Langton Capital – 2015-12-02 – Daily Wrap: Greene King, rugby, Sharm, oil 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:
Greene King H1 numbers:
• See also meeting notes below.
• Having risen sharply over the last few trading sessions before its H1 numbers today, Greene King shares may have given a bit back today – but that was not to be
• The shares are sharply higher in morning trading on a number of factors
• GNK has come up with the goods and has suggested that it will continue to do so in that synergy targets have been raised (re Spirit) and the integration is said to be ahead of plan
• Furthermore, the group says that the economy feels a little better and, despite every pound remaining a prisoner as far as the consumer if concerned, trading is in line with expectations
• Interestingly, if Langton’s quadratic equations are working properly, deriving the last six weeks’ LfLs from the w18 and w24 numbers given suggests that the group should have been up by more than 4% over the September and H1 October (Rugby World Cup) period
• Observers may choose to believe that this means upgrades are more likely than downgrades
• Industry-wide, there may be a willingness to afford a slightly higher rating to leisure retailing in general
• MARS’ shares rose last week and GNK is strong today but, if true, this would leave MAB as something of an outlier
• It is rarely advisable to try to catch a falling knife but, at some point, it is likely that the market will look on MAB more favourably
Greene King H1 numbers, analysts’ meeting:
• Following the announcement of its H1 numbers this morning, Greene King hosted a meeting for analysts and our comments are set out below:
• Current trading, trends etc.:
• October sales were good, helped by the rugby
• Greene King’s underlying business recorded a ‘modest decline’ in margins – say 19.7% to 19.5%
• The integration of Spirit will lead to a lowering of margin due to the higher number of leasehold pubs in the former’s estate
• The NLW will cost a net £2m in FY16, £4m in FY17 and £6m in FY18. The group declined to comment on the gross cost
• The group is not factoring in further price increases
• The trading environment is ‘healthier’ but consumers are still very careful when it comes to parting with their money
• The group says that Value, Loyalty and Quality are more important than ever
• All income types are in LfL growth. The group will not specify but it says that accommodation is growing most rapidly
• New capacity is something of an issue – but the group ‘has seen it before, particularly in 2006 and 2007’
• The group does not believe that the MRO will materially impact the business
• Cash, debt, balance sheet & other:
• Greene King disposed of 18 pubs in H1 and it will sell a further 20 to 30 in H2
• It will sell around 90 further tenanted outlets over the next three years.
• Spirit’s cost of capital will be reduced – but this will happen over time, as its debt is rolled over
• Spirit update:
• Greene King reports that it will cut the number of brands that it operates from around 20 to 10, of which 5 will be growth brands – Hungry Horse, Flaming Grill, Farmhouse Inns, Chef & Brewer and Metropolitan
• Synergy benefits should now be £35m
• The integration will ‘play over five years or so’
• Langton Comment: Greene King’s shares have moved strongly higher on the back of this morning’s H1 numbers such that they have now advanced by around 20% over the last 3wks.
• The group’s shares are now trading on a current year PER of around 14.6x EPS and offer a yield of around 3.6%.
• GNK has been able to reassure that October was very good and that current trading is in line with expectations.
• The integration of Spirit is ahead of plan suggesting that upgrades are more likely than downgrades going forward.
• Whilst we believe that there may be better value elsewhere and see today’s share price move as a little on the strong side, we recognise the appeal that relatively certain (integration-driven) growth offers shareholders.
Flying to Egypt:
• It is hardly surprising that Monarch has extended its ban on flying to Sharm into the middle of January
• We believe that other operators are likely to follow suit and believe that further postponements are likely
• In the background, operators will be busily putting on capacity to alternate destinations and, once this programme is in place, Sharm may struggle to regain custom, particularly in the short term
• This will be more of an issue for operators with assets on the ground than it will be for tour operators as the latter, at a price, have a significant number of destinations from which to choose
Random information, hopefully not all of it useless:
• Sterling up a little vs Euro & US$ yesterday. Oil price down a little. All good.
• Leisure stocks amongst the winners yesterday (TUI & WTB up) and today (Greene King) on subdued oil price, lower costs, decent domestic growth etc.
• Evolution remains a feature, Burger King serving alcohol.
We’re so 21st Century, this morning’s Tweets (diff. font size denotes importance):
1. GNK H1: Sales (incl. SPRT) +49.2% at £917.7m. Op. profit +46.1%, PBT is £121.3m (+46.9%) + adj. EPS +15.4% at 34.5p. DPS + 6.3% to 8.45p.
a. GNK H1: GNK LfL sales are +2.0% in the period. Spirit LfL sales are +1.2%, Pub Partners net income is +2.4% and brewing is +3.6%.
b. GNK H1: Regarding H2 to date, the group says that sales trends have been ‘broadly similar’. ROCE up, sold 12 sites + 6 sites for CMA
c. GNK H1: Says ‘consumer environment continued to improve during the first half.’ Says confidence not fully reflected in UK market
d. GNK H1: The group says there is ‘intense competition for every pound in the consumer pocket.’ Integration benefits ahead of plan
e. GNK H1: Re brand optimisation, it says ‘retail growth brands & investment programme identified to deliver long-term growth’.
f. GNK H1: Whilst not expensive, GNK’s shares therefore trade at a premium to those of both Marston’s and Mitchells & Butlers.
g. GNK H1: There’s a lot of choice in the pubs sub-sector. Investors may consider there to be better value elsewhere.
2. Research commissioned by AB Inbev suggests that as many as one million UK households will buy beer online in December
3. Burger King is allowed to serve alcoholic drinks in its Bury St Edmunds restaurant from 10am to 11pm seven days a week
4. China is set to outgrow the US and UK to become Chile’s largest wine maker within months, according the Asia director at Wines of Chile
5. Bishopthorpe Road in York has been named Britain’s best high street in a competition run by the government’s Future High Streets Forum
6. Monarch has extended its flight cancellations to Sharm el Sheikh to Jan 6 + offers flights to other destinations such as Cyprus + Spain.
7. Original Bowling co approved by CMA to complete purchase of Bowlplex. Deal will complete next week, add 11 sites to make 54 in total
8. Macau Casino revenue fell by 32.2% in Nov vs year ago post crackdown on corruption, incentives to bet etc
9. UK manufacturing growth slowed in Nov as PMI fell to 52.7 from 16mth high of 55.2 in Oct. Any number > 50.0 implies growth