Langton Capital – 2016-07-14 – Fulham Shore, JDW, DART Group, Whitbread & other:
A Day in the Life:
Still a bit busy, brewery trip this morning. On to the news:
RECENT WEBSITE ARTICLES:
• Note on recent trading – here
• Recent notes – here
• Ongoing tweets, older emails found – here
FULHAM SHORE – FULL YEAR NUMBERS:
• The Fulham Shore reports FY numbers. Group currently operates 34 restaurants, 24 Franco Manca, 9 Real Greek & 1 Bukowski
• Fulham Shore FY: Busy year, acquired 99% of Franco Manca (April 15). Revenues of £29.5m (2015: £8.3m). Headline EBITDA £5.2m.
• Fulham Shore FY: Headline operating profit £3.3m vs £0.8m, debt £3.3m (2015: Cash £3.0m).
• Fulham Shore FY: During year opened 7 Franco Manca restaurants, 1 Greek & 1 Bukowski with 5 FMs opened since year end.
• Fulham Shore FY: Group has introduced an online takeaway ordering platform for Franco Manca. Chairman David Page reports ‘sites are available, our restaurants are busy and popular, our prices are good value and our staff are well motivated. We therefore look forward to the further expansion of our Franco Manca and The Real Greek businesses during the current year.’
• Fulham Shore FY: Group on site or exchanged on two restaurants in London, one in Southampton & Reading. Outside London, the group reports ‘we have been encouraged by how well our Neapolitan sourdough pizza have been received by the local customers in these towns.’ The group says ‘the Franco Manca business model is simple: we continue to offer hand crafted sourdough pizza at attractive prices which, with some of the freshest and best ingredients we can source and daily ‘made-on-site’ sourdough, leads to high customer satisfaction and steady repeat business.’
• Fulham Shore FY: Says ‘we intend to expand Franco Manca nationally, as and when we identify suitable locations.’ The group says ‘retail and restaurant locations are becoming readily more available as the demise of various retail businesses continues under the pressure of internet shopping.’
• Franco Manca says it will ‘trial a delivery platform with the aid of Deliveroo in August, initially with 5 Franco Manca pizzeria.’ It says ‘more sites will follow if the trial is successful.’
• Fulham Shore FY: On Brexit says ‘the turbulence that this may cause to parts of the restaurant industry and the UK economy in general will last some time. However we feel that, as in previous periods of economic disruption, the restaurant businesses that offer best price / best product will prosper, as customers turn to real value.’
JD WETHERSPOON Q4 CONFERENCE CALL:
• Q4 Update – Conference Call: Following its Q4 update this morning, JD Wetherspoon hosted a conference call for analysts and our comments thereon are set out below:
• JD Wetherspoon says it anticipates a ‘modestly improved’ outlook for the full year.
• Margins. Q4 was >8%? Margin was better. Sales have been a little better & that has fed through to margin.
• What about the margin going forward? Declined to comment. Margin is ‘an output’. Group focuses on sales etc. Going for the same margin next year would not be unreasonable.
• Wages? NLW will by +5% next year. The NMW (in October) ‘has already been taken care of’.
• Believe wages should go up by 2.5% to 4% over the next year. All other costs should be in line with inflation.
• LfL sales have continued to be slightly better than expected. This can’t be projected into the whole of next year.
• Football has had no impact.
• What magnitude of sales & EBIT will be lost as a result of disposals? It shouldn’t impact LfL sales. Shouldn’t impact EBIT much either.
• Won’t split LfLs into volume & price. It is ‘quite sensitive information’.
• Food as a proportion of sales? Around 36%.
• Forward-buying for inputs? Most bar products are on long-term deals. Broadly CPI-based. Food is impacted by commodity prices. US$ could impact it. Says around half of food is fixed for between 1yr and 4yrs. Group will ‘have to navigate its way’ through any Sterling weakness.
• Brexit slowdown? Tim’s warning is cautionary – but the group is not seeing problems at the moment. Group however doesn’t think it can see another 3% LfL year when inflation is <1%. All group can do is to ‘take it as it goes’
• But you are suggesting analysts should increase their numbers? Yes, basically. It has been a ‘fairly strong final quarter’.
• What levers can you pull if trading slows down? Group has levers but will try to manage it for the long term. Group has prospered in previous recessions.
• JDW’s Brexit stance may have helped trade? It could be that ‘all publicity is good publicity’.
• Balance Sheet, Debt & Outlook:
• How many units do you expect to sell next year? This year, around 80 have been put on the market & around half have been sold or disposed.
• Over the ‘near term’ the group expects ‘something like the same again’.
• New openings should be around 15 per year for the next few years.
• Why is debt up by more than expected? Freehold reversions and share buy-backs.
• Buy-backs? This year has seen a material pickup. Group is unwilling to be bound by statements today re FY17.
• Langton View: JD Wetherspoon has reassured that current trading is between OK and good. There may be some modest upgrades.
• It says that it cannot see this persisting but maintains that it is well-positioned overall.
• If the company is right in saying that ‘irresponsible doom-mongering…may lead to some kind of slowdown’ then it is arguably likely that small ticket spending could hold up better than spending on large ticket items.
• JDW’s shares have bounced from the 613p at which the group bought back £4m of its shares in January and it now trades at around 17x earnings. True, FY16 will be historic in a couple of weeks and shares trade at around 15x or so FY17. Overall, this seems like fair value.
PUB, RESTAURANT & DRINKS PRODUCERS:
• Spending in pubs and restaurants fell towards the end of June – a point of the year that more typically sees double digit growth – according to Barclaycard data. The latest figures paint a mixed picture for the second quarter of the year, with other areas of consumer spending holding up relatively well in the wake of the referendum, and a 3.1% year-on-year increase in spending for the quarter as a whole.
• CGA reports that global cocktail consumption is rising & says this highlights a major opportunity for British bars and suppliers. Its International Cocktail Report says that 78% of British bars are selling cocktails but the American market remains more developed. CGA reports ‘in Britain the cocktail heartland is still a high tempo, drink-focused night, but in the US there are far fewer preconceived barriers around ‘the right occasion’ for cocktails. An opportunity exists to make like our American and French counterparts and broaden our cocktail consumption across the occasions and dayparts.’
• Californian wine shipments to the rest of the UK totalled around $31.9 billion in 2015
• Alcohol Focus Scotland has claimed that whisky producers are putting profits ahead of health. It says of producers ‘they have dismissed the scientific evidence and disregarded the democratic process to protect their members’ substantial profits’.
• The trend towards smoking alcohol via alcohol bongs in the US is concerning some health professionals. Campaigners say ‘you have really no clue as to how much you’re ingesting.’
• Euan Macpherson is to hand over day to day control at Crisp Malting Group after overseeing the production of 64bn pints’ worth of malt
• YUM Brands has reported Q2 sales of $3bn and has raised its estimate for the full year. It expects a 14% increase in profits. CEO Greg Creed reports ‘our China division is off to a good start in the third quarter for both KFC and Pizza Hut Casual Dining, including a return to positive same-store sales at Pizza Hut Casual Dining in recent weeks.’
• Insolvency consultancy Begbies Traynor noted a 53% rise year-on-year in the number of pub businesses being dissolved in Q2 of 2016. A total of 831 pub businesses were dissolved in the three months, up from 531 in the same period 2015, while Begbies’ Red Flag Alert survey found that 20% of businesses qualified as facing significant financial stress at the end of June (2015: 17%). The company said the number of closures in the sector this year has already reached 1,648, compared with 2,254 for the whole of last year.
• Speaking to The Times, one Begbies partner commented: ‘The damage to consumer confidence in light of the current economic and political uncertainty means that the UK’s pubs and bars face serious challenges ahead that could result in more business closures or failures over the coming months.’
• BT Sport is increasing prices for commercial customers by 8.9% from 1 September following Sky’s 10% hike, but is also offering licensees a two-year ‘content guarantee’ deal. Pubs which decide to take the deal before September will be locked in to that price until the summer of 2018.
• Leaving the EU could boost trade for the UK’s thriving craft brewing industry as foreign drinks importers get to grips with a weaker pound.
• Amazon has celebrated its ‘biggest day ever’ after its annual Prime Day Sale, which drove a 60% year-on-year surge in purchases. The event, in its second year, is only available to members of Amazon Prime.
• The Co-op Group has offloaded 298 of its smaller food stores in a £117m deal with McColls, taking the latter’s estate to 933 (assuming the deal is approved by shareholders).
• CAMRA figures suggest the rate of pub closures has slowed from 27 a week to 21 a week in the last six months, although branded food and modern pubs have increased. CAMRA chairman Colin Valentine said: ‘The rate of pub closures is still alarmingly and unacceptably high. Most of these lost pubs will have been precious to the people who use them regularly. It’s vital that people support their locals as much as possible.’
• Drivers have yet to fully benefit from falling oil prices in the wake of the referendum, according to RAC, which is calling on fuel retailers to pass on savings.
• US cinema chain AMC Entertainment is buying Odeon for £921m as overseas companies bargain hunt in the UK following Brexit.
LEISURE TRAVEL & HOTELS:
• Dart Group has reported a 109% rise in underlying operating profit to £105m for the year to 31 March, driving basic EPS up 169% to 60.22p and putting its shares on a PER of 8.9. Underlying figures exclude a £17m exceptional provision in relation to possible passenger compensation for flight delays. The fast-growing group is increasing its total dividend per share by 33% to 4p as a result.
• Dart’s Leisure Travel division grew sales 15% to £1,261.4m, thanks in part to a 22% rise in package holiday customers (with nearly 40% of its package holidays sold on an all-inclusive basis and ‘this trend continuing in this new financial year’), while its Distribution & Logistics arm saw profit before tax increase by 63% to £5.4m. The leisure group says trading in the current financial year has started off well for both businesses, although it is ‘disappointed at the result of the recently held referendum’.
• As at 31 March 2016, the Group’s cash and money market deposit balances had increased by £109.2m (2015: £39.1m) to £412m (2015: £302.8m) and included advance payments from Leisure Travel customers of £385.8m (2015: £318.7m), in respect of their future holidays and flights.
• Dart’s chairman commented: ‘The increase in profitability reflects the strength of the Group’s Leisure Travel business, which combines both Jet2.com, our leisure airline and Jet2holidays, our package holidays provider, together with an improved performance from Fowler Welch, our Distribution and Logistics business.’
• Premier Inn is to pull out of India & S/E Asia via a “phased withdrawal”. It has 3 hotels in India, 2 in Indonesia & 1 in Thailand. Whitbread CEO Alison Brittain is to focus the group’s overseas hotel business on Germany. Ms Brittain reports ‘to build a successful future for Premier Inn overseas, we must focus on those markets where we can grow scale and where our brand proposition is most compelling for our customers.’
• PPHE Hotels is to pay a special interim dividend of 100p per share. The cash will be paid on 23 Aug to those on the register on 22 July. CEO Boris Ivesha reports ‘we have seen excellent progress against our strategy in recent years. The recent refinancings enable us to continue investing in our portfolio ensuring our well-established hotels continue to improve on their strong market positions.’ He concludes ‘in line with our objective of delivering excellent shareholder value we are delighted to be able to return excess reserves to shareholders as we continue to generate long-term value.’
• Brexit and terrorism are the two biggest concerns for UK travellers, with 10% of GfK respondents saying they are more likely to consider all-inclusive breaks as a result. Domestic tourism also stands to benefit, says the research agency, although this period ‘may be short-lived’.
• STR’s June 2016 Pipeline Report shows 143,825 rooms in 941 projects Under Contract in Europe, up 10.1% year-on-year.
• Meanwhile the US had 522,324 rooms in 4,241 projects Under Contract, up 22.6%.
• TripAdvisor is launching a new airline reviews platform for customers alongside a redesigned flight search platform aimed at increasing transparency in the marketplace.
• Tour operators are expected to push up prices next year, assuming a weak lates market this summer impacts unhedged online travel agents.
• The government has reiterated its determination to enforce fines on parents who take children on holiday during term time without permission.
• Manchester Airports Group reported a 7% increase in airport passengers to almost 52 million in the year to March, driving a 22.5% rise in operating profit to £192.6m.
FINANCE & MARKETS:
• Interest rates may be cut (though they can’t be cut much) at 12:00 today.
• House prices. See Brexit below.
• Philip Hammond has replaced George Osborne as Chancellor of the Exchequer. Mr Osborne leaves the government. Prior to becoming a politician, Mr Hammond worked in the medical equipment industry. He is thought to be a hawk on finances but may be restricted in his financial movements by PM Theresa May.
• It is to be hoped, surely, that Mr Mark Carney’s job is safe.
• Japan has cut its growth estimate for this year saying that the economy should grow by 0.9% vs the Jan estimate of 1.7%
• Mark Carney has warned that allowing banks to lend more is not a ‘silver bullet’. There could be supply (of funds) but there must also be demand.
• World Markets: UK down yesterday, Europe mostly weaker. US markets up & Far East mostly up in Thurs trad
• Oil price up a shade at around $46.80 per barrel
LIFE AFTER THE BREXIT VOTE:
o The Petitions Committee is to allow a debate on the 4.1m strong ‘keep-us-in-the-EU’ petition. This is unlikely to go anywhere. The debate will not be in the main chamber and will not be allowed to change laws.
o UK may need to recruit foreign nationals to trade-negotiate for country in post-EU world. It worked for our football team. Didn’t it? Foreign Minister Philip Hammond says ‘I see no reason why we wouldn’t hire people who were non-British if they were the best people to do the job.’ He does add ‘clearly one would not want to hire a citizen of another country to negotiate a trade deal with that country. But having entered that caveat I would hope that we would put together the best and most capable teams from wherever.’
o Perfect storm possibly averted as Clinton takes 13pt lead over Trump. Except in some key states says Reuters
o Economist: ‘Regulatory uncertainty will dog firms for at least as long as it takes Britain & the EU are negotiating a divorce’
o Economist: ‘…firms planning to invest in Britain are putting decisions on hold’.
o Scotland boss Nicola Sturgeon yesterday met with 20 City of London bosses in order to push Edinburgh as a prime, EU location. Sky News reports she will ‘roll out the red carpet to major City firms amid efforts by European rivals to poach financial services jobs from a post-Brexit London.’ Langton has yet to be approached.
o JDW’s Tim Martin has questioned the honesty and/or economic acumen of IMF, B of England, Treasury, PM, CBI and others. Included on the list were Goldman Sachs, other brokers (not Langton), PwC, ‘many FTSE100 bosses’ and others when it came to the Brexit discussions. See – here
• On a brighter note:
o Economist: UK may not see a ‘dramatic divestment’. It may rather be a ‘slow erosion’. Siemens says ‘lots of little decisions’ will be made away from UK.
o IEA says that ‘leaving the EU, and becoming an EFTA/EEA country, is almost risk-free’
o Aberdeen Asset Management has lifted the suspension on dealing in its property fund. It has cut its value by 17%
o RICS survey suggests that house prices will fall in the next 3mths. The fall may last longer in London & the S/East
YESTERDAY IN A NUTSHELL – SEE LIVE TWEETS ON WEBSITE:
• Some of our morning tweets: JDW Q4: LfL sales rose by 4.0% in the period under review (11wks to 10 July). Total sales up by 3.8% reflecting disposals
• JDW Q4: Says ‘FY operating margin before exceptional items…is expected to be around 6.8% vs 7.4% last year’
• JDW Q4: Says economists predicting problems post Brexit ‘are either dishonest, or they have a poor understanding of economics’
• JDW Q4: Says ‘in spite of the dire warnings above, Wetherspoon trade strengthened slightly in recent weeks’
• JDW says ‘irresponsible doom-mongering…may lead to some kind of slowdown’.
• IEA says leaving EU should lead to lower food prices as UK won’t have to deal with ‘insidious’ power of French farmers
• UK retail sales fell in June on the back of poor weather and the associated poor sales numbers for clothing
• A snap FT survey suggests that retail sales are bouncing back a little in July.
• Poor STR data for London hotel market. Says 2.5% increase in supply met a 1.8% drop in demand
• STR – London occupancy down 4.2% to 84.4%. Average daily rate also fell 1.9% driving REVPAR down 6%
• Other tweets: What’s happening to commodity prices? All sweet stuff – sugar, OJ, cocoa – seems to be getting more expensive.
• Brexit, what’s the problem? asks market. FTSE250 pushing ahead presumably in hopes of rate cut tomorrow at noon.
• JDW on conference call asked if chairman Tim Martin intended to help with Brexit negotiations. Co declined to speculate
• JDW conf. call. Says no sign of downturn now but group has ‘prospered in previous recessions’.
• JDW conf. call. Declined to split LfL growth between volume & price but said food is now 37% of total sales
• JDW says doom-mongers may cause recession, says 3% LfL growth unlikely to be sustainable in FY17. Group still well-positioned
RETAIL NEWS WITH NICK BUBB:
• Mothercare Ahead of today’s Q1 (for the 15 weeks to July 9th) enthusiasm for Mothercare’s status, post-Brexit, as “an Overseas earner” has been tempered by the recent weakness in International sales, but it has provided some reassurance today by flagging that International sales were actually up by 5.1% in constant currencies in the period, albeit that was boosted by the early fall of Ramadan. Similarly, UK sales of +1.2% LFL were boosted by an earlier Sale. Mark Newton-Jones, the CEO, says “We have not seen any immediate consumer reaction to the Brexit vote, but it is too early to call as we went into the end-of-season sale early. We hedge both dollar purchases and royalty receipts and we expect limited impact on our financial results this year”.
• B&M: The fast-growing B&M has delivered 21% total sales growth for its Q1 (13 weeks to June 25th), thanks to store openings, although UK sales were only flat LFL (after a 1.7% new store cannibalisation impact). B&M say that the quarter started slowly, but picked up in May and “current trading is stable, albeit our key seasonal category of Outdoor and Garden products fluctuates from week to week in line with weather conditions. The Group has satisfactory currency hedging in place through to the end of the important Christmas 2017 period”. Reassuringly, B&M also say that they are on course to achieve market consensus profit expectations for the full year. Conf call 10.30am.
• Halfords: Much as expected, today’s Q1 reports flat Retail LFL sales, with Cycling sales down, disappointingly by 4%, “impacted by both the timing of Easter and poor weather, particularly in April”. But, reassuringly, Halfords also say “We now have over 75% of our FY17 purchases hedged at around $1.45”, so there is no further FX warning. Conf call 8.45am