Langton Capital – 2016-01-20 – JD Wetherspoon, oil, interest rates, Sterling & other:
A Day in the Life:
Follow us on Twitter at either @langtoncapital or @brumbymark.
Find previous emails at http://www.langtoncapital.co.uk/daily-notes/
But busy as the JDW conference call is at 8am so just a brief idea for the day. Never buy your spouse five packets of curry mixes and a new ironing board either for Christmas or her birthday. Practical it may be but…
Anyway, it looks set to be a busy morning so, without further ado, let’s move on to the news:
JD Wetherspoon – Q2 Update:
Q2 Update – 12w to 17 January 2016:
JD Wetherspoon has this morning updated on trading for the 12w to 17 January 2016 and our comments thereon are set out below:
LfL sales in Q2 are up by 3.3% with total sales including the impact of new openings up by 6.3%
In H1 to date (the first 25wks), like-for-like sales increased by 2.8% and total sales increased by 6.1%.
The group says ‘we expect the operating margin (before any exceptional items) for the half year ending 24 January 2016 to be around 6.3%, 1.1% lower than the same period last year.’
It says ‘the margin reflects the increases in the starting rates for hourly paid staff in October 2014 and August 2015, which totalled approximately 13%.’
Balance Sheet, Debt & Outlook:
The group reports that it has opened 5 new pubs since the start of the financial year and has sold 2.
It says ‘we intend to open 10 to 15 pubs in the current financial year.’
Re finances, JDW comments ‘the Company remains in a sound financial position.’
It says ‘net debt at the end of this financial year is currently expected to be slightly above the 26 July 2015 total of £601.1million.
Chairman Tim Martin reports ‘like-for-like sales have improved in the second quarter so far’ but he adds ‘owever, as indicated in our November trading update, increased labour costs will be an important factor in the outcome for this financial year.’
He concludes ‘our current view is profits for this year are likely to be towards the lower end of analysts’ expectations.’
Langton View: JD Wetherspoon has released a less-downbeat-than-usual statement.
LfLs have improved, which somewhat supports our view that Restaurant Group may be an outlier on the downside & Xmas was not at all bad.
However, and this is JDW so it was always likely that there would be a ‘however’, the group has somewhat upset the otherwise not-negative tone of its statement by saying that forecasts would be toward the bottom end of the current range.
We would suggest that the scaled-back rate of new openings (it was c15 in November and is 10-15 now) may be behind this as current trading looks to be reasonable. We will hear more from the pub companies next week when Marston’s updates on its Q1 and Greene King produces its December Tracker. M&B also hosts its AGM on 28th.
As recently as 11 Sept, the group said ‘we continue to anticipate a trading performance similar to, or slightly above, that achieved in the last financial year.’ It knew at the time that it was putting wages up and LfL sales have improved yet guidance has now moved towards a bottom-end-of-the-range outturn.
Consensus forecasts, which may edge down a fraction, now put the group on around 14x current year earnings with a yield of just under 2%. This is relatively cheap given the rating on which the group’s shares have traded in recent years.
Given that the group has always maintained that it can use its cash flow to either pay a dividend, buy back shares or open new pubs, if the third of these is coming down, it will be interesting to see what happens to the other two. The group is due to report H1 numbers on 11 March.
We would suggest that any material weakness should present a buying opportunity. Indeed, as alluded above, the company itself is likely to see it that way. The group is a superlative operator, it has focused on accommodation, drink, food, further day-parts, coffee and a host of other growth areas and, though we acknowledge that this has to come through at the bottom line in order to justify our recommendation, we remain supportive of its shares.
Pub, Restaurant & Drinks Producer News:
• Leicestershire-based brewer and pub operator Everards grew LfL net income across its 176 pubs by 3.2% in the year to 30 September. EBITDA was up 25% to £6.1m and was helped by a 5.1% increase in sales of beer to licensees.
• Kim Jong-un, Supreme Leader of North Korea, has apparently overseen the production of a ginseng root-infused liguor which is ‘suave and causes no hangover’. The drink is called Koryo Liquor and gains its alleged hangover-negating characteristics from its production process, in which sugar is replaced by burnt rice.
• Nisa has released strong Christmas results, with a 6.3% increase in sales and EBITDA up to £520k (from a £2.4m loss the prior year) in the ten weeks to 3rd January. The convenience store chain credits the improved performance to its competitive pricing and promotional offers.
• Toys R Us has announced plans to expand its presence in China and is aiming to double its stores in the region to 200 within three years. The private equity-backed toy store chain anticipates accelerated growth in China as a result of the relaxation of its one-child policy.
• EasyJet founder Sir Stelios Haji-Ioannou is ready to oppose the pay of the new management team at his easyHotel budget hotel chain, writes Travel Weekly. The entrepreneur will vote against easyHotel’s remuneration report and is also expected to withhold his vote on all the other resolutions at the company’s AGM on Thursday. Stelios holds 49% of the voting rights in easyHotel, which IPO’d in 2014 and last year posted annual profits of £790,000 on sales of £19.95m, but the EasyJet founder believes the group has a cost control problem.
• Speaking to the Telegraph, Stelios said: ‘This is not just about salaries, this is about growing profits… I haven’t seen enough effort, if you like, to reduce costs, I am taking this unusual step of actually voting against the remuneration report. I think this is an elegant way of saying profits have to go up.’
• Netflix customer numbers surged to a record 5.59 million customers in the three months to December, bringing total membership to 74.76 million. The result surpassed expectations and pushing its shares up 8%, although the firm missed its forecast for US subscriber growth. The video streaming company recently announced its aim to expand to 130 countries.
• Ireland’s competition regulator has approved the £10bn merger between Paddy Power and Betfair, which will join to form Paddy Power Betfair on 2nd February. Betfair’s Breon Cocoran will be CEO of the new company, while Paddy Power CEO Andy McCue will become chief operating officer.
• Twitter went offline for many users yesterday, leading the group to assure complaining users that the platform is ‘working towards a resolution’.
Finance & Markets:
• A survey by PwC finds that global executives are more pessimistic about growth in 2016, with only 27% thinking things will improve compared to 37% last year. Business leaders are increasingly worried about geopolitical risks such as China’s economic slowdown, echoing the concerns aired by the IMF in its recent downgrade of global growth forecasts.
• Bank of England governor Mark Carney said on Tuesday there is no timetable for raising interest rates and said it is harder than usual to offer any guidance. Speaking to students at the University of London, Carney commented: ‘The journey to monetary policy normalisation is still young… [It] doesn’t have a set timetable, only an expected direction of travel.’
• The probability of a global economic recession this year is as high as 20% in a worst case scenario, according to Morgan Stanley. The firm said tumbling oil and commodity prices and capital outflows from China could potentially lead to weakening consumer demand in the US and Japan and weakness in the emerging markets. ‘Two and a half percent seems to be the danger area for global recession, because historically that is the real GDP growth rate where you see GDP per capita go negative.’ said Elga Bartsch, Morgan Stanley’s global co-head of economics.
• The International Monetary Fund has downgraded its forecast for global economic growth by 0.2% to 3.4% this year followed by 3.6% in 2017. Only three large advanced economies are forecast to beat 2% growth this year: the US, the UK (+2.2%) and Spain.
• UK house prices increased 7.7% in the year to November with the East of England (+10.2%), London (+9.8%) and the South East (+9.8%) seeing the strongest growth. By contrast, the North East of England and Scotland saw price rises of just 0.4%, according to the ONS. The average cost of a home grew to a new record of £288,000.
• The UK CPI rose from 0.1% to 0.2% in December as a 46% rise in air fares offset falling food and clothing prices.
• Sterling lower, down 4% since start of 2016. BBC points out has been losing ground vs Euro for 8wks, longest downward run since the single currency was introduced in 1999. Last week it hit 12mth lows.
• World markets: UK & Europe up yesterday, US also in positive territory. Far East markets down in Weds trading
• Oil price slipping again, trading at around $28.30 per barrel
Retail Roundup from Nick Bubb:
Pets at Home: The Q3 today from Pets at Home (for the 12 weeks to Dec 31st) is full of figures, but the key message is that LFL sales were up by a solid 2.2%, comprising Merchandise LFL growth of 1.7% (reflecting “strength in Advanced Nutrition, omnichannel and recovering sales in Health & Hygiene”) and Services LFL growth of 8.5% (“driven by strong performance in vet and grooming services”) and the company says that the “financial outlook for FY16 remains in line with current expectations”. There is a conf call for analysts at 8.30am. 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:
Scottish drink drive rule changes:
• Drink driving is indefensible.
• Having said that, it’s interesting to look at the STLA stats that we ran with this morning when some 40% of venues in Scotland suggested that sales had declined over Xmas & New Year
Lies, damned lies and statistics:
• Some 40% of rural pubs surveyed by the STLA showed a decline in revenues at Xmas & New Year.
• The reduced drink-drive limit is the unspoken suspect.
• But the SLTA also reports some 39% of respondents in general in growth with a further 16% report their business as stable.
• Take 100% less 39% less 16% = 45% and you have the proportion of respondents who were presumably in decline (or who didn’t know whether they were in decline or, indeed, what day it was)
• Indeed if 40% of rural pubs are in decline, then presumably 60% are not
• Viewed at from the latter angle and the drink drive changes looks somewhat more benign
Revolution trading update:
• Group opens three new units during H1 (to 26 Dec), sees LfL sales +2.7% but total sales up by only 1.9%; how does that work?
North African holidays:
• We report in our earlier email that terrorism (Tunisia, Egypt) was responsible for an 8% decline in tourism to North Africa in 2015.
• But surely the more remarkable fact is that 92% of people presumably still travelled to a region where tourists had recently been singled out and murdered?
• And, labelled a ‘dramatic slump’, isn’t an 8% reduction actually far lower than might have been expected?
• The United Nations World Tourism Organisation goes on to say that tourism to Africa in general was down by only 3%
• Is this a statistical quirk, are we missing something or is this a case of the tourist ignoring the ‘fat tail’ risk when he/she decides where to go to sun themselves on a beach.
• Certainly the risk of being shot to death in your beachwear is small but, when it happens, it renders any modelling of the risks that you did beforehand totally meaningless.
Sterling very weak:
• Sterling has been falling both against the US$ and the Euro since about August last year.
• US$ strength is consistent with the US Fed sitting in pole position when it comes to putting interest rates up
• Though here, there’s now markedly less of a consensus when it comes to the assumption that the US will jack rates 4x this year. Some saying it may only happen once.
• But Sterling’s weakness vs the Euro is a little more difficult to explain.
• Keen to avoid backward-rationalising a move, we’ll just say that it is what it is and mention that a downward move against both currencies will put margin pressure on suppliers (perhaps particularly the holiday providers) and take money out of consumers’ pockets – both via the raised cost of imports at home and the higher Euro cost of holidays when abroad.
Random information, hopefully not all of it useless:
• Interesting to see furniture company ScS Group come in with a positive comment this morning. It suggests that big ticket spending is alive and well. It says LfL order intake for the 25 weeks to 16 January is +8.8% and adds ‘this is a pleasing result against tough comparatives in the previous year. As a result the Group expects to report profits significantly ahead of current market expectations for the year ending July 2016’.
• Rally attempted across most markets as UK indices bounced from levels below to August 2015 lows.
• Oil price off the bottom but still flat with Iran coming back on the scene. Last trades around $29.30. Short term chart gives a degree more comfort than does any longer term picture. The rise is invisible over the longer term.
• Gold rally, did you see it? Did you see it? It’s over now so no biggie – and the commodity is down by 16% over the last 12mths in any case
• Soft commodities. Most prices lower. Outliers seem to be Soybean Meal (down 19% over the last year) and White Sugar, at plus 8%.
Further retail comment – Nick Bubb:
• Next: Embarrassingly, Next has had to issue an announcement today to flag that it has “identified a procedural oversight in respect of the company’s processes for the payment of the special dividends…which have resulted in a technical infringement of the Companies Act 2006”. The footling issue appears to relate to a failure to file interim Accounts at Companies House, but Next is having to hold an EGM on Feb 10th to rectify the matter. Importantly, Next says that it “has no impact on the company’s intentions or ability to continue returning its surplus cash flow to shareholders via future Special Dividends or Share Buybacks. The company’s past Accounts will not need to be restated and no dividends are expected to be repaid”. The only remaining mystery is why the much-respected “Mr Share Buyback Man” has been sitting on his hands over the last
• MySale: As major shareholders in this Australian-based Online “flash Sales” business, Philip Green and his friend Mike Ashley will be interested to see the reassuring MySale trading update today, flagging that, as expected, EBITDA swung back into a small profit in the first half (the 6 months to Dec 31st), after suffering a significant loss a year ago. The recovery is driven by the operations in South-East Asia, but MySale also highlight the improvement in the UK where “following a refinement to our operations, we are seeing the first signs of encouraging growth and performance”. Carl Jackson, the CEO, says that ”We carry strong momentum into the second half of the year in all areas of our business…The Board is confident the Group is on track to meet its expectations for the financial year as a whole and we will continue to invest to drive growth”.
• British Land: Supermarket property investors will be interested to hear what British Land have to say in their Q3 update today, given their big involvement in the sector. But the only reference is under the heading of “Retail Recycling”, noting the disposal of £94m of superstores in the quarter, including Sainsbury’s in Islington. In terms of its Retail portfolio of shopping centres and retail parks, Chris Grigg, the CEO, says “Our operational performance was good, with outperformance on footfall particularly of note”, flagging that Retail footfall was up by 2.0% (+650bps versus the market) with Meadowhall +4.0% and that “Retailer same store sales” were up by 0.9%.
• Today’s Press and News: The main focus today in the papers is on the news that Home Retail has confirmed that it has formally agreed to sell Homebase to Wesfarmers and it is widely noted that Wesfarmers is bullish about the UK DIY market and intends to change the name of the chain to Bunnings. The other main news is that Asda has launched a programme of big job cuts at its HQ in Leeds. The Times flags that Holland & Barrett has been accused of squeezing small businesses after it sent a letter to suppliers demanding contributions to its investment plan. And the lead story in the Daily Mail market report is that Amazon is considering launching a takeover bid for Ocado…