Langton Capital – 2016-02-10 – Greene King, Heineken, Carlsberg, pub trading & other:
A Day in the Life:
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Find previous emails at http://www.langtoncapital.co.uk/daily-notes/
Diary planning has never been my strong suit.
However, though in common with many other human beings I’ve yet to change my behaviour as a result of my experiences, I think that the worst thing you can do is to leave just an hour between meetings.
Because then you run the risk of ruining both of them whilst simply working up a sweat getting between the one and the other.
Hence you have to make your apologies when leaving the first meeting and you’re breathless and potentially rather damp when you get to the second. You’ve then got to get into the building where you’re having the meeting, no small task these days, wait for a lift, get shown to a room etc. all of which takes time and then you have to wait a while, perhaps check out if the stationery is worth pinching such that, by the time the person you’re meeting arrives, it’s time to leave again.
Anyway, such is life. It’s now time for the news but if you would like to spread the love and add a colleague or acquaintance to this email list then just let me know. On the other hand, you could just forward it to them & suggest that they hit the ‘subscribe’ button at the bottom and then, via the miracles of modern science, it will bung them on the list.
Greene King – Q3 Trading Update:
Q3 Trading Update – 20wks to 7 Feb 2016:
Greene King has this morning updated on trading for the 40wks to 7 February and our comments are set out below:
Greene King reports LfL sales +2.2% for the 40wk period with Spirit Managed LfL sales up 1.1%
It says ‘in the two Christmas weeks, LfL sales grew 5.0% in Greene King & 5.2% in Spirit’
The group reports that Pub Partners LfL net income up 2.5%
In Brewing & Brands, GNK says that own-brewed volume is up 3.9%
Overall, combined Retail sales were up 67% after 40 weeks ‘benefitting from a 33 week contribution from Spirit and 6% growth at Greene King.’
The group says ‘we achieved record sales of £6.8m on Christmas Day in the combined Retail estate’
GNK adds ‘following the successful integration of the Spirit leased business at the end of the first half, Pub Partners performed well with LfL net income up 2.5% – an improvement on the trend seen at the half year.’
The group says beer sales growth ‘was driven by Greene King IPA and Old Speckled Hen. Greene King IPA has been helped by its popularity surge in China and the distribution from within the Spirit managed estate. In addition, we recently announced that Greene King IPA is now the official beer of England cricket.’
Cash, debt, balance sheet & other:
Greene King reports that the Spirit integration is ‘progressing well’ and says that it has had an ‘encouraging performance in rebranded trial sites’
The group opened 10 new sites in the year to date
It adds that its disposal programme ‘is on track, with 33 Pub Partners disposals so far this year.’
Rooney Anand, Greene King CEO says ‘this was another strong performance, with all divisions trading well during the important festive period, and record trading on Christmas Day.’
He adds ‘the latest Greene King Leisure Spend Tracker shows that, despite varying their choices when eating out, pubs were a major destination for customers.’
Mr Anand says ‘I am pleased to report continued progress with the Spirit integration, including encouraging signs from our rebranded trial sites thus far, and continued progress in terms of synergy delivery.’
Overall, the group says ‘our expectations for the full year are unchanged.’ It concludes ‘despite the current global economic uncertainty, we remain confident that we will deliver further value to our guests and shareholders by continuing to develop and enhance the existing Greene King business while successfully integrating Spirit.’
Langton Comment: Greene King’s shares spiked up to 980p in December but have since edged back by around 15% in line with the market.
Today’s numbers reassure that the group is on track and that trading is in line. The outlook for the full year should therefore be unchanged.
Numbers are now firming up for the current year and GNK looks as though it should earn around 66p in the current financial year, suggesting that the group’s shares trade on around 12.6x earnings. The group’s shares yield around 3.8%.
This is certainly not expensive but other shares within the sector now trade at a material discount.
Certainly GNK’s growth should be ‘home grown’ as it integrates Spirit but it’s hard not to notice that Mitchells & Butlers’ shares trade on c7x earnings and MARS trades on a multiple of 10.8x.
We believe that much of the low-hanging-fruit (where modest capex led to materially better returns) has been taken at Spirit but there will be some more to come. Further integration benefits including the movement of units between brands should be possible.
As mentioned earlier, we believe 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:
• JDW yesterday bought back a further 150k of its own shares at 678p per share.
• Heineken reports full year numbers says has ‘organic revenue +3.5% with revenue per hectolitre up +1.3%’
• Heineken full year consolidated beer volume +2.3% ‘with positive growth in Americas, Asia Pacific and Europe’ this offset weaker volume in Africa Middle East & Eastern Europe. The premium segment was +3.5%.
• Heineken CEO Jean-François van Boxmeer reports ‘our strong performance in 2015 reflects the successful execution of our strategy, as well as the relevance of our unique geographic diversity and our portfolio of premium brands, led by Heineken. In 2015, top and bottom line growth was supported by increased investment in our brands, sustained innovation, and cost efficiencies.’ He continues ‘we improved operating margin by 46bps…at the same time we have continued to invest for future growth’. He concludes ‘whilst we expect further volatility in emerging markets and deflationary pressures in 2016, we are confident that we will again deliver top and bottom line growth, as well as margin expansion in line with our guidance.’
• Carlsberg reports Q4 & FY numbers, says seen ‘strong cash flow delivery in a year of transition’.
• Carlsberg: Organic net revenue growth of 2% for the year as a whole ‘driven by strong Asian performance.’
• Carlsberg improvement in Q4. Says ‘all regions contributed positively to organic net revenue growth of 5%’. Says has seen an organic operating profit decline of 7%…in line with expectations.’
• Carlsberg sees lower profits in Q4, down 23% ‘reflecting phasing differences, restructuring costs and higher central costs’
• Carlsberg CEO Cees ‘t Hart says: “2015 was a mixed year for the Carlsberg Group. While our Asian business continues to perform strongly, our businesses in Western and Eastern Europe had a challenging year. As a consequence of the strong Asian results, however, 2015 marked the inflection point when the growth markets of Asia accounted for a larger part of the Group than Eastern Europe.’ He goes on to say ‘I’m confident that the strengths of our business in terms of leading market positions, an attractive geographic profile, well-balanced portfolios of strong international and local brands, and committed employees provide us with a strong base upon which to build a organically growing business. The combination of Funding the Journey, which is well on track, and the upcoming evolution of our strategy, which leverages the strengths of our business, will enable us to
• M&C Allegra Foodservice reports that Q4 2015 saw average spend/head per visit rise across all day parts y-o-y for the first time in 2yrs. Says growth driven by 10% increase in spend on snacking, spread over the whole day. M&C Allegra says ‘all operators -where they can – will look to increase prices in the run up to Christmas, as they feel that price increases get missed then, so there should be an increase in spend levels. However, this only works when consumers are happy to spend more, but the increase in disposable income last year has given them the ability to spend more.’
• M&C reports that ‘after an underwhelming start’, Rossopomodoro is looking to expand more rapidly in the UK
• M&B is set to roll out its new Sizzling Pizza & Carvery brand, should have 20 or so by the summer
• Enterprise shares lose another 7.7%, shares now down 46% from last May. The group updates on trading tomorrow. Enterprise commented in its Report & Accounts (dated 16 December 2015) that it was £74 million ahead of the amortisation schedule of the class A securitised notes in its Unique securitisation through early repayment and market purchases. It commented ‘although we have not purchased any notes during the current year, we still remain one year ahead of our amortisation schedule which will require us to make payments of £74 million during 2016, £78 million in 2017 and £82 million in 2018.’ The group’s shares have underperformed those of Punch Taverns by around 50% since May last year.
• Whitbread is to open its first Beefeater Bar + Block high street all-day restaurant concept in Birmingham next month. The concept is intended to appeal to a younger customer base in city centre locations
• The Institute for Fiscal Studies has said that the current alcohol tax regime does not sufficiently target heavy drinkers. It suggests that stronger drinks should attract higher taxes & says ‘action to tackle the very low levels of duty charged on strong cider would also make sense.’
• Rioja is set to record its 3rd consecutive year of growth based on last year’s harvest.
• Coca Cola has reported Q4 numbers showing sales down 8% (on a strong US$) at $10bn and profits of $1.2bn or 28c per share. Overseas markets account for more than half of total sales. CFO Kathy Waller said that the group was adapting to a changing environment and told Reuters ‘in the United States, in particular, we have a price-pack architecture strategy promoting the mini cans and the 8-ounce glass bottles.’
• Disney shares fell 4% in after-hours after posting rising profits but a after raising concerns re slower growth at ESPN. Star Wars was the bright spot but the slip in cable revenue spooked investors.
• Shares in Viacom down 14% after co reported 6% fall in Q4 revenue to $3.2bn. The co reported ‘2015 was a challenging year operationally as we redesigned ourselves and adapted to significant industry disruption. Our first fiscal quarter of 2016 reflected these challenges’
• The GBTA says the majority of business travel buyers across Europe have not cut their budgets in the wake of the Fri 13 Paris attacks. It says ‘the fact is that we’ve reached a new normal in managing risk, and business travel buyers are taking steps in their travel programs to improve communication, put in place duty of care policies and improve safety and security of travellers.’
• STR reports that Airbnb is not detracting from hotel performance in Manhattan. It says ‘during strong demand nights for Airbnb units, there was no pattern of adverse effects on hotel occupancy or average daily rate.’ It concludes ‘there is no evidence that indicates every room occupied by an Airbnb guest is a room subtracted from hotel occupancy.’
• UK hotel rates have risen by 26% over the last 4yrs reports HRS. London is now one of the most expensive cities in the world
• Hotel Bulletin reports London market is to add a further 7,000 hotel bedrooms in 2016. It says demand growth remains subdued. Rates at some point may therefore come under pressure. The HVS, AlixPartners and AM:PM produced bulletin reports that 16k rooms are expected to open across the whole of the country in the current year.
• Hotel Bulletin reports UK REVPAR grew by 2% in 2015. It says that in Q4, London occupancy fell for the 4th consecutive quarter. Re London, the Bulletin says ‘the huge amount of openings planned for 2016 in London will be of concern to the city’s hoteliers who, while historically are used to robust performance, are currently experiencing limited demand growth.’ It says ‘flat or declining occupancy is historically followed by plateauing rates indicating that a peak in hotel market trading may nearly have been reached.’
• Hotel Bulletin suggests budget sector to feature 51% of room growth in next 3yrs across the UK. It says ‘demand for budget rooms is still strong from both the leisure and the business sector proving the format is one of the most successful in the hotel business. This growth is likely to continue, particularly with new players emerging such as Premier Inn’s super budget hub concept.’
• Airbnb has paid $1.3m in taxes to Paris, a payment of the 83c per room (over 1.4m rooms) tourist tax
• Fitch Ratings has said it could see ‘a more challenging debt financing environment’ as regards lending in the coming year
Finance & Markets:
• Former City regulator Adair Turner says without radical intervention, UK economy could have low interest rates “almost indefinitely”. He told the BBC that “interest rates in the UK may not go up beyond 2% by 2020”. He also warns ‘the losses which will emerge from peer-to-peer lending over the next five to 10 years will make the bankers look like lending geniuses’.
• World markets: UK down yesterday, Europe also. US down later in the day & Far East down in Weds trading
• Oil rallying a little after sharp fall. Now trading at around $31 per barrel
• UK trade gap widened by £1.9bn to a record £125bn in 2015 according to the ONS.
Retail Roundup from Nick Bubb:
John Lewis Partnership Sales Watch: We forecast that yesterday morning’s official John Lewis Partnership sales figures for last week (w/e Feb 6th) would show that February (and the new financial year) had started solidly for John Lewis and weakly for Waitrose and we were pretty much on the mark. At John Lewis overall LFL sales were just over 1% up (up 2.5% gross), although it sounds like Store LFL sales were 2%/3% down, ex Online sales. In sales mix terms, the best area was Electricals, with gross sales up 5.4%, with Fashion up 4.4% and Home down 1.9%. At Waitrose LFL sales were down by c1.5% (up 0.8% gross), despite the usual hype about Valentine’s Day and promotions themed around Chinese New Year. We suspect that those sorts of LFL sales trends will persist at John Lewis and Waitrose through the rest of H1.
IPO Watch: Yesterday was not a great day on the stockmarket to launch a new IPO, but the media company Ascential (better known as the old EMAP, the publisher, inter alia, of such well-known trade magazines as Retail Week and Drapers) managed to hold its ground at the placing price of 200p. Nick Bubb – firstname.lastname@example.org
This was produced for distribution Friday 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:
So what should we be afraid of, what’s the next big thing?
• It’s often said that we end up well-prepared to fight the last war.
• And the same may be true in financial markets where CDSs are likely to become artificially expensive courtesy of demand prompted by the film The Big Short and no-body expects the banks to go on the same sort of global spending spree that they embarked upon in 2003-08.
• However, some things do repeat themselves.
• Securitised bonds have been at the root of a number of problems and we’re keeping a sharp eye (see yesterday’s wrap) on corporate bond spreads.
• Here it would appear that markets are tightening.
• This means that some deals may struggle to complete through lack of funding. We would hope the likes of SBRY and AB InBev (let alone Shell) have secured their funding long since.
Asset prices (London):
• As lending tightens, asset prices should come under downward pressure.
• International cash flows (e.g. China, Greece, Middle East etc.) into London may obscure this as cash buyers will remain active.
• However, as cash buyers find that their would-be leveraged competitors are unable to secure leverage, prices should still fall.
• This could leave some recent purchasers exposed as the option of flipping their properties may disappear.
• Lower asset prices should lead to lower rents.
• However, as some trophy buyers seem to have been willing to take 1% or 2% yields (presumably with a view to jacking rents up), the upward pressure already in the system (in London at least) may take some time to dissipate.
• And, given that upward only rents, reversionary obligations etc. make rents extremely sticky on the downside, they may not dissipate at all.
Interest rate rises. Yeah, right…
• So looking at an extremely red screen, it’s beginning to appear as though one tiny interest rate rise in the US has crushed the world.
• We’re sure it’s more complicated than that but try telling that to the equity markets.
• The US move has served as a lesson – both to the US and to the rest of the world.
• There is unlikely to be a rush to put rates up for a second time in the US and the Bank of England and the European Central Bank don’t look as though they’re going to do anything this side of Christmas.
• At time of writing, the market is down by 51pts.
• There may be buying opportunities out there but, as is usual at this stage in a sell-off, those on the side-lines are not minded to invest and those minded to invest are not on the side-lines.
• In fact bulls may well have committed themselves 1,000pts above current levels.
Meanwhile, in the real economy…
• The January BRC-KPMG Retail Sales numbers were better than had been expected.
• Sales in January were up by 2.6% LfL with non-food the star. See Nick Bubb this morning. Non-food could have been up by 6.5%.
• Within non-food, big-ticket items seem to have sold well – see earlier emails for comments on big-ticket vs small-ticket spending.
• Furniture was the best performing sub-sector.
• At some point spending should move onto smaller ticket items but, as the news is likely to be full of negative stories re China and global stock markets, it may be that consumers will be disinclined to spend.
Back to what we should be afraid of…
• Fat-tail risks. By definition, these are rare. So rare, in fact that they don’t tend to be in the track record (which is typically short) but, as with LTCM which made its money snatching nickels from the path of a steamroller), when they occur, they can be pretty mind-blowing. The typical response in the wake of a disaster is ‘we should have known…’
• The US dollar. This is a reserve currency & it is globally ‘over-held’. Should the dollar be threatened by the Renminbi or some other basket of currencies, holders of US $s globally will ‘rebalance’ their holdings. Rebalance means sell dollars. The US$ would fall as a result & international creditors would be disadvantaged. This has the potential, in certain lights, to be seen as the biggest ‘theft’ in history.
• Pensions. Whose idea was it to offer final salary, index linked pensions to 100s of millions of workers worldwide? Who asked the permission of the countless millions of still-employed workers if they would be happy to graft to make their now-leisured predecessors better off then they themselves are?
• We have about another dozen issues that we’d like to address but this email is already late in going out & there’s only so much depressing news that Langton can handle in one go.
Random information, hopefully not all of it useless:
• Asia very weak overnight, carried through to the UK.
• Today was another day when the markets tried to rally but then fell.
• Banks now taking the brunt.
• S&P trading at 22mth lows. Japan off 5% overnight. Yen now at a 15mth high vs US$.
• But that’s nothing. Athens market at 25yr lows. Lower than it was during the Greek crisis. Banks in Greece off as much as 26% yesterday alone.
• Gold, silver etc. now rallying for real as the sell-off gets serious.
• Despite recent strength, price of gold still down around 3% over the last year.
• Soft commodities generally weak. This will be doubly helpful given that the US$ has been weakening recently.