Langton Capital – 2017-11-23 – M&B, Domino’s Pizza, Budget, APD, UK growth & other:
M&B, Domino’s Pizza, Budget, APD, UK growth & other:
A DAY IN THE LIFE:
Forgot to mention that three members of the Langton team were at The Den Tuesday to watch the Mighty Hull demolish Millwall nil-nil. Just thought we’d mention it. Discretion won the day and we were very, very quiet. Early meeting with M&B this morning so let’s move straight on to the news:
MITCHELLS & BUTLERS FULL YEAR NUMBERS:
Mitchells & Butlers has this morning reported full year numbers for the 53 week year to 30 September and further comments are set out below:
• M&B reports full year LfL sales +1.8% with 2.3% growth in the last 7wks
• Total revenue is £2.18bn, up from £2.09bn last year
• Adjusted operating profit is £314m (down 3.1% on a 52wk basis from 2016) and reported PBT is £77m (2016: £94m)
• Adjusted EPS is 34.9p (down 1.4% on 2016) and the group is recommending a final dividend of 5p to make 7.5p for the year as a whole
• The group says that it will not pay an interim dividend in 2017/18 saying this is ‘pending assessment at year end of capital allocation and prospects.’ This may leave the market a little nonplussed
• CEO Phil Urban comments ‘this year, we have continued to make progress on our three priority areas: building a more balanced business; instilling a more commercial culture; and driving an innovation agenda.’
• Mr Urban says ‘this has resulted in a period of strong operational achievement for Mitchells & Butlers with a sustained return to like-for-like sales growth driving market outperformance.’
• The group says ‘we have also gained agreement with the pensions trustees on future pension contributions which gives clarity to shareholders and pensioners alike.’
• Regarding the outlook and margins, Mr Urban reports ‘cost headwinds across the industry have adversely affected margins but we continue to work hard to mitigate as much of these as possible through our focus on efficiency and profitable sales growth.’
• The group’s CEO concludes ‘’overall, we believe that the progress we have made this year positions the Company well to deliver long-term shareholder value.’
More on current trading:
• M&B reports ‘trends within the broader eating out market are mixed, with the restaurant sector overall seeing sales decline but with branded restaurants experiencing growth of 4.5% in 2017.’
• It says ‘recent data suggests that consumer behaviour is changing, with people eating out less frequently but spending more when they do make the decision to go out.’
• Some others say that people are going out nearly as much, but that they are spending less when they do so.
• M&B says ‘the market remains highly competitive and, as a result, levels of discounting appear to be increasing in some segments of the market.’
• Re costs, the company reports ‘there are unprecedented cost headwinds facing the sector, putting the focus on efficiency and maximising profitable sales growth.’
• The group says ‘in addition, there is also political uncertainty domestically and surrounding the impact of the UK leaving the European Union.’
• M&B points to consumer confidence, the availability (and cost) of employees and the effect on input costs as areas of concern’.
• The group nonetheless says ‘we believe that success in our evolving market requires quality brands, offering great experiences at the right price and with high amenity levels, to generate sufficient sales growth to mitigate cost headwinds.’
Balance Sheet, Debt etc.:
• M&B reports positive cash flow of £103m (2016: £60m)
• The group has net debt of £1.75bn (2016: £1.84bn)
• This represents 4.2x EBITDA (2016: 4.3x)
• In line with much of the market, M&B saw performance deteriorate somewhat at the top line during September.
• October has been a little better and 2.3% over the last 7wks is a decent number. Arguably conversions, refurbishments and the fact that the group has a large London estate suggest that the number could have been a little better still.
• M&B points out that eating out is under pressure. This is in line with our recent comments and with data from the Coffer Peach Tracker etc.
• Margins are down and there is little in today’s statement to suggest that they will bounce back in the near term. M&B points to input cost pressures and discounting. Both of those forces are currently moving in the wrong direction.
• The group is not going to pay a H1 dividend, suggesting that it may wish to husband its cash at a time of increased uncertainty.
• Evidence of a turn in the company’s fortunes may be emerging but the markets are tough and getting tougher 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. But these earnings will now be under review and the c3% yield is historic rather than a certainty going forward.
• M&B has an extremely attractive estate but it still has much to do. Today’s announcement is realistic and should be in line with expectations. Trading is tough. Discounting is getting worse and costs are rising. Trading over Christmas will be critical in deciding as to whether M&B has finally turned the corner.
• Unfortunately, it may be doing so just as the market becomes somewhat more challenging. However, the group can only play the ball that it is bowled and, with this in mind, it is doing all that it can.
• We’re sick of Budget Reports Mr Gove may have said. But still, here’s our summary.
• The ALMR responded to the Budget statement, with Chief Executive Kate Nicholls saying: ‘At a time of rising costs, a freeze in the beer duty and a continuation of support for pubs on business rates is very welcome’. Kate further commented with ‘The promise of more frequent revaluations [of business rates] is also welcome and something the ALMR has lobbied for, although we are concerned that, in practice, there may be some administrative burdens which will need to be addressed’.
• The BBPA’s Chief Executive, Brigid Simmonds has reacted to the Government’s budget stating: ‘The Chancellor’s decision to freeze beer duty and cancel his planned rise is an early Christmas present for beer drinkers and pubgoers worth £117 million this year and in subsequent years. It will secure over 3,000 jobs in pubs and the wider beer supply chain that would otherwise have been lost. This real-terms duty cut shows he has listened to our campaign and the concerns of pubs and pubgoers, and acknowledged the special role that beer and pubs play in the nation’s social life’. Brigid continued with: ‘This extension of the pub-specific rate relief is also very welcome and continues to recognise the disproportionate rates burden faced by pubs’.
• The British Institute of INnkeeping has welcomed the continued support for pubs on business rates, with Chief Executive, Mike Clist saying: ‘We welcome the fact that Government has listened to the call to help pubs in what is a very competitive marketplace. Moving the annual inflation of rateable values from RPI to CPI, continuing the £1,000 rate relief policy for a further year and moving the revaluation of properties to 3 yearly will all help. We do however still believe the rating system needs a complete overhaul and we will continue to lobby for this’.
• The Society of Independent Brewers (SIBA) has reacted to the budget, commenting: ‘SIBA’s 850 brewery members will be delighted by the Chancellor’s announcement that he will freeze beer duty in this Budget, recognising the important role of the Great British pub. This is great news for brewers, pubs and consumers alike. We’d now like to see the Chancellor go further and commit to a freeze in beer duty across the entire Parliament. An extension by one more year of rate relief for pubs and a move to CPI from RPI is also welcome but more action is still required’.
• The Chancellor has announced that the National Living Wage will rise by 4.4 to £7.83 per hour next April, but retailers should benefit from a share of a £2.3bn saving on business rates.
• More under Finance & Markets below.
PUB, RESTAURANT & DRINK PRODUCERS:
• Majestic Wines has reported its H1 results, with adjusted PBT up £6.7m to £6.8m, with sales up 5.7% on track to hit its £500m sales target by 2019. Rowan Gormley, Chief Executive for the group said: ‘The plan is on track. Two years in and profits are growing, our foundation is solid and we are ready to accelerate growth. We have the opportunities to invest in new customers and a team excited to focus on what they do best. It’s time to put our foot on the gas’.
• OBR says unemployment will rise next year. Albeit from low levels to slightly less low levels.
• OBR says NLW and NMW increases will ‘price some workers out of employment’.
• Prices. Four-pint milks have been £1.00 for a year or more. They are now £1.10. That’s 1) the end of an era and 2) a response to the c50% rise in farm-gate milk prices from around 20p to c30p over the last fifteen months or so.
• The UK foodservice delivery market is expected to reach a value of £7.1bn in 2017, following a 7.6% growth on last year, the MCA has reported. The UK orders 332m meals a year with an estimated average value of £21.45
• The US based casual dining chain, Cracker Barrel Old Country Store, has announced it plans to expand its off-premise platform along with its new Crafted Coffee offering in 2018. The group reported net income declined 4.1% in Q3 to $46.4m, with revenue broadly flat up 0.1% to $710m.
• Moët Hennessy has purchased a controlling stack of cult Napa estate, Colgin Cellars.
• Technomic has reported that consumers in the US ‘are skipping breakfast slightly more often now than in 2015’. The decline is mostly in home breakfasts & implies that people are consuming more of their calories outside of the home. Snacking is reported to be on the increase.
• Technomic suggests that vendors provide ‘speedy service and craveable grab-and-go options’ saying these ‘can help operators and suppliers engrain themselves into consumers’ morning routines.’ Technomic reports that ‘order-ahead and delivery capabilities are likely to appeal to those who constantly feel short on time in the mornings.’
• Technomic reports that all-day breakfast menus remain popular in the US. It reports 30% of consumers saying that they are purchasing breakfast fare beyond morning hours more often now than two years ago.
• Technomic suggests that coffee brand loyalty is down. It says only 37% of coffee drinkers admit to being ‘loyal’, down from 41% in 2015.
• Vice president of corporate affairs for Carlsberg UK, Bruce Ray, has commented: ‘Today’s announcement today about a cut/freeze in beer duty will be welcomed by brewers, publicans and everyone who enjoys a glass of beer in the pub. This year’s cut will support continued innovation and investment, create new jobs, attract tourists and ultimately benefit our beer-loving nation’.
• Denny’s Corp has expanded into Guatemala, its 13th country, bringing the group a step closer to its stated aim of becoming a global company. Denny’s international stable of stores now make up about 7.3% of its 1,725-location network, an increase from approximately 6.9% of the portfolio the same time last year, though the brand lost three restaurants over the 12-month stretch.
Delivery-focussed mini burger concept Bite Me Burger Co has ceased trading, per MCA.
• Boxpark Wembley has submitted plans for the biggest boxpark to date — a 50,000 sq ft site set to house 27 independent food and beverage operators and a dedicated events space.
• UK REIT and pub operator NewRiver is to transfer the last of the 202 pubs acquired from Marstons into its own management over the next few weeks. The group now has a pub estate of 336, having purchased a further 158 pubs from Punch, sold 15, and closed another nine for convenience store conversion.
• Furniture retailer Multiyork has been placed in administration. Some 550 jobs are at risk.
HOLIDAYS & LEISURE TRAVEL:
• Tailor-made specialist Sunvil as posted a 30% year-on-year increase in passenger numbers to Cyprus in 2017 and plans to build on this growth in 2018. Sunvil said it has seen an increase in couples and older travellers looking to discover the ‘hidden delights’ of the island.
• The average room rates at all but one of the US president’s hotels have fallen amid a ‘Trump Slump’. The average price for a two-night stay at Trump Las Vegas in January 2018 is £237, down 63% from £637 in January this year. The only Trump hotel to go up in price when comparing January prices against a year earlier was Trump Doonbeg, in Ireland, which saw average rates go up 7% to £357 for two nights.
• APD for short haul flights was frozen in yesterday’s Budget. There will be an increase for premium class flights and for private jets.
• STR reports occupancy across Europe’s hotels rose by 1.7% to 76% in October. Rate rose by 4% and REVPAR was 5.8% higher.
o Reuters dubs Budget ‘bleak but boring’. Is that like being ugly but nasty. Isn’t the missing word there ‘and’?
o Reuters: ‘Britain slashed its economic growth forecasts and expects to borrow a lot more going into the next decade’. What’s not to like?
o NIESR reports the Budget was balanced in the light of its downgraded growth forecasts. NIESR says ‘on these forecasts, UK economic growth will continue to lag behind the OECD’. It adds ‘the projections for the fiscal deficit had deteriorated significantly since March.’
o OBR cuts UK GDP forecasts. It now estimates UK economy will grow by 1.5% this year, 1.4% next, 1.3% in 2019 and 2020 and by 1.5% in 2021 and 1.6% in 2022. The higher numbers in this string are further away and therefore less certain. Forecasters tend to ‘hedgehog’ in that numbers tend to droop as they get nearer in terms of timing.
o OBR suggests around national wealth will be 2.5% lower in 2022 than it had done prior to yesterday’s revisions.
o OBR says borrowing will fall more slowly. It will fall as a % of GDP but to continue to rise in absolute terms. Debt service costs now apparently exceed costs for the army and the police combine. This will rise as debt levels increase. Labour is of the view that debt is not yet high enough.
o OBR says inflation will peak at 3% this quarter. Wage restraint means that the UK worker has sucked it up & finds him/herself around 2% worse of than he/she was before inflation exceeded pay rises.
o OBR says unemployment will level off at its current 4.3%. It says then it will ‘edge up as GDP growth slows a little further and the National Living Wage prices some workers out of employment.’
• Indirect taxes:
o Few changes. Strong cider & cigarettes up. No rise in duty re drink.
FINANCE & MARKETS:
• Minutes from the latest Fed meeting suggest that rate-setters are optimistic about US growth. A rate rise in December is still likely.
• Oil up slightly at $63.16
• Sterling up vs dollar at $1.332
• Pound down vs Euro at €1.1262
• UK 10yr gilt yield up 1bp at 1.28%
• World markets: UK higher but Europe & US down yesterday. Asia mixed in Thursday trade.
PRIOR DAY LATER TWEETS:
• Later tweets: EIG reminds investors 90% of group income still comes from leased pubs. This business is now back in growth
• EIG buys back shares again. Says NAV per share is 313p. Maintains this is best use of shareholders’ money. At least for the moment.
• TCG FY below estimates but tone very positive. Says more growth to come. Turkey & Egypt bookings growing rapidly
• TCG shares fall on lower UK margins, fear of big-ticket hit in UK & sickness claims. Tone of comments overall positive, however
• TCG: Shares want to go down, they’ll go down. However, co had reported tougher prices in high-demand Spain would hit margin some time ago
• SCS says order intake at its H of Fraser stores down 6.4% LfL. Department stores; if they didn’t exist, would you build them? Answer………no
• J Lewis has a good week after 6 bad ones. Advertising may help. Some suggest growth is discount-driven
START THE DAY WITH A SONG:
Yesterday’s song was the Human League with ‘Don’t you want me’. Today who sang:
And take me disappearing through the smoke rings of my mind,
Down the foggy ruins of time,
Far past the frozen leaves,
The haunted, frightened trees
RETAIL NEWS WITH NICK BUBB:
• Majestic Wine: Today’s interims from Majestic Wine show a strong recovery in profits, to £6.8m, and the estimable CEO Rowan Gormley says, boldly, that “The plan is on track. Two years in and profits are growing, our foundation is solid and we are ready to accelerate growth”. In more unusual language, he also says “The team have worked like demons and I am dead proud of every one of them”, but the key message is that “We expect full year results to be in line with current market expectations. Looking further out, we aim to increase the rate of sales growth in the medium term, by steadily increasing our investment in new customer acquisition”.
• Mothercare: Ahead of today’s interims, the Mothercare share price has been under a lot of pressure, as if something was amiss and the answer seems to be that the once mighty International side of the business is suffering. CEO Mark Newton-Jones tries to put a brave face on it, pointing to the encouraging way that the UK operation has ground out 2.5% LFL sales growth against a challenging market, but H1 losses have still edged up. And the International performance remains disappointing, “primarily driven by the key Middle East market”, with LFL sales down by 8% overall and with H1 profits dropping back by 28%. Ominously, Mothercare say that “towards the end of the reporting period, and in subsequent weeks, we have seen a softening in the UK market with lower footfall and spend which is consistent with recent industry report”, but it draws back from making a formal comment on the
• Retail Sales Watch: All the focus now is on how well November will turn out on the High Street, after all the pronged “Black Friday” discounting, but we haven’t seen the final word on how bad the outcome was for October. We flagged on Friday last week that the ONS Retail Sales figures for October (the 4 weeks to Oct 28th) were not too bad, as the Office of National Statistics (the ONS, aka the “Planet ONS”) had reported non-seasonally adjusted total sales by value up by 2.6% last month (ex-petrol), driven by 5.0% growth for Small Retailers, whereas the BRC-KPMG measure of gross sales (which focuses on Large Retailers) was up by only 0.2% (down 1.0% LFL). So, who was right? Well, the new consultancy group, Retail Economics (RE), which is run by Richard Lim (who used to run the monthly BRC-KPMG Retail Sales survey), has just come out with its own overview and their estimate is that gross
• News Flow This Week: Today we get the Hotel Chocolat AGM at 10.30am, up at the HQ in sunny Royston (north-west of Stansted Airport), although no trading update is expected. And at 1pm, the widely respected Institute of Fiscal Studies (IFS) and its estimable boss, Paul Johnson, present their overview of yesterday’s mildly reflationary Budget to the press. And, in the US, today is Thanksgiving Day (with the markets closed) and tomorrow is “Black Friday”, in case you hadn’t noticed…