Langton Capital – 2017-10-24 – Whitbread, big ticket, rents, Brewdog, G4M & other:
Whitbread, big ticket, rents, Brewdog, G4M & other:
A DAY IN THE LIFE:
Bit busy with Whitbread this morning but just a question for you. How long can you go after waking up before checking your texts, emails, WhatsApp messages etc. on your phone? Answers on a (digital) postcard & we’ll give some feedback tomorrow:
WHITBREAD H1 NUMBERS:
Whitbread has this morning reported H1 numbers for the 6mths to 31 August and our comments are set out below:
• Whitbread reports H1 revenue of £1.67bn (last year £1.56bn) with underlying profit of £328m (2017: £307m)
• Group reports underlying EPS of 143.7p (2017: 133.9p) and it is to pay a H1 dividend of 31.4p (2017: 29.9p)
• Whitbread says it has grown revenue and market share at both Premier Inn and Costa
• says it has made ‘significant strategic progress in the UK and Internationally’
• It has opened ‘over 2,000 new Premier Inn rooms opened in the UK in H1’ and it has launched new breakfast & lunch ranges at Costa
• Premier Inn Germany is ‘accelerating’. It has one unit open and 9 sites secured. Whitbread says its ‘efficiency programme [is] gaining momentum with over £60 million delivered over last two years’
• Premier Inn LfL sales are +3.6% in the UK with Q2 +2.6%
• Costa is markedly behind inflation in the UK at +0.6% LfL in H1 (versus +2.3% last year)
• Restaurants are behind inflation at +1.1%
Premier Inn & Restaurants: :
• In hotels & restaurants, Whitbread comments that it has seen Premier Inn underlying operating profit growth to £295 million
• Whitbread says here it ‘has a unique business model and position in the UK budget branded hotel market, supported by a significant food and beverage offer.’
• It believes it can grow share further. Independents currently have 50% of the market
• UK PI revenue +6.4% in H1. This growth was ‘a mix of high like for like room sales growth and the benefit of new rooms opened in the last 12 months’
• LfL PI sales growth was +3.6%. REVPAR was +1.8%
• London sales are +9.9% (8.2% of that from new hotels). Regional sales +7.7%
• Whitbread reports ‘Costa has a leading position in the structurally attractive UK coffee market, with more than 2,300 stores throughout the country.’
• The group quotes research saying the coffee market should grow by 5% to 6% in terms of unit numbers ‘over the next few years’
• Costa had 6,688 Express machines (2014: 5,323) at the end of H1. The group has 2,326 stores in the UK
• Internationally, Whitbread says ‘the hotel market in Germany is a highly attractive opportunity’. It says the market is 35% bigger than that in the UK but branded budget hotels have only 6% of the market
• Whitbread sees the Indian coffee market as interesting
Debt, balance sheet & cash-flow:
• Whitbread reports this has been a ‘good financial performance in line with expectations’
• The group says it has ‘strong discretionary cash generation of £293 million supports ongoing investment’
• Net debt has been reduced to £852m. Return on capital is up to 15.4%.
• Whitbread Chief Executive Alison Brittain comments ‘I am pleased with the progress we have made in executing the plan we set out in November last year, with earnings per share up 7.4% in the half and return on capital of 15.4%.’
• She adds ‘our plan is based on growing in our core UK markets; focusing on structural growth opportunities for Premier Inn in Germany, Costa in China and Costa Express; and strengthening our capabilities and efficiency to deliver these attractive opportunities.’
• The expansion of Premier Inn in Germany has been accelerated ‘with nine hotels now in our committed pipeline in addition to our existing hotel’
• Ms Brittain says ‘we have significant structural growth opportunities, in the UK and internationally, and confidence in our plans to capitalise on these opportunities.’
• The CEO concludes ‘although we remain cautious on the current environment, we are confident that ongoing disciplined allocation of capital and focus on executing our plans will deliver long-term growth in earnings and dividends and a strong return on capital.’
• Re current trading, Whitbread says ‘new hotels within the UK are expected to contribute 5-6% to total sales growth for the full year, comprising approximately 4,200 rooms openings this year. Costa remains on track to deliver 230-250 new stores and approximately 1,200 new Costa Express machines in the full year.’
• Langton Comment: Whitbread’s Premier Inn continues to perform well but Restaurants and Costa are now growing, at the LfL level at least, more slowly than inflation.
• The UK economy is facing well-documented headwinds but, one would hope, affordable treats will remain resilient and budget hotel demand should benefit if inbound tourist numbers continue to rise.
• Germany looks very interesting. The group will not be unopposed in such an attractive market but Premier could continue to grow.
• Whitbread’s shares have bounced recently and, at around 15.5x this year’s earnings, they are not prima facie cheap. However, this represents a lower rating than has been accepted as ‘normal’ for Whitbread.
• The current rating reflects some concerns that the UK economy is about to slow and that, despite the company having an attractive freehold base and somewhat international brands, this will weigh on results.
FLEURETS ON RENTAL TRENDS:
• Drake & Morgan is set to launch ‘The Listing’, its 23rd site, in the City of London next month.
• In the US, Fat Brands Inc. has completed its $24m listing and becomes the first restaurant to IPO using new rules that enable small companies to raise money. The LA based company listed at a $120m valuation at $12 per share.
• The new Moody’s report signals a tough environment for restaurant margins and growth over the next 12-18 months, citing competition, rising inflation and lack of consumer confidence as headwinds.
• Fleurets’ October rental survey sounds a gloomy note as leisure operators continue to navigate higher input costs on the one side and softer consumer spending power on the other. The property valuer draws a link between Brexit-related uncertainty, the lower pound, rising costs, declining spending power and confidence, and, ultimately, a stalling economy. Changing market conditions have arguably been reflected in the softening share prices of Marston’s and Greene King (although JD Wetherspoon continues to outperform). Meanwhile, the lengthy appeal process for sharply higher business rates in the South East and London makes it likely that the rate of pub, bar, and restaurant failures in these areas will rise.
• As for the Pubs Code, which came into effect more than a year ago, there have been fewer than expected applicants. This could be read as an admission that the tied pub model is not quite as bad as had previously been made out, but could also be seen as reflecting widespread concern over the Code’s drafting and a complex and costly application process. Tenants have to employ external accountants, lawyers, and surveyors to navigate a convoluted process — a financial and time commitment simply not possible for many pub businesses.
• Fleurets says the above points all suggest a softening of rental values. This has been seen in bars and restaurants, which have continued the trend of expanding out of London into the regions, and are seeing significant landlord incentives being granted, such as large reverse premiums to assist with fit-outs, and extended rent free periods.
• In conclusion, Fleurets comments that Brexit negotiations are likely to dominate the next 12 to 18 months. A domino effect of rising inflation, leading to a rise in interest rates, leading to a hit to consumer spending power (particularly to those with bigger loans and mortgages) means that tough trading conditions are here to stay for at least the next year. This means that rental values will likely come under pressure in the coming months — indeed, there is growing evidence that this is already the case.
PUB, RESTAURANT & DRINK PRODUCERS:
• BrewDog co-founder James Watt has justified the brewer’s premium pricing in supermarkets, where its beers are over twice as expensive as other beers (per Nielsen), and says that pubs need to get better if they are to survive. Speaking to The MA, Watt said: ‘The fact that pubs are struggling? Good pubs are not struggling. I think pubs need to look at what they are serving, their environment and their staff. So many pubs are doing fantastically well at the moment, and pubs that are not good will not do too well, and consumers are going to vote with their feet and their cash.’
• The CEO of the ALMR, Kate Nicholls, has commented on the introduction of minimum unit pricing in Wales, stating: ‘Minimum Unit Pricing is a very blunt measure and we would encourage the Welsh Government to continue to explore a more nuanced approach to alcohol-related harm. The trends over the last decade or more are clear – fewer people are consuming less alcohol, and this is particularly true of young people’.
• The BBPA has distributed over 200,000 beer duty themed beer mats, that will highlight the 39% tax rise that beer drinkers have endured over the past ten years. The beer mats will encourage customers to write to their MPs on the issue before the upcoming budget on the 22nd November.
• A portfolio of 16 London pubs is on the market with Savills with a guide price of £69.5m. The portfolio is let to operators such as Greene King, M&B, Ei Group and Fuller’s.
• The BGA have published research suggesting that the labour crisis in the fruit & veg market is a year-round problem.
• Big ticket spending under pressure as Pendragon warns on falling demand for new cars and lower prices for used vehicles. Shares drop by nearly 20%. Another drop is expected in car sales for October when the SMMT releases figures next month. Pendragon is seeing ‘unprecedented pressure’ on margins in the premium car sector. It says some ‘manufacturers continue to force vehicles into the market despite softening demand’. It is worth considering what the word ‘unprecedented’ means. The co has said that it will focus on its online systems. But that won’t sell more cars (or furniture or carpets or new kitchens etc.) Small ticket affordable treats holding up relatively well).
HOLIDAYS & LEISURE TRAVEL:
• Eight of the top 20 UK airports increased short stay parking and drop off & pick up fees this year leading to criticism from the RAC after some motorists have been hit with ‘eye-watering’ fees. Fees have increased by as much as 100% in some airports, according to the research.
• STR reports Europe hotel performance for Q3 2017 saw occupancy up 2.2% to 79.2%, ADR rising 4.5% to €119.17 and RevPAR increasing 6.9% ot €94.36.
• Airbnb has parted ways with its China chief after only 4 months in the role. Hong Gee said he was leaving to pursue other opportunities, leaving Kum Hong Siew, Asia Pacific head, to act as interim China chief. Local restrictions have so far slowed the platform’s growth in China alongside competition from local rivals Xiaozhu and Tuji.
• Gear4Music released its interim results for the six months ended 31 August 2017 yesterday afternoon. The group reported revenue up 44% yoy to £31.2m with gross profit up just 36% to £7.8m, reflecting a deterioration in gross margin of 160bps, down to 25.0%. Segmental revenue split: UK revenue of £17.9m (+30%) and International revenue of £13.3m (+70%).
• G4M recorded a 44% increase in active customers (those who have purchased in last 12 months) and launched its US$ website. The company also said its distribution centres in Germany and Sweden were scaling well.
• Andrew Wass, CEO of G4M, said ‘I am very pleased with these results which combine tangible strategic and commercial progress with 44% revenue growth, which was ahead of our expectation for H1 as indicated at the start of the year, equating to two-year growth of 150%. Revenue growth in our core UK market continues to be strong, alongside a very strong performance in our International markets…we are well prepared for a busy seasonal period and the Group continues to trade in line with the Board’s expectations for the full year.’
• Streaming giant Netflix will fund its new shows and potential acquisitions by raising an additional $1.6bn (£1.2bn) from investors. Netflix plans to release 80 films next year and spend up to $8bn on content, leaving some analysts wary about its cash burn and debt interest costs. Netflix announced it would rise prices in the UK and US earlier this month.
FINANCE & MARKETS:
• Donald Trump will name the new chair of the US Fed ‘very shortly’. Likely before he visits Asia on 3 November
• Bank of England Deputy Governor Jon Cunliffe has said that a rate rise in November remains an ‘open question’ The CBI says ‘we’ve seen a general softening in manufacturing activity over the past three months, with the outlook for investment becoming more subdued.’ It says ‘to boost investment growth, government should use the budget to provide a fillip for factories through business rate reforms, including exempting new plant and machinery from rates altogether.’
• Oil down 40c or so at $57.47
• Sterling up at $1.3219 and €1.1236
• UK 10yr gilt yield down 2bps at 1.31%
• World markets: UK little changed yesterday with Europe up and US down later on. Far East mostly up in Tuesday trade
o Barnier warns Britain’s trade deal will be no better than Canada’s and it will take years to negotiate
o UK said to be outgunned 3:1 in terms of seasoned negotiators vs US
o Merkel said to be furious over leaks of private talks between Mrs May and Brussels officials.
o Brussels & no10 deny that Mrs May was ‘anxious, despondent and discouraged’ and was ‘begging for a deal’
PRIOR DAY’S LATER TWEETS:
• Later tweets: Major restaurants to edge back on discounting. Prezzo now ‘only’ 30% off, Pizza Express 25% off. Café Rouge still 40% off mains
• Discounting in restaurants. Easier to start than to stop. Will majors be able to row back from 40% discounts? Half term will help…
• Ernst Young has reported that profit warnings are sharply higher on the back of a less buoyant economy
• Philip Hammond warned right wing Brexit Tories may ambush him over Budget in a move to oust him as an un-re-educated non-believer
• UK facing an investment crisis as companies cut back on spending amid Brexit uncertainty reports EEF
• Hopes that Nov rate rise in UK could be a one-off. May weaken Sterling a little, buoy debt-fuelled spending
• Pendragon: Big ticket slump hits car sales. Not new news, bro? But shares down 18%. E&Y say profit warnings up in Q3. What about Q4?
• Pendragon: ‘We anticipate resumption of growth in profits in 2018’. Why is that, then? Time distance make the heart grow fonder?
START THE DAY WITH A SONG:
Yesterday’s song was Adele with Hello. Today who sang:
Now it’s three in the morning,
And I’m trying to change your mind,
Left you multiple missed calls,
And to my message you reply
RETAIL NEWS WITH NICK BUBB:
• Carpetright: After the profit warning from Pendragon yesterday, it would have been no great surprise to get some gloomy news in the Carpetright pre-close trading update today, but over the last 25 weeks UK sales have been up by 0.8% and Europe sales have been up by 6.5% LFL and CEO Wilf Walsh (who wisely avoids any comment on the UK economic outlook) says “while trading conditions in the UK remained volatile over the first half, the 2.1% increase in like-for-like sales in our core flooring category is pleasing given the increased level of competition”. And although first half sales are expected to be down, he goes on to say that “we expect a significantly stronger second half with full year profit within the current range of market expectations” (the consensus is that y/e April 2018 will see underlying profit before tax of £15.8m), which should reassure the City.
• News Flow This Week: Thursday brings the Debenhams finals and the Inchcape Q3 update. And today sees the opening of the new and much-awaited Westgate shopping centre in Oxford.