Langton Capital – 2016-05-18 – Marston’s, Enterprise Inns, SSP, Pat Val & other:
A Day in the Life:
It’s crazy busy today so I’ll just start & finish with this thought: why do people say ‘over-exaggerate’?
Because surely, they’re either accusing someone of stretching the truth or not.
And sure, it’s not an absolute but, having said that, I don’t think sticking the word ‘over’ before it does much to change the meaning. You might just as well say ‘green’ or ‘Tuesday’, it’s just a waste of breath.
Anyway, before all these numbers do my head in it’s time for the news. However, if you would like to come off this email list please simply hit the unsubscribe button above. Similarly, if you are getting it forwarded and would like to go on directly or if you would like to recommend it to one of your colleagues, please just hit the subscribe button and/or suggest that your colleague does too.
Marston’s – H1 Numbers:
Marston’s has this morning reported H1 numbers for the 26 week period to 2 April 2016 and our comments are set out below:
Marston’s reports underlying revenue +11% at £428.7m. Underlying profit before tax is 11.8% higher at £33.1m.
Underlying EPS is +11.9% at 4.7p per share and Marston’s will pay a 2.6p dividend for H1 (up 4%), which is 1.8x covered by earnings
LfL sales at the group’s Premium & Destination outlets are up by 3%. Similarly, Managed & Franchised LfL sales are 3% higher than H1 last year (against a market up by perhaps 1%)
Managed margins are up around 10bps. They may be flat for the full year as a result of the NMW. This is not new news.
LfL EBITDA across the company’s leased estate is running 3% ahead of last year and own brewed beer sales, including the Thwaites (April 2015) acquisition, are up by more than 10%
Average EBITDA from leased pubs, including the impact of selling bottom end units, is up 13% in 2016 and has risen by 44% since 2012
Debt, cash-flow, capex etc.:
Cash flow is up by £23.1m to £81.3m and debt, including the Thwaites acquisition, is £1.273bn, broadly in line with last year.
Debt to EBITDA is now around 5.0x, down from nearer 5.4x a year ago
Fixed charge cover, which levels the playing field in terms of the ownership or non-ownership of property, is 2.6x, up from 2.4x last year.
On this measure, Marston’s cover is in line with cover at GNK, MAB and RTN.
The group’s new-build programme continues apace. Marston’s opened 7 pubs in H1 and should open at least 20 during the full year. It opened 3 lodges in H1 (including a first under the franchised model) and will open 5 for the year as a whole
CEO Ralph Findlay reports ‘we are encouraged by our first half performance and are on track to meet our expectations for the year.’
He continues ‘in pubs, we have driven our growth by the organic development of pub-restaurants and franchise-style pubs, and more recently through investment in lodges and premium bars, widening our appeal. In Brewing, we had an excellent first half year and achieved good growth through our industry-leading brands and service.’
Re current trading, the company says ‘after the first few weeks of the second half year, performance remains in line with expectations.’
Marston’s adds ‘despite more challenging comparatives in the second half year, we remain confident of achieving our targets for the full financial year and are on track to complete the new-build and lodge expansion plans outlined below.’
As mentioned, comps in H2 will be a little tougher, suggesting that +3% may be difficult to maintain. An outturn of perhaps 2% in H2 would lead to a very-acceptable 2.5% for the year as a whole
The impact of the MRO should be limited for MARS as only around 14% of EBITDA comes from its leased units
Langton Comment: Trading for Marston’s picked up noticeably towards the middle of last year and this momentum has continued throughout H1 2016.
Comps will become a little more challenging in H2 and the NMW will put some pressure on margins but Marston’s continues to outperform both its market and the majority of its competitors.
The winners and losers in respect of sales (JDW & MARS vs RTN and perhaps MAB) are beginning to make themselves plain with the former comfortably beating the Peach Tracker on a regular basis and the latter underperforming.
This is not achieved without effort and, amongst the first as it was to dispose of tail end units, to identify new build as an area of growth and to embrace franchises and everyday low pricing, Marston’s has worked hard over a number of years to achieve its current position.
Marston’s now has a smaller number of pubs overall but it has improved the quality of its estate markedly. It has transformed its business over recent years and it is now beginning to reap the benefits. Its tail has gone and its c140 new-build pubs are trading strongly.
It is adding its own units at an attractive EBITDA multiple of under 6x and the return on capital on these freehold units remains between 13% and 15% depending on location.
We continue to believe that well-located units selling customers what they want to buy at a price they are prepared to pay, will perform well.
Though not immune to moves in the wider economy, Marston’s is in control of its own destiny. It has repositioned its estate and controls trading at the majority of its units.
The group’s shares offer good value. Marston’s is growing EPS and cutting its debt. Its shares trade on around 11x current year earnings and offer a 4.9% yield. We see estimates as unlikely to change in the near term but the quality of earnings continues to improve. We believe that Marston’s is capable of delivering double-digit EPS growth into the medium term and see its shares as offering extremely good value.
Enterprise Inns – Analysts’ Meeting:
Enterprise hosted a meeting for analysts following the release of its H1 results for the 6mth period to end-March and our comments are set out below:
• Chairman Robert Walker says the group is ‘very pleased with its numbers’ and adds re implementation programme ‘we are exactly where we want to be’.
• LfL income in the leased & tenanted business, which for some time will be by far the largest part of the group, is up by 1.8%. Pubs in the South are up by 3.3%. The North & Midlands are approaching stability
• The commercial estate now comprises 264 properties. Yields should come down (and values rise). The group points to its current sale of 22 pubs for £20m, a yield of 6.7%
• Enterprise has 75 managed pubs. This number will rise, over time, to perhaps 800
The medium term:
• Enterprise has guided to EBITDA of perhaps £85k from 2,400 leased & tenanted pubs, £70k from 1,000 commercial properties and between £90k and £200k from 800 managed houses
• The above implies perhaps £360m from which (an expanded) head office cost of c£44m should be deducted.
• Depreciation could rise to perhaps £25m, interest is around £150m and the resultant PBT (3-5yrs down the road) could be around £140m
• Tax is c20%, there are around 503m shares in issue so EPS could be around 22p
• Put this on anything like a ‘normal’ rating and Enterprise’s shares, if it able to execute, could be worth say 220p to 264p in 3-5yrs time
• Discount that back (say 4yrs at 10%) and you arrive at around double today’s share price. And all the company needs to do is execute on plan
Market Rent Only:
• The implementation of the pubs code has been delayed from 26 May (a ridiculously short changeover period) to an unspecified date.
• But the MRO will come.
• Here Enterprise has a sensible strategy and, with only 11% of its pubs subject to >10yrs of outstanding lease (and only 9% between 5-10yrs), the group should be able to populate its managed business from expired leases
• Of course this may leave the lessee, the very person that the MRO was meant to benefit, out in the cold (or taking a job as a manager) but there were always likely to be unintended consequences.
• Indeed ‘lease expiry’ is the next ‘event’ for c700 pubs. The group will have 200 ‘events’ this financial year and 600 next
• It is currently only spending capital on tenancies and managed units
Balance sheet, cash flow & other:
• Debt is £2.3bn, assets are worth £3.7bn.
• The next refinancing of any size is the £350m bond due 2018. Enterprise is relaxed & will commence negotiations re a refinancing in the near future
Langton Comment: If ‘all’ Enterprise needs to do is execute its plan in order to double the current share price then, surely, job done?
Well not quite.
The strategy (for example terraform Mars) and the execution may be two very distinct things (and be separated, in the example of Mars, by a few centuries) but, we would suggest, Enterprise’s strategy is sensible, its execution is on track and its timeframe should be 3-5yrs.
But whenever analysts mention ‘estimates’, ‘net present values’ and ‘discount rates’ one should bear in mind that there are a multitude of inputs, any one of which (or all of which) could be wrong.
If you change the discount rate to 20% (a bit high, we would suggest) then you get an NPV of maybe 116p – and slip it from 4yrs to 5yrs and up the discount rate to 25% and you get 79p but, as mentioned above, GIGO.
However, we believe that Enterprise is more likely than not to get it right. As this will involve a shift to managed and commercial units, there will not be a massive boost bot EBITDA but, we would contend, the group’s multiple should react positively.
Nothing will happen overnight but, on the balance of probabilities, we would suggest that Enterprise’s shares offer good value.
• Main features London hotels, slowing markets, Restaurant Group etc. Link to index page – here
• Ongoing tweets found – here
PUB, RESTAURANT & DRINKS PRODUCER NEWS:
• Pat Val reports H1 numbers. Revenue +14.4% at £50.0m, EBITDA +21.3% at £10.6m, PBT +20.6% at £8.4m
• CAKE H1: Reports EPS 6.6p vs 5.5p & maiden interim dividend of 1p. Group opened 12 stores in H1. Chairman Luke Johnson reports ‘I am delighted to announce an excellent set of results for the six months to March 2016. The Group has continued to deliver strong growth in sales and profit in what is a competitive trading environment. We opened 12 new stores in the period all of which are performing well. Our pipeline for new stores is well developed and I look forward to another period of strong growth in the second half of the year’.
• CAKE on H2 trading. Says ‘we continue to control costs tightly’ & says it is ‘confident of achieving the Board’s expectations for the full year.’
• SSP Group results for the six months to 31 March show like-for-like sales up 3.3% and operating profit up 28% at constant currency rates to £30.9m. The operator of food and beverage outlets in travel hubs also pushed its operating margin up 50 basis points to 3.4%, helping to generate a 43% jump in EPS to 3p. Net gains of 2% were driven by strong performances in the US and Rest of the World. SSP’s interim dividend has been increased 19% to 2.5p, with the group citing an ‘encouraging’ pipeline of new contracts as grounds for optimism.
• SSP: Second half trading has started in line with expectations although the group warns of tough comparatives. Overall, however, SSP’s ‘significant structural growth opportunities and [its] programme to deliver operational improvements’ should give it enough growth avenues to deliver on its targets.
• SABMiller FY results show a 5% rise in net producer revenue, with volumes up 2% and EBITA growing by 8% thanks in part to a 60bps margin improvement. Currency fluctuations against the USD means that reported EBITA and adjusted EPS are down 9% and 6% respectively (although adjusted constant currency EPS grew by 12%). Exceptional charges of $721m have been paid, principally relating to the impairment of investments in Angola and South Sudan, along with costs associated with the Anheuser-Busch InBev SA/NV (AB InBev) transaction. SAB has increased its full year dividend 8% to 122p a share.
• SAB: The global brewer is on track with its cost and efficiency programme, with its target annualised savings of $1.05bn pa by the year ending 31 March 2020 and said, and commented that it does not anticipate ‘completion [of its merger with AB InBev] occurring before the payment of the final dividend in respect of the financial year ended 31 March 2016 to SABMiller shareholders on 12 August 2016.’
• Enterprise Inns. Press generally supportive, say the company is ‘on track’ etc. Group bought back another 100k shares yesterday.
• RTN shares up again yesterday. Greene King raising money in the debt markets may have set tongues wagging
• Carlsberg’s chairman has leapt to the brewer’s defence ahead of ABInBev’s merger with SABMiller, praising its impact on the Danish economy. The upcoming merger will push Carlsberg into third place in its home market.
• Stock Spirits has acknowledged shareholder complaints concerning its Board and is now seeking two independent non-executive directors. The group’s management is attempting to satisfy Western Gate’s request for new board members, its largest shareholder with a 9.7% stake, but wishes instead to allow its own nomination committee to decide their identity. It is worth noting that Stock’s current chairman, David Maloney, is also head of the nomination committee.
• Seemingly unable to resist another thinly veiled dig in what has proven an ill-tempered dispute, Stock Spirits added that it ‘will not support non-executive Directors who are not independent and who lack the suitable skills and experience necessary to supplement that of the existing Board.’
• Western Gate’s response has proven less than enthusiastic, noting that Stock Spirits appears to be ‘the only party that holds the view that Alberto da Ponte and Randy Pankevicz are not independent and lack the skills required,’ adding that the group’s three leading proxy advisory agencies and fellow shareholders are ‘fully supportive of the proposals.’
• Stock Spirits: Amaral commented: ‘The communication from Stock Spirits today has come as a surprise given I have been pushing for this type of action for months. I received a call from the Chairman asking me to withdraw my resolutions only a few hours before the release of the Company’s announcement, which was likely already drafted. The Chairman could not put forward any names of their proposed candidates as the Company had not even met with an executive search firm yet and that is simply no basis to withdraw my resolutions given the support received from other shareholders for these proposals.’
• Figures from the IBD show the surge in popularity of craft distilleries around the world is fuelling demand for professional distilling qualifications. The Institute of Brewing & Distilling has seen candidate numbers for its distilling examinations soar recently. This year, 223 candidates will sit the General Certificate in Distilling, up 80% on 2010, while 159 will take the next stage Diploma in Distilling.
• The fall in Scotch whisky exports is showing signs of ‘slowing’, according to research by the Scotch Whisky Association. In 2015, the value of Scotch whisky exports reached £3.86 billion, representing a decline of 2.4% from £3.95bn in 2014, while volume fell 2.8% to 1.16bn bottles. The SWA commented: ‘While challenges remain, growth is returning in more mature markets while emerging markets still provide good potential. In short, prospects for growth remain strong but the industry continues to face challenging global economic conditions.’
• Almost two million tonnes of food is wasted every year in the UK grocery supply chain, according to a new report by Wrap, equal to £1.9bn in lost sales. The report finds that more than half of food waste is avoidable.
• The administrators for BHS has warned that it is only looking at bids for the full estate, including its £85m of debt, and on the basis of no jobs lost
• JDW Monday bought back 38k shares at 700.6p.
• Tyne Bank Brewery has raised £189k on Crowdcube. It is currently over-funding. Its initial target was £150k.
• Qatar Airways has increased its shareholding in IAG to 15.01%, ‘strengthening (the) commercial and strategic ties between the companies.’
• Dutch fitness chain Basic-Fit is planning to float on Euronext Amsterdam. The group has over one million members across its 351 clubs in the Netherlands, France, Spain, Luxembourg, and Belgium.
FINANCE & MARKETS:
• UK CPI fell to 0.3% in April per ONS. Cheaper flights dragged the number down. Prices there fell by 14.2% between March (which included Easter this year) & April.
• US consumer prices grew at their fastest rate in three years in April (+0.4%) thanks to rising energy prices, increasing the likelihood of a rate rise later this year. The Labor Department’s inflation figures showed energy prices increased by 3.4% in April, the biggest rise in three years, mainly due to an 8.1% increase in petrol prices.
• UK house price inflation jumped 9% in March as landlords rushed to buy ahead of stamp duty changes, according to the ONS.
• World markets: UK up yesterday but Europe lower. US down and Far East mostly lower in Wednesday trade
• Oil price up again overnight, trading at around $49.40 per barrel.
• The US has raised import duties on Chinese steel by 522% after accusing manufacturers of selling below cost
Retail Roundup from Nick Bubb:
Today’s Press and News: BHS and Philip Green are still in the news today…with the Times flagging yesterday’s news that John Hargreaves of Matalan fame is fronting a joint bid for BHS with the owner of the Select discount fashion chain, whilst the Daily Mail highlights that Mike Ashley plans to turn into BHS into “another Woolies” if he wins the auction, building on his Mega Value variety store trial. Last night the Business editorial in the Evening Standard noted how useful it has been to Philip Green that his friend Mike Ashley has been creating “competitive tension” in the BHS bid process…
Next Share Buyback Watch: The hard-working “Mr Share Buyback Man” at Next was in action yet again yesterday, for the sixth working day in a row, and, just to shake things up a bit, he bought just over £7m worth of Next shares (rather than his usual £5m worth), to take his post-final results activity to a cumulative total of c£70m.
News Flow This Week: Tomorrow brings the Asda/Wal-Mart Q1, the Mothercare finals, the Booker finals, the ONS Retail Sales figures for April, the Next AGM and the Game Digital refinancing EGM. The Moss Bros AGM update is then on Friday. And at some stage soon the administrators should finally unveil the outcome of the bidding for BHS and Austin Reed…
Covent Garden Restaurant Watch: The property company CapCo announced yesterday, breathlessly, that the famous Petersham Nurseries is to take a big 16,000 sq ft restaurant unit in its new Kings Court development next year. As Petersham Nurseries (near Richmond) also runs a posh garden centre, it is not inappropriate that the development is on…Floral Street!
Lookers: the mainstream motor retailers have taken a bit of a bashing on the stockmarket in recent weeks, on the back of the successful Motorpoint IPO and evidence of slowing new car sales, but Lookers came out fighting yesterday, in its IMS update for the quarter ended 31 March, “which shows a strong performance in the period and continued improvements in all areas of the business”. As the Q1 comps were strong, management “therefore believe that the results for the year ending 31 December 2016 should be in line with current market expectations, which will represent a significant increase over our 2015 performance”. Nick Bubb – email@example.com
Yester-tweet – Yesterday in a Nutshell: Live Tweets on Website:
(SOME OF OUR) EARLY TWEETS:
• Enterprise H1. Early days but transition is on track. Revenue £305m vs £302m last year. EBITDA (pre-exceptional) £142m (vs £144m)
• ETI H1: says ‘leased and tenanted like-for-like net income is up 1.8% (H1 2015: 0.6% growth) across the whole estate’.
• ETI H1: Commercial property LfL income +5.2%, now has 75 managed pubs. Just selling another 22 units.
• ETI H1: Cash flow up, CEO Simon Townsend reports ‘we are continuing to make good progress.’
• ETI H1: Plan appears solid. Execution will be the challenge but trading is in line with expectations, so far, so good
• Premier Foods reports FY numbers. FY group sales +0.6% with branded flat. Q4 numbers +1.4% & +1.0%.
• Premier Foods: CEO Gavin Darby reports ‘we are very pleased to report sales growth both in the year and Q4’
• PFD FY. Q4 shows good progression, growth targets raised. Debt down to £534m from £585m. Pension deficit now, wait for it, a surplus
• CAMRA SAYS men ‘do not believe’ new drinking limits of 7pts per week. Says more explanation is necessary.
• Pragma Consulting reports that, whilst 27 pubs a week are closing, smaller players (sales <£25m) grew revenues by 29% over last 5yrs
• Oil price hitting 6mth highs. Trading at around $49.20 per barrel. Doom-mongers left with a little less doom to monger
• Enterprise says it’s strategy is correct & execution is underway. Sounds good to us. Not an overnight job but progress being made
• Some 700 leases come to an end over next couple of years. Enterprise will have pick of bunch to get to 800 managed units
• ETI runs analysts through evolving estate line by line. Targets around £360m of unit EBITDA on 3-5yr view
• Enterprise. Identifying what you have to do isn’t the end of the task. It’s the beginning. But it’s progress nonetheless
• Premier Foods’ shares down on good numbers, good debt figure, good pension surplus & good outlook. How’s that happen?
• Greene King raises debt, Restaurant Group shares rise 10% in 2dys. Coincidence? Not really, but could be 2 plus 2 = 5