Langton Capital – 2016-07-06 – Service sector growth, food prices, Brexit & other:
A Day in the Life:
So how come everything you need to maintain your house mysteriously breaks whilst being stored for the winter?
Whether it’s the pressure washer, the strimmer, the lawn mower or the chain-saw you can be reasonably sure that they’ll have one thing in common and that’s that they won’t work when you try to switch them on.
The mice may have got to them, the petrol may have congealed in the pot or gravity may have exerted some kind of hitherto unknown force on them leading to an internal malfunction but why does it happen, year after year after year?
Anyway enough of that. On to the news:
RECENT WEBSITE ARTICLES:
• Leisure, the Brexit impact – here
• Small vs large ticket items – here
• Recent notes – here
• Ongoing tweets, older emails found – here
PUB, RESTAURANT & DRINKS PRODUCERS:
• Chairman of Greene King Philip Yea has bought 10,000 shares in the company at a price of 747p per share
• Hackney’s Licensing Sub Committee has permitted its proposed late night levy to go before the full council for approval on 20 July.
• Growth in the UK service sector slowed last month from 53.5 to 52.3, according to the closely-watched Markit/CIPS purchasing managers’ index. A figure above 50 indicates growth. Markit said the fall reflected ‘intensified’ anxiety over Brexit, while a ‘further slowing, and possible contraction, looks highly likely in coming months as a result of the uncertainty created by the EU referendum.’ The Bank of England is likely to cut interest rates and increase quantitative easing.
• Sainsbury’s remains confident of the profitability of its proposed purchase of Home Retail despite the economic uncertainty brought about by the EU referendum. Sainsbury’s shares have fallen 19% over the last three months, reducing the deal’s value.
• McDonald’s Corp has won a legal case in the European Union’s General Court which permits the fast-food giant to prevent other operators from using ‘Mac’ or ‘Mc’.
• Food prices saw their biggest drop for over a year last month of 0.8%, adding to what the British Retail Consortium calls an ‘extraordinary run of deflation’.
• Australian Vintage has issued a profit warning as a result of the ‘significant unfavourable’ movement in Sterling although it expects uncertainty to settle down ‘in the short to medium term’.
• Fuller’s has completed a major overhaul of its wine portfolio, introducing 100 new bottles and taking its total portfolio from 300 to 350, writes Imbibe. The pub group is aiming to double key parts of its range and hit double-digit growth in wine sales according to its head of wine, Neil Bruce.
• The UK leisure market is worth £117bn in revenue and is growing at nearly twice the rate of the retail sector, according to a survey of 3,000 consumers from Deloitte. The report, entitled, ‘Passion for leisure: A view on the UK leisure consumer’, found that 85% of UK consumers spent on eating out in the first quarter of 2016, while 75% spent money on culture and entertainment, 73% took to coffee shops, and 70% drank in pubs and bars.
LEISURE TRAVEL & HOTELS:
• Sterling down at 128c will make a real difference to holidaymakers on the ground. Brochure prices won’t rise till next year.
• Sterling has dropped by 14% against the US$ since 23 June and by a still-meaningful 12% against the Euro. This should benefit domestic tourism operators (many unlisted) but will mean that on-the-ground prices will rise for British tourists immediately (they will be bringing less money home at the end of the holiday) and holiday list prices will rise for next year.
• IAG saw a 13.6% rise in revenue passenger kilometres year-on-year in June and a 13.2% increase in group capacity as measured by available seat kilometres.
• Travellers to France and Italy faced disruption yesterday as air traffic controllers went on strike, with Ryanair warning that further delays and cancellations are likely.
• SACO has launched a lifestyle-led aparthotel brand called Locke targeted at tech-savvy business travellers, with its first property ready to open on Leman Street, Aldgate, in October.
• Overseas tourists have gone online to search for UK hotels and holidays as they look to take advantage of a weakened pound. Hotel and holiday deals website Travelzoo said it had seen a spike in the number of searches from its members in the US and China following the results of the EU referendum on 23 June.
FINANCE & MARKETS:
• Sterling has hit a new 31-year low against the dollar as markets adjust to the uncertainty surrounding the UK’s exit from the EU.
• Sterling has continued its fall into Wednesday trading. It fell below 128c to the dollar in Asian trading. Now around 129c.
• Oil trader Vitol has said that the 2016 rally in the oil price has now run its course. Boss Ian Taylor says it should touch $60 next year
• The New York Fed’s William Dudley has said that the Fed can remain patient when it comes to raising interest rates. Brexit vote raises level of uncertainty, he adds. Mr Dudley said ‘if you strip out the energy sector, inflation is still a little below what we would like… so that allows us to be patient in terms of letting the economy run with accommodative monetary policy in place.’ He adds ‘if inflation were higher … we could probably be a little more aggressive in terms of monetary policy. With uncertainties about the outlook and inflation being lower than desired, it allows us to be a little more patient.’
• The services PMI for the Eurozone fell to 52.8 in June from 53.3 the month earlier
• World markets: UK mixed yesterday with FTSE100 up but the domestic FTSE250 sharply lower. Shares down in Europe, US & Asia
• Oil price sharply down at $47.66 per barrel as world moves to risk-off mode once more.
LEISURE & ECOMOMIC NEWS – BREXIT SHOCK:
• Property values uncertain:
o M&G and Aviva have joined Standard Life in suspending trading on their property trusts. Looks like borrowing short, lending long. Aviva said ‘we have acted to safeguard the interests of all our investors by suspending dealing in the fund with immediate effect. Suspension of dealing will give Aviva Investors greater control in managing cash-flows and conducting orderly asset sales in order to meet our obligations to investors wishing to redeem their holdings.’
o Funds unsure of asset values and/or whether they can realise assets. Hence have strapped unit holders in tight
o St Modwen Properties yesterday said that it would take a more “cautious” approach to development post the Brexit vote
• Labour shortages:
o Damage limitation. Food & Drink Federation has said it will support & reassure its “valued” European workers. Up to a quarter of the workers in the food industry are said to be from EU countries. Ian Wright FDF director general described Brexit as the UK’s “most significant peacetime challenge ever”.
• Brighter news:
o Tesco has said that England’s defeat by Iceland had a bigger impact on the country than had the vote to leave the EU. Chief product officer Jason Tarry said ‘for us it’s been business as usual since the vote. Nothing has actually changed. The bigger impact has actually been England losing in the Euros and the weather.’ He added ‘we will take it in our stride. Frankly we’ve been through quite a lot in the past couple of years and we’re match fit.’
o Sainsbury has warned against ‘talking ourselves into a recession’. Says the Argos deal still works
o Some hoteliers have suggested that bookings from overseas visitors are increasing on the back of the weak pound
• Bank of England:
o Bank of England has warned that commercial property may be a key risk to the economy. Foreign investors have been 45% of the market since 2009.
o B of England warns re property ‘valuations in some segments of the market, notably the prime London market, had become stretched.’
o B of England warns if overseas buyers don’t buy our assets, property, businesses etc., we will not be able to afford our imports
o B of England says ‘some risks have begun to crystallise’ & adds ‘the current outlook for UK financial stability is challenging.’
o UK business confidence has slumped since the Brexit vote reports a YouGov, CEBR poll. Says evidence of “significant shock reaction”
o Gov. sale of 73% government-owned RBS could be delayed for an additional two years cautions boss Ross McEwan
o Sterling weakness, see above.
YESTERDAY IN A NUTSHELL – SEE LIVE TWEETS ON WEBSITE:
• Some of our morning tweets: Young & Co updates on Q1, says ‘we have had a good start to the current year, without much help from the weather.’
• YNGA says ‘clearly, the result of the EU Referendum has created considerable political and economic uncertainty’
• CGA survey on National Living Wage finds a welcome from most pub & restaurants saying ‘it will have a positive effect on the market’.
• Slug & Lettuce owner Stonegate has ‘absolutely no plans’ to go ahead with a £1bn float considering Brexit-related volatility.
• Sainsbury’s is ending its joint venture with Netto following a ‘comprehensive review’, ending a trial that begain in June 2014
• TUI’s outgoing boss of non-mainstream (and former CFO) Will Waggott is thought likely to be involved in any bid for the business
• Gym Group updates on H1, says it is seeing ‘strong trading momentum’ and adds that its ‘rollout continues to plan’
• Confidence across firms at a 4yr low in run up to EU referendum reports Federation of Small Businesses.
• Listed Scottish asset manager Standard Life has suspended redemptions on its £2.7bn property fund.
• Other Tweets: Sterling on the slide again. Good for domestic holiday companies & some hotels if people can’t afford to travel abroad
• Brexit Panorama useless mush. Sounding off, disgruntlement, legitimised xenophobia, fear etc. No searching questions asked, no plan
• Milk price in UK lurches down again. Good for the Premier Foods of this world, it’s their biggest input cost
• Red meat prices down, down but white meat (hogs) up. Also grain prices very low. With weak pound is perhaps Just as well
• REITs among the big losers as property crash fears bite. Housebuilders lower. RICs survey (backward looking) on Friday
• Standard Life property fund redemptions suspended. Hasn’t it effectively borrowed short and lent long? Learned nothing, then…
• Idea we can be tax haven on Europe’s doorstep, retain access to open market & shut door on migrants is laughable/naïve/tragic in equal order
• Where have Brexiters gone? Resigned, on holiday or in hiding? And if I hear one more person say ‘I didn’t think we’d win, but…’ I’ll scream
RETAIL NEWS WITH NICK BUBB:
• Topps Tiles: Since the “Brexit” vote, the share prices of the “big ticket”, housing market related companies have been hit very hard, as the City has moved quickly and brutally to discount a future UK recession, so there is a lot of attention on how “white van man” is reacting to the change in the climate, with the Howden interims on July 21st and the Travis Perkins interims on August 2nd two important barometers coming up on the horizon. But the update from little Topps Tiles today is reassuringly strong, with LFL sales up by 6.2% for the 13 weeks to July 2nd. That is flattered a bit by the shift of Easter, with underlying LFL sales up by 5.6%, but that is still good, given the attractions of Euro 2016 in France in recent weeks for many of Topps’ core customers, even if the weather has been helpful for “indoor” work like tiling.
• Booker: Ahead of today’s AGM at 11am (which is, as usual, held in the downmarket part of Wimbledon, in the Booker Cash and Carry branch), Booker has issued its trading update for 12 weeks to June 17th and Group sales, including Budgens and Londis, rose by 10.0% on the same period last year, with LFL sales down by 2.9%: non-tobacco sales reduced by 0.7% LFL (impacted by deflation in food prices and many customers reporting weak consumer demand during the period) and Tobacco sales down 7.7% (continuing to be adversely impacted by the ban on small stores displaying tobacco products). CEO Charles Wilson says that “Overall Booker Group had another solid quarter…Our balance sheet remains strong with a net cash position…Booker Group remains on course to meet expectations for the year ending 24 March 2017.”
• John Lewis Partnership Sales Watch: As the sector tries to reassess the outlook for the second half of the year after the EU Referendum vote, yesterday’s John Lewis sales figures for last week were potentially a big talking-point, but there was actually no sign of a Brexit slump at John Lewis, with gross sales up by 2.1% (flat LFL), helped by the cool weather/earlier Clearance. However, Waitrose was c5% down LFL last week, w/e July 2nd, impacted by a tough comp (helpfully sunny weather a year ago, plus the “Pick Your Own Offers” hype).