Langton Capital – 2016-11-16 – More on Enterprise, beer duty, the blame game & other:
More on Enterprise, beer duty, the blame game & other:
A DAY IN THE LIFE:
I went through a phase of buying more and more language books.
Because, I reckoned, the more books I had, the more I would learn and I followed the same logic with pens and pencils, cookery manuals and the rest but, at the end of the day, all I was doing was creating a bigger and bigger pile of bumph to take to the charity shop.
And the same should be said, I believe, about information in general. You can surround yourselves with it these days, much of it free. And then, if you’re human like the rest of us, you’ll imagine yourself to be well-informed and you’ll make confident, bold decisions based on that assumption, about 50% of them wrong.
This seems to be true, not least, in the stock market. Because here we’ve got raw and refined information coming out of our ears. Some of it is plain bonkers but much of it fits the facts – but then so did the flat-earth theory until further research proved it to be wrong.
However, for the stock pickers out there, this isn’t altogether a bad thing. Doesn’t have much a ring to it but ‘long live stock market financial and behaviour imperfections’ is what I say. Oh, and just in case he’s feeling friendless and alone, well done Mark Carney. On to the news:
ENTERPRISE INNS – ANALYSTS’ MEETING:
• Following the release of its FY numbers to end-September, Enterprise Inns hosted a meeting for analysts and our comments are set out below:
• See earlier email. All models, all regions and all quarters saw like-for-like growth in FY16
• The market, overall, is ‘more stable’. In addition, the regulatory uncertainty surrounding the MRO has now been cleared up
• Absolute EBITDA was down only marginally despite a 4% drop in the number of pubs owned
• All options – disposal, move to commercial leases, move to managed or move to short-term tenancies – have proved to be accretive to earnings
• That said, the MRO has been and is being disruptive
• New lettings were delayed for the same reasons as those outlined by Punch Taverns last week. This should only have a temporary impact
• Admin costs rose from £37m to £40m and will rise to c£42m this year – this is due to the enlarged infrastructure demanded by the new business model(s)
• Unplanned business failure numbers are down once again to only 1.6% of the estate. Only 59 pubs are currently closed
• There will be some cost pressures coming through. Prices may have to rise at some point
• Group is now 18mths into its new strategy
• Group reiterates this strategy (return to growth in tenanted), expansion of managed model, debt reduction, remains firmly on track.
• ETI no longer offers longer term tied leases.
• It may take pubs over to manage them at lease-end
• Around 94 (of a possible 285) pubs that have had a ‘trigger event’ have enquired about free-of-tie alternatives. None of these have yet concluded.
• Balance sheet, cash flow & other:
• The capital markets are ‘open to Enterprise’ & the group has pushed bullet payments out to the right
• In addition, it has paid down the absolute amount of debt outstanding by some £122m
• Debt to EBITDA has fallen from 7.8x to 7.5x. Punch Taverns stands at 6.6x.
• The share buyback (£25m is on the cards) is testament to the fact that cash is not the problem that it was in the wake of the smoking ban, the credit crunch & the recession
• Langton Comment: Enterprise has reassured on trading & says that it has the breadth of offer, tenanted, longer-leased, commercially-leased or managed, to suit all its pubs. It still sees itself owning around 800 managed pubs, c1,000 commercially tenanted pubs and 2,400 traditionally tied units.
• The group is on track & its shares are cheap. However, in the absence of a catalyst (a ‘tipping event’), investors may need to be patient.
• Overall, a PER (and Langton acknowledges but does not completely agree with the suggestion that one should look at EV/EBITDA measures) of little more than 5x earnings does seem somewhat grudging for a company that is doing pretty much everything right.
PUB, RESTAURANT & DRINKS PRODUCERS:
• The ALMR has written to Chancellor Phillip Hammond calling on him to actively support the pub industry in his Autumn Statement on 23 November. The upcoming business rates revaluation has proven to be a particular bone of contention as it will disproportionately hit the hospitality industry due to turnover-based valuations. The ALMR is consequently calling for an ‘urgent review’ of trading provisions questioning the subjective element of ‘fair maintainable trade’ pub assessments.
• A study of more than 80,000 Chinese adults by Pennsylvania State University suggests that moderate amounts of alcohol can cut the risk of stroke and cardiovascular disease. Quarterly blood samples allowed researchers to measure participants’ high-density lipoprotein (HDL) – aka ‘good cholesterol’ – as well as liver function and inflammatory markers. Moderate drinking appeared to slow the natural decline of HDL levels.
• Fuller’s flagship pub, The George IV, on Chiswick High Road is once again hosting the switch on of the Chiswick High Road Christmas lights on 24 November at 5.30pm. The switching on of the lights will be led by Fred Turner, Fuller, Smith & Turner’s Head of Tenanted Operations, and is in partnership with the London Borough of Hounslow.
• Lancashire pub group Thwaites has posted a 5% rise in turnover to £44m on continuing operations although profit before tax was down due to interest rate swaps and pub investment.
• Kantar Worldpanel data show Tesco has continued to grow its grocery market share, accelerating at its fastest rate in three years of 2.2% in the 12 weeks to 6 November. This handily beats overall grocery market growth of 0.8%, bumping the UK’s number one up to 28.3% of the market, with much of the growth driven by own-label brands at the cheaper and more premium ends of the price spectrum.
• UK’s major supermarkets reported to have cut petrol prices by 3p per litre in attempt to attract pre-Xmas shoppers
• The BBPA has urged Cheltenham Borough Council to abolish its Late Night Levy and continues to support the existing local Business Improvement District (BID). The British Beer & Pub Association proposes that the Late Night Levy unfairly disadvantages pubs, many of which are small, independent, and contributing positively to the night-time economy. For such businesses, the Late Night Levy can represent a significant imposition.
• Brigid Simmonds, Chief Executive, British Beer & Pub Association, comments: ‘Cheltenham implemented a Late Night Levy in 2014, but have found it has failed to reach expected revenue targets, raising less than 39 per cent of the £199,000 figure that had been predicted in the first year. It is right, therefore, that they look again at the Levy…
• ‘…We will continue to oppose Late Night Levies, campaigning against them wherever they are proposed. We’ve already seen several big city councils, such as Leeds and Bristol, abandon their Late Night Levy plans, and it’s encouraging to see that Cheltenham is looking to do the same.’
• Recruitment agencies are warning restaurants that they will not be able to provide enough chefs to meet demand this Christmas due to an ongoing skills shortage. Restaurants are facing a ‘real headache’, according to the findings of a survey by the Recruitment & Employment Confederation (REC), which shows 61% of respondents say they do not have enough chefs over the festive period and just 18% believe they have sufficiently skilled chefs.
• REC chief executive Kevin Green said the statistics were a real worry, not just for Christmas but beyond and warned that if not addressed it would have implications for the future of the industry. ‘Training and progression needs to be improved so that more people are encouraged to become chefs. That’s a longer term fix, but there’s an immediate skills crisis which needs to be addressed. Any restrictions on access to chefs from the EU, such as a salary threshold for work visas, will only exacerbate the problem.
• ‘Without a supply of chefs to meet growing demand, restaurants, bars and hotels will have to pay more for their staff and it’s likely that these costs will be passed on to the customer. We may even see restaurants close their doors if they can’t remain competitive and profitable.’
• Council of Mortgage Lenders says mortgages are now more affordable than they have ever been. Says first time buyers spend c17.7% of monthly income on mortgage repayments. Not sure the same would be true if rates rose to 6, 7 or 8%.
• CML points out 2yr fixed mortgages can be had for as little as 0.99%. Fine if you can pay the loan back in 24mths.
• Morrison’s has launched a service at Amazon. Orders will delivered same day by Amazon. Costs will be £6.99 for a 1hr slot or in a two hour slot for free. Morrison’s reports ‘as food maker and shopkeeper, we have unique skills to help build a broader new Morrisons through capital light growth. ‘Morrisons at Amazon’ is another exciting joint opportunity and makes Morrisons good quality, great value-for-money products available to even more customers.’
• Questions may be raised as to the ongoing nature of Ocada’s relationship with Morrison’s
LEISURE TRAVEL & HOTELS:
• Aparthotel operator Staycity is opening two sites in France in 2017, which will join its existing aparthotel in the 10th district of Paris. Staycity Marseille (108 apartments) will open in February and Staycity Lyon (144 apartments) will follow in the Spring of next year. Staycity premises opening in the UK over the next 12 months include Manchester (182), London Covent Garden (106) and Liverpool (202). Staycity Aparthotels now has over 3,000 apartments across eight major cities across the UK and Europe with expansion plans which will take it to 15,000 apartments by 2021.
• Expedia’s German hotel-booking site Trivago has filed through holding company Travel BV for an IPO, with a ‘placeholder’ amount of $400m. The website is seeking to list its American depositary receipts on the Nasdaq under the symbol TVRG and will make its Class A shares, currently held by Trivago management, to the public, while its Class B shares will remain with Expedia. Expedia first bought into Trivago in 2012, paying about $628 million in cash and stock for 61.6% of the company. Trivago posted a net loss of $57.8m on revenue of $425.6m in the first nine months of this year.
• The global meetings and events sector is expected to grow next year, according to a study by Carlson Wagonlit Travel.
• STR’s October Pipeline Report shows 153,206 rooms in 1,007 projects under contract in Europe, representing a 14.9% increase year-on-year in rooms under contract. Europe reported 66,787 rooms in 442 projects in construction for the month, which is a 21.6% increase in year-over-year comparisons, with London proving to be its largest market. This is followed by Moscow, Istanbul, and Berlin.
• easyHotel is in ‘advanced discussions’ regarding the potential acquisition of a freehold site in Sheffield to be used as one of the group’s ‘super budget’ branded hotels.
• Shares in Nintendo have climbed on the news of a launch date for its new Super Mario game for the iPhone, with users having to pay $10 (£8) for the full game.
• Snapchat’s parent company has filed documents for a stock market listing that could see the company valued at between $20bn and $25bn. It is likely to be one of the biggest tech sector floats in years, but some US reports say the business could be valued at as much as $40bn.
FINANCE & MARKETS:
• UK inflation in surprise fall in October, CPI falls to 0.9% from 1.0% a month earlier. Economists were looking for 1.1%. Factory gate prices now rising rapidly, up 2.1% on the year. Raw materials +4.6%
• German growth slowed in Q3, exports slipped with economy growing by 0.2% in the quarter. German officials report ‘the development of foreign trade had a downward effect on growth. Exports were slightly down while imports were slightly up compared with the second quarter of 2016.’
• IEA reports infrastructural spend (under Trump or in Europe) will not be sufficient to boost Western economies
• US retail sales rose by a stronger than expected 0.8% in October when compared with the month before
• World markets: UK, Europe & US higher yesterday. Far East up in Wednesday trading.
• Bank governor Mark Carney has attacked politicians for criticising the Bank in what he called a “massive blame deflection exercise”. Various politicians including PM Theresa May & former front-benchers William Hague & George Osborne have suggested that cheap money could have unpleasant side-effects. Mr Carney said ‘it’s very important to distinguish between the stance of monetary policy and the reasons why global interest rates are low, the reasons why inequality has increased. Those are caused by much more fundamental factors and an excessive focus on monetary policy in many respects is a massive blame deflection exercise.’ He then pointed the finger saying ‘we can’t make the structural decisions that are going to change the path of productivity in this economy. Others are going to make those decisions. You’re going to make those decisions.’
• Brent up & trading around $46.95 per barrel.
• Sterling little changed against the US$ at $1.246. Stable vs Euro at 116c.
• Bond yields little-changed to down a bit overnight
YESTERDAY IN A NUTSHELL – SELECTION OF TWEETS, LIVE TWEETS ON WEBSITE:
• Enterprise Inns FY. Revenue is £632m v £629m last year. Group EBITDA £292m (2015: £296m). Is ‘in line with expectations’
• ETI FY: Group PBT £122m (2015: £122m) ‘as interest savings from reduced debt offset reduction in EBITDA’.
• ETI FY: EPS 19.6p (2015: 19.4p). LfL income is +2.1% y-o-y in the group’s ‘Publican Partnership’. Is +3.8% in commercial property
• ETI says that ‘improved trading and enhanced operational support have helped to further reduce unplanned business failures’
• Alcohol consumption in the UK has declined by almost a fifth over the last decade and is now at similar levels to 1979.
• Markit has reported that global optimism has slipped to a joint post-2008-crisis low ‘amid rising political uncertainty’
• Markit says the ‘global business outlook darkened by reduced optimism among US and UK companies amid political change’
• Paris tourism bookings have fallen 65% since last November’s terrorist attacks.
• Cineworld updates on trading for first 45wks, says total revenues +10.8%. Says has ‘achieved strong revenue growth’
• Later tweets: CIPD sees small decline in recruitment intentions. Also wage settlements coming in at 1.1%. Could soon be under water vs inflation
• Enterprise reassures that plans are on track, has plenty of options when it comes to how to manage its units
• Check today’s email, older emails & blog posts here – http://www.langtoncapital.co.uk/
RETAIL NEWS WITH NICK BUBB:
• John Lewis Partnership Sales Watch: The cold weather last week was good for Fashion sales at that great bellwether, John Lewis, with gross sales up by 4.5%, but total sales were only up 1.8% gross in w/e Nov 12th (broadly flat LFL), breaking a 6-week winning run. The problem was that sales in the high-flying Electricals department were down a tad in gross terms, given the tough comps created by the launch of the iPad Pro a year ago, whilst Home sales were only up by 0.7% gross. Over the last 15 weeks, gross sales at John Lewis are running 4.3% (c2.5% up LFL), with Electricals sales running up by 8.5% gross. Over at Waitrose, however, sales were better last week, with gross sales up by 4.2% (c1% up LFL) in w/e Nov 12th, boosted by the “25% off wine” promotion. Over the last 15 weeks, gross sales at Waitrose are cumulatively up by 2.9% (a tad down LFL).
• Today’s News: The Evening Standard last night had an upbeat assessment of the new Marks & Spencer Spring fashion range and the Fashion pages of today’s papers have more positive reviews: the Telegraph says it represents “easy-to-wear chic” and the Times’ T2 section concludes that the new M&S collection is smaller but more focused, better finessed and more fashionable (although it separately says that Jigsaw is the best kept secret on the High Street). In terms of today’s news, there is no announcement yet about the content of the “Capital Markets Day” for Tesco. But Morrisons has announced the launch of its new Grocery Online store-pick service, via Amazon, which is not good for Ocado…Morrisons at Amazon will launch on Prime Now in selected postcodes in London and Hertfordshire (the main Ocado warehouse is, of course, in Hatfield in Hertfordshire).
• News Flow This Week: Tomorrow brings the Majestic Wine interim results, the Ted Baker Q3 update, the ONS Retail Sales figures for October, the Boohoo Spring/Summer range preview and the Asda/Wal-Mart Q3 update.