Langton Capital – 2017-06-30 – More on GNK, Constellation Brands, real wages & other:
More on GNK, Constellation Brands, real wages & other:
A DAY IN THE LIFE:
So as the Bank of England frets over double-digit increases in unsecured lending and starts to stutter about r-r-r-r-rate increases, it reminds me that I’ve always thought of the economy as a bit like one of those thick-skinned balloons full of water that kids play with.
That’s because, however you squeeze it, in the short & even the medium term, the quantity of water in the balloon doesn’t change (much), it just goes somewhere else.
And that’s what, no disrespect intended, the politicians don’t seem to get.
Because you can temporarily give the illusion that there’s more water (by pumping debt into the economy, for example – or by distracting the population via a World Cup win or a good singer on the X-Factor) but this won’t last and, over time, it’ll be a zero sum game as the debt (or QE, brief football success or whatever) has to be repaid.
In fact, increasing the quantity of water in the balloon (via a better education system, inventions, productivity increases, a ‘better’ work ethic, less of a feeling of entitlement or simply working harder and/or longer etc.) is so unpopular, mind-numbingly boring and long-term, that the politicians won’t touch it.
The swivel-eyed nutjobs amongst them are happier wrapped in the flag, finger-jabbing and talking about bent bananas whilst the luvvies are pointlessly meandering around with a soppy look on their faces trying to share things that they haven’t created leaving the heavy lifting to someone, anyone, else.
Anyway, as a Cambridge-educated economist and Chartered Accountant who runs a business, what would I know? Indeed having been bold enough to categorise the loons above, it would be hypocritical of me not to expect myself to be categorised as an expert that everyone had had enough of. And probably a member of the metro liberal elite into the bargain.
It didn’t feel like that growing up in Hull though. On to the news:
GREENE KING – ANALYSTS’ MEETING:
Following the announcement of its FY numbers this morning, Greene King hosted a meeting for analysts and our comments are set out below:
⦁ These are ‘record results’ with the Spirit integration completed a year ahead of schedule. Some £35m of synergy benefits have been realised & this number could move higher
⦁ Q4 was very good, helped by a late Easter
⦁ ROCE was stable at 9.4% but, given the cost headwinds being faced etc., this ‘will be a challenge to maintain over the medium term’
⦁ Trading may become more challenging but, post the Spirit acquisition, GNK says that it ‘has more levers to pull’
⦁ The group says that, as in the 2007-09 period, the market will sort the winners from the losers
⦁ Managed pub LfL sales are +1.5% but, ex the drag from Fayre & Square, they are +2.0%. Some 90 remaining Fayre & Square outlets will be rebranded or disposed of this year
⦁ Margin is down from 17.7% to 17.0% on the back of lower LfL sales and an ‘investment in the customer offer’. This has been mitigated by some integration benefits
⦁ Cost headwinds are greater than had been expected at the company’s H1 numbers. Some £60m will impact the P&L in FY18
⦁ Cost pressures should abate in FY19. Visibility is very limited.
⦁ Around £45m of this should be mitigated by labour scheduling, discussions with suppliers etc. The group says it is ‘relatively confident’ that it will deliver this mitigation
⦁ Margins were down around 100bps in H2.
⦁ Prices may rise but GNK will tend to be a price follower rather than a leader. It intends to remain competitive
⦁ LfL profits (+5%) have been strong. Average increases, including the impact of disposals, have been stronger still (at +7.9%). Around 40-50 units should be sold in the current year
Brewing & brands:
⦁ This has been a more challenging year. Some lower margin sales have been foregone. Volumes are down 2.8% against a 2.7% reduction in ale across the market. Margins were down in H2 as a result of marketing & other costs
Cash flow, balance sheet, debt & strategy:
⦁ GNK reports free cash flow of £119.6m but adds that a more normal figure will be around £60m to £80m
⦁ Fixed charge cover is 2.3x. Debt is c4.0x EBITDA.
⦁ Greene King’s shares are broadly unchanged on today’s news. The Group reports that headwinds (declining consumer confidence, cost increases etc.) are building but maintains that it is relatively well-positioned and adds that, post its Spirit purchase, it has ‘more levers to pull’.
⦁ It is also our opinion that spending on ‘affordable treats’ will hold up relatively well. The purchase of a new car, suite or set of curtains can wait (you still have your old items), but a beer and a pizza on a Friday night cannot.
⦁ Added to which, abstinence from all-things-fun can be debilitating and, whilst walking on a seven-year-old (as opposed to a new) carpet is not really a hardship, missing out on ones weekends for the foreseeable future most definitely is.
⦁ We remain of the view that uncertainty is unavoidable but we believe that GNK is one of the UK’s better-positioned pub companies. Its shares are not expensive but, with the seas becoming a little more choppy, would-be buyers may sit on their hands in the short term.
PUBS & RESTAURANTS:
⦁ Greene King’s shares were virtually unchanged yesterday against a falling market. Headline numbers were broadly in line but the Press’s take on the statement was that the company (and consumer-facing stocks in general) face trading headwinds over the medium term.
⦁ Constellation Brandz gained almost 6% yesterday after the spirits maker boosted its full-year outlook after it beat Q1 forecasts with net income of $402.8m and adjusted EPS of $2.34 (Factset consensus: $1.98). Constellation Brands’ portfolio includes Corona and Modelo beers, Robert Mondavi and Clos du Bois wines and spirits brands like Svedka vodka. Beer sales were up 8% while wines and spirits fell 4%.
⦁ Blue Apron yesterday listed in the US and rose only around 1% on their issue price. This after pricing cuts brought about because of fears that amazon amongst others could prove to be damagingly competitive in the future. The group is not currently profitable. It lost $59m, $47m and $31m in 2016, 2015 and 2014 respectively. Some would-be shareholders may have concluded that the private equity investors that pushed the valuation to such levels, were looking in the wrong place for the next Uber, Airbnb, Amazon etc.
⦁ B of England deputy Andy Haldane has said that UK pay has flatlined. He says pay growth has stagnated over the past decade, one of the main causes being flatlining output.
⦁ Punch and Heineken UK are putting proposals to the CMA to address points raised in the Initial Decision made regarding the takeover. Both parties confident there will be no need for a Phase 2 referral.
⦁ Draft House, chaired by Luke Johnson, has agreed to buy the Grand Union chain of bars for an estimated £3m. The Grand Union Group, in which Johnson has a 50% stake, comprises of six venues which will be converted into Draft House sites.
⦁ Richoux has announced it has raised around £4m in a subscription of about 25m ordinary shares, at 16p a share. The proceeds will be used for general working capital purposes.
⦁ Kantar Worldpanel reports fresh poultry sales have overtaken red meat in the UK. Fresh poultry sales amounted to 529m kg, a 6.1% rise whereas red meat sold 511m kg, down 0.9%. Dishes such as curries, pasta and stir fry now represent 49% of all home-cooked meals. Chicken and beef volumes were up 6.9% and 0.7% respectively, whereas lamb and pork volumes were down 8.2% and 2.2% respectively.
⦁ Vianet and Matchpint have seen beer volumes up yoy for the pubs showing the first British and Irish Lions Test last Saturday. The data shows pubs also saw beer sales rise during match time – seeing a 240% uplift versus sports sites that didn’t show the Lions match. Overall beer volumes in sports venues were up 4% against the same Saturday last year which had Euro 2016 and international rugby matches.
⦁ The institute of Competitive Socialising is to open a new site on Leadenhall Street, the MCA has reported. The group, which owns Swingers, the crazy golf and street food concept, will focus on the US arcade game Skee-Ball with its newest unit. The site is set to open in early 2018.
⦁ Wales has announced it will introduce minimum unit pricing for alcohol in the next 12 months. The minimum price will likely be set at 50p per unit.
⦁ Heavitree reports H1 numbers to end-April saying ‘the Group has increased operating profit against the corresponding period last year by 10.79% to £698,000. This has been achieved by increases in all areas of contribution apart from machine income.’
⦁ The Wall St Journal yesterday reported that Premier Foods was considering a range of corporate options. This prompted the co to comment that ‘the Group regularly reviews options to deliver value for all its stakeholders. These reviews are carried out in the ordinary course of business as part of the Group’s standard planning cycle and also on ad hoc bases, and may involve external advisors. The Board has made no changes to its strategy since the strategic update communicated in our preliminary results announcement on 16th May 2017.’
HOLIDAYS, LEISURE TRAVEL & HOTEL:
⦁ Snoozebox reports FY numbers to end-Dec saying sales fell to £2.4m from £5.8m. The group registered an EBITDA loss of £2.0m and a loss before tax of £8.9m. The loss per share was 3.03p. Debt is virtually unchanged at £5.5m. The co says ‘the Board is currently continuing its discussions with its primary lender concerning amendments to the Group’s capital structure and funding.’
⦁ Snoozebox chairman Chris Errington says the co has ‘successfully stabilised the Group’s operations.’
⦁ A deal between the UK and EU over aviation is ‘vital’ and Thomas Cook could be ‘more shy’ about further UK growth without one, the Chief Executive of the group, Peter Fankhauser has warned. Mr. Fankhauser said ‘We need a single aviation agreement and we need a transitional agreement on air traffic rights on [Britain’s] exit. We don’t want to see barriers to travel going up’.
⦁ Holiday costs will rise and all-inclusive hoteliers are threatening to pull out of the UK market if the government doesn’t doesn’t address the issue of fake sickness claims, the head of Thomas Cook, Peter Fankhauser, has warned. Mr. Fankhauser has said ‘It is a joke that the Germans seem to have stronger stomachs. Europe is laughing at the Brits and it is starting to backfire on the British travel industry. The government has been too slow to close a loophole in the regulations’.
⦁ British tourists making bogus holiday illness claims could face criminal charges in Cyprus, the sixth country in which this has occurred.
⦁ The US hotel industry has reported mixed figures in its three key year-on -year metrics for the week of 18-24 June 2017, according to data from the STR. Occupancy declined by 1.2% to 75.8%, the average daily rate rose 1.1% to $129.73 whereas RevPAR fell 0.1% to $98.31.
⦁ The US authorities are to step up security checks on air travel, in a bid to counter the threat of terrorist attacks. The US Department of Homeland Security has said that they plan ‘to raise the baseline for aviation security across the globe by implementing enhanced security measures’.
⦁ UK hotel bookings have remained strong despite recent terror attacks, the ALMR has found. RevPAR for April increased by 5.6% with occupancy climbing 1.3%.
⦁ Gatwick has reported a passenger increase of 7.7% to 45m in the year ending March 31, 2017. The record year has been driven by long-haul flights, with one in five passengers traveling long-haul distances.
⦁ Merlin has updated on trading saying ‘group trading year to date has been broadly in line with expectations’. It says ‘we continue to make good progress towards our 2020 New Business Development milestones.’
⦁ Merlin says that c250 accommodation rooms have been opened so far in 2017 with 3 Midway attractions opened and LEGOLAND Japan opened on 1 April.
⦁ Re current trading, Merlin says ‘in our Midway London Division, trading in the early part of the year benefited from stronger foreign visitation to the UK reflecting the more favourable foreign exchange rates. This continued in the immediate aftermath of the Westminster attack on 22 March, although the incident did result in a softer domestic, day-trip market.’
⦁ Merlin says ‘attacks in Manchester and London over the past month have resulted in a further deterioration in domestic demand and, given the typical lag between holiday bookings and visitation, we are also cautious on trends in foreign visitation over the coming months.’ CEO Nick Varney says ‘I am pleased that we are making good progress towards our 2020 New Business Development milestones. That said, the impact of recent terror attacks on our London attractions is unclear at this stage.’ He concludes ‘Merlin has a diverse portfolio of global brands with over 70% of 2016 profits from outside the UK and this proportion will only grow over time as we continue to invest internationally. I remain confident in the company’s underlying growth prospects.’
⦁ Bowling operator Ten Entertainment has announced the acquisition of Strike 10 Bowl in Rochdale, Greater Manchester. Ten says it ‘has a proven track record of integrating acquisitions through its ‘Tenpinisation’ strategy which provides the tools and methods to allow a rapid re-development of new sites, bringing the operations, systems and technology and customer experience, up to the high standards of the Company’s wider estate.’ CEO Alan Hand comments ‘the completion of our third site acquisition this year is an exciting development and will grow the Group’s portfolio.’ He concludes ‘our two new sites at Blackburn and Eastbourne are undergoing our Tenpinisation transformation process which is proceeding in line with expectations. We now look forward to beginning the exciting process at Rochdale.’
⦁ Gym Group updates on trading ahead of its capital markets day saying ‘trading for the first five months of the year has met the Board’s expectations and profit for the full year 2017 is anticipated to be in line with consensus market expectations.’
⦁ Gym Group reports its ‘pipeline continues to be strong for the remainder of 2017 and is building well for 2018.’ CEO John Treharne comments ‘the Group continues to trade strongly with membership increasing by nearly a fifth year on year to over 500,000. Six new gyms will have opened in the first half of the year and we are on track to meet our guidance which is towards the top end of our 15-20 range. There remains a substantial opportunity with strong fundamentals underpinning our growth and we are confident in delivering continued profitable progress.’
⦁ Sony Music has announced it will begin pressing its own vinyl releases, the first time it has done so since 1989. The global record company giant will resume in-house domestic vinyl production this year in a Japanese factory south-west of Tokyo.
⦁ Murdoch’s attempted takeover of Sky for £11.4bn is set for a lengthy in-depth investigation after Ofcom decided the deal could give the mogul too much control over the news agenda.
FINANCE & MARKETS:
⦁ UK car production was 10% lower in May this year than it was last. Around 40% of cars made in the UK are exported to Europe. The SMMT reports ‘after a record start to the year, car production in the UK has slowed as production lines gear up for a range of new models.’ The SMMT adds ‘maintaining our current open trade links with Europe, our biggest market, and further developing global markets is vital for this sector.’
⦁ US economic growth revised upwards to 1.4% in Q1 (from earlier estimates of 1.2%).
⦁ Bank of England data shows consumer borrowing & mortgage lending up in May after a slow start to the year.
⦁ BoE data shows unsecured borrowing +10.2% in the 3mths to May. This compares with wage growth of around 2%
⦁ Oil up a shade at $47.70
⦁ Sterling up again at $1.3022 and Euro 1.138
⦁ UK 10yr gilts up sharply again to 1.25%. They were 1.16% yesterday and 1.01% earlier in the week.
⦁ World markets: UK markets down on Sterling strength & various worries. Europe also lower with US down Thursday & Far East lower in Friday trading.
⦁ Labour strongman and long time rebel Jeremy Corbyn has sacked three of his front-benchers for failing to support Labour in the Queen’s Speech.
⦁ ONS data shows there are more than twice as many Brits living in Spain as there are Spaniards resident in the UK
YESTERDAY’S LATER TWEETS:
⦁ Carney suggests rates may rise. Says much of world is operating at capacity & rates could edge higher
⦁ Food retail: Market +3.7% in 4wks to 17 June. Not bad but the discounters were up by a whopping 17.3%
⦁ GNK in line but cautious comments re costs, the consumer, confidence levels & uncertainty.
⦁ Hony Capital (owner of PizzaExpress) raises capacity fears by saying it will move to 10,000 units worldwide (from 850)
⦁ Foodservice costs up 9% with fruit costs up in double digits. Could rise further if labour shortage leaves crops in fields
⦁ YouGov says consumer confidence has been ‘ticking downwards’ – but now it is falling more rapidly
RETAIL NEWS WITH NICK BUBB:
⦁ Game Digital: The Game Digital share price has been notably weak again of late (down to just 33p, capitalising the company at a mere £56m…) and so it is perhaps no great surprise to see the embattled business issue yet another profit warning this morning: “we now expect Adjusted EBITDA for the full year to be substantially below previous expectations”. Interestingly, Game say that the Spanish business has traded strongly in the second half (to y/e July), but blame poor supply of the new Nintendo Switch console to the UK market for the sales shortfall. The company makes more bullish noises about prospects for the next financial year, but the jaundiced City will no doubt take this with a large pinch of salt, particularly as the company refers to the fact that “the group is exploring new funding arrangements to enable an acceleration of the roll-out of the new in-store gaming
⦁ Consumer Confidence Watch: The widely-followed monthly GFK Consumer Confidence survey came out overnight and, with Wednesday’s comment from Dixons Carphone CEO Seb James that “the UK consumer environment seems to be holding up for us” ringing in our ears, the headline is “Three weeks after the general election, UK Consumer Confidence decreases five points to -10”, flagging that the “Major Purchase measure plunges eight points” and “Consumers worried about what the coming year will bring”…
⦁ BDO High Street Sales Tracker: We flagged on Wednesday that John Lewis did surprisingly well last week, given the heatwave, and today’s BDO High Street Sales Tracker for small/medium-sized Non-Food chains flags that a year ago the EU Referendum vote and poor weather hit footfall, so the comp w/e June 25th was very weak…And so, against a dismal -9.4% a year ago, Fashion Store LFL sales bounced by 8.3%, helped by the prolonged hot weather. Including Homewares and Lifestyle chains, total Store LFL sales were up by 8.0% last week and overall Online sales were up by a heady 27.2% (against very weak 6.8% growth a year ago).
⦁ News Flow Next Week: As we head into the first week of July, things are pretty busy, kicking off with the Sainsbury Q1 update on Tuesday. Wednesday brings the Ocado interims, the Topps Tiles Q3, the Booker Q1/AGM and the Sainsbury AGM. Thursday brings the SuperGroup finals and the ABF (Primark) trading update, with Friday rounding things off with the Dunelm Q4.