A Day in the Life:

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

I mentioned last week that I had a problem with the concept of infinity and, whilst I know it’s not in the same league (in fact it’s infinitely smaller), I also struggle with just how much data can be stored on my laptop, phone, whatever.

I mean I’ve been known to download books. Music. Films even and people send me 8mb, 10mb, 12mb emails willy-nilly, all of which get stored on my computer and, when the systems do their job, such things are often (and apparently randomly) synced with my phone, tablet and the like.

Which means that 400pg books are like nothing. Try a hundred of them. Try 10,000 in fact and stick on a dozen films. Why not a 100 and 2,000 songs and 10,000 deleted (but not really deleted) emails of half a mb each and the storage system laughs at you, is that all ya got?

The exception, of course, is when you’re on the train. I get it that you can’t sit alongside 400 other passengers and all stream a video but, when the train limits you to 20mb and somebody sends you a couple of emails with glossy pump or frothy pint photos, you’re sunk. On to the news:

Greene King – H1 Results – 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 then 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.

The News:

Pub, Restaurant & Drinks Producer News:

• SABMiller confirms AB is looking at sale of Peroni + Grolsch as well as the Meantime in the UK. It says ‘any sale would be conditional upon completion of the AB InBev acquisition of SABMiller and would be subject to appropriate engagement with stakeholders, including employee representative bodies such as unions and works councils.’ SAB says ‘AB InBev will lead the process, in compliance with competition rules, and in line with the 11 November 2015 Co-operation Agreement between the two companies SABMiller will assist, including preparation of the relevant information for potential buyers.’ SAB CEO Alan Clark says ‘under SABMiller’s stewardship, Peroni and Grolsch have become world-renowned premium beer brands. Meantime has been a welcome addition to SABMiller and has a growing and loyal fan base. These beers are loved by consumers and we are very proud
of them. Until the change of control we will continue to invest in growing these great beers and supporting our talented people who brew, sell and manage them.’

• AG Barr updates on Q3 trading (end-July to date) saying revenues in the 18wks to 28 Nov rose by 3.9% v last year

• AG Barr Q3: Says ‘ongoing’ business sales in Q3 down 0.2%. Year to date revenues down by 2.2%. It says ‘as anticipated, our revenue performance in the third quarter has gained momentum as we put the specific challenges of the first half behind us and return to our long-term growth strategy.’

• AG Barr Q3: Says ‘despite continued difficult market conditions we have maintained our market share’ and ‘margins remain in line with our expectations, underpinned by ongoing tight cost control activity.’ Barr adds ‘our balance sheet remains strong’ and it says ‘we continue to deliver against our operational investment and efficiency programme.’

• AB Barr re outlook. Says ‘we are now entering the important festive trading period and we anticipate the marketplace will remain highly competitive.’ It adds ‘however our sales execution activities are well developed and, as previously stated, assuming satisfactory Christmas trading, the Company remains on track to meet the Board’s expectations for the year.’

• Deadline for pubs code consultation extended as House of Lords calls for MRO to be included in second legislation. Baroness Neville-Rolfe comments ‘the Government have listened to concerns about the timing of the consultation. We cannot withdraw part one and reissue the consultation as one document without delaying the whole package beyond the May deadline many stakeholders want to meet. Therefore, to meet the concerns expressed, we intend to extend the deadline for responses to the first part of the consultation well into the New Year.’

• Draft House tells M+C ‘we’re looking to open three to four sites in 2016, 4-5 sites in 2017and 5-6 sites in 2018.’ The co says ‘we’re looking for least one of the sites next year not to have a London postcode.”’

• One year anniversary of reduction in Scottish drink-drive limit tomorrow. SLTA says impact has been “a catastrophe”. M+C reports SLTA as saying ‘it’s been a catastrophe for the sector. There are town centre pubs that have got away relatively unscathed but for most operators this has had extremely hard.’ He continues ‘we have been very clear that we are not against the changes themselves but the fact the penalties have not been adjusted. That has been a real barrier to people driving from the pub even if they are confident they’re under the limit. You might think people will just come out to drink soft drinks with a meal but that’s not what we’re seeing. People are staying away. England is sleep walking into this. It will absolutely decimate the industry if it is introduced in the same way it has been in Scotland.’

• Drink-drive limits. GNK yesterday said that LfLs were running +2% but that, ex-Scotland, they would have been +2.4%.

• Whisky producer Macallan’s £100m expansion plan has been approved by Moray Council. Glenfiddich also to increase production

• Liberation Group reported to have appointed advisors to review options going forward. LGV Capital has owned group since 2008. The co currently has 75 mostly freehold pubs + 2 drinks distribution businesses in the Channel Islands

• Brown Forman reports Q2 numbers, says underlying US sales +7%, Emerging Markets +8%. Reported numbers hit by strong dollar

• Brown Forman Q2: Net sales down 4% (strong dollar) at $1.1bn. Operating income flat at $302m. CEO Paul Varga reports ‘while adverse foreign currency exchange continued to dampen our reported results, Brown-Forman’s underlying results in the first half of the year remain strong and keep us on track to achieve our full year growth outlook. We expect our top-tier underlying results to be driven by ourJack Daniel’s-led portfolio, our leadership position in the premium American whiskey category, and the breadth and balance of our geographic development.’

• Brown Forman Q2. Jack Daniels grew underlying sales by 7% but reported sales down 2%

• Oakman Inns tells M+C has enjoyed a buoyant start to H2. Says after a period of consolidation it aims for “aggressive” expansion in 2016.

• Tesco has apologised for delays in delivery of non-food items following Black Friday rush. It says it is down to “unexpectedly high demand”

• Tesco subsidiary One Stop reports annual profits down to £10m from £21m in 2014. Sales +17% at £925m. Co says ‘the fall in operating profit primarily reflects the application of new accounting policies on impairment, in line with the wider Tesco Group. Revenue grew from £789m to £925m over the year and the business has continued to perform well in a challenging market.’ It says ‘we’re pleased with the progress we’ve made in growing our franchise business since its launch in early 2014, forming successful partnerships with great independent retailers across the country. The loss reflects start-up costs as we build the business and invest in our franchise partners.’

Travel & Hotels:

• UK bombs Syrian IS positions following Commons vote. Unlikely to boost holiday bookings in short term

Other Leisure:

• Ladbrokes has been blocked by an HMRC tribunal from reclaiming £54m of tax it had sought to receive following exploitation of Deloitte loophole. HMRC says ‘avoidance just doesn’t pay; we win about 80 per cent of cases taxpayers choose to litigate, and many more concede before litigation. We will uncover avoidance schemes and contrived structures designed to minimise tax and we will challenge them.’ Ladbrokes is reported as saying ‘we believed we had a strong argument in this case. We’re now considering our options with regards to a possible appeal.’

Finance & Markets:

• Fed Reserve chair Janet Yellen said yesterday that she was “looking forward” to US rates rising as it would be proof of recovery. She suggested that jobs growth in the US was strong and consumer spending was ‘solid’ adding ‘when the Committee begins to normalize the stance of policy, doing so will be a testament … to how far our economy has come.’ A rate rise this month now looks more likely than ever.

• ECB likely to announce more stimulus measures across the Eurozone later today. It may introduce negative overnight rates

• Australia’s economy grew by 2.5% in Q3 compared with the same quarter a year ago. Exports were +4.6% in the quarter

• World markets: UK up yesterday but Europe mostly lower. US down overnight + Far East mostly lower in Thursday trading

• Oil price down to around $42.80 per barrel having been some 30c lower in earlier trade. OPEC meeting today in Vienna.

Retail Roundup from Nick Bubb:

Today’s Press and News:
The FT and the Guardian flag that Morrisons has, as expected, been ejected from the FTSE 100 index following last night’s review. The Retail correspondent of the Telegraph in her column examines the recent events at Home Retail Group after the rumours of a potential bid for Homebase and concludes that it’s not surprising that private equity firms are sitting on their hands, as there would be a lot of work involved. Ironically, the Guardian highlights that Argos has had to apologise after hundreds of customers complained about late deliveries and a failure to answer phone calls about Black Friday orders. There are a few snippets about yesterday’s news that another institution has backed Findel’s decision to block the move by Mike Ashley’s Sports Direct to get one of its people voted onto the Board. The Times reports that private equity firms are
carrying out due diligence on a potential investment in the lifestyle clothing chain Joules. And Lex column in the FT looks gloomily at the outlook for the General Retail sector in the aftermath of price deflation.

News Flow This Week: The ASOS AGM is being held this morning at 11am at HQ in Camden, but no trading update will be issued and nor is one expected at the AGM of DFS tomorrow. However, ABF will give a trading update on Primark first thing tomorrow, ahead of their AGM. Nick Bubb – nicholas_bubb@hotmail.com

Wednesday 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:

Greene King H1 numbers:

• See also meeting notes above.

• 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

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.