Langton Capital – 2015-12-02 – Greene King H1 numbers, evolution, leisure travel & other:
A Day in the Life:
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Another ‘only in Yorkshire’ story; so did Black Friday really drive sales?
Or did it simply move them from one day of the week to another because I think it’s the latter and that’s definitely how it worked with us.
Because take printer ink. I mean I didn’t wake up last Friday and think it’s less than a month to Christmas, it’s Black Friday, we’ve imported another strange custom from the US and, do you know what, I need more ink for the office printer.
But a certain company bombarded me with offers.
Now the price of ink is a national scandal and the company had already attracted my attention by selling reconditioned cartridges at around £30 per pop compared to the £120 that you pay for the genuine article.
And now it was offering 30% off – so I had two more – and then, on Cyber Monday (whatever that is), it moved to 50% off – so I had another two but arguably all the company had done is supply me with four cartridges at an average of £18 each when I’d been (un)happily paying £120 only a few weeks earlier. And I won’t be back for a while because, with 48,000 pages of supply under my belt, I won’t need to. On to the news.
Greene King – H1 Results:
H1 numbers – 24wks to 18 Oct 2015:
Greene King has this morning reported H1 numbers for the 24wks to 18 October (it had previously reported for the 18wks to 6 Sept) and our comments are set out below:
Greene King reports total revenues including Spirit up by 49.2% at £917.7m
Operating profit is up by 46.1% at £180.2m, PBT is £121.3m (+46.9%) and adjusted EPS is +15.4% at 34.5p
The H1 dividend has been increased by 6.3% to 8.45p.
The group reports that 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%.
All numbers (bar Spirit, which was not given) represent an uptick since week 18.
Regarding H2 to date, the group says that sales trends have been ‘broadly similar’.
Cash, debt, balance sheet & other:
Greene King its return on capital employed is up 20 basis points to 9.4%
Chairman Tim Bridge points out ‘in addition to Spirit, we continued to add new sites selectively and during the first half added ten managed sites to the existing Greene King estate.’
Re disposals, he adds ‘we continued to make strategic disposals of properties from our Pub Partners business and during the half sold a further 12 sites, including two from the Spirit tenanted and leased estate. Also, as required by the Competition and Markets Authority, we disposed of six tenanted and leased sites and ten managed sites.’
Re the trading environment, GNK says ‘the consumer environment continued to improve during the first half. However, increased consumer confidence remains to be fully reflected in the UK eating and drinking out market’.
The group says there is ‘intense competition for every pound in the consumer pocket.’
Re the balance sheet, GNK says ‘operating cash flows remained strong’ but the group saw a ‘one-off working capital outflow of c.£30m in the period relating to rent, interest costs and VAT.’
It says ‘during the period, we disposed of 31 sites, which included 16 sites sold as a condition of the CMA’s approval of the Spirit acquisition, with total cash proceeds of £39.9m.’
GNK says ‘we expect £140-£150m of core capex spend in the combined estate for the full year, including £40-£50m in the Spirit estate.’
Net debt at the half-year end ‘was £2,078.7m, an increase of £710.0m from the previous year-end, with the key movements being the £673.0m Spirit net debt on acquisition and the payment of the £43.2m special dividend to former Spirit shareholders.’
The group adds ‘at the period-end, our £460.0m revolving credit facility was £265.om drawn’ and it says ‘our overall credit metrics remain strong’
Greene King says that it has completed the acquisition of Spirit Pub Company during the period and adds that ‘integration [is] ahead of plan’
It says it would now ‘expect to outperform initial cost synergy guidance; target raised to £35m’
Re brand optimisation, it says ‘retail growth brands & investment programme identified to deliver long-term growth’. The group says ‘we anticipate there will be material benefits from the optimisation of the combined brand portfolio.’
It says ‘our vision is to operate a smaller number of brands and formats across the enlarged estate, creating a platform for long-term growth and value creation.’
GNK adds that its tenanted and leased business is now fully integrated ‘ahead of schedule’ and says that the retail business will be based in Burton
Rooney Anand, Greene King CEO says ‘it has been a strong first half, with the Greene King business strengthening and significant progress made in the Spirit integration.’
He says ‘like-for-like sales growth in Greene King Retail improved during the half and both Pub Partners and Brewing & Brands delivered profit growth and margin expansion.’
Re Spirit, he adds ‘we completed the acquisition of Spirit Pub Company and, by combining the best of both companies, made good progress in capturing value from the acquisition and creating the UK’s leading pub hospitality company.’
Overall, the CEO concludes ‘we believe we have the best portfolio of retail pub brands, the best pub assets and the most talented team which, when combined with the strong contribution from synergies and the benefits of our enlarged scale, will ensure we continue delivering value to our customers and our shareholders.’
Re current trading, the group says ‘since the period-end, we have seen broadly similar trading patterns across the business and we go into the busy and important Christmas season with deposited bookings up strongly in both Greene King Retail and Spirit Managed.’
It adds ‘we anticipate a positive outcome for the full year as we focus on growing the existing business while continuing to integrate Spirit.’
Langton Comment: Greene King’s shares have bounced markedly over the last 3wks or so from around 780p to their current 853p.
Today’s numbers should reassure re the outlook for the full year and, even at this early stage, GNK has been able to say that it should exceed its early integration targets re both speed and the magnitude of the benefits to be gleaned from the Spirit purchase.
As mentioned, numbers are now firming up for the current year and GNK looks as though it should earn around 64p in the current financial year, suggesting that the group’s shares trade on around 13.3x earnings. The group’s shares yield around 3.7%.
Whilst not expensive, GNK’s shares therefore trade at a premium to those of both Marston’s and Mitchells & Butlers.
We believe that much of the low-hanging-fruit (where modest capex led to materially better returns) has been taken at Spirit but further integration benefits including the movement of units between brands should be possible.
One of the issues in the pubs sub-sector within an extremely heterogeneous leisure sector is that investors are spoiled for choice. They may invest in:
• MAB (potential recovery – at some point, brand value, sites)
• MARS (solid, cheap, dependable & now exiting its disposal phase into a period of growth),
• JDW (class act but somewhat maverick)
• GNK (integration benefits, not quite so cheap but should benefit from an enhanced growth rate during integration)
The above is not to even mention smaller operators (FSTA, YNGA etc. or the bar companies) and it is not likely that investors will have room for all stocks.
It’s unfair perhaps to ask GNK what it is going to do for an encore but growth (from a £2.6bn market cap) could be a little slower once Spirit has been integrated. With that and the choice in investments in mind it may be that investors consider there to be better value elsewhere.
Pub, Restaurant & Drinks Producer News:
• Research commissioned by AB Inbev suggests that as many as one million UK households will buy beer online in December, up 200,000 on last year. AB Inbev e-marketing manager, Dries Mertens, added: ‘Not only is beer a popular beverage at Christmas parties, but we are seeing a growing interest in pairing beer with food – and Christmas lunch is perfect for this.’
• The ALMR has launched its annual ALMR Christie + Co Benchmarking Report survey and is calling on licensed hospitality businesses to contribute. Neil Morgan, Head of Pubs at Christie + Co said: ‘The ALMR Christie + Co Benchmarking Report is an essential tool for the sector and provides data that helps inform key decision makers including government. We would encourage as many licensed hospitality operators to participate in the survey in order to give the most robust data possible.’
• Burger King is allowed to serve alcoholic drinks in its Bury St Edmunds restaurant from 10am to 11pm seven days a week. The site is only permitted to sell one beer per adult until 9pm and no drinks are allowed outside. Burger King has more licensing applications waiting to be processed as it looks to capitalise on a trend seen in the US and internationally, but not so much in the UK.
• Beam Suntory has confirmed it will sell its sherry business to Philippines-based spirits producer Emperador in a deal worth €275m.
• 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. Wine exports from Chile to China grew at 34% in volume and 32% in value in the twelve months ending September 2015 compared to the US, which saw just a 2% rise in both volume and value.
• Channel Islands-based brewer and pub operator Liberation Group has appointed Sapient Corporate Finance to oversee a review of the group’s options. A sale process is expected to begin early next year. Liberation currently operates 75 pubs, mostly freehold, and recently acquired Butcombe Brewery in Somerset in a deal worth just under £18m, giving it a presence on the mainland.
• Bishopthorpe Road in York has been named Britain’s best high street in a competition run by the government’s Future High Streets Forum. Bishy Road Traders Association chairman Jonny Hayes said: ‘All high streets have to adapt to a changing environment – and we’ve been no different. But the traders on Bishy Road have really done their upmost to make the place a better place to live, shop and work.’
Travel & Hotels:
• Leading over 50s specialist Saga has sold Allied Healthcare to Aurelius Group for a total consideration of £19m. CEO Lance Batchelor commented: ‘Allied remains a market leader in the provision of domiciliary care to local authorities and the NHS. However, as outlined earlier this year, it does not fit with the Saga business model. I am therefore pleased to announce the successful completion of the sale process to Aurelius and I am confident this will be a good home for Allied.’
• Monarch has extended its flight cancellations to Sharm el Sheikh to January 6 and is offering flights to other destinations such as Cyprus and Spain.
• Adventure travel specialist Explore Worldwide has been sold alongside sister company Regaldive to Hotelplan UK.
• Activity resort owner Mark Warner has had a ‘resilient year’ despite terror threats, widespread migration and a faltering Greek economy. Head of sales and marketing Ben Roseveare said: ‘We will make between £100,000 and £200,000 profit, which is a similar figure to last year. Given that four of our resorts are in Greece and one in Turkey, our owners are very proud of the team’s performance. No one is running around the building high-fiving each other, but we’re in the black and that shows that customers have supported us.’
• Original Bowling co approved by CMA to complete purchase of Bowlplex. Deal will complete next week, add 11 sites to make 54 in total. CEO Steve Burns says ‘we are delighted to have been given approval to acquire 11 Bowlplex centres in locations that are an excellent addition to our existing business.’ He adds ‘we are looking forward to working closely with the Bowlplex centre management team in introducing our innovative, customer focused ways of working. We will be making significant investment in the Bowlplex estate over the next three years creating fantastic, upgraded environments under the Hollywood Bowl brand.’
• Man City parent co valued at $3bn post 13% sale to consortium of Chinese investors for £265m
• Macau Casino revenue fell by 32.2% in Nov vs year ago post crackdown on corruption, incentives to bet etc. Macau is now the world’s largest gaming centre having overtaken Las Vegas more than a year ago. It is the only place in China where casinos are allowed.
Finance & Markets:
• 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. Markit reported ‘although the pace of growth so far is only very modest, it positions manufacturing as less of a drag on the broader economy.’ It adds ‘while the improvement in recent months is a welcome trend, scratching beneath the surface of the manufacturing numbers stills exposes a number of weaknesses. Growth remains heavily focussed on the domestic consumer, while the strong gains at large-scale producers have yet to filter through to SMEs. A broadening of the expansion is necessary if the nascent recovery is to be sustained.’
• Canada out of recession in Q3 with GDP in the quarter up an annualised 2.3%.
• Brazil’s economy, on the other hand, has remained in recession with GDP down 1.7% in Q3 vs Q2. Down 4,5% on a year
• World markets: UK up yesterday but Europe down. US up but Far East mostly down in Weds trade
• Oil price lower at around $44.30 per barrel ahead of Energy Information Administration weekly oil inventory data
• Ireland’s finance minister yesterday cut estimate of year-end budget deficit to 1.7% of GDP from 2.1% on strong tax collection
Retail Roundup from Nick Bubb:
News Flow This Week: Howden have announced this morning that their new non-exec Chairman is to be none other than the highly respected, Richard Pennycook, once a stalwart of Morrisons…The FTSE Index quarterly review is announced this evening and poor old Morrisons now looks a goner, as it was ranked only 111th in the FTSE 100 index at last night’s closing prices. As we move further into December, there are several AGM’s coming up, including the ASOS AGM tomorrow and the DFS and ABF (Primark) AGM’s on Friday, but the only one guaranteed to bring a trading update is the ABF AGM. ASOS are not reporting on trading in the first 4 months of their new-year until after Xmas, on January 14th (aka “Super Thursday”).
Diary Clash Watch: We are used to having the prestigious annual “Retail Week” Conference and Awards in London clash with the middle two days of the beloved 4-day Cheltenham Festival of horseracing, but next year things will be complicated still further by the fact that the wretched Chancellor has called his Budget for Wednesday March 16th. To be fair, that is about the same timing for the Budget as this year, and the problem is that both Cheltenham and Retail Week Live have pushed back a week: Cheltenham kicks off on March 15th and Retail Week Live kicks off on March 16th, in the new venue of the brand new Intercontinental Hotel out at the O2 Arena…Nick Bubb – firstname.lastname@example.org
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:
Merlin updates on (most of) full year:
• Merlin shares up a little on Q3, Q4 update.
• Curate’s egg but Alton Towers, though still down y-o-y, is less down than it was in the summer & autumn.
• Lego had a good Halloween.
• Feels like a company with legs (consider also WTB, SSP).
• Current re-based trading range of 365p to 415p looks more likely, in our opinion, to break on the upside than the down.
• Shares not cheap, but will they ever be?
• Could be that, as with WTB, it is right to buy at a ‘fair’ price because, if you wait for the shares to become cheap, it may be unlikely that you will ever own them
The weather & the on-trade:
• WDR has pointed out that nine of the first ten months in 2015 were colder than average.
• We pointed out something similar when we suggested that Premier Foods, which sells a number of ‘cold-weather’ products such as custard, gravy and the like, would maybe report strong numbers for the quarter to end-September.
• August, fortunately for pub beer gardens, was the exceptional month in 2015.
• Furthermore, wet weather in the summer may be a little more off-putting than a temperature that is slightly below average
• And, whilst it’s wet now, the summer was OK and the rain now will be falling on beer gardens that would have been empty in any case
• From here on in snow would be a problem. A chilly and wet December with snow in the last two weeks would be unhelpful.
• But, at this stage, nobody has any real idea as to how the weather will pan out and it’s all to play for
Black Friday still hoovering up the cash:
• Some operators may have wound this back a little.
• But Black Friday still saw a spike in sales, even if a chunk of this was online.
• John Lewis said that Black Friday itself was up around 12% – though much of this was down to a surge in online sales.
• However, discounts can bring forward sales & it is hard not to accept that there is a degree of cannibalisation going on.
• Greene King has recruited John Forrest, former chief operating officer of Premier Inn, as COO of the Greene King’s retail division. Forrest starts in January and will report directly to Greene King CEO Rooney Anand.
Random information, hopefully not all of it useless:
• Sterling down a little, oil price up a little. Just saying. ASDA move to <100p petrol was for Black Friday only.
• Who’d be a gold bug, hey? Precious metal prices flat on their backs. What’s that saying, if you can’t find the bigger fool to pass your non-productive ‘assets’ on to, then you may be the bigger fool. Gold now down 10% on the year, palladium down 32%, silver down 13% etc.
• Soybean prices down 28% on a year ago, even ‘El Nino’ affected prices, OJ, sugar, cocoa, looking a little less healthy.
• Whitbread shares very strong yesterday and today, recovering a little from recent recent lows. Can’t keep a good share down, etc. Co has international brands. MERL also looked like a company that would recover from bad news more rapidly than most.
• Cranswick. Great company and all that but shares perhaps a little stretched. Fair enough, you should run your winners (see Greggs, WTB, SSP etc.) but nonetheless, we would be somewhat inclined to book some profits…
• Evolution continues to be a feature, Yotel is pushing its Pod product.
• New openings. Hotels again with Yotel saying that it would like to move from its current eight units to perhaps 50 in 5yrs. Ambitious, no? Such an opening profile – or at least the ambition thereto – is now relatively common across the casual dining space.
• UK mortgage approval numbers suggest that the freeze may be over. Approvals peaked >100k in the boom, hit c45k in the crunch & now running in high 60s.
• C-store chain McColl’s pointing out that LfL sales are still negative. Could be that the business model here is under threat. Models generally are, of course, but here we have a number of well-financed traditional C-stores putting on capacity alongside smaller shops built by SBRY, TSCO etc. and an enhanced offer from discounters such as Poundland, Home Bargains etc.
• Stock selection still matters. They may both be asset-backed pub operators but last week the shares of MAB (down c8%) and MARS (up c8%) moved in radically different directions.