchising 4) may also allow a company to expand rapidly (say KFC in China) in a territory where there may be some restrictions on foreign-ownership or assets or companies.
• But the franchised model a) can be less profitable on a unit-by-unit basis. In addition b) it involves a certain lack of or loss of control. The brand owner may ‘scrub’ its franchise list from time to time but it still runs a reputational risk that is beyond its day-to-day control.
• Hence you pays your money & you takes your choice. Many established companies have a 2/3 v 1/3 (franchised v company-owned) model in developed economies with a franchised model in developing markets.
• Others have virtually 100% franchised models – such as Dominos in the UK or Subway – with many other operators never even considering the franchised route to market – Restaurant Group, JD Wetherspoon etc.
Costs and likely future inflation:
• Tesco Dave tells us we are (or rather he is) facing a ‘lethal cocktail’ of high business rate tax and costs at a time of declining profits.
• He points 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.
• And this at a time when the industry (and leisure retailing, licensed & otherwise) has little pricing power of its own.
• So how will this end?
• Well the costs are baked in, so they’re going to happen.
• And, longer term, we can’t as a country allow all businesses to see their margins fall to such a point that they go bust hence inflation is being added as a 3yr to 5yr ingredient.
• And that serves a number of purposes.
• Politicians are rightly concerned that deflation could or would be potentially more dangerous than would rising prices and hence they would be quietly pleased if crowd-pleasing moves such as the National Living Wage were to kill off deflation before it can take a hold.
• However, if you were to stand in the Square Mile and say that inflation was a latent problem, you would be dismissed as a crank.
• Nonetheless, this may ultimately be an issue and, in that environment, heavily-indebted companies such as Punch Taverns & Premier Foods (and indeed all operators with a preponderance of freehold units) would find themselves handily positioned to prosper as their incomes would rise whilst their debt wouldn’t.
Random information, hopefully not all of it useless (re most leisure operators etc.):
• Commodity prices. Precious metals weak, non-ferrous metals weak, softs weak except for El Nino plays, sugar, cocoa and OJ.
• Sterling up v US$ and Euro. Happy days for importers of commodities, holiday makers, holiday companies etc. Not such good news for exporters.
• Premier Foods says H2 will be better than H1. And yesterday’s reported H1 was the best reported trading for a number of years.
• With the weather still a balmy 18 degrees or so outside and winter still seemingly a remote prospect, MKS is moving still further ahead of itself as it will preview its summer 2016 ranges today.