Langton Capital – 2015-11-17 – Enterprise Inns, Marriott, EasyJet, Paddy P & other:
A Day in the Life:
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Find previous emails at http://www.langtoncapital.co.uk/daily-notes/
I know cyber-security is a real problem but just how are you meant to keep a handle on your passwords these days?
I mean some sites require you to change your password every month or two and then they won’t let you use a password that you’ve used before. That means that you can’t use one of your two or three favourites, football team, dog’s name, middle name or whatever other cryptic and high-security string of letters and numbers you’ve used in the past such that you’ll end up, over time, with a presumably infinite number of words, digits or the like to remember.
And how’s that going to work, are you going to carry a list of your passwords in your wallet? On to the news:
Enterprise Inns – FY Numbers:
FY Results: Year to 30 Sept 2015:
Enterprise has today released full year results for the year to 30 September 2015 and our comments are set out below:
The group has achieved LfL income growth of 0.8% in the year as a whole and +1.0% in the fourth quarter
Revenue is £625m (2014: £632m) and the group has generated pre-exceptional EBITDA of £296m (2014: £302m).
Pre-exceptional PBT was £122m against £121m last year
Adjusted EPS is up 2.1% at 19.4p (2014: 19.0p) and there is no dividend.
Operational & Strategic Highlights:
Enterprise reports ‘the execution of our strategic plan for the business is on track.’
It says ‘delivery of this plan will ensure we can best serve our publicans and communities whilst providing a clear path to maximising shareholder value through the optimisation of returns from every asset within our estate.’
The plan involves:
Creating a re-invigorated tied tenanted business. Here business failures are down a further 18%
Building a managed business. The group now has 35 managed units (as at 30 September) including a first ‘managed expert’ pub
Creating a quality commercial property portfolio – now 213 sites
Investing and disposing where appropriate. Some £69 million (2014: £66 million) has been invested in the estate and net proceeds from the disposal of primarily under-performing assets was £75 million
Balance sheet, capex & other:
Enterprise says ‘our balance sheet remains strong with a total net asset value of £1.35 billion (2014: £1.40 billion).’
It says ‘group net debt includes the most significant liabilities in the balance sheet and has reduced to £2.3 billion (2014: £2.4 billion) during the year.’
The group points out that it has a balance sheet net asset value of 270p per share
Enterprise says ‘we have a long-term, secure, flexible and tax efficient financing structure comprising bank borrowings, securitised notes and corporate bonds.’
It adds ‘we are a cash generative business and have used excess cash flows to reduce debt.’
CEO Simon Townsend ‘we are pleased to report further operational progress and a second, successive full year of like-for-like growth in net income across our leased, tenanted and free-of-tie estate.’
He says ‘trading in the first six weeks of the new financial year has been in line with our expectations and continues to maintain our growth momentum.’
Mr Townsend adds ‘while the market in which our pubs operate remains highly competitive, and as we prepare for the implementation of new legislation in 2016, we are encouraged by the continuing momentum of our business, reflecting the exceptional efforts of our publicans and the strength of our relationships with them.’
He says ‘the implementation of our strategic plan is on track, providing us with greater flexibility with which to optimise returns from each of our assets and deliver greater value to our shareholders’ and adds ‘our managed house estate is being successfully expanded and our commercial property portfolio continues to grow in both scale and quality in line with our plans.’
Langton Comment: Enterprise has reassured that its transformation, though clearly still not without risk, is on track.
It’s leased and tenanted business is stable, it now has a working managed operation, it has identified the first units to be operated in its commercial property division and has continued to make capital investments and to dispose of pubs.
Trading is a little slower in H2 than H1 but this appears to be confined to Q3 with Q4 amongst the best in the year.
Current trading is in line and, as the group is pencilled in to earn around 19p in the current year, the group’s shares trade on an undemanding 5x earnings.
Of course debt is still high and there is no dividend. The former is reducing and a move re the latter would be welcomed by the market.
The group’s shares have fallen by around 30% over the last 6mths or so and this looks a little over-done. Whilst the MRO remains unclear as to the detail and Enterprise still has to execute on what appears to be a sensible growth strategy, its shares look relatively cheap.
Pub, Restaurant & Drinks Producer News:
• The Metropolitan Police has urged pubs to review security arrangements in the aftermath of the Paris terror attacks, citing a ‘severe’ risk of further incidents. Police forces across the country are currently examining their policing responses and adapting them where appropriate.
• Corona and Modelo beer brewer Constellation Brands is buying Ballast Point Brewing & Spirits for c$1bn to gain a foothold in the craft beer market. Ballast, whose brands include Sculpin IPA and Grapefruit Sculpin IPA, is expected to have net sales of about $115 million this year.
• Homeware retailer Robert Dyas is selling ‘morning-after’ breathalysers for those who like to enjoy themselves over the festive period. The introduction of the product coincides with the Department for Transport’s annual anti drink-driving campaign.
Travel & Hotels:
• EasyJet has reported a record PBT of £686m for the FY to 30 September 2015, up 18.1% year-on-year, on total revenue up 3.5% to £4.69bn. The budget airline group grew its passenger numbers by 6% to 68.6 million, with a record load factor in August of 94.4% and an annual load factor of 91.5%.
• EZJ: The group has an additional 36 aircraft set to be delivered between 2018 and 2021 as a result of its 2013 agreement with Airbus, which should give EasyJet an expected cost saving of £27m by 2021. The budget carrier said that it stands to gain long-term from strong growth in its core market of short haul European flights ‘as people take more holidays and city breaks’, adding that this market has grown over the last ten years and expanded by 5% in the last year alone.
• EZJ: A significant driver of the growth has been lower fuel costs and the group said that, based on current market fuel prices, ‘we expect the unit fuel4 bill to decline by between £140 million and £160 million during the year to 30 September 2016.’
• EZJ: Commenting on the results, Carolyn McCall, easyJet Chief Executive said: ‘Our outlook for the longer term is positive. We expect demand in our markets to be sustained and for easyJet to continue to be a winner in its markets. We will see passenger growth of 7% a year, sustaining margins through rigorous cost control and the benefit of fleet up-gauging, resulting in positive profit momentum.’
• Marriott International has confirmed the $12.2bn takeover of Starwood Hotels & Resorts, which will create the world’s largest hotel company. The enlarged group will have more than 5,500 hotels, 1.1 million rooms across 30 brands around the world, and will generate annual revenue of some $2.7bn. Marriott said: ‘The transaction combines Starwood’s leading lifestyle brands and international footprint with Marriott’s strong presence in the luxury and select-service tiers, as well as the convention and resort segment, creating a more comprehensive portfolio. The merged company will offer broader choice for guests, greater opportunities for associates and should unlock additional value for Marriott and Starwood shareholders.’
• Marriott to buy Starwood, create largest hotel co in world. Combined co would have 1.1m rooms in 5,500 hotels over 100 countries.
• Marriott/Starwood: Companies announce they have ‘approved a definitive merger agreement under which the companies will create the world’s largest hotel company.’ They say ‘the transaction combines Starwood’s leading lifestyle brands and international footprint with Marriott’s strong presence in the luxury and select-service tiers, as well as the convention and resort segment, creating a more comprehensive portfolio.’ The groups add ‘the merged company will offer broader choice for guests, greater opportunities for associates and should unlock additional value for Marriott and Starwood shareholders.’
• Marriott/Starwood: Starwood shareholders to receive 0.92 Marriott shares per share. Total consideration c$12.2bn. Groups says they will be able to ‘deliver at least $200 million in annual cost savings in the second full year after closing. This will be accomplished by leveraging operating and G&A efficiencies.’
• Marriott/Starwood: The former’s CEO Arne Sorenson says ‘the driving force behind this transaction is growth. This is an opportunity to create value by combining the distribution and strengths of Marriott and Starwood, enhancing our competitiveness in a quickly evolving marketplace. This greater scale should offer a wider choice of brands to consumers, improve economics to owners and franchisees, increase unit growth and enhance long-term value to shareholders. Today is the start of an incredible journey for our two companies.’ He adds ‘we expect to benefit from the best talent from both companies as we position ourselves for the future. I know we’ll do great things together as The World’s Favorite Travel Company.’
• Marriott/Starwood: Press comment on the deal revolves around grandeur and integration risks. Marriott seems to have beaten Hyatt and Hilton in what may have become a fully-valued auction.
• Eurotunnel has reminded investors that any Brexit could see the reintroduction of the ‘booze cruise’.
• Paddy Power has reported in line trading for the period from 1 July to 15 November, with ‘unfavourable’ sports results offset by underlying growth. The group expects full year 2015 operating profit to be a mid to high single digit percentage increase above 2014 but there is no new news on its merger with Betfair. The betting group released its new, faster native iOS app, with a similar Android update expected next month.
Finance & Markets:
• Eurostat has revised Eurozone inflation up to 0.1% for October, with rising prices in vegetables, restaurants and fruit offsetting falling fuel.
• World markets: UK + European markets up yesterday. US up later in the day + Far East higher in Tues trade
• Oil price up a shade on Paris attacks at around $44.60 per barrel
• Eurozone CPI +0.1% in Oct, in line with expectations
A few thoughts on Majestic Wine’s strategic update today – shares started the day down and are now up, so investors are continuing to assess the situation.
• The Majestic hockeystick recovery (aka Things Will Get Worse Before They Get Better): Adjusted H1 profit is down 1% to £8.4m and basic EPS has fallen 72% to 2.7p a share (due to the group’s reported tax rate being impacted by a high number of disallowable non-cash expenses). Costs are set to increase and profit will decrease as MJW invests in its new three year strategy (which will include £4m of opex, £1.5m of one-off costs, £4m of capex in 2016).
• MJW’s three year strategy being: A basic reappraisal of the group’s three core businesses (MJW Retail, MJW Commercial, and Lay & Wheeler), with the end goal set as the introduction of a progressive dividend by 2018 and £500m in sales by 2019. The group wants to do this by:
Improving wine availability, improving IT systems, streamlining multichannel proposition and making its range of wines more exciting ranges.
Reducing staff turnover in stores, which has risen from 14% in 2012 to 23% in 2015, and arresting the mature store sales decline which has been linked to this turnover. Recent signs show management retention has started to improve.
Scaling back store openings from 330 to 230 and using cash to improve existing estate. CEO Gormley wants to redesign and refit mature stores to encourage sales growth. Store expansion capex has been halved from 2013/14 from £12m to c£6m, with the rest going on existing stores.
• ‘It’s not rocket science’ says the management, and we’re minded to agree. Implementation is another thing altogether, however, and this is where the group’s enhanced Board should reassure investors. CEO Rowan Gormley sounded unfazed by the task during today’s analyst meeting. These are tried and tested turnaround tactics.
• Valuation: MJW’s shares are at near 5 year lows of c309p and trade on a PER of 12.9 rising to 16.4 next year. The group is cash generative and is making all the right noises re. investment in estate, multichannel efficiencies, improved craft beer and spirits ranges etc. The company is also well-liked – shares have rallied post-meeting and are now up. The group’s ‘simple’ repair and maintenance spend in its shops could prove good bang for buck, alongside more energetic marketing activities.
• However: As always, there is execution risk with a new strategy although the revamped board appears up for the task. The group’s debt has grown from £11m to £25m and current lease adjusted net debt is 3.5 times EBITDAR. In the short-term, shares could well rally following a recent slump however the long-term threat posed by potential supermarket price reductions etc. may be understated – not much protects MJW from Lidl, Aldi, SBRY et al should they drill down wine prices, and there is also the risk of larger online players such as Amazon entering the fray. Jack Brumby – firstname.lastname@example.org
Retail Roundup from Nick Bubb:
Kantar Watch: The latest monthly UK Grocery market share figures (for the 4 weeks and the 12 weeks to Nov 8th) are published today by both Kantar and Nielsen and Kantar is to beat its great rival to the draw this month, by leap-frogging them to announce the results at 8am. 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:
Terrorism & leisure travel:
• We consider it an awful shame that we have to comment again that terrorism is not good for leisure travel.
• I mean how could it be?
• Paris, specifically, is a short-break market but events such as those of Friday night are likely to dissuade a number of would-be travellers against taking leisure breaks of any description.
• And terrorism can lead to a wider malaise.
• The reaction of markets in Europe today would suggest that there is little fear that the attacks could trigger a recession but, it should be said, anything (such as a closely-fought election or a terrorist incident) that leads to people sitting in front of a TV and not spending runs the risk of dampening consumption.
• Indeed many scholars now consider Alan Greenspan’s series of cuts that brought the Fed Funds rate down to 1% in the wake of the 9-11 attacks 1) headed off a recession but 2) fuelled the resulting housing boom.
• We will have a number of hopefully informed and informative updates on the travel market over the next few weeks. EasyJet updates tomorrow and Dart Group (Jet2) reports on Thursday. Thomas Cook then reports full year numbers on 25 Nov and TUI follows suit on 10 Dec.
• The Sharm disruption is likely to cause many if not most airlines extra costs easily into seven figures and comments as to the would-be traveller’s mood post the Paris atrocities would be helpful.
Random information, hopefully not all of it useless (re most leisure operators etc.):
• Commodity costs all lower – except El Nino impacted softs such as sugar, cocoa and orange juice.
• Sterling up against the US$ over Friday & up against the Euro today. Helpful for importers, commodity users & holidaymakers etc.
• Markets last week pretty tough. Miners & oils down more than 7% across both sectors. Supermarkets down on back of Sainsbury numbers. SBRY finished the week down 12%, OCDO down 11%, MRW down 10% and TSCO, he of the ‘lethal cocktail of costs’ fame, ‘outperforming’ at down 9%.
• The poor performances of share prices across the UK food retailing market last week puts Premier Foods’ performance in an even more favourable light.
• Friday saw a bit of a dead cat bounce across stocks with dreadful short & medium term performance. Anglo American, Pearson & Drax amongst the one-day winners but all down materially over last 6mths or so.
• Let’s not take our eyes off the reporting schedule. There are a number of profit warnings out there. The market may, just may, be a little too optimistic on earnings. Not too surprising, really, as Japan is back in recession and Eurozone growth is weak. Even cheerful Vince (Cable) is suggesting that we could have something of a rocky road ahead.
• The advent of Amazon Pantry suggests that the gas is being turned up further on the delivery market. Some are playing the very long game. I will be interesting to see who, if any, operators can make money in the short term.