Langton Capital – 2015-11-26 – Daily Wrap: Marston’s meeting, London sales, petrol prices & 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:
Marston’s FY comment:
• See also comments below.
• Bottom line is that MARS is growing sales > industry & raising margins.
• Estate is in better shape, shares on PER of <12x and yield 4.5%.
Marston’s FY Analysts’ Meeting:
• Following the announcement of its full year numbers for the 52wks to 3 October earlier this morning, Marston’s hosted a meeting for analysts and our comments are set out below:
• Financial Results:
• Group average EBITDA per pub is up to £100k. This is +15% in 2015 and +40% over two years
• Reiterates it is beating the market on LfL sales but is raising margins
• Profits have risen against a £4m disposal headwind and £2m pension hit
• Rents are rising across leased units (+2.5% in FY15)
• Beer had a strong year, innovation continues. Some 80% of beer is now sold outside the group + 70% of beer sold is premium product
• Cost outlook is benign, 1.5% to 2% except for labour, which could rise by c4%
• The group would not be drawn on 8wk FY16 LfL sales saying that the next 5wks are much more important.
• Cash flow, balance sheet, new openings, debt etc.:
• Property revaluation has led to a £54m net estate uplift
• Group is comfortable with debt levels but ratios will improve as profits come in, capex falls & dividend growth (slightly) lags EPS
• Marston’s strategic issues:
• MARS’ key areas are 1) new build, 2) exploiting its broad range of offer types, 3) the move to controlling units (via franchise, new build) and 4) continued (though now modest) disposals
• Anecdotally MARS is now confident enough to commission a new-build franchise unit and it mentioned one in Hull that turns over c£25k per week. Destination & Premium pubs now contribute >50% profits
• New build costs have perhaps edged up by perhaps £100k to £200k per site. The group has visibility on c100% of the 20 planned for FY16 and some visibility on the following 2yrs
• Both MAB and GNK are less active in the new build market
• Other areas. Regarding accommodation, MARS now operates some 800 rooms. Thwaites has been integrated well. It is building 5 lodges FY16 vs 3 in FY15.
• In FY16, capex will fall a little and Leased will complete virtually all of its disposals
• NLW. MARS points out that only the move to 920p was ‘new news’ as far as it was concerned. This will cost c£2m p.a. The reduction in Corporation Tax, however, will save £1m.
• The group may be in the market ‘for another Thwaites’. It has the distribution to make the most of further purchases
• The group is working on ‘The Pub of the Future’ & may share its findings (further food, enthusing a younger market etc.) via a CM Day next year
• Re Market Rent Only leases, the group has offered FoT rents for a number of years. It has not had much take-up and it does not expect a short term change
• Industry-wide strategic issues:
• Supply of pubs & casual dining outlets in some ‘hotspots’ is becoming a problem. MARS is operating in less pressured areas
• M&B commented on Tuesday that the market for new entrants was frothy. It said it was in part reminiscent of 1999-2000 (a period that did not end well re specific co failures, industry margins etc.)
• MARS turned down the opportunity to operate in West Quay Southampton but did open in Knutsford
• National Living Wage & apprenticeship levies will impact all players – see above for Marston’s comments
• The consumer outlook is generally positive but pricing power is weak. Some operators will attempt to pass on some of the NLW costs in FY16
• Langton Comment: Marston’s has reassured that it is now through the period of dilution caused by the disposal of its bottom-end units and that it should now be in a position to deliver double-digit growth going forward.
• The numbers speak for themselves in that MARS has reported industry-beating LfL sales whilst increasing its margins.
• In future, we should expect more of the same. The group will push new build & continue to reshape its portfolio of pubs via selected disposals and the occasional transfer of units from one business model to another.
• And the beer business seems to be moving from strength to strength. The group sells 80% of its product to third parties, 70% of which is premium ale. It has around 3,500 free trade customers and perhaps 8,000 national accounts.
• We believe that current year forecasts (of around 13.75p in earnings with a dividend of c7.35p) are secure. At this level, the group’s shares are therefore trading on a PER of <12x and offer a yield of 4.5%. We would suggest that this fails to fully value the group’s expansionary prospects and represents an attractive entry-level for would-be holders.
London spending, Greene King Tracker etc.:
• Our main problems with London are 1) occupancy costs and 2) new capacity being put on, particularly in casual dining.
• The above feeds through to margins (i.e. costs are higher) and lower LfLs (because total sales may edge up but there are more operators trying to scoff the cake.
• However, Greene King’s latest Tracker suggests that, whilst leisure spending y-o-y is still up in London, it is down month on month.
• It says ‘changes in total leisure spending month-on-month were very slight, with the greatest reductions in leisure spending among households in London and the South East where total spend fell £7 (3%).’
• It adds ‘among households in London and the South East, spend on Eating Out fell by £11 (11%) month-on-month, among households elsewhere the decline was limited, falling by just £1 (1%) against September.’
• This may be short-lived but it will make unpleasant reading in the Capital as the number of leisure outlets has been increasing and, if the total spend is actually down (even if only m-o-m) then this will be doubly painful.
Random information, hopefully not all of it useless:
• Autumn Statement broadly welcomed. But give us time, we’ll find something to moan about.
• Osborne brings home reality. If benefit recipients aren’t going to foot the bill then business (apprenticeship levy etc.) and rate payers (brakes coming of on rates) will have to do so.
• Fact of the matter is that there’s a bill to be paid, it wasn’t going to pay itself & a payroll tax, though it’s an irritant for many, is at least paid by Starbucks, Google and other foot-draggers.
• Sterling down against Euro and US$ at a time during which the oil price has been firming. Two or three days don’t make a trend but there is a little upward pressure on the price of petrol (in Sterling) developing.
We’re so 21st Century, this morning’s Tweets (diff. font size denotes importance):
1. Marston’s FY numbers. Slightly ahead of forecasts, show group back in growth, achieves LfL sales increases whilst driving margin.
a. MARS FY: Sees ‘profit growth in all trading segments despite disposals’, debt/EBITDA down, returns on new build good, FY16 started well.
b. MARS FY: Opens 25 pubs in year, average profit per pub now £100k (managed + leased) +40% in 2yrs. Shows impact of disposals + new build.
c. MARS FY: ‘we remain confident of achieving our targets for the full financial year’. Sees impact of NLW as ‘moderate’.
d. MARS FY: New build is ‘key growth driver’ (134 units added since 2009) but quality of entire estate better overall.
e. MARS FY: ‘3yr transformation of our pub portfolio towards an optimised estate is now largely complete.’ Double digit growth cemented in.
f. MARS FY: Will open at least 20 new pubs this year. Work on disposals now complete. PER <12x with 4.6% yield.
2. TCG receives good press, shares strong despite ‘one of the most difficult years in my 30yrs experience in leisure travel’.
3. Autumn Statement broadly welcomed. Small business rates relief extended, apprentice levy to impact bigger firms.
4. BHA report on Britain’s Food Service industry says such businesses serve >4m customers per day
5. Greene King Tracker (Oct) provides ‘reason to be upbeat about the prospects of the leisure sector’ & show increases across the board.
a. GNK Tracker: Shows ‘uniform spending increases across Drinking Out, Eating Out and Other Leisure.’
b. GNK Tracker: Re Xmas says ‘there is much evidence that this positivity will continue into the Christmas period’.
c. GNK Tracker: Says in Oct average British household spent £206 on out of home leisure up some £18 (9%) year-on-year but down £3 m-o-m
d. GNK Tracker: Says spending on Other Leisure was strongest across categories at +13% y-o-y. Eating out remains largest category.
e. GNK Tracker says ‘y-o-y increases across the board are a compelling indicator of the economy’s strength’ but does point to m-o-m falls.
f. GNK Tracker reports ‘household spending on eating out in London fell by 11% in Oct vs a 4% decline nationally’. Says falls not evenly spread.
6. The value of the global luxury spirits market will nearly double in the decade to 2020, according to Euromonitor figures.
7. Chancellor George Osborne surprises by dropping plans to scrap some benefits for low-earners. Keeps cash in pockets (for the time being)