Langton Capital – 2016-11-30 – Greene King, Britvic, margins, gouging, Brexit & other:
Greene King, Britvic, margins, gouging, Brexit & other:
A DAY IN THE LIFE:
Langton put its hand in its pocket last week and took a sizable chunk of its immediate family out for a meal.
Admittedly this was at a chain restaurant but, after paying £3.25 for a portion of chips and £4.25 for a thimble sized bottle of Peroni, it didn’t particularly think as though we were scrimping.
And there was other stuff in addition to beer and chips, of course, such that the bill comfortably exceeded £20 per head (incl. water (chargeable), coffee, tip, meal, drinks etc.) for what was meant to be an easily affordable treat.
Which is where the operators may be going wrong because, if you’ve got a family of six or seven people, you’ll remember these things. Marston’s, Greene King, Franco Manca still generate very acceptable margins for meals at twice the price (with less gouging for extras) and that might be the way to do it.
Surely maximising lifetime spend (i.e. encouraging return visits) is better than treating your restaurant like a huge spider’s web in which you suck dry anybody foolish enough to wander in? For Langton reports on recent restaurant comparisons etc. see website and/or earlier emails. On to the news:
GREENE KING H1 NUMBERS:
First Half Numbers – 24wks to 16 October 2016:
Greene King has this morning reported H1 numbers for the 24wks to 16 October and our comments are set out below:
Full Year Numbers:
Greene King reports group revenue up by 13.8% at £1.04bn with adjusted PBT some 14.6% higher at £139m
The group says that all divisions are in profit growth
Group EPS is 36.0p (up 9.0%) and H1 dividend is 8.8p (+4.1%)
Pub Company LfLs are ahead of the market +1.3%. The group had been +2.8% at week 8 suggesting that the following 16wks were c0.5%
Pub Partners LfL net income is +4.2%
Own-brewed beer volumes were down 3.8%. GNK says this was in ‘a cask ale market down 5.4% & a total ale market down 3.1%.’ GNK reports ‘our core brands maintained their UK market leading positions’.
Nonetheless, the numbers imply a very poor trading period for beer over the last 6wks or so, potentially Rugby impacted
The group reports that Spirit integration ‘continues ahead of schedule’ and it says ‘synergies [are] expected to be £30m this year. The group should be hitting its original three-year target in two years.
GNK says ‘trading in Pub Company since the period end has improved versus the trends seen in the second quarter.’
It says ‘trading in Pub Partners and Brewing & Brands was broadly consistent with that seen in the first half.’
The group reports ‘our latest Leisure Spend Tracker highlighted that 28% of consumers expect to visit the pub in Christmas week and we are looking forward to another successful festive season with deposited bookings on all key dates up strongly on last year.’
Cash Flow, Balance Sheet & Debt:
GNK has completed 50 brand conversions with average sales uplifts of over 30%.
It says H1 featured strong free cashflow and net debt stands at 4.2x EBITDA. Debt stood at 3.9x EBITDA at the full year. The rise was ‘as expected’ following the tap of the group’s securitisation in May
GNK says it has ‘flexible and long-term debt financing’ in place
Market Conditions, Strategy and Other:
GNK says much of the increase in consumer spending ‘is being driven by the supply of new branded eating out sites’
It says ‘eating at home has become more attractive due to the twin drivers of grocery food deflation and the growth of branded takeaway and delivery businesses.’
Group adds ‘there are also demand challenges with higher consumer expectations for value, service and quality, which are mainly impacting the value food sector, the on-going digitalisation of leisure and the demand for healthier options.’
However ‘pubs can maintain their market share of eating out and drinking out.’
Overall, Greene King CEO Rooney Anand reports ‘we have delivered market outperformance and strong integration momentum against a backdrop of continued challenging market conditions.’
Mr Anand continues ‘our performance has been driven by growth in all divisions and the synergy benefits from the integration. These have helped to offset increased cost pressures, particularly from the National Living Wage, as well as additional investment in the customer offer to meet higher guest expectations of value, service and quality.’
GNK says ‘the full impact of the UK decision to leave the EU remains unclear. Looking ahead, increasing levels of consumer uncertainty, further cost pressures and the changing dynamics of eating out, mean the consumer environment is likely to become more challenging.’
Group concludes ‘we are confident that the strength of our brands, pubs, people and cash generation leaves us well placed to deliver another year of progress, value creation and returns for our shareholders.’
Langton Comment: Greene King has turned in numbers broadly in line with expectations.
The integration of Spirit would appear to be going well.
Managed houses have slowed in Q2 but the group reports trading has improved since.
The performance of tenanted houses has been good but beer looks disappointing.
Overall, GNK remains concerned about the wider economy and mentions Brexit, input costs, rising wage inflation and consumer confidence issues.
Uncertainty is unavoidable. We believe that this is more likely to lead to a delaying of large-ticket rather than small ticket purchases – although the pub is not immune.
GNK is one of the UK’s better-positioned pub companies and, with its shares now trading at a single-digit multiple, it is not expensive.
WHITBREAD CAPITAL MARKETS DAY:
• Whitbread yesterday made a series of presentations to shareholders, brokers & bankers in which it outlined where its businesses are today and how they intend to maintain growth.
• The presentations came under the headings of Introduction, Property, Premier Inn and Costa. Over a period of 6hrs, a great deal of information was given out. We haven’t attempted here to list the facts (these will be available on the group’s Investor Relations website where the 180 slides will be posted) but have noted some of the key points below:
• INTRODUCTION: Whitbread reports that its strategy & its 2020 milestones remain unchanged
• The group should save £150m in costs over 5yrs. It won’t be breaking this number down any further
• PROPERTY: Whitbread’s property has a book value of £3bn but it ‘is worth between £4.2bn & £5.1bn’. There is no lotting premium
• This is on a yield of 4.5% to 5.5% – helped by the fact that Whitbread is its own tenant
• Some 63% of Premier is freehold. Even with the leaseholds in the pipeline, this will stay at c60%
• Sale & leasebacks should amount to £50m to £150m per annum
• Freehold makes financial sense at present – but it can lead to slower expansion. Debt can be had for c3% but rents will run at around 7% when the upward only nature of reviews is considered. Leaseholds are less flexible than freeholds in that the tenant cannot add extensions (or indeed tear them down)
• PREMIER INN: Whitbread maintains that it is a value retailer. It will grow share, taking it primarily from independent operators.
• Units hit maturity at 3yrs in provinces & by end-yr1 in London. Occupancy is c81% and ‘could go to 82% or 83% over the medium term’
• Branded budget is around 18% of the market today & should grow to c29% by 2020.
• Disrupters should take c3% of the market by 2020
• Says PI delivers on both quality and value. It can see opportunities ‘beyond 100k bedrooms’. It has only 2k rooms to find to hit its 2020 target of 85k. Extensions are the lowest-risk route for expansion. It has ‘line of sight’ to 100k rooms
• In markets where PI has <15% share, group says it can expand
• Location is still the key deciding factor. This favours operators of scale, Premier Inn foremost amongst them.
• London, though tough at the moment, is still seen as an area for growth
• Wishes to drive B2B, which comprises ‘higher margin customers’. Business customers pay around £10 per night more than leisure customers
• Hub by Premier Inn gives access to high-cost areas. Occupancy is c94%
• Having restaurants adds £2 to £2.50 or so to REVPAR & directly leads to F&B spend. It allows the group ‘to control the guest experience’. However, up to 85% of guests are not staying in the hotel
• All Taybarns have now been converted to Brewer’s Fayre. Whitbread believes Bar & BLOCK will be able to compete with other casual diners. Two should be open by the end of this week
• The German market is ‘structurally attractive’. There are far more independents (c75% of the market) to provide share going forward.
• WTB is committed to four sites in Germany. With ‘more soon’. It may buy a small number of existing hotels.
• Germany should be in profit by c6 hotels – but this will be partially dependent upon whether these are leasehold or freehold units.
• Behind the scenes, price management has evolved. The Automated Trading Engine ensures that prices rise as the day of occupation approaches.
• Also behind the scenes, cost management is a major issue. Saving 1 minute per day per room on cleaning costs is worth £1m
• Almost 90% of bookings come directly from PremierInn.com
• Re profitability, there are cost headwinds. Some of these will be mitigated by LfL growth & efficiency benefits (e.g. centralised purchase of cleaning products). However, margins will fall by 20-30bps next year.
• Other: Customers are more demanding but there are a small number of things that are vital when providing a ‘value’ product. This is where WTB concentrates its attention
• Question: If you’re deemed to be good value (in PI), shouldn’t you put your prices up? Company chooses not to do so. Network growth is where the money is and, for the moment, taking price will not help to drive growth in the size of the estate.
• COSTA: Here convenience & quality remain key. There are a lot more good coffee shops out there than there were a decade ago but Costa ‘has a great plan and has confidence that it will be able to execute it’
• The competitor environment ‘is fundamentally changed’. Costa ‘has fallen behind in food’. But it has the heritage etc. to retain its lead. Admittedly per the company.
• Group says it has ‘significant further runway for growth’ in the UK. It seems not to agree that there are enough already.
• Group will ‘innovate in coffee and food’. Perhaps a food acquisition or at least a closer partnership may be on the cards. There are some barriers (lack of a kitchen, not least)
• UK now drinks more coffee than tea. But UK is still a modes consumer vs some other geographies such as Scandinavia, Germany, France etc.
• Watch out, there are more ‘craveable hero products’ and ‘tailored ranges of food’ coming.
• Group has 2,121 stores with ‘clear line of site to 2,500’. There is ‘significant white space’.
• Costa has 44 Drive Thru sites with 13 of the top 20 Costa stores being in this category. Some are being considered in or next to Premier Inn sites
• Estate is reasonably flexible with an average lease length (now) of around 12yrs and break clauses meaning that 10% of the estate could be exited per annum
• The High St is the area that is currently showing least growth. Costa ‘does not think the High St is dead, however’
• China: 395 JV stores. Been there 10yrs & have a ‘solid base’. However, it’s ‘not been perfect’, and ‘there has been a lack of focus’.
• Food in China will be area of focus. Will be ‘British inspired’.
• Group is no2 (behind Starbucks) in coffee in China – but it only has 395 stores vs 2,400 at Starbucks. Starbucks is raising the profile of the whole industry. Costa should be able to benefit from this
• Q: Will stores be closed? Some will be closed. Leases are short, however, so this should not be too problematic.
• Other international. Costa is no1 in Poland. Can drive the business in Mid East & S/E Asia.
• Costa Express has gone from 877 machines in 2011 to >6k. The original target for 2016 was only 3k machines. Shell is the largest partner. There are 3k machines on forecourts. International is performing well.
• Costa costs: There are headwinds. Group will attempt to mitigate. Margins will fall in 16/17 and a further 100bps will be ‘invested’ in FY18.
• Group believes some of its competitors may try to take price next year. Costa will then decide whether to move in this direction as well
• Group may ‘package’ products – wrap & a coffee, for example.
• Staff scheduling is being addressed. Also, delivery to store.
• Langton Comment: Guest will have left the above presentations awash with information. Whitbread has strength in depth across its operations. It has good brands, there are growth opportunities and it is still a largely freehold business.
• Its shares were perhaps a little stretched when they exceeded £54 in the middle of last year.
• This partly because the coffee market, though not saturated (per the insistence, it must be said, of the operators), was becoming a little more so & the UK hotel market, particularly in London, was likely to face a more difficult market in 2016. In fact check out the crossroads where Clerkenwell Road meets Goswell Road. There’s a Temptations, a Starbucks, a Pret, a Costa and a new Shoreditch Grind. There’s also a Pizza Express, a pub, a wine bar and a salad bar – all selling coffee. That’s at least 10 units within a few dozen yards.
• Some of the market’s concerns led to selling and WTB’s shares are down c36% from their 2015 peak.
• In addition, we have some concerns that hotel operators, including Premier Inn, have succumbed to facility creep meaning that facilities (and room rates) have risen over time. This has left something of a gap below them into which Tune, EasyHotel and others may be able to expand.
• Furthermore, there are some macro headwinds. Costs are an issue and so, perhaps, will be demand. Though it is an affordable treat, coffee at £2.65 per cup with an ex-vat margin of 85% or so, may be vulnerable to a consumer slowdown.
• Currently the group’s shares trade on around 14.4x earnings for the year that ends in February. Certainly, growth is likely to be harder to come by and that 14.4x may not drop much for FY18. However, the group has good brands, good assets and growth potential overseas.
PUB, RESTAURANT & DRINKS PRODUCERS:
• Britvic has released its preliminary results for the 53 weeks to 2 October, during which revenue rose 10.1% to £1.43bn and like-for-like pre-exceptional EBITA grew 3.8% to £178.8m. Adjusted earnings per share increased 6.5% to 49.3p, putting the soft drinks producer’s shares on just over 11 times earnings at 547p. GB Carbs were a standout performer in the year for Britvic, which has overseen an ‘excellent first year’ in Brazil, and is on track with its ‘transformational’ three-year supply chain programme to deliver a minimum 15% EBITDA return by 2020.
• Simon Litherland, Chief Executive Officer commented: ‘Britvic has delivered another strong set of results in challenging market conditions. In our core markets, we continued to take market share with a particularly strong carbonates performance. Internationally, we have had an excellent first year in Brazil and Fruit Shoot continued to grow in France, USA with the launch of multi-pack, and latterly in Brazil following its recent launch in Sao Paulo.
• ‘We are confident we will mitigate inflationary input costs through a combination of revenue management activities and internal cost saving initiatives. The new financial year has started well and although 2017 will be another challenging year, we expect to deliver pre-exceptional EBITA in line with current market expectations.’
• Revolution Bar Group will have opened four Revolución de Cuba bars in the last eight weeks of 2016 as part of its plans to open five sites a year. The openings in Reading, Aberdeen and Harrogate – with Glasgow to follow in mid-December — are ‘strategically timed’ to benefit from the festive season. Mark McQuater, CEO said: ‘We will have opened four new Revolución de Cubas in the last 8 weeks and more than doubled the number of Revolución de Cubas, now 12 bars, in little over 18 months, a testament to the strength of the concept and brand. The early opening profile in H1 will benefit the Company for the year to come. Looking ahead we have a strong pipeline of sites.’
• Carlsberg to go back to its Danish roots in major re-brand. Group to spend £15m in 2017 on marketing. Beer sold in the UK will still be brewed to the same recipe in Northampton but the revamp was necessary as ‘Carlsberg is not performing as it should.’
• Shepherd Neame announces acquisition of Village Green Restaurants for a total consideration of £11.85m. Village Green Restaurants Limited operates five freehold pub restaurants in and around Maidstone and Ashford in the company’s Kent heartland. The acquiring company says ‘all the pub restaurants will be operated under Shepherd Neame’s managed pub division. The last audited accounts for the year ending 31 October 2015 for the company showed annual turnover of £6.6m and operating profit of £0.9m.’ CEO Jonathan Neame reports ‘we are delighted to welcome the team from Village Green Restaurants Limited to Shepherd Neame. Over recent years we have transformed our pub profile, greatly developed our food offer and enhanced the experience for our customers and this is another important development in our strategy.’
• SSP has sealed a deal with baker Paul Hollywood to roll out several Knead bakeries across the UK. Knead will sell bite-sized chocolate tarts and sausage rolls etc. SSP CEO Kate Swann reports ‘the initial taste tests last week were fantastic and we’ll have the final round this week with Paul ahead of the launch next year.’ Not likely that Gregg’s will be quaking in its boots but Knead could take some business from Pat Val at the top end of the market for occasional treats etc.
• GfK reports that consumer confidence in the UK slipped to minus 8 in November from minus 3 in October. This represents the lowest level since just after the 23 June vote to leave the EU. GfK reports ‘the slump across the board this month points to continuing uncertainty about the state of the economy among consumers.’ GfK adds ‘this will be an acute concern for retailers as they gear-up for the key Christmas selling period. Many are saying that fears about the British economy have been overstated, but time will tell if the pessimism shown in the Index is misplaced or not.’
• German restaurant chain Vapiano is preparing a stock market listing that could value the group at €600m including debt as it looks to fund its planned expansion. The restaurant chain, which specialises in Italian food, is hoping to value itself at 20 times 2017 EBITDA, which is forecast to be in the region of €30-35m, putting it roughly in line with listed peers such as UK-based Domino’s Pizza, which trades at 19.2 times its expected core earnings.
• Morning Advertiser’s inaugural Drinks List: Top 100 Brands shows that millennials continue to drive to buoyant craft beer market. CGA Strategy client director Phil Montgomery commented: ‘Millennials are key to the trade because they go out more and spend more than the average consumer, so by capturing that key group in the on-trade, the category has flourished. It plays into the trends we are seeing in the drinks category [as a whole] in terms of heritage and provenance, so consumers are getting that unique experience with craft beer.’
• AB InBev is launching its rollout of Goose Island brewpubs with an ex-Be At One site in Ramsden Road, Balham, next month, per MCA.
• Vianet’s iDraught data show that sports pubs experienced a year-on-year fall in consumption on Saturday 26 November despite Rugby Union and Premier League games. Sports venues were down -4.17% year-on-year, with non-sports focused venues experiencing only a marginal uplift of 0.26%. The sample comprised almost 1,500 sport pubs showing the matches, versus a ‘control’ group of about 2,800 non-sport focused pubs. Next Saturday provides some big match-ups, with the England vs Australia rugby game and some heavyweight Premier League matches.
• Neil Rankin-led barbecue concept Temper is in talks for a second site at the Angel Court development in the City, writes MCA.
• Thornton’s owner, Ferrero International is to acquire several brands from United Biscuits as the chocolate maker expands beyond its core business.
• Temptations has put its Clerkenwell site up for sale (MCA).
LEISURE TRAVEL & HOTELS:
• Hotel booking specialist HRS has found that average hotel room rates across the UK’s major cities fell by as much as 20% in the last quarter. Falling by 15% in the last quarter, Liverpool offered the cheapest average room rate in the UK at £84 a night, while London retained its reputation as the most expensive place to stay in the UK with an average night’s stay at £153.
• A $1.15bn (£930m) bid for the Grosvenor House, A JW Marriott Hotel and New York Park Plaza by a consortium of Saudi and UK family wealth funds has been provisionally accepted.
FINANCE & MARKETS:
• The US economy grew at an annualised rate of 3.2% in the quarter to end-September. Q3 growth was the strongest since 2014. The US Commerce Dept. reported ‘the increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures, exports, private inventory investment, and federal government spending, that were partly offset by negative contributions from residential fixed investment and state and local government spending.’
• Bank lending to manufacturers slipped by 5.2% in Oct per B of England. Consumer lending, however, rose by 10.5%.
• Basically, UK making less but borrowing more. Can’t last too long & not necessarily the way to a bright future.
• Mortgage approvals up to 67,500 in October.
• UK carmakers say losing access to single market will cost the industry £4.5bn per year in lost revenues
• Sleep loss is said to be costing the UK economy £40bn per year per a Rand Europe survey of 62k people
• World markets: Big caps down in UK yesterday but Europe up. US higher and Far East mostly up in Wednesday trade
• Oil around $46.80.
• Sterling down a shade at $1.248. Little changed vs Euro at 117.4c.
• US long-bond (30yr) rates down around 4bps to 2.95%.
YESTERDAY IN A NUTSHELL – SELECTION OF TWEETS, LIVE TWEETS ON WEBSITE:
• Patisserie Valerie has reported a 13.3% increase in revenue to £104.1m and an 18.2% rise in statutory pre-tax profit to £17.2m
• P Val. Luke Johnson, Executive Chairman, said: ‘Our strategy remains that of organic growth’ but he does not rule out acquisitions
• The Sainsbury’s Local nearest our office now has contactless payment. Perhaps it’s about time.
• SSP FY numbers. Group reports underlying profit £121.4m (+18.2% at constant currency) with LfL sales +3.0%.
• SSP says strong LfL sales ‘driven by growth in air passenger travel & retailing initiatives.’ Revenues were £1.99bn (+5% c.curr)
• SSP says margins higher, underlying EPS 15.5p (+16%) with total dividend for year of 5.4p (+26%). Has ‘encouraging pipeline of new contracts’
• SSP concludes ‘the new financial year has started in line with our expectations’ but accepts there is a ‘degree of uncertainty’
• EasyHotel has reported FY numbers for the year to end-Sept. System sales are +6.8% at £21.3m, PBT +38.4%.
• EZH: Group revenue +8.7% at £6m with LfL revenue +13%. EBITDA +6.5% at £1.55m, EPS 1.4p (2015: 1.0p)
• EZH: Group has ‘significantly accelerated development pipeline with 1,527 rooms now in development’
• EZH: Post year end, the group raised £38m gross via a placing. It has completed a £7.2m refinancing & is good to go re growth
• Hogg Robinson managed to grow first half underlying operating profit by 4% at constant exchange rates
• The number of foreign holidaymakers visiting the UK fell by almost 400,000 in the first nine months of the year
• Merlin updates on 47wk trading, says group ‘anticipates reporting good profit growth in 2016, in line with expectations.’
• MERL reports ‘underlying trading in the Midway Attractions Operating Group has remained consistent’ & Resorts had good Halloween
• MERL reports ‘LEGOLAND Parks Operating Group has shown continued positive momentum following 2yrs of exceptional growth’
• OECD suggests global economic growth will pick up faster than previously expected partly because of a Trump boost in the US.
• Later tweets: CBI quarterly trends for UK service sector comes in at minus 19 (that is excess pessimists over optimists).
• Hotel Chocolat pays eye-watering rent for Covent Garden site per Capital & Counties. Top of the markets stuff or another peak coming?
• Pat Val shares up 8% after dismal year. Shares still down nearly 40% from their early-2016 peak as investors re-appraise growth prospects
• Foreign visitors to London down on year. Sterling collapse didn’t provide boost. STR says London REVPAR -11% in Oct
RETAIL NEWS WITH NICK BUBB:
• John Lewis Partnership Sales Watch: In the last full week before “Black Friday”, John Lewis lost ground, with LFL sales down 4%, as customers waited for cut-price Electricals deals, but they more than made it up last week, with sales surging to just under £200m in w/e Nov 26th, up by 6.5% on last year (c5% up LFL). Although it has not revealed how badly gross margins were affected by price matching through the “Never Knowingly Undersold” policy, John Lewis trumpeted that “it was the biggest ever week in John Lewis’s trading history” and it was certainly a logistical triumph. Interestingly, Home sales were only up by 0.9% gross, “with fewer deals on branded items”, but Fashion sales were up by 4.6% gross and Electricals sales were up by 11.0% gross. It remains to be seen how far sales were brought forward from this week (even though the Black Friday Sale carried on until
• BDO High Street Sales Tracker: John Lewis may have had a good time last week, as boosted by unspecified level of Online sales momentum, but the BDO High Street Sales Tracker for small/medium-sized Non-Food chains flagged that w/e Nov 27th was a bit disappointing. Fashion Store LFL sales were down by 3.8%, despite a soft comp, and though Homewares sales were quite robust, total Store LFL sales were down by 3.0%. However, Online sales were up by a very decent 22.6% overall, despite tough comps.
• Consumer Confidence Watch: As a sign of things to come, potentially, today’s monthly GFK Consumer Confidence index will unsettle a few retailers, with the overall index slumping by five points to -8 (-4 was expected in the City), with all categories measured seeing a drop in November. Joe Staton, the Head of Market Dynamics at GfK, says “Although scores for our personal financial situation just about remain positive, the big theme is the reduced confidence in the UK economy looking back and ahead. We are viewing our economy over the past 12 months with increasing despondency”.
• Today’s Press and News: The Guardian has a big splash about the bumper £200m of sales that John Lewis rang up last week, but notes our concern that Black Friday will have pulled a lot of business forward from this week and December. The Times and the Telegraph note that relations are thawing between Iceland and Iceland…and there are a few snippets about the weak GFK Consumer Confidence figures (see above) and the FTSE index review tonight (see below). Finally, the Telegraph’s Questor column advises buying shares in Sports Direct, arguing that the shares are “grossly undervalued”…
• News Flow This Week: The FTSE Quarterly Index review comes out this evening (with Travis Perkins expected to drop out of the FTSE 100 and DFS expected to drop out of the FTSE 250). The McColl’s Q4 update and the ASOS AGM are out tomorrow, whilst the DFS AGM is on Friday.
• News Flow Next Week: The BRC-KPMG Retail Sales figures for November (the 4 weeks to Nov 26th) will be out first thing on Tuesday and then Thursday brings the Sports Direct interims, the Ocado Q4 and the Mulberry interims. See Calendar attached for December/January.