Langton Capital – 2016-03-14 – More on JDW, Fevertree, Goals, terrorism & other:
A Day in the Life:
Watching our dog have another altercation with the postman at the weekend, both of them hopping from foot to foot either side of the gate basically barking at each other, I’ve become convinced that he’s a bit of a philistine.
The dog, that is because, after running around all over the daffodils for a minute or two, actively encouraged in this by the postman it has to be said, he tends to wee on the plants in public and scrat in mud for a few seconds whilst flaunting his nakedness.
Again, the dog that is.
The postman, meanwhile, confident in the knowledge that the dog is due a good telling off as a result of this flower-destruction, seems to have developed something of a self-satisfied smirk after which he sounds his horn a few times and, though he looks tempted to throw our post over the fence, then drives away just as he sees you running down the drive in your slippers.
So the dog gets no breakfast, we don’t get our post and the postman doesn’t get another hole ripped in his trousers; everyone’s a winner. On to the news:
JD Wetherspoon – H1 Numbers – Analysts’ Meeting:
Following the announcement of its H1 numbers 24 January 2016 this morning, JD Wetherspoon hosted a meeting for analysts and our comments thereon are set out below:
• The group points out that H1 numbers include a property gain of some £3.8m. Without this, EPS is down some 16.6%
• Revenues LfL in H1 split as to wet sales +2.9%, food sales +2.9%, machine income down 2.9%, accommodation sales +7.5%
• Margins are lower ‘because of slightly lower gross margin (mix changes) and additional staff costs’. Cost inflation has been benign
• Head office costs are down by some £2m on the completion of a number of IT projects and a lower level of new openings
• The group has not seen much of a difference in terms of regional performance
• Depreciation is up by 9% – this is due to the completion of a number of capital projects rather than as a change in policy
• Prices in Ireland (particularly wet prices) have been put up such that the differential with competitors is now in line with the UK
The underlying business:
• JDW frequently focuses on the issues that it believes to be core to its success.
• It is justifiably proud of its brand awareness (slide 15), staff retention & pay levels (slide 13), its CAMRA placing (slide 17) and its Cask Marque, food hygiene and even its Loo of the Year prizes (slide 17)
• Longer term, issues such as these matter. They should help JDW build barriers to entry & retain customers
Balance sheet, debt:
• The group has taken advantage of property yields exceeding the cost of finance & has spent around £15.5m on freehold reversions in H1
• Debt is 3.49x EBITDA. Whilst higher than in the recent past, this is driven largely by freehold purchases
• The ‘majority’ of the five units opened in H1, we are going for 4, were freehold in tenure
• It makes sense to buy freeholds where possible because of 1) low interest rates and 2) the flexibility to spend more on beer gardens, accommodation and the like
• The group will open 10-15 new pubs ‘for the next couple of years’
• Re the pubs for sale (c54 units), group is making ‘reasonable progress’. It hopes to be out of most of them this year. The market for disposals is a little better. Depending upon how well the current units sell, JDW may sell more
Current trading, outlook etc.:
• Price increases. These only impacted last week. No feedback as yet. Amounted to around 5p at the bar ‘and a little more on food’. Similarly changes to the Sunday menu will only take place this weekend.
• The group has not put prices up for a little while – but it thought that the time was right
• JDW has put in place a pay structure that virtually complies with the NLW legislation that could cause some other operators issues next month
• Comps in H2 are softer & the group hopes for a ‘reasonable’ outcome to the year. When pressed, it suggested that this may mean LfL sales growth of perhaps 2% to 3% with profit numbers in line with forecasts
• Accommodation. The group has c950 rooms. It would like more but additions will be opportunistic in nature
• Margin. Once again the group would not be drawn. It maintains that this is an output rather than a key metric
• Group suggests the consumer environment is not too bad. Comments contrast just a little with those from RTN earlier in the week
• JD Wetherspoon reassured that trading is in line with expectations and that it should produce a ‘reasonable’ result for the year. It maintains that the business is ‘in good shape’.
• Numbers will not be changing suggesting that JDW’s shares are trading on around 15x this year’s earnings with a c1.8% yield.
• This is not cheap in comparison with the ratings on which some other pub companies trade but, as we believe that JDW is a superlative operator that has created material barriers to entry, we see it as good value.
• Indeed the company itself has recently once again been buying its own shares back. Its new openings programme has slowed over the medium term and such buy-backs may remain a feature going forward.
Pub, Restaurant & Drinks Producer News:
• JDW Fri bought another 205k of its own shares at price of 697p. Has now bought back 1.24m (average 649p) since H1 numbers
• Bistro chain Cote is set to be sold to BC Partners in a £250m deal less than two years after CBPE Capital acquired its controlling stake, writes Sky News. The move for the 65-strong chain comes as part of a chain of takeovers of fast-growing groups in the eating out sector.
• Students are more likely to go out for a coffee on campus than a boozy night out these days, according to a survey of 2,000. Almost a third of students say they spend no money at all on socialising in a typical week, compared to 14% who said they did before tuition fee rises in 2012, while 80% (up from 67% in 2010) now claim to spend less than £20 a week on drinking, smoking, and partying.
• Fevertree FY numbes, revenues £59.3m (vs £34.7m), EBITDA +82% at £18.2m, EPS 11.5p vs 1.5p. Dividend 3.08p vs 0.3p.
• Fevertree FY. Says has made ‘significant distribution gains in both the On & Off-Trade in the UK’ and achieved new listings with M&S.
• Fevertree FY: Charles Rolls Executive Deputy Chairman reports ‘Fever-Tree’s on-going success is driven by a global consumer desire and demand to drink premium mixers to complement their premium spirits, and our strong first mover advantage. We are increasingly well positioned to take advantage of the growth in both the On and Off-Trade in all geographies with the brand’s growing international reputation.’ He concludes ‘we maintain that the premium segment is still in its infancy and will continue to outperform the other drinks categories as global cross-category premiumisation continues to gain prominence.’
• Fevertree FY: CEO Tim Warrillow says ‘2015 was an exceptional first full year for Fever-Tree as a public company in which we continued to strengthen our reputation as the leading international premium mixer brand. In our tenth year of trading we achieved a 71% increase in revenue and 82% increase in adjusted EBITDA, underpinned by strong, improving margins. Growth was strong across all of our four main geographical regions illustrating the global appeal of the brand.’ He concludes ‘we have had an encouraging start to 2016 and look forward to the future with confidence.’
• Property. Grosvenor has sold a 125-year leasehold interest in an office building at 69 Grosvenor Street, basically a house, to a private investor for £35m. Grosvenor says ‘we will recycle the capital from the sale, reinvesting it back into our London estate.’
• ONS figures suggest that just 26% of hospitality businesses employ staff on zero-hours contracts, down more than half from the 53% reported in 2014.
• BrewDog is closing its Development Fund, designed to help craft breweries ‘reach that next level’, in the wake of a series of acquisitions by large beer brands. ‘Recent corporate takeovers and buyouts have detracted from our good intentions and that just doesn’t sit well with us,’ said the Scottish brewery, adding ‘Despite being significantly smaller in scale – and with intentions diametrically opposite – to recent ‘investments’ made in Ballast Point, Camden Town, Meantime, Elysian and others, when one brewery has a stake in another it can’t help but compromise the smaller of the two parties.’
• The private equity owner of Krispy Kreme’s UK business, Alcuin Capital Partners, has hired Investec to oversee a flotation in the near future. Alcuin bought Krispy Kreme UK from an investment group led by three American entrepreneurs in 2011 in a deal worth c£25m as a franchise of US-based Krispy Kreme Doughnuts Inc.
• Despite news last Wednesday that Hotel Chocolat is planning to float, it has been a quieter start to the UK IPO market this year amid turbulent markets, a global economic slowdown and uncertainty about Britain’s future in the European Union. As of the end of February, eight companies had listed in London, raising £385m, compared to £468m raised by 11 companies in the same period last year, according to the London Stock Exchange.
• British Pub Confederation chair and Lib-Dem MP Greg Mulholland’s claim that Paul Newby will not be an independent pubs code adjudicator has drawn criticism. Business minister Anna Soubry labelled Mulholland’s comment concerning the Fleurets director a ‘disgraceful set of slurs. Mulholland argued in the House of Commons that tenants had been ‘astonished’ by the appointment.
• Sparkling wine sales in the UK have flown past the £1bn mark for the first time, with WSTA figures showing off-trades sales of £709m and on-trade sales of £348m for the 12 months to January 2016. The sparkling category includes Prosecco, Cava and English sparkling wine as well as labels from other countries including New Zealand and French Cremant.
• STR data shows London hotels had a negative February, although the 0.4% decrease in average daily rate to £127.35 represents an improvement on January. Occupancy in the capital fell 2% to 75.6%, as demand growth continues to lag supply, while revenue per available room declined by 2.4% to £96.33.
• The US hotel industry observed a slowdown in RevPAR growth from 8% in 2014 to 6.3%, according to STR and Oxford Economics data.
• At least 34 people were killed and 125 injured in an attack in Ankara yesterday, marking the second major attack in the Turkish capital in less than a month. President Erdogan said the country is now a target in an unstable region.
• Juno, a start-up rival to Uber, is having some success in taking market share by offering better rates for drivers alongside equity offers. Juno’s founder Talmon Marco, an entrepreneur who co-founded Viber , says the company is specifically targeting Uber drivers and offering them a better deal with lower commission rates and equity in the company. ‘What Uber left out in the process of building their company is that they completely and totally forgot about the people who do the work, the drivers,’ commented Marco. ‘Imagine a company where all the employees hate management; that is not a good place to be.’
• Five-a-side soccer centre operator Goals has reported LfL sales down 4.9% to £33m and group EBITDA down c20% to £11.8m for FY December 2015. Free cash flow (-18% to £10.6m) and underlying PBT (-21% to £8.3m) were both down. Underlying diluted EPS fell marginally to 14.3p a share. Like for likes for the start of the new financial year have returned to modest growth.
• Five-a-side. Newly-appointed executive chairman, Nick Basing, commented: ‘2015 was undoubtedly a disappointing year, however Goals still has a very sound operating model. I will be continuing to spearhead the ongoing review into every aspect of the business to develop a new strategy to improve performance and returns, partly based around a re-investment program to rejuvenate and grow the business. It is pleasing to see early signs of our work so far with a return to very modest, positive like-for-like sales in the first nine weeks this year.’
Finance & Markets:
• George Osborne has announced that further public spending cuts will be forthcoming in this week’s Budget, as he looks to protect his austerity plan from a weakening economy. The chancellor has reassured that the changes will not be drastic, however. Osborne said the world is facing its most uncertain time since the financial crash, with China’s slowing economy, commodity price falls, and geopolitical tensions in the Middle East.
• The International Energy Agency says there is growing evidence that oil prices are stabilising and could even begin to rise again. Lower output from the US and other countries, coupled with a milder than anticipated impact from Iran, have allowed market forces to ‘work their magic’.
• The UK’s trade deficit narrowed from £3.7bn to £3.5bn in January according to ONS stats, although its goods trade gap with the EU widened to a record level of £8.1bn.
• The British Chambers of Commerce has downgraded its growth forecast for the UK economy due to ‘global headwinds and uncertainty’. The BCC now anticipates economic growth of 2.2% this year, down from its previous estimate of 2.5%, while its 2017 forecast has been reduced from 2.5% to 2.3%, with 2.4% growth in 2018.
Retail Roundup from Nick Bubb:
Today’s Press and News:
News Flow This 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:
Yesterday’s wrap comprised the Restaurant Group comments included above.