Langton Capital – 2016-03-10 – RTN, PPHE, Cineworld, Morrison’s, pub trading & other:
A Day in the Life:
I haven’t driven a car in London for years and, every morning as I pass the snarle up around Aldgate Tube Station, I thank my lucky stars that I don’t have to do so.
Because heaven knows at what time in the morning the traffic actually backs up. It must be 4am or 5am because it’s a real mess by 6am, that’s for sure.
And those motorists bombing into London from Essex, the East End or from Tower Bridge and the south and thinking they’ll just pop up Mansell Street and turn left into the City are in for a rude awakening as it’s gridlocked and will remain so for months as Boris puts in place his bicycle super-highway and his minions plant a few trees, which brings me on to the underpasses.
‘What underpasses?’ you may say.
And you’d have a point because they’ve gone. The powers-that-be needed some clear underground spaces – too many cables, pipes and sewers etc. elsewhere – to plant trees and thus decided that they would fill them in and leave pedestrians to fight thousands of frustrated delivery drivers to cross the roads above ground.
So they destroyed and filled in the underpasses but then they dug them up again. The reason is unclear but now they’ve filled them in again and, though the taxpayer will be the poorer as a result, it’s certainly shortening the dole queues hereabouts. We could go on but, as there are a number of RNSs out, let’s move on to the news:
Restaurant Group – FY Numbers:
Full Year Numbers – Analysts’ Meeting:
Following the release of its FY numbers to 27 Dec, the Restaurant Group hosted a meeting for analysts and our comments are set out below:
Full year numbers:
• See earlier email. Group hit targets but attention moved quickly on to current trading
• LfL sales for the first 10wks of the current year are down by 1.5%
• RTN does not give a detailed brand breakdown but Frankie & Benny’s (52% of outlets) did more than 100% of the damage
• The group’s other brands (excluding Garfunkel’s), namely Chiquito, Coast to Coast, Brunning & Price, the concessions (largely airports) and Joe’s Kitchen were in growth
Where was the hit?
• Internet shopping: Retail parks are down on reduced footfall – internet shopping etc. – and this may persist
• Skewed film releases: Leisure parks were down due to the nature of film releases in Jan & Feb. This year benefitted from the tail-end of Star Wars but last year, Fifty Shades of Grey brought viewers (and diners) out mid-week for several weeks. This may be temporary.
• Cannibalisation: A feature within both of the above is cannibalisation. The group says around 1% of its LfL sales miss was due to new units eating into revenues at existing sites. This will persist.
Other points re trading:
• RTN maintains that cinema attendances were 8% down in January.
• The group was materially impacted by the cancelling of ‘Orange Wednesday’ (cheap cinema tickets) just over a year ago.
• Q1 was the strongest last year so comps are tough.
• Costs this year, ex-wages, look to be benign.
• Recently opened units have been performing as strongly as ever. The point here, however, may be that some other units may be suffering as a result of others opening.
• Pricing: Whilst the group would not be specifically drawn, analysts were left with the impression that prices at RTN were top quartile
• Cannibalisation. The group highlighted Stoke. It had two, c40k per week units. It opened three more on a new location (of 6 units in total). This hit sales at the two existing units by around 15k each – but the group generated 95k of additional income overall. This is both 1) reassuring and at the same time 2) worrying.
• Discounting: Whilst not majorly involved itself, RTN CEO Danny Breithaupt says that he has never before seen as much discounting as he did in January and February 2016
• Overall, the group is highlighting the fact that it is still growing in terms of total sales. The verdict on whether this is what shareholders bought into or not may be being delivered by the share price
• RTN says its competitors are improving.
• Slide 24 shows that leading brands have opened c370 new restaurants in the last year.
• Relatively new entrants such as Bill’s, Turtle Bay and Franco Manca have increased the number of units in operation by 106%, 170% and 533% respectively,
Balance sheet, debt etc.:
• RTN remains lowly geared. This is as it should be for a leasehold-based business with a £74m per annum rental liability. Fixed charge cover, at 2.7x (2014: 2.7x) is not a problem.
• The new openings pipeline is secure (around 40+ per annum) but, given the group’s comments on cannibalisation, this may not be quite the bull-point that it has recently been.
• The group still intends to expand to 850+ units. It intends that Frankie & Benny’s (currently 52%) fall to around 40% of total unit numbers
Langton Comment: Restaurant Group is being impacted by reduced retail footfall (possibly permanent) and by latterly unhelpful blockbuster release schedules (hopefully temporary).
It may also be eating its own lunch but, and herein lies the problem, it’s hard to see what else it can really do because it is better that it does this itself as the alternative would be to stand back and allow a third party to take market share.
And therein lies a problem.
Because this may become a feature of RTN going forward and that may not be what holders had bought into.
If the group is to become more of a reasonable-PER or even a yield stock, then its shares may slide a little further. On numbers that may be downgraded, the group’s shares are currently trading on around 12.2x 2016 numbers with a yield of 4.3%.
That’s what happens if you start off highly rated and then your shares fall by 40%.
Overall, we continue to acknowledge the merits of RTN but, until we have a little more clarity on trading, it will be tough to call the business model and we would seek to make investments elsewhere.
Pub, Restaurant & Drinks Producer News:
• Restaurant Group shares take a pounding. Down 23% to 420p. Would be looking reasonable value but earnings estimates are under review. Group CEO Danny Breithaupt tells MCA that ‘sometimes like-for-likes have to take a back seat’. Group is still driving total sales. Has elements of the Whitbread statement about it. It’s reasonable to suggest that dividends are paid from total profit rather than from some spurious LfL figure. But try telling that to the Stock Market. The old habit of shooting the messenger appears to be alive & well.
• Telegraph runs story suggesting Restaurant Group could be ‘vulnerable to private equity bidders’. PE already owns a major part of the eating out market including brands such as Nando’s, Las Iguanas, Café Rouge, La Tasca, Pizza Express and others.
• Fleurets director Paul Newby has been appointed the new pubs code adjudicator and will be in charge of a c£1.6m budget.
• Nando’s is rolling out on-site technology upgrades as it looks to take its UK sites ‘to the next level’ and reduce energy consumption. New Nando’s restaurants have been fitted with LED lights, which make up 85% of all lighting, while a range of variable extractor fans which only operate and consume energy while the chefs are cooking have been installed in kitchens. Nando’s UK energy, waste and water manager Julie Allen believes this has produced energy savings of around 37% compared with conventional fans.
• Conservative party members have joined with opposition lawmakers in blocking government attempts to relax Sunday trading regulations.
• Drinks company C&C Group is expecting FY16 operating profit to be in the region of €103m as Q4 trade ‘provides grounds for optimism’. General trading picked up in Scotland as comparatives moved past tighter drink driving legislation, with Tennent’s performing particularly well. Meanwhile Bulmers continues to lose share in Ireland, although the group’s Magners Original brand shipped 1% more volume over the course of the year and enjoyed a strong Q4.
• C&C anticipates ‘strong cash generation’ and FCF/EBITDA conversion of around 70%, and its €100m share buyback programme is 75% complete, with 20.5m shares purchased at an average price of €3.63.
• Stock Spirits reports FY numbers. Total revenue €262.6m (2014: €292.7m), PAT €19.4m (2014: €35.8m).
• Stock spirits. Says total sales volume down to 11.8m 9ltr cases from 14.4m last year. Decline in Poland 38.1%. CEO Chris Heath comments ‘2015 saw another year of disruption in the Polish market and I am personally very disappointed that we had to issue revised profit guidance in November 2015.’ He says ‘our team in Poland have worked incredibly hard to put in place the necessary building blocks to return the business to growth.’
• Stock Spirits: CEO Chris Heath comments ‘we have recently completed a thorough strategic review of the Group and a detailed ‘root and branch’ review of our operations in Poland.’ He says cash flow remains strong and ‘the Board are focussed on the delivery of our strategic and operational goals, in order to return the business to sustainable growth.’
• Morrison’s reports FY numbers, says LfL sales down 2.0%. Q4 LfL better at +0.1% ‘despite deflation of over 3%’.
• MRW FY. Total turnover down 4.1% at £16.1bn. underlying PBT £302m (vs £413m). EPS 7.8p vs 10.9p, DPS 5p vs 13.65p.
• MRW FY. Says debt down by £594m to £1.75bn, has stabilised LfL sales, is listening to customers & customer satisfaction improving. Chairman Andrew Higginson reports ‘the Board is pleased to be announcing that future dividends will be covered around two times by earnings per share, which is a policy that aligns shareholder returns with the long-term performance of the Company. He adds ‘the team made good progress during the year, with lower debt once again a highlight. We are on track to deliver improved future profits and returns for shareholders.’
• MRW FY: CEO David Potts says ‘by improving the shopping trip for customers, we have started the journey to turnaround the business and make our supermarkets strong. Our listening programme is informing and shaping the six priorities that are now driving the improvements that customers are noticing.’ He says ‘our strong balance sheet and cash flow provide the platform for turnaround and growth, but what makes us truly unique as food maker and shopkeeper is the personality and dedication of our thousands of colleagues. I am confident these strengths will help us fix, rebuild and grow Morrisons.’
• MRW re outlook. Says will save remainder of £1bn 3yr target this year ‘but the turnaround will take time’. It says this ‘will continue to require sustained investment in the proposition.’ On a brighter note, the group says ‘we also expect to exceed our three-year targets for £600m operating working capital improvement and £1bn property disposal proceeds.’
• Around one in 10 people drinks in excess of the controversial new recommended alcohol limit of 14 units per week in just one day. Figures from the Office for National Statistics show 9% of people drank more than 14 units of alcohol on one day in the week before they were surveyed.
• Mitchells & Butlers has completed the rollout of contactless and Apple Pay across its estate as part of its drive to keep abreast of digital developments. Chris Hopkins, commercial and marketing director for Mitchells & Butlers said: ‘Digital technology continues to grow at pace and we continue to look for new opportunities to integrate these technologies into our business to help us enhance our offers, support our brands and ultimately deliver a better service to our guests.’
• The Institute of Economic Affairs’ report, ‘Alcohol and the Public Purse’, posits that the alcohol industry is in rude health, contributing some £6.5bn in tax.
• The number of workers on a zero-hours contract for their main job rose by 104,000 to 801,000 in the year to late 2015.
• Christopher Snowdon of the Institute of Economic Affairs comments that the rate of teetotallers among young people is notably high.
• Tour operator Neilson is cutting its Turkey programme for summer 2016 due to reduced demand from UK holidaymakers. Richard Bowden-Doyle, chief executive of Neilson, commented: ‘Whilst Turkey remains a popular destination for UK holidaymakers, in common with other travel companies, we have seen lower demand this year… We will now concentrate our activities this year into our longer standing Turkey clubs, Phokaia and Seaside, which have particularly loyal followings, alongside our six Greek clubs and our Greek yacht fleet, which continue to be extremely popular.’
• GfK has warned families who delay booking their summer holiday that they could be priced out of ‘safe’ markets such as Spain. Business group director David Hope reported bookings to Turkey from the UK down 40% YoY, while sales to Spain were up 36% and the Canary Islands +33%.
• PPHE reports FY numbers. Says has seen an ‘improved year-on-year trading performance.’
• PPHE: Revenues +11.8% to €302.5m (constant currency +4.4%). EBITDA +16.9% (+9.1% constant currency).
• PPHE: PBT +25.5% at €41.2m, normalised EPS 99c vs 79c with a total dividend of 20p, up 5.3% on last year. President & CEO Boris Ivesha reports ‘we are pleased to report another year of progress with double digit growth in revenue, normalised profit and normalised earnings per share. Excellent progress was also made with the various projects in our development pipeline.’ He goes on to say ‘trading in the year to date is in line with the Board’s expectations in all markets.’ He concludes ‘2016 will be a tremendously exciting year for us, with three new hotel openings and the relaunch of the extended and significantly improved Park Plaza Riverbank London.’ He says ‘we will also continue to progress the various renovation projects to ensure that our hotels continue to improve on their strong market position, whilst making further
• Cineworld FY numbers. Revenues +13.9% at £705.8m, PBT £99.7m vs £67.3m. EPS +38.9% at 30.7p. Dividend 17.5p vs 13.5p.
• CINE FY: Opened 18 sites in year (taking group to 2,011 screens) with 93.6m admissions, up 12.9% y-o-y. CEO Mooky Greidinger reports ‘we are pleased to announce 2015 was another record year for the Cineworld Group and its shareholders.’ He says ‘our strong financial performance was driven by improved efficiencies throughout the business and the cost savings achieved following the successful integration of the two Groups.’ Re the future, Mr Greidinger says ‘our vision continues to be “The Best Place to Watch a Movie” and we look forward to 2016 with optimism, which has a promising film slate and will see us open another 13 sites across four territories’.
• 32Red, the online game operator, has seen FY15 revenue jump by 52% thanks to strong organic growth ‘accelerating throughout the year’. Mobile revenues grew 71% to make up 44% of total casino revenues (from 32% in 2014) ‘despite significant external regulatory and tax headwinds’. The group is recommending a final dividend of 1.7p per share (2014: 1.4p) bringing full ordinary dividend for the financial year to 2.8p (2014: 2.4p), on top of the 3p special dividend declared on 10 February 2016.
• The operator says 2016 has started strongly, with LfL net gaming revenues for the first nine weeks of the year up 35% on the same period in 2015 and up 66% including the contribution from Roxy Palace. Commenting on the results, Ed Ware, Chief Executive Officer, said: ‘The acquisition of the Roxy Palace business in July complements the strong organic growth delivered in the core business as we exploited targeted marketing opportunities and attracted new customers to the 32Red brand. Marketing expenditure will be increased again in 2016 we are well positioned for another year of progress, building on the excellent achievements in 2015.’
• Rank Group announces launch of new digital platform. It says this is now operating across both Mecca & Grosvenor digital sites’. It says it will add Spain later in the year. CEO Henry Birch reports ‘we are very pleased to have launched our new digital platform within the timeline and budget that we set. Performance so far has been encouraging and we will turn on increased functionality over the coming months.’
Finance & Markets:
• ECB meets today. Further stimulus is expected. Wider QE, perhaps lower rates.
• World markets: UK mixed but Europe up yesterday. US also higher & Far East higher in Thursday trade
• Oil price off the top but holding at around $40.85 per barrel.
• NIESR suggests that GDP in the UK rose by 0.3% in the three months to end-February. It had been running at 0.4% in the 3mths to Jan.
• House price rises to slow per RICS. Says tax changes could “take the heat out” of the investment market at least. Second home buyers and buy to let landlords face a 3% additional tax on purchases from next month. RICS says ‘over the past three months, we have witnessed a surge in buy-to-let activity.’ It adds ‘investors have rushed to purchase homes before the stamp duty surcharge comes into effect. It is inevitable that over the coming months, April’s stamp duty changes will take a little of the heat out of the investor market.’
Retail Roundup from Nick Bubb:
Morrisons: Today’s finals reveal that Q$ LFL sales were broadly flat, which is better than nothing, but there is nothing else of great note in the statement. Interestingly, however, Morrisons note that “In the medium-term, we now expect £50m-£100m incremental profit from broader business opportunities we have identified within online, manufacturing, wholesale, popular and useful services, and from lower interest costs”. There is a 9.30am analysts meeting.
John Lewis Partnership Profit Watch: By tradition, the annual Partnership Bonus is unveiled at 9.30am to the assembled staff in the Oxford Street store, but last year JLP announced the final results and Bonus to the Stock Exchange at 9.15am, so we expect the same pattern this year. As a reminder, given that pension charges will be c£60m higher, it looks like JLP pre-exceptional, pre-tax profits for y/e Jan 2016 will be down from c£343m to £300m (ie around the middle of the £270m-£320m guidance range) and, on this basis, the Bonus will be down from 11% to 9% or 10%. There is an analysts meeting at 12 o’clock at HQ in Victoria, although we won’t be able to go this year, unfortunately, even though it will be the swan song of the retiring Waitrose MD, Mark Price.
Hotel Chocolat Group:
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:
Yesterday’s wrap comprised the Restaurant Group comments included above.