Langton Capital – 2016-03-11 – JD Wetherspoon, coffee, evolution, ECB & other:
A Day in the Life:
Having to dash to the JDW H1 meeting this morning so no time for A Day in the Life.
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JD Wetherspoon – H1 Numbers:
H1 numbers – 26w to 24 January 2016:
JD Wetherspoon has this morning reported H1 numbers to 24 January 2016 and our comments thereon are set out below:
• The group last updated on 20 Jan meaning that today’s new news comprises the formal figures as well as comments on trading since end-January
• JDW reports that sales in H1 came in at £790m (2015: £744m). LfL sales for the H1 as a whole were up by 2.9%.
• The group reports operating profit of £49.4m (2015: £55.4m) with PBT of £36.0m against £37.5m last year
• EPS comes in at 19.1p against 22.9p and the dividend at the H1 stage is left unchanged at 4.0p
• The group reports that LfL bar sales increased by 2.9% (2015: 1.5%), food by 2.9% (2015: 10.1%) and fruit/slot machines decreased by 2.9% (2015: increased by 1.1%). Like-for-like room sales at our hotels increased by 7.5% (2015: 11.8%).
• The operating margin was 6.3% (2015: 7.4%).
• Net interest was covered 3.1 times by profit before interest, tax and exceptional items (2015: 3.1 times).
Balance Sheet, Debt & Outlook:
• Net debt at the half-end was £626.1m, up £25.0m on the same time last year. Net debt to EBITDA stood at around 3.5x
• The group opened 5 new pubs and sold 2 during H1 to take the number of pubs open at the period end to 954.
• It says ‘we expect to open approximately 15 pubs in this financial year’ but adds ‘following a review of our estate, we have placed a number of pubs on the market and anticipate that some of these may be sold in the remainder of the financial year.’
• Chairman Tim Martin reports that operational excellence remains key and says ‘93% of our pubs have obtained the maximum 5 rating under the FSA scheme.’
• He points out ‘we have now been recognised as one of ‘Britain’s Top Employers’ in a Guardian publication for 14 consecutive years.’
• In addition ‘99% of our pubs have achieved approval from Cask Marque, a brewery-run scheme which encourages high standards in ale quality.’
• As regards trading, Mr Martin reports ‘as previously highlighted, the biggest danger to the pub industry is the continuing tax disparity between supermarkets and pubs.’
• He says that he now believes ‘there is a growing realisation among politicians, the media and the public that pubs are overtaxed and that a level tax playing field will create more jobs and taxes for the country.’
• He concludes ‘sales comparisons in the second half of the financial year will be slightly more favourable, although further wage increases are due in April. As a number of companies have indicated, the pub and restaurant market is highly competitive, but we are aiming for a reasonable outcome for the financial year, before the impact of the property gain referred to above.’
Langton View: JD Wetherspoon has indicated that H2 should see easier comps and this fact, despite Chairman Tim Martin’s confirmation that trading in the pub & restaurant market is highly competitive, should underpin numbers.
JD Wetherspoon has once again bought back shares (earlier this week) for the first time in several weeks suggesting that it believes that they represent good value at these levels.
Arguably there is relatively little new in today’s statement. We knew the LfL sales, the margin had been commented upon and the slowing down in new openings was likewise public information.
The suggestion that H2 could be a little easier (alongside the news that Mr Martin favours leaving the EU) may be said to be new, but may not be price sensitive.
JDW’s shares are trading on a current year multiple of around 15x with a yield of 1.8%. Whilst not cheap, per se, this is relatively lowly valued by JDW’s own recent standards.
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:
• Italian coffee brand Lavazza has warned Starbucks that, when it enters the Italian market, it will have a lot to learn. CEO Antonio Baravalle says ‘I don’t want to be arrogant in what I say, but it is evident they are coming to a culture of coffee — and I am talking about coffee, not strawberry Frappuccino.’ He says ‘I see it as a positive thing. They are going to have to work to raise the quality of their coffee and then they can export that back to the world, which will open the way for us.’
• Harry Ramsden has tweeted that its first licensed pub will be at the Wingerworth in Chesterfield in partnership with Punch pubs
• Fourth Hospitality reports on industry wage levels, suggests NLW ‘may not cost the industry as much as originally predicted.’
• Industry wages: Fourth says ‘analysis of hourly rates from thousands of hospitality venues shows that over 21s currently earn £7.04 – as at October 2015 – just 16p shy of the new living wage.’ It says ‘this number had risen from £6.96 a year earlier.’
• Fourth suggests ‘these figures suggest that, in reality, hospitality businesses have already moved a long way towards providing higher levels of pay to hourly-paid staff – on the face of it, reducing the impact the new living wage will have when it is introduced in April.’ Fourth’s Mike Shipley says ‘our insight suggests the perceived gap between current pay rates and the new living wage is nowhere near as big as some in the industry may think.’ He continues ‘however, it is clear that the hospitality industry is already paying a premium, presumably to compete for the best people, and it’s a question of whether operators maintain that premium.’
• JDW buys back more shares, takes 69,500 off the market at an average price of 700p per share
• Domino’s Pizza buying back shares, retires 75k pieces at average price of 1002p per share.
• BBPA chief exec Brigid Simmonds has welcomed two-year The Community Pub Business Support Programme, delivered by the Plunkett Foundation. Simmonds commented: ‘There is a huge amount of expertise needed to run a modern pub, from catering and hospitality, to licensing law and regulation. This funding will bring targeted help to those wanting to overcome the challenges and help keep their pub thriving.’
• The National Living Wage will be the single biggest challenge this year for the eating and drinking out sector, according to CGA Peach’s latest Business Leaders’ Survey. The poll of more than 260 senior and influential figures in the industry put the NLW ahead of other looming issues such as increasing rental and property costs and market saturation, with 33.7% of leaders ‘very concerned’ about its impact. The measure will come into force on 1 April, with those aged 24 or over entitled to at least £7.20 an hour.
• The ALMR has moved to challenge the IAS’s figures in its report on duty and says pubs and bars already face a ‘huge’ tax burden. CEO Kate Nicholls noted: ‘It is nonsensical for the report to take as its starting point a figure of £21 billion that is now over ten years out of date and was an estimate produced under Tony Blair’s Government.
• ‘Since then, overall consumption as well as alcohol related violence, crime and harm have all fallen as has the proportion of alcohol consumed in licensed premises. The Institute for Economic Affairs report found that gross costs of alcohol amounted to £3.9bn per year with revenues from alcohol taxation in England amounting to £10.4bn giving an annual net benefit of £6.5bn.’
• Len Shackleton of the Institute of Economic Affairs notes that discussions to do with zero hour contracts should acknowledge their advantages. Almost 23% of those on zero-hours contracts are students, for whom flexibility over working hours can make holding a job while studying easier.
• Patisserie Holdings is to open its first Baker & Spice site since 2009 in Brighton next month with a second site to open before July, writes M&C.
• The gin industry in the UK is booming, with more distilleries opened last year than ever before, and record gin sales in both pubs and supermarkets. New figures from the Wine and Spirit Trade Association show that an ‘incredible’ 49 gin distilleries opened across the country last year, up 50% year on year. The WSTA Market Report shows that some £500m of gin was sold in UK pubs and restaurants in 2015, while shops surpassed the £400m mark.
• The Competition and Markets Authority has proposed a price cap for all households using pre-payment meters. Millions of low-income households could see power bills cut following a watchdog’s report into the energy sector.
• Monarch will operate departures from Lapland and flights to Lisbon next winter as the airline raises capacity by a further 240,000 seats.
• Average hotel room rates paid last year increased by 4% although room rates in the capital fell by 1% to £135 a night.
• STR reports on US hotel industry, says that REVPAR for the week to 28 Feb increased by 2.3%. Rate rose but occupancy down 1.0pps.
• FT points out that Cineworld has ‘courted controversy’ by promoting insider into CFO role within company
Finance & Markets:
• ECB moves to boost Eurozone economy, cutes rates by varying amounts. Deposit rate 10bps worse at minus 0.4%.
• ECB moves. Draghi says ‘rates will stay low, very low, for a long period of time and well past the horizon of our purchases.’ Current ECB QE purchases are scheduled to end in March next year. Draghi added ‘from today’s perspective and taking into account the support of our measures to growth and inflation, we don’t anticipate that it will be necessary to reduce rates further’.
• Euro slips versus US$ but regains position as M Draghi’s comments (‘these are the last rate cuts’) are taken on board
• ECB will start buying corporate debt and launch four new rounds of cheap loan packages into the real economy.
Retail Roundup from Nick Bubb:
Today’s Press and News: The slump in the markets yesterday after the latest ECB pronouncement gets plenty of front page Business headlines in today’s papers, eg “Markets fall as Draghi’s ‘big bazooka’ backfires” in the Times and “ECB launches stimulus blast to ward off deflation trap” in the Telegraph. In terms of Retail news, Morrisons, Home Retail and John Lewis Partnership were all in focus on the retail beat yesterday and all get plenty of coverage. In terms of today’s news, the headlines are likely to be grabbed by the controversial Chairman of the pub company Wetherspoon’s, Tim Martin, spouting off at length about the EU on the back of the interim results (which fortunately show that current trading has picked up, with the six weeks to 6 March seeing LFL sales increase by 3.7%).
Trade Press: The Editor of Drapers magazine looks at the BHS CVA in her column today and thunders that “Whatever the outcome of the CVA, some or all of BhS’s 40 “category 3” loss-making stores are likely to close, so the size and turnover of the business will be reduced”. The main News story is obviously about BHS and is headlined “Creditors to decide fate of ailing BHS” and Drapers also flags that the small department store chain Beales has filed a CVA for 11 of its 29 stores. Drapers also note that the South African retailer Foschini Group (which bought Phase Eight last year) is thought to be considering a bid for Whistles and that the Pep&Co founder, Andy Bond, is launching a new value variety chain called “GHM!” (“Guess How Much”), with a retail park store in Hinckley.
News Flow Next Week:
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:
• Fundamentals may be pulling the share price in one direction but, if bid rumours gain traction (today’s Telegraph), then they may pull it the other way.
o RTN mentioned cannibalisation. It said that it is better to eat one’s own revenues than it is to let a competitor do it for you.
o This is true. But it does play into the hands of those suggesting that there is a degree of saturation out there – even on leisure and retail parks.
o The High Street has been competitive for years and, whilst RTN does not really operate in that market, some High Street operators may look away from their normal markets (at leisure and retail parks) in order to avoid rising property costs.
o RTN (p24 presentation) suggests that Bill’s, for example, has moved from 35 to 72 units in little more than a year.
o RTN reassures that returns at new units are every bit as good as they have been in recent years – but this is not the whole story.
o If Stoke, the example that the group gave, is anything to go by, then the appearance of a new (and strongly-performing) site in the vicinity can hit revenues by as much as £15k (around 40%) per week.
o The group suggests that around 1% of LfL sales have been lost to cannibalisation.
• Corporate action:
o A trade bid might just be cannibalisation squared.
o Private equity does indeed own a chunk of the eating out market.
o It may be hungry, no pun intended, for more.
o RTN’s earnings may be slightly less exciting going forward but they are relatively predictable and the group is very cash generative.
o A bid for the company is by no means out of the question.
• So what does this mean?
o Shareholders who bought into RTN didn’t hitherto do so on a bid story. They made the purchase in the anticipation that Frankie & Benny’s would pave over the world.
o This isn’t perhaps now going to happen so it would be natural to see a churn of shareholders.
o Excluding those, of course, who allow their rationale to ‘evolve’ to what may be the new reality.
• Overall, and whilst aware that there could be major sellers (and buyers) out there, we would not want to be too short of these shares at the moment.
• Coincidental to RTN’s comments yesterday about leisure parks, Cineworld this morning has reported full year numbers
• Whilst the group operates in a number of markets in addition to the UK, it does comment on the upcoming film release schedule.
• It says ‘I am happy to say that when we look forward, we can do so with optimism…Hollywood looks more committed than ever to quality productions, which include many sequels as well as many original movies.’
• It continues ‘overall, the film slate for 2016 looks solid, and includes a strong family film slate.’
• This is consistent with RTN’s comments.
• Cineworld adds ‘notable releases include “Fantastic Beasts And Where To Find Them”, “The BFG”, “Star Wars: Rogue One”, “Captain America: Civil War”, “X-Men: Apocalypse”, “Batman v Superman”, “Finding Dory”, “The Secret Life of Pets”, “Ice Age 5”, “Angry Birds”, “Warcraft” and “Alice Through The Looking Glass”.’
• Thomas Cook points to bear in mind.
• Has had a turbulent few months with violence in Tunisia and Egypt causing disruption that has spilled over into the Turkish market.
• This disruption has caused a wave of re-booking across the holiday industry but this has been largely dealt with.
• The concerns in the stock market have arguably yet to abate.
• Today we run with a GfK story suggesting that ‘safe’ destinations for family holidays (Spain, Portugal etc.) look like selling out.
• This will be good for margins and, ultimately, for profits.
• Elsewhere, only 4% of Chinese adults have a passport.
• That number’s unlikely to go down & TCG has a JV with Chinese private equity company Fosun – which also has a 5%, at some point to be 10% stake in Thomas Cook itself.
• This JV, over the longer term & with a fair wind, could turn out to be the biggest business that TCG has ever operated.
• TCG is forecast on consensus numbers to earn around 13p this year suggesting that the group’s shares are trading on around 8x earnings.
• One would suggest that, with China in mind, this is not expensive.
Random information, hopefully not all of it useless:
• Oil price holding above the $40 level. Bizarre markets but that’s deemed to be good news. A bit of inflation would be taken the same way.