Langton Capital – 2016-09-12 – More on JDW, GNK, current trading, Brexit & other:
A Day in the Life:
When you periodically share the house with half a dozen other relatively tech-savvy ‘adults’, is it just me or do you end up in a scramble for broadband?
Because I often do and, as a result, I can find myself watching programmes on iPlayer or any other ‘catch-up’ service in 40 second chunks as the thing buffers and then lets me watch another snatch before someone somewhere else in the house snatches the internet back in order to finish off a game with a teenager in Latvia or to do whatever else youngsters do on the Internet in the privacy of their own bedroom.
It doesn’t bear thinking about but, at the outset of a week that promises to be warm and sunny, let’s move on to the news:
JD WETHERSPOON – FY RESULTS ANALYSTS’ MEETING:
• Following the release of its FY numbers for the 52wks to 24 July 2016 this morning, JD Wetherspoon hosted a meeting for analysts and our comments thereon are set out below:
• Trading in the year under review:
• JD Wetherspoon reported that headline profits moved forward (on the back of property disposals) but announces that underlying EPS for the year was down by 8% at 43.8p
• Hence the group’s shares, normalised for property disposal profits, are trading on around 22x historic earnings
• The group comments that it expects a ‘slightly improved trading outcome’ for the current year, implying that the 22x multiple will fall only modestly over the medium term
• Margins were 6.9%. They are not expected to fall further – though the group reiterates that it does not target margins as such
• Much good stuff, often overlooked by analysts, is going on beneath the surface. Staff retention is better, hygiene levels are market-leading, the group has the best airport pub in the world (at Stansted) and JDW’s loos are frequently the best in the country
• Current Trading
• The group has reported that LfL sales are +4.1% over the first 6wks of the current year
• It cautions that this pace is unlikely to be maintained. Total sales growth will likely be around 100bps lower due to disposals
• EBITDA per pub is around the same level as 10yrs ago. JDW says this is no mean feat & adds that it hopes to move these numbers up
• Cost pressures – other than labour – are benign. F&B and utility prices should rise by between 1% and 2% this year whilst wages could rise by around double that rate
• Recent price rises look as though they are sticking, but the market is still resistant to higher prices
• Balance Sheet, Debt & Outlook:
• JDW has allocated much more resource than usual this year to buying in the freeholds of the units that it previously leased
• This has improved operating profits by around £1.5m in the year to July 2016 and buy-ins look set to continue
• The group bought back more than 5m shares last year at an average price of around 691p
• Debt is up but it is manageable. More freeholds in the mix will likely mean more debt – but lower rents should be payable across the estate as a whole
• The group has disposed of 41 pubs in the year to July 2016, more than it has disposed in the previous ten years combined
• The group reports that, over the last 2-3yrs, it has identified around 80 units for sale. Some 60 of these are gone or are in the hands of solicitors
• The average cost of new-build pubs has risen but, as these are larger than average and often include hotel bedrooms, this is not a surprise
• Re share buybacks, these will likely continue but, as Chairman Tim Martin has 29.5% of the shares in issue, a whitewash (requiring an EGM) may be necessary in the near future
• Langton View: JD Wetherspoon has reassured that margins should not fall further and adds that it does not believe it has many more pubs that it would like to dispose of.
• We continue to believe that the company is best-in-class but, with the shares now changing hands at 22x earnings, we consider them to be something of a stretch.
GREENE KING UPDATES ON 18 WEEKS TO 4 SEPT – FURTHER COMMENTS:
• Greene King Friday updated on trading for the 18wks to 4 September and our comments are set out below:
• Current trading:
• Greene King reports LfL sales +1.7% for the 18wk period, citing a strong start thanks to the European Football Championship and better weather.
• Pub Partners LFL net income was up 4.5% after 16 weeks, while in Brewing & Brands, own-brewed volume declined 0.5%.
• Strong progress made with the integration of Spirit; a quarter of its managed pubs now operate under its ‘best of both’ IT system. Greene King completed 41 brand conversions with ‘encouraging sales uplifts’.
• Langton Comment: It has been a busy summer for Greene King shares, down from 892.5p to 733p in June-July (-18%) before gradually recovering to a high of 840p prior to today’s relatively subdued statement.
• The numbers are mixed but it is the tone when discussing the industry’s outlook that might have gotten investors thinking.
• Contrary to JD Wetherspoon’s cheeriness in today’s other big update, Greene King talks of ‘softening economic indicators’, a ‘reduction in consumer confidence’, ‘risks to leisure spend’, and a ‘potentially tougher trading environment ahead.’
• It will be interesting to see which pub groups’ view of the immediate future plays out. The other pub companies have, so far, implied that the UK post-Brexit has been business as usual. Only Greene King has felt the need to mention its effect on trade.
• Furthermore, reports point to a stellar August Bank Holiday, implying that the rest of the trading period will have been less good and that total period LfLs may have been skewed to the upside.
• Greene King trades on 11.9x earnings and its premium to MARS (11.7x earnings) has narrowed somewhat. Questions remain as to the sustainability of current levels of growth post-Spirit, although this acquisition should generate synergies and drive like-for-likes for some time yet.
• With this in mind, questionable trading aside, Greene King is as dependable an income-play as ever and today, with its shares closer to 800p than 1,000p, marks an undemanding entry point.
RECENT WEBSITE ARTICLES:
• Summer trading – here
• Over-expansion issues – here
• JD Wetherspoon numbers – here
• JD Wetherspoon analysts’ meeting – here
• Greene King trading update – here
PUB, RESTAURANT & DRINKS PRODUCERS:
• Nine of Marco Pierre White’s pub/restaurant companies have collapsed owning around £10m. Eight are in liquidation per The Sun. The administrator of Minotaur Inns said ‘following the sale of assets the bank has received a total of £4.2million and suffered a shortfall.’
• The Times warms the price of cheese and wine are likely to rise on the back of Sterling’s post Brexit vote fall
• Comptoir Group revenue for the half year ending 30 June rose 24.6% to £9.7m as gross profit grew by 10.2% to £3.4m. Adjusted EBITDA was up by 9.2% to £1m. Comptoir’s IPO means it now has net cash on its balance sheet of £8m (H1 FY15: £1.3m) and the group intends to use this money to open eight new sites in the remainder of the year.
• Frontier Pubs, the Managed Investments partnership between Enterprise and Food & Fuel, opened its first pub in Honour Oak Park last Wednesday. The Chandos opened following a major £350,000 refurbishment, funded by both parties, and is focusing on craft beer, freshly made pizzas, with a busy schedule of sporting fixtures lined up.
• Peter Myers, Commercial Director for Food & Fuel said of the collaboration: ‘Working with Enterprise has been seamless. They’ve been actively involved with the refurbishment and offered us some great opportunities to work with their suppliers. I’m confident the partnership will continue to be a successful one.’
• According to Pernod Ricard’s UK on-trade channel director, the new Star Wars film, stormy weather, and Christmas markets kept customers out of the pub during the festive season. However, those who did make it to the bar spent more.
• A new study of more than 1,000 participants in the US aged between 13 and 20 has found a link between more alcohol adverts on television and increased underage drinking. The participants were asked if they had viewed any TV shows with adverts for alcohol in the past month and found, on average, study participants who saw zero ‘adstock’ units had about 14 drinks per month. However, that number grew to around 33 drinks-per-month among those who had viewed up to 300 adstock units and jumped up to over 200 drinks-per-month for those consuming 300 adstock units.
• Casual Dining Group brands Las Iguanas and Bella Italia are opening in Center Parcs Longleat Forest, while another Bella Italia will open in Center Parcs Sherwood Forest.
• Whitbread is set to open a flagship branch of its steak-focused all-day dining restaurant Bar & Block at London’s Kings Cross after the success of the first site in Birmingham. The second unit will open in November and will replace Whitbread’s Thyme restaurant, a 5,522 sq ft site on York Road. The 212-cover site will boast a 68-cover central bar, open kitchen, and standalone and booth seating and will serve craft beers and ciders as well as cocktails and wine. A Whitbread spokesperson added: ‘We’re keen to develop the brand further, and aim to have several venues open by the end of this financial year.’
• The new boss of Asda ushered in his first wave of price cuts last Friday as the retailer seeks to reverse a dramatic 7.5% fall in Q2 underlying sales. The scale of the drop in sales led CEO Sean Clarke to warn that it would take time to turn around the firm’s fortunes. Now the group is slashing prices by an average of 15% on thousands of own brand products just days after Morrison’s embarked on a similar initiative.
• Prezzo has reported a 13% increase in revenue to £213.8m for the 53 weeks ended 3 January 2016 as adjusted profit before tax fell slightly from £23.3m to £23.1m. A £20m dividend was financed by the sale of £29.8m worth of freehold property sales.
• New fivers are legal tender from today.
• Home secretary Amber Rudd has confirmed that work permits are one of the post-Brexit migration curbs being considered. Rudd reiterated Theresa May’s dismissal of a points-based system to control EU migration, saying it ‘simply doesn’t work’, but added that nothing was being ruled out. The home secretary also accepted EU nations could choose to implement new restrictions on EU travel for Britons, although this might hurt several economies that benefit from British tourists.
LEISURE TRAVEL & HOTELS:
• Action Hotels reports H1 numbers, revenues +18% at $25.6m, gross profit +14% at $18.4m, EBITDA +18% at $7.2m.
• Action Hotels reports $31m increase in asset values to $428m in H1 to end-June. Group reports 3% increase in H1 dividend to 0.76p. CEO Alain Debare reports ‘we are very pleased to update the market on a good first half, with a strong performance across the Action Hotels portfolio. We remain focused on driving performance at our operating hotels and our growth reflects the solid performance from our mature hotel portfolio, as well as the early success of our newest hotels. We have a good pipeline of hotels in development and are on track to complete an additional three hotels this year’. Chairman Sheikh Mubarak A.M. Al Sabah reports ‘we continue to meet the increasing demand for quality, internationally branded economy and mid-market hotels and have outperformed expectations set out at IPO with regards to the number of rooms in operating and pipeline hotels by 29%,
• Rising staff costs are holding back profit for UK hoteliers, according to a study by intelligence firm HotStats of nearly 45,000 hotel bedrooms across the UK over 15 years. In the last 15 years, payroll costs in regional hotels rose by an average of 26% while profit per available room fell 26% – from £41.67 in 2000 to £30.49 in 2015. The trend may have played a part in the proliferation of sharing economy ventures and budget hotels, where service is reduced in exchange for value for money.
• Easyjet pilots are considering strike action in time for this October half term, with a ballot on industrial action set to conclude on 21 September. Pilots’ union Balpa has written of concern over ‘pilot fatigue’ and Easyjet, which has around 2,000 UK-based pilots, said it was ‘committed to finding a resolution to the issues raised.’
• Scottish travel group Minoan has issued a profit warning, citing the fall in the value of sterling combined with a downturn in travel to Turkey as having a ‘material effect’ on business. ‘In the past few months the impact on gross profit has been running at approximately £100,000 per month,’ Minoan said in a trading update. ‘The Brexit vote, its associated effects and the situation in Turkey, will have an as yet unclear but significant impact on the financial results for the current year.’
• European airlines have urged the government to end Air Passenger Duty to boost British tourism, saying that such a move would boost UK GDP by 1.7%. Passengers have paid in excess of £31bn in 21 years, with the cost of the highest aviation tax in the world rising by 824% since being introduced in 1994.
• The US hotel industry posted positive gains in the week to 3 September, with occupancy up 1.6% to 64.5%, ADR up 2.4% to $118.97, and RevPAR up 4.1% to $76.76.
FINANCE & MARKETS:
• The UK’s trade deficit fell in July to £4.5bn from £5.6bn in June per ONS. Exports rose by 0.2% whilst imports fell by 0.5%
• World markets: UK & Europe down Friday. US also sharply lower, Far East markets down in Monday trading
• Oil price sharply lower over weekend. Fell c4% on Friday. Brent crude trading around $47.30 per barrel
• BCC cuts UK growth forecast, expects UK to grow by 1.8% this year (down from 2.2% estimate) & 1% next year (was 2.3%). It says uncertainty will ‘dampen growth prospects’. It also expects consumer spending to weaken but it believes that the country will avoid a technical recession.
• The TUC has warned that employers should not use the UK’s vote for an exit from the European Union as an excuse to cut jobs and spending. Unite boss Len McCluskey said ‘out of the EU must not mean out of work.’ Ultimately the wishes of the TUC may be unlikely to influence corporate confidence levels. The TUC also said ‘we’ve had the votes, the vote was close but clear and now our job is to get on with representing working people, whichever way they cast their vote, and make sure that they don’t pay the price of a Brexit.’
YESTERDAY IN A NUTSHELL – SELECTION OF TWEETS, LIVE TWEETS ON WEBSITE:
• JD Wetherspoon beats numbers. LfL +3.4% for year, profits > expectations at £80.6m. Dividend unchanged at 12p.
• JDW says ‘gloomy economic forecasts for the immediate aftermath of the referendum have been proven to be false’
• JDW sales +4.1% since year end. Says expects ‘slightly improved trading outcome for the current financial year’
• Greene King updates on first 18wks saying saw a strong start to the year but there has been ‘softening of some economic indicators’
• GNK says ‘reduction in consumer confidence’ may lead to ‘tougher trading environment ahead.’
• AlixPartners & CGA Peach report that UK’s casual dining brands are still expanding ‘despite pre-Brexit vote jitters’.
• AlixPartners CGA Peach says ‘drink-led venues continue to struggle in many parts of the country’
• Other tweets: Strange day; JDW being upbeat, GNK downbeat. Parallel universe or Brexit forced optimism / depressed pessimism on show? Or something else?
• Greene King making something of Brexit whilst other operators say it’s very much business as usual. Not likely both are right
• Greene King LfLs. Bank Holiday could well have been stellar, which means the rest of the last 10wks was pretty pedestrian to say the least
• So will Wetherspoon Tim have to be upbeat now? Got the Brexit he was after so might have to cheerlead whilst others cry into their pints
• Greene King features Local Pubs estate for honourable mention. How do we think Hungry Horse is performing, then?
RETAIL NEWS WITH NICK BUBB:
• Grocer Watch: Given the shock Lidl UK MD change on Friday, it was topical that the widely followed Grocer “33” weekly supermarket pricing survey in Saturday’s Grocer magazine saw guest retailer Lidl reassert its price leadership over the main supermarkets; back in June, when it last appeared in the survey, it was only 8% cheaper than Asda, but this time it 13.5% cheaper, with a basket of only £42.86, and it was the cheapest on no less than 27 of the 33 items. Behind Asda, things were quite tight: Morrison’s was only 64p behind Asda, with a basket of £50.17, whilst Tesco was only a little further back on £50.55. Asda’s failure to be 10% cheaper than its rivals again forced it to dole out a hefty £4.78 price guarantee voucher. Sainsbury was 5th on £54.08 and poor old Waitrose was a distant 6th, with a basket costing as much as £62.39, nearly £20 more than Lidl (albeit
• Saturday Press: There was a lot of news out on Friday, but the biggest shock was that Ronny Gottschlich, the UK boss of Lidl, has “stepped down” from the role and been replaced by an obscure Austrian manager, one Christian Härtnagel. The FT, however, went big on the news that the Serious Fraud Office has charged three former Tesco UK executives with fraud and false accounting relating to the £326m black hole in the Tesco accounts in 2014 (former UK MD Chris Bush, the former UK finance director Carl Rogberg, and the former food commercial director John Scouler). Staying with the Food Retail theme, the Guardian flagged that Asda is to cut prices on fresh meat and own brand essentials by an average 15% (to hit back after the recent Morrisons price cuts) and launch a new slogan, “That’s better,” via a TV ad campaign. The other big news on Friday was that Andy
• Sunday Press: The Sunday Telegraph looked at how a new space race has begun in the convenience store market. The Mail on Sunday reported that Poundland’s new owner Steinhoff could substantially increase its clothing range or replace some of the 700 stores with its own fashion chain Pep & Co. The Mail on Sunday also noted that the value of Boohoo.com has climbed to £1bn on expectations of a bumper year. The Sunday Telegraph had an overview of Sports Direct and Mike Ashley’s career and relationship with the City, concluding that a new strategy is needed, and the Observer’s Business leader continued to campaign for the removal of Keith Hellawell as Chairman. The Sunday Telegraph also noted that Morrisons is strengthening its Amazon ties and is to roll-out Amazon lockers across hundreds of its stores. The Sunday Times said that the private equity owned Paperchase is
• Today’s Press and News: The Times flags that Alistair McGeorge, the former CEO of Matalan, has been appointed as chairman of The Original Factory Shop. In the Telegraph, the Tesco Chairman John Allan has blamed the supermarket industry’s preoccupation with opening more and more space for its past mistakes and the FT has an article headlined “Tesco waits to see what SFO has in store”, noting that after three executives have been charged with fraud, corporate prosecution is a possibility.
• News Flow This Week: After the recent excitement with Sports Direct, attention shifts to “Super Thursday” this week, which is going to be less busy than usual, because of the demise of Home Retail and Darty…But Thursday still brings the key updates from Next and John Lewis/Waitrose on the back of their interims (as well as the Morrisons interims, the Poundland Q2, the ONS Retail Sales figures for August and the latest MPC interest rate announcement). Before then, tomorrow brings us the JD Sports interims and the Ocado Q3 and then Wednesday brings the Dunelm finals and the SuperGroup AGM.