Langton Capital – 2016-06-30 – More on Greene King, Brexit, Vianet & other:
A Day in the Life:
A REQUEST FOR FEEDBACK:
So will small ticket spending hold up?
No really, that’s a genuine question, pleases drop us a line & let us know how trading is going. We will share results with contributors & put a shorter version out with the email when we’ve had replies.
March & April were skewed by the move in Easter. May and June were similarly impacted by the shift in the half term week and June was additionally impacted by the football.
But July should be a ‘clean’ month and, according to my calendar, July starts tomorrow.
Of course the weather will skew things. This week last year was the hottest of the summer after which it rained for two months. Hence that will need to be accounted for but, please, let us know how trading is going.
A DAY IN THE LIFE:
So we’ve had to break the Brexit news to the dog.
He’s a Bernese Mountain Dog and, despite the fact that Switzerland is not in the EU, he has always felt European when he’s been eating snails and 5dy old dead pigeons in the garden and he’s frankly inconsolable.
The ducks are chilled, however.
They seem to think that the chance of them being paired up with some sort of orange-flavoured sauce has diminished but, as I’m still in a pretty ratty frame of mind, they may be fatally disappointed come Christmas.
Anyway, back to the dog.
I’ve tried to tell him that things will be alright but he doesn’t seem convinced. He did his puppy eyes and tried to squirm his way into the ground and then, rather surprisingly, he asked me ‘what’s the plan?’
I said that I didn’t know and that nor did anyone else. He then asked if I’d heard from Boris recently to which I had to reply ‘no’ and then he speculated that Boris was probably as shocked, surprised and upset as everyone else.
It was only when he tried to share his food with me that I realised it must be a dream, he wouldn’t do that. Or a nightmare, of course. On to the news:
RECENT WEBSITE ARTICLES:
• Small vs large ticket items – here
• Recent notes – here
• Ongoing tweets, older emails found – here
LEISURE NEWS – BREXIT SHOCK:
• French Finance Minister Michel Sapin has said that freedom of movement will be ‘on the table’ in talks with UK.
• US President Barack Obama has said the Brexit vote raises ‘longer-term concerns about global growth’. In appealing for an orderly exit, he added ‘the possibilities of investment in Great Britain or in Europe as a whole’.
• Property Week has said that the Brexit vote has put a raft of upcoming property deals ‘on ice’.
• Vianet has today said that the Brexit uncertainty is ‘unhelpful’.
• Airline bosses meeting in Brussels have said that the Brexit should cause only ‘short term turbulence’. IAB boss Willie Walsh said that ‘the fundamentals haven’t changed’ whilst Michael O’Leary of Ryanair said ‘I don’t think it will have any long-term impact on Ryanair.’
• Pro-Brexit Institute of Economic Affairs said that 18-24s have not been robbed of their future. Rather unhelpfully, it says they should have turned out and voted. It said ‘if the turnout of everyone who committed to staying in the UK for a few decades had matched that of those who were planning to emigrate soon then we’d have stayed in’.
PUBS & RESTAURANTS – GREENE KING ANALYSTS’ MEETING:
• Following the announcement of its FY numbers this morning, Greene King hosted a meeting for analysts and our comments are set out below:
• Managed Houses:
• Greene King pubs (ex-Spirit) record revenue growth (not LfL) of 5.1% in the year to 1 May
• The group added 791 Spirit managed houses during the year and built a further 13 units. It sold 26 units
• GNK LfL sales were +1.9% and SPRT were +1.0%
• Spirit pulled down the reported margin due to the larger number of leasehold units that the target operated
• This year, the National Living Wage will add around £2m (net of mitigation) to costs. This will rise to £6m b y FY19.
• Other labour costs should rise by 2-3%, food and drink prices should be lower and utility costs will be up by 2%
• Spirit synergies are still set at £35m (by year three). This number could rise.
• Scotland is showing positive LfL sales now that the impact of the reduced drink-drive limit has annualised through
• Pub Partners:
• Greene King Pub Partners’ LfL net income was +2.7%
• The average LfL was +9.8%. It stands around £77k.
• The group has around 1,200 leased & tenanted units. Over time, this should reduce to around 1,000.
• Brewing & Brands:
• Beer volumes were +2.9% including the effect of selling more GNK beer into the Spirit estate
• Cash Flow, Balance Sheet & Debt:
• Group says it is committed to retaining a ‘prudent & flexible’ balance sheet.
• Net debt to EBITDA has fallen from 4.3x to 3.9x.
• But, as Spirit brought with it a number of leased units, fixed cost cover may be a more appropriate measure and, here, the cover has declined from 2.9x to 2.3x.
• The group recently crystallised £120m in swap losses as a part of a £300m (£180m net) debt extension. It says that the opportunities available made it worthwhile taking this hit (which had already been provided for).
• Strategy, Integration etc.:
• GNK maintains that it (in retail) will focus on 1) brands, 2) value, service & quality, 3) staff, 4) property and 5) its balance sheet.
• If the company (or any company) gets all of the above right, then it will prosper
• Spirit brand swaps will be the most exciting part of the group’s acquisition. This is just getting underway – but early signs are positive
• The enlarged company should make around 300 conversions over 3yrs
• The beer division will focus on its key brands, IPA, Old Speckled Hen and Belhaven
• Current Trading & Conclusion:
• The group comments that, since January, EU Referendum uncertainty seems to have hung over consumer spending
• This has not dissipated post the vote
• GNK says uncertainty will be a feature of the industry for some time but it suggests that small ticket spending should hold up and points to its own resilient performance in 2007-08.
• Trading in the first 8wks of FY17 has been good with LfL managed sales +2.8%.
• Langton Comment: Greene King has reassured that the integration of Spirit is on track.
• It furthermore suggests that small ticket sales should hold up even if the wider economy falters.
• Input costs (wines, ultimately fuel etc.) will rise a little if the Brexit is carried through. Around 9% of GNK’s staff are EU nationals and, whilst there is no suggestion that they would have to go home, further recruitment may not be allowed.
• In common with most domestic operators, GNK has given ground recently. However, trading as they are at little more than 11x this year’s EPS, we believe that GNK’s shares offer good value.
PUB, RESTAURANT & DRINKS PRODUCER – OTHER NEWS:
• JDW Tuesday bought back 1.2m of its own shares for cancellation at a total cost of some £8.25m.
• Since January, JDW has bought back around 5.5m of its own shares for £37.3m or 685p per share. This is equivalent to perhaps 10-15 relatively large freehold pubs.
• Vianet has commented on trading ahead of its AGM later this morning saying it is in line with expectations. James Dickson, Chairman, says ‘trading across our continuing operations in the first two months of the current year is in line with expectations and is noticeably ahead of the comparable period last year with all business areas progressing well.’
• Vianet says trading is ahead of last year. The Chairman continues ‘Vending Solutions, in particular with its coffee vending telemetry systems and contactless payment solutions, has continued to make good progress and is demonstrating solid growth.’ Dickson concludes ‘the Board is confident of the medium and long term prospects of the Group and this is reflected in its decision to recommend maintaining the final dividend at 4p per share. Whilst the economic uncertainty and exchange rate volatility resulting from Brexit is generally unhelpful, the Group’s continuing progress to date, leads us to look forward positively to the remainder of the year and beyond, and the Board remains confident of delivering value to its shareholders.’
• My Local, the convenience store chain once owned by Morrisons, has entered administration, with KPMG overseeing the process. Mike Greene, chief executive of My Local, explained that times are tough in the sector, adding: ‘This is the first time in 20 years that the convenience sector is not growing strongly. Some long-established high street names have gone and many of the large chains are shrinking the size of their networks. In addition, the supermarkets are cutting prices to compete with the discounters, piling further pressure on prices and margins, making it harder to compete.’
• MCA’s Food To Go Tracker suggests food quality is more important for food to go consumers at breakfast and lunch than speedy delivery or value for money.
• MP Greg Mulholland has called on business minister Anna Soubry to set a date for the implementation of the pubs code. Mulholland said in the House of Commons that tied pub tenants eligible for the Market Rent Only Option are ‘missing out’ due to the Department for Business, Innovation and Skills’ mistakes, and for this reason the incoming pubs code should be applied retrospectively. The British Pub Confederation estimates for every month the code is delayed, 220 tenants miss out on their chance for MRO.
LEISURE TRAVEL & HOTELS:
• Three suicide bombers at Istanbul’s Ataturk airport are now known to have killed 41 travellers & injured 239 others.
• Fosun has taken advantage of post-Brexit volatility by increasing its stake in Thomas Cook to 8.2% as part of its intention to take its holding up to 10%.
• Iata’s director general says governments are facing a ‘growing challenge’ to keep travellers safe in airports after 41 were killed in an attack on Istanbul’s Ataturk airport. Tony Tyler, chief executive of Iata, said: ‘This tragedy in Istanbul and the one in Brussels earlier this year show that there is a growing challenge for governments to keep people safe in the ‘landside’ parts of the airport. Moving people ‘airside’ more quickly can help to mitigate risk. The industry has a number of initiatives in place to achieve that aim and we are working with governments and airports to implement them.’
• Sportech has reported that HMRC has paid it £93m in relation to its Spot the Ball VAT claim. Around £4m may follow. The decision is not absolute. Sportech says it ‘is awaiting a decision from the Supreme Court as to whether HMRC has been granted the right to appeal to the Supreme Court against the Court of Appeal’s unanimous decision in favour of Sportech.’ It says if HMRC can appeal and it wins, then the £93m would need to be repaid. The group adds that it will update shareholders with further information as it becomes available.
FINANCE & MARKETS:
• Bank of England Governor Mark Carney will outline his thoughts on how the British economy is coping with last week’s referendum vote today at 3pm.
• World markets: UK & Europe up strongly yesterday. US higher and Far East mostly up in Thursday trade
• Oil price up through $50 (again) and, as price is now falling, it may but it in a downward direction too. Price around $50.05 per barrel
• Number of mortgage approvals up to 67,000 in May. This is a historic number. Figures straddling Brexit vote will be more important
• The cheapest house prices in the UK can now be found in the North East of England and Cumbria, according to Nationwide. Prices in the UK overall rose by 5.1% in the year to June, up from 4.7% last month, although the figures do not yet reflect the result of the EU referendum.
YESTERDAY IN A NUTSHELL – SEE LIVE TWEETS ON WEBSITE:
• Some of our morning tweets: BREXIT: Molson Coors yesterday sold $5.3bn of bonds on the US markets. It is the first major financial deal since last Thursday’s Brexit vote
• Revolution Bars pulls out of acquisition that it was considering. It blames ‘market uncertainty following the result of the EU Referendum’.
• Kantar has said that grocery sales should not fall as a result of the Brexit. People’s gotta eat. But prices will rise.
• Ryanair is to divert expansion away from the UK. Boss Michael O’Leary says ‘we will pivot all of our growth into the EU’.
• PWC has said the economy will be smaller than it would otherwise have been as a result of any ultimate Brexit
• Tax rises & spending cuts will have to follow in due course said UK Chancellor George Osborne.
• M&G (part of Prudential) is reported to be looking at a move of more of its operations to Dublin.
• FY from GNK. Beats expectations, current trading good but Brexit will cause uncertainty. Shares on c11x this year earnings.
• Chris Moore, a non-executive director of Domino’s Pizza Poland, has purchased 500,000 ordinary shares in the company at 36.5p
• Merlin CEO Nick Varney has said the fall in the pound is good for domestic tourism as Britons will holiday at home
• Snoozebox reports FY numbers. Sales £5.8m (vs £2.8m) but loss before tax up to £18.9m from £5.6m.
• Airbnb is in talks for a new round of funding that would value the apartment-sharing service at $30bn.
• Carnival reports Q2 numbers, says net revenue yields +3.6% in constant currency compared to prior year (> guidance of +1.5%)
• European leaders are leaning on Britain to move quickly on Article 50 in order to get Brexit negotiations going
• Fitch cuts UK rating, Osborne says prepare for higher taxes and lower benefits. Scotland trying for a side-deal
• Later Tweets: Emergency Budget? So was Mr Osborne the boy who cried wolf, or will we really get one that makes our eyes water in 3mths?
• Various stocks, food retailers, pubs, stores etc. are likely to say they ‘remain committed to the UK’. But they have no choice, do they?
• Stock market rally is on but, with there being so much uncertainty out there, few are yet willing to call the bottom.
• Input prices. Most up in Sterling terms due to weakness of pound – but interesting to note that grain prices are weak. Also milk
• Sharp movements (like last 4 trading sessions) throw up trading opportunities. But, as ever, these are much clearer with hindsight
• Monster share purchase by JDW yesterday, bought to cancel 1.2m shares for £8.25m. Mr M putting his shareholders’ money where his mouth is
RETAIL NEWS WITH NICK BUBB:
• Consumer Confidence Watch: We have been flagging that the survey work for the widely followed monthly GFK Consumer Confidence survey (which came out overnight) was done well before last week’s EU Referendum drama (between June 1st and June 15th), which clearly reduces its significance. Nevertheless, Joe Staton, the Head of Market Dynamics at GfK, highlights that “one trend that continued in the run up to the Referendum is a deepening pessimism over the general economic situation. As we approached voting day, this was already 18 points lower than in June 2015 and it’s almost certain we’ll see this worsening when next month’s results are in”. Confidence about personal finances is propping up the overall index, with the total score remaining the same at -1, but it is difficult to see this holding up, post-Brexit.
• Share Buyback Watch: It was interesting, again, to see which companies took advantage of the recent share price slump in the Retail sector to buy back some more “cheap” stock yesterday…Next bought c103,000 shares at an average price of c4857p and WH Smith bought 25,000 shares at c1504p, whilst Pendragon and DFS carried on with their modest buyback programmes. In terms of Director buying, we noticed that the Chairman of Halfords, the veteran Denis Millard, added to his modest holding, by picking up 10,000 shares at c312p.