A Day in the Life:

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Find previous emails at http://www.langtoncapital.co.uk/daily-notes/ 

Dreams are weird, aren’t they? I mean last night, I dreamt that I bought a horse.

And anyone who knows me would immediately recognise that as an improbable event as I struggle to keep, let alone find any affection for, gerbils and what’s a horse if not an overgrown gerbil after all?

But I bought the thing and then forgot about it. I was told that it needed feeding, that all seemed like too much bother and I sold it. I was in for £5,500 (and I have no idea if that’s a good price for a horse) and out within 24hrs for £2,500 which, even by Langton’s standards, is not a particularly good investment.

And then I woke up, horseless both in my dream and in reality armed with some ammunition to use against our now-nine-year-old should she decide that she wants a pony at any time in the near future. I can tell her ‘I had a horse once, and it’s not all it’s cracked up to be’. On to the news:

Punch Taverns – Full Year Results:

FY Results:

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.

The News:

Pub, Restaurant & Drinks Producer News:

• M+C reports tenant organisations to be asking for more time to respond to the pubs code consultation as they will be busy pre-Xmas. The current deadline is the 14 December.

• General feeling that pub code rules being watered down. Tenant organisations complaining, asset owners more sanguine. PMA reports BBPA CEO Brigid Simmonds as saying meetings ‘productive’ whilst PAS saying it will resist attempts to ‘rail road tenants into consulting on a deeply flawed document’ and Fair Pint saying it was concerned that the consultation failed to honour the letter and spirit of the Small Business, Enterprise and Employment act.

• Punch numbers met with relief + Press generally supportive, focussing on re-fi and underlying profits, new operating model etc.

• Nichols has said that it wished to double the volume of its drinks consumed out of home by 2020.

• Coaching Inn Group is investing £100,000 into a collaboration with fresh coffee company Bewley’s and initial results are showing a 50% increase in sales. Kevin Charity, Managing Director of The Coaching Inn Group, said: ‘Providing a high quality full day offer to increase local as well as visitor and business trade, is a key part of our development strategy for all our hotels and there is a strong and still growing demand for great coffee as part of that offer. We’re looking forward to working with Bewley’s as we continue to roll out the new-look coffeehouses across our estate.’

• Just Eat shareholder Index Ventures has sold 25m shares in the group at 440p per share.

• Thwaites has enjoyed an ‘excellent’ first half of the year to the end of September, generating turnover of £45m. The group made £71.1m in the same period last year but has since sold its beer operation to Marston’s. The company also notes the ‘pleasing growth’ in the provincial hotel market, adding: ‘prospects for the second half seem favourable and the early indications are positive.’

• Bibendum Wine CEO Michael Saunders has predicted more ‘seismic’ changes to come in the fragmented UK wine sector following a wave of consolidation.

• Tim Bacon has become executive chairman of Living Ventures and long-term business partner Jeremy Roberts is now group CEO, writes M&C. Bacon, who has been chief executive since the group’s inception in 1999, said: ‘Nothing much changes, I will still be leading from the front. Fundamentally the new structure gives me more time to think and develop the business by passing on a whole load of work from my desk to Jeremy’s and Paul’s.’

• Conviviality’s first half, in which profit rose 38% thanks largely to its acquisition of Matthew Clarke, has been hailed as ‘transformational’ by its CEO. The group has now purchased a majority stake in 13-year old London-based bar and events company Peppermint, which services more than 40 events annually. The Bargain Booze owner revealed that Matthew Clark had been in discussions with Peppermint before it was acquired by the company, adding that the purchase will allow it to provide ‘a new generation of choice alongside brand investment, adding value to clients through multi-channel sponsorship’.

• M+C reports BBPA CEO Brigid Simmonds as saying many MPs now regretted voting for the MRO. She maintained that the industry had made significant improvements under self-regulation and told MP Greg Mulholland ‘you simply have not understood what we’ve been doing over the past couple of years. We’re not looking at the past-we’ve never sat here and said we were wonderful but as an industry we have moved on in the right way and the last thing we need is statutory legislation.’

• Castle Rock Brewery has opened its biggest pub, The Embankment, former home of Boots Social Club at Trent Bridge, Notts.

• China’s Singles Day shopping event finally saw Alibaba Group register total sales of US$14.3bn in 24 hours

Travel & Hotels:

• All Leisure is proposing to sell + leaseback the Hebridean Princess cruise vessel to private investors led by chairman Roger Allard. Group says ‘the Hebridean Princess vessel is a five star cruise vessel which can carry 50 passengers. Cruises typically operate around the west coast of Scotland and the Outer Isles, occasionally visiting Northern Ireland, Norway and the Channel Islands.’ It says ‘the Independent Directors believe that the operations and performance of this division will not be affected by the Proposed Transaction, and also note that all scheduled cruises of the division are expected to go ahead as planned.’

• All Leisure to receive £2.9m for Hebridean Princess + lease back for £500k p.a. to end-Dec 2023. The Hebridean Island Cruises division contributed approximately £2.1 million to Group net profit for the year ended 31 October 2014 and ‘had a net book value of approximately £1.9 million as at 30 April 2015.’ The group says ‘the proceeds of the Proposed Transaction will strengthen the Group’s balance sheet and improve liquidity’ and it adds ‘the expected date of completion for the Proposed Transaction is 30 November 2015.’

• TTG reports tour operator Flights + Fly (tragind as Cheapflights360, City Breaks + others) has ceased to trade

Other Leisure:

• Man Utd has reported revenues for the quarter to Sept up 39.3% at £123.6m. Total revenues for the year should be c£505m.

• Viacom reports weaker Q4 (end-Sept) numbers, tells analysts that it expects ad revenues to improve this quarter after 7% Q4 fall. Analysts had been looking for an 8.4% fall.

Finance & Markets:

• Greek workers have staged a general strike against recently imposed austerity measures. Transportation services have been disrupted

• B of England’s Andy Haldane has said the UK’s ‘economic aircraft appears to be losing speed on the runway’. Could lead people to believe that interest rate rises were to be postponed, would impact Sterling etc. Speaking to the TUC, Mr Haldane said ‘now more than ever in the UK, policy needs to be poised to move off either foot depending on which way the data break.’

• World markets: UK and Europe down yesterday, US down later in the day and Far East lower in Fri trade.

• Oil price markedly lower at $44.10 having been even lower at some points yesterday. Stocks deemed to be high

• Eurozone industrial production fell m-o-m in Sept by 0.3%. Observers had been expecting fall of c0.1%

Retail Roundup from Nick Bubb:

Waitrose Sales Watch: Despite Sainsbury’s gloom on Wednesday about the industry outlook,  Waitrose saw a notable spike in sales last week, with gross sales up by 5.4% overall (excluding petrol) in w/e Nov 7th, which would be c3% up LFL, thanks to strong promotional activity such as the “25% off wine” deal. Over the last 14 weeks, Waitrose sales were cumulatively 1.6% up in gross terms (c0.5% down LFL).

John Lewis Sales Watch: Over at Waitrose’s sister company, the going was much tougher last week, as we flagged on Tuesday, the weather was unhelpfully warm for selling Autumn Fashion and the comp was quite tough (there was a cold snap in early November last year) and so November got off to a bad start, as w/e Nov 7th saw gross sales down by 0.4% (down by c2% LFL, ex the impact of the new Birmingham store etc), despite “unprecedented demand for telescopes”, after the launch of the new John Lewis Christmas TV advert!

BDO High Street Sales Tracker: this weekly High Street sales index of medium-sized Non-Food chains organised by the accountants BDO is a good guide to underlying Fashion store trading momentum, even though it still excludes Online sales. Fashion LFL sales have been poor in recent weeks, despite weak comps, and BDO has reported today that last week, w/e Nov 8th, saw weak  trading, with overall Fashion store LFL sales down by as much as 6.6% (despite the fact that this week last year saw Fashion LFL sales down by 3.6%). Total store LFL sales were down by 5.1% (including some Lifestyle and Homewares retailers) and overall Non-Store/Online sales were notably sluggish, up by just 5.0%.

Trade Press (1):
The front page story of “Retail Week” magazine today is headlined “John Lewis goes Dutch with de Bijenkorf”, flagging that John Lewis has picked the Netherlands as the destination for its first physical presence in Europe, as it tests the waters ahead of further International expansion. RW also highlights that Sainsbury’s boss Mike Coupe insisted that they had “over-delivered” on its strategy (despite reporting plunging H1 profits), New Look is aiming to open up to 20 more standalone menswear stores in the next 18 months (CEO Anders Kristiansen says that the four stores already open are performing “far better than anticipated”) and SuperGroup has hired ex-Tesco executive Nick Tatum as its Global Retail Director responsible for operations and logistics. The Editor-in-Chief looks at Sainsbury in his column and thunders that
“the grocer has proven once more what a robust business it is, testament to the value of a solid strategy enacted by a strong team”.

Trade Press (2):
The main News story in Drapers magazine today is that Matalan’s UK suppliers are finding it difficult to secure credit insurance, amidst concerns over the retailer’s plummeting profits.  Drapers also flags that John Lewis has had the much the best response so far amongst the Xmas TV ads. In her column, the Editor reflects on John Lewis’s reaction to the news that Asda is pulling back from “Black Friday” this year and thunders that “Black Friday chaos could leave retailers in the red”. The feature interview is with All Saints CEO William Kim and his global ambitions for the iconic east London fashion brand. And, as this is Drapers’ first “interactive” issue, the magazine has worked with the augmented reality app Blippar to bring the special edition to life, with an extra interactive map of Birmingham’s
fashion stores and a chance to vote in the Womenswear High Street “Hit or Miss” fashion survey: more on this on Monday.

News Flow Next Week: Another busy week kicks off with the Majestic Wine interims and Strategy update on Monday. On Tuesday we get the B&M interims and the British Land interims, together with the latest Kantar and Nielsen Grocery market share data and the Asda Q3 update. Thursday brings the Mothercare interims and the Poundland interims and a Ted Baker IMS update, together with the ONS Retail Sales figures for October. Friday is FNAC’s much-postponed “put up or shut up” bid deadline for Darty. There is still no definite date for the much-awaited Arcadia finals. Nick Bubb – nicholas_bubb@hotmail.com

Thursday Wrap:

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:

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.

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.