Langton Capital – 2017-05-17 – Mitchells & Butlers, Labour manifesto, laptops & other:
Mitchells & Butlers, Labour manifesto, laptops & other:
A DAY IN THE LIFE:
Our coffee percolator seems to take an age.
I know a watched pot never boils but this one really doesn’t. In fact it takes so long that we often lose patience with it & pour the coffee when enough liquid has come through to make at least one decent cup.
The problem there, of course, is that it has the consistency of treacle and could send an elephant bonkers but, at silly o’clock in the morning it might be just what is called for. ON TO THE NEWS….
MITCHELLS & BUTLERS H1 NUMBERS:
• Mitchells & Butlers has this morning reported H1 numbers comprising the 28wks to 8 April and further comments are set out below:
• Headline Numbers:
• M&B reports that it has seen continued LfL sales momentum. LfL sales are +1.6% in H1 and are +1.9% in the first 33wks of the year.
• Easter moved into H2 but it is included in the 33wk number
• The group is continuing to ‘focus on mitigating inflationary cost headwinds’.
• Total revenue is £1.123bn (2016: £1.096bn)
• Operating profit is down £12m at £145m. PBT is £75m vs £83m last year and EPS is 15.2p (adjusted) vs 15.7p last year.
• The group is announcing a H1 dividend of 2.5p per share, unchanged on last year.
• More on Recent Trading:
• M&B reports that it has ‘completed 178 return generating capital projects with focus on premiumisation of its estate’
• It says it has improved social media interaction
• In addition to cost pressures, MAB focuses on the supply of new units commenting ‘the level of supply in our market has also changed significantly in recent years.’
• The group adds that, recently, it has ‘seen restaurant supply growth slow considerably, reducing to a small decline in the last four quarters, although clearly within the net position there are examples of segments and operators that are continuing to roll out.’
• MAB concludes ‘while we are not now seeing the same level of new openings as two years ago, our marketplace remains highly competitive.’
• Balance Sheet & Other:
• M&B reports capex during the period of £93m (vs £88m last year) ‘including 6 new site openings and 172 conversions and remodels’
• Free cash flow was £24m (vs £34m)
• Net debt is £1.83bn, little changed from last year’s £1.86bn. This amounts to 4.3x adjusted EBITDA (vs 4.2x last year)
• M&B CEO Phil Urban reports ‘during the half year we have generated sustained sales growth, whilst consistently out-performing the market.’
• He adds ‘this comes from the good progress we have made in our three priority areas: building a more balanced business; instilling a more commercial culture; and driving an innovation agenda.’
• Re costs, Mr Urban comments ‘as previously announced, margins have been adversely impacted by increased costs, most notably from wage inflation, property costs and exchange rate movements.’ He adds ‘in order to partially mitigate these costs we have been working hard to encourage our guests to trade up and increase spend per head for a more premium experience whilst challenging our General Managers to run their businesses as cost effectively as possible.’
• In conclusion, the company reports ‘overall, we are pleased with the turnaround in our sales trajectory and relative performance against the market. In a challenging cost and consumer environment we will continue to focus on our three priority areas.’
• Langton Comment: M&B has seen performance improve at the top line in the current year to date.
• However, costs are clearly an issue as EBITDA, profit & EPS are lower on increased sales.
• Working harder and longer for less money seems to be the order of the day- at least in the short term.
• Nonetheless, the group comments that its LfL momentum is gathering pace and, mindful that JDW recently said that it might need 3% to 4% LfL growth in order to stand still in terms of profits, there may yet be some way to go.
• The fact that the group refers to evidence that a number of its initiatives are working is encouraging.
• Xmas was good, recent sales have been better than the H1 average and, as M&B is a big ship, it will take time to turn.
• Evidence of such a turn may be emerging but the markets are tough and the competition is not standing still.
• As regards its share price, we are now at a point where the group is trading at only around 7.6x current year earnings and it has a 2.8% (and hopefully growing) yield.
• M&B has an extremely attractive estate but it still has much to do. Today’s announcement is positive in tone but the group’s shares have recently been strong over the last month or so, its share register remains abnormal and some investors may decide to bank some recent profits.
ENTERPRISE INNS – H1 ANALYSTS’ MEETING:
• At the group’s analysts’ meeting yesterday, EIG conceded that the MRO has slowed lettings. EIG expects this to be temporary.
• Slightly fewer than expected tenants are opting for a commercial lease.
• Costs are a bit higher as the co is simply having to do more.
• LfL rent is stable & beer income is up.
• The group’s transformation will cost around £350m in capex. Some £300m will be generated from disposals.
• Some 300 (based on sample results to date) leases may move to FoT. The loss of income to EIG across such pubs is around 18%. However, it could be said that the quality of the income actually rises.
• More managed partner groups will be added in H2.
• Group is confident that it has turned the corner. The economy may not help in the short term but the new model appears to be working. Execution cannot be taken for granted but it appears to be progressing to plan.
PUB, RESTAURANT & DRINK PRODUCERS:
• Patisserie Holdings generated an 11% rise in revenue to £55m, translating into a pre-tax profit of £9.7m (+15.7%) and diluted EPS of 7.88p (+19.2%) for the six months to 31 March 2017. Revenue from its principal brand, Patisserie Valerie, was £40.4m (+15.7%) and revenues from other brands came to £15.9m (+0.6%). Digital sales grew by 14.3% to £1.6m. The popular branded café and casual dining group has used its operating cash flow to open ten new stores in the year to date, making for a total estate of 192 trading stores, while it retains net cash of £16.2m on its balance sheet (2016: £8.9m). Patisserie aims to have 20 new sites by the end of the year.
• Chairman Luke Johnson commented: ‘We have delivered another strong set of results with growth in both revenues and profit and excellent cash conversion despite the challenging market conditions and the current inflationary environment. We have opened 10 new stores including our first international store in the Republic of Ireland, and the pipeline to the end of the year to achieve our target of 20 new store openings is on track. With a strong balance sheet and an experienced management team, we remain operationally focused on the organic delivery and continue to assess acquisition opportunities. Accordingly, I am confident of delivering a successful second half of the year and beyond.’
• Cider and beer manufacturer, C&C, has reported FY 2017 operating profit at €95.0m, in line with the prior year. The group saw revenue decline by 6.9% on 2016 to €559.5m. CEO, Stephen Glancey said ‘The results reflect the increased investment behind our core brands, which returned to volume growth of 2.6% and the €15 million efficiency benefits arising from our production rationalisation programme.’
• Simon Cope will join Byron in July as its new managing director, having recently left Wagamama after helping the group achieve double-digit like-for-like growth for three years in a row. Cope will sit on the executive board and lead the next stage of the brand’s evolution, focusing on marketing, food development, and property.
• Healthy food-to-go concept Pure has reported FY16 turnover growth of 17% to £11.8m and group EBITDA of over £1m for the second year in a row, per MCA. The 13-strong group, in which Whitbread has a 49% stake, saw pre-tax profit rise slightly from £449.1k to £451k. Pure warned, however, that an increase in occupancy costs will make profitability more challenging in the near term.
• German steak-house chain Maredo, which currently has 46 sites, has been sold by ECM Equity Capital Management to Perusa Partners.
• The Herbert Group (the UK’s largest KFC franchise with 119 sites) has undergone a refinancing in order to pursue its merger and acquisition strategy. The Marlow-based company has secured a £20m debt facility from Lloyds Bank. In addition, the bank has provided a £2.5m revolving credit facility to support working capital for the company, which has an annual turnover of over £130m.
• US numbers show that problems can be caused by overcapacity.
• US restaurant sales fell by 0.9% LfL in April per the latest MillerPulse index. This represents 10 falls in the last 11 months. Journal NRN comments ‘the decline is due entirely to a loss of customers. Traffic in the month fell by 3.5 percent. Traffic has fallen by 1.9 percent or worse in each of the past 12 months, and has been down by at least 2.7 percent in each of the past five months.’ Miller Pulse commented ‘this is an ugly looking chart.’
• US restaurant sales falling despite strong consumer confidence numbers. Simply too much capacity.
• US restaurant costs have risen this year with increased labour costs compounding problems caused by negative LfL numbers
• Labour Party Manifesto. Largely meaningless given the landslide that is about to befall us but:
o The ALMR has commented on the Labour Party’s manifesto, saying that it welcomed pledges to reform business rates, but it has warned about increasing wage costs for employers.
o SIBA has similarly welcomed the suggestion that there is a need for a ‘National review of local pubs to examine the causes for their large-scale demise, as well as establishing a joint taskforce that will consider future sustainability’, but is prompting urgent action on beer tax and business rates.
o BBPA says ‘it is good to see that Labour has identified pubs and high streets as important issues but we would want to look at any proposals for new powers over pubs in detail.’
• Cider maker Aston Manor could be sold for more than £100m after it hired investment bankers to review the business, reports The Telegraph. Aston Manor is the UK’s largest independent cider producer and is responsible for Frosty Jacks cider.
• The Society of Independent Brewers (SIBA) is calling for a lower duty rate for draught beer to ‘encourage the consumption of beer in the sociable environment of the pub’. The group makes the call in its pre-election manifesto.
• Lavezza has up to €2bn to spend on acquisitions in the coffee industry with Antonio Baravalle, CEO, saying ‘If we want to be independent in this big consolidation process, there is only one possibility — to grow. Either you sell or you grow, there is no other alternative.’
APPS AND THE ON-TRADE:
• Langton has been let loose with a pen again & we’ve written about Apps in the On-Trade. Briefly they’re here, they’re big & they’re getting bigger. The note is here
HOLIDAYS, LEISURE TRAVEL & HOTEL
• Extending the US cabin laptop ban to Europe would create an ‘economic tsunami’, the Business Travel Coalition has warned. ‘A ban from Europe could affect 3,500 fights a week this summer and 65 million passengers per year,’ BTC chairman Kevin Mitchell said in a letter to European transport commissioner Violeta Bulc. ‘The economic risk to airlines and the travel and tourism industry is orders of magnitude greater than the threat from pandemics, volcanoes or wars.’
• La Quinta is reported to be exploring the sale of the company:
• Fresh rail strikes have been announced for 30 May at Southern Railway, Merseyrail and Northern.
• Online travel giant Expedia has bought a majority stake in Silverrail, a London-based rail technology firm for an undisclosed fee. Dara Khosrowshahi, CEO of Expedia, said ‘Rail is ready for an online revolution….and SilverRail is powering that innovation.’
• Travelodge has added the ‘super room’ to four London hotels – Waterloo, Euston, Farringdon and City Road – with 1,000 super rooms being available by autumn. The company is targeting business travellers and the rooms will be located on ‘business floors’.
• Sandals Resorts International has announced it is ‘exploring options to accelerate the company’s long-term growth’, as chairman Gordon Stewart, neither confirms nor denies a possible sale of the group. Reuters has reported that the company has hired investment bank Deutsche Bank AG to explore several options, including selling a majority stake in the all-inclusive Caribbean resort group.
• Coaching Inn Group is on track to have 20-25 sites by mid-2019 after securing £10m from the Business Growth Fund, according to the company’s finance director. Edward Walsh, finance director, acknowledged cost pressures on the industry but said ‘we are a high-margin business in terms of having the bedroom revenue. That does help insulate from other pressures’. The group currently has 13 sites across England and Wales.
• Google has announced partnership deals with Audi and Volvo, in bid to develop an Android-based in-car entertainment system.
• Manchester United recorded a loss of £3.8m during the first three months of 2017, as operating costs soared. Total revenue for the period was up 3% to £127.2m.
• Jackpot Joy yesterday reported quarterly numbers to end-March saying that revenue rose 11% to £71.4m with adjusted EBITDA +4% at £29.2m. The group says ‘for 2017, management continues to expect revenue growth in line with market growth rates and Q2 has seen a strong start across the Group’.
FINANCE & MARKETS:
• UK inflation up to 2.7% in April from 2.3% in March. Now at highest level since Sept 2013 and somewhat above the Bank’s 2.0% target. The Bank of England last week warned that 2017 would be “a more challenging time for British households” with inflation rising and real wages falling.
• Election & Brexit:
o See comments above re Labour Party manifesto.
o EU-Singapore trade deal will not take effect unless all 28 EU nations approve it. Suggests EU-UK trade deal could be similarly slow.
o European Medicines Agency, which employs 900 staff in London, is reported set to move to stay within the EU
• Greece has fallen back into recession for the first time since 2012. Greek economy has now shrunk for two consecutive quarters
• Average house prices across the UK are now up 4.1% y-o-y (in March) compared with +5.6% in February. London growth was the second lowest in the country at +1.5%.
• Oil down 70c or so at $51.26
• Sterling up vs Trump-weakened US$ at 1.2929
• Sterling down vs stronger Euro at €1.1639
• UK 10yr gilt yielding 1.14%, down 1bp on yesterday
• UK markets hit new highs yesterday, Europe mostly lower & US down. Far East mostly lower in Wednesday trade
YESTERDAY’S LATER TWEETS:
• Later tweets: UK FTSE heading for new record with 9th consecutive rise. Inflation comes in at 2.7%. Deemed not to be a big deal.
• Enterprise updates on H1. Analysts’ meeting reassures that group is on track, new business model continues to develop
• Enterprise: H2 will benefit from shift of Easter but won’t be helped by this summer’s lack of football (vs Euro 2016 last year)
• Leasehold pub demand said to have slipped. Companies such as PUB & EIG are likely keeping best stock to run as managed houses
RETAIL NEWS WITH NICK BUBB:
• Marks & Spencer: The Autumn/Winter Press Show for City analysts etc is being held tonight, but there are tons of detailed previews of the latest M&S womenswear range in today’s papers (and yesterday’s Evening Standard), so it will be interesting to see how many turn up, particularly as “no management will be present”. As ever, hopes spring eternal that the new range will do the trick, despite the perennial difficulty of merchandising the range properly instore and the competition etc etc, but the Telegraph trumpets “The new M&S collection that will make you happy” and the Guardian says “M&S puts faith in fluted sleeves as womenswear comes out fighting”.
• John Lewis Partnership Sales Watch: We have been flagging that the weather so far in May has not been as good as last year and the impact shows through in last week’s subdued JLP sales figures. At John Lewis Fashion sales were weak and so total sales were up by just 1.3% gross (c0.5% down LFL) in w/e May 13th and that left John Lewis still running up only 1.1% up gross (c0.7% down LFL) on a cumulative basis over the last 15 weeks. Over at Waitrose w/e May 13th saw sales rise by only 0.2% gross (over 1.5% down LFL) and so over the last 15 weeks combined Waitrose was just1.8% up gross (about flat LFL).
• News Flow This Week: Tomorrow (aka “Super Thursday”) brings the Burberry finals, the Mothercare finals, the Greggs trading update, the Booker finals, the ONS Retail Sales for April and the Asda Wal-Mart Q1, as well as the Land Securities finals. The Moss Bros AGM is on Friday.