Langton Capital – 2017-11-24 – Fuller’s more on M&B, consumer squeeze and other:
Fuller’s more on M&B, consumer squeeze and other:
A DAY IN THE LIFE:
I think we all know that Gangnam Style is ether at or near the top of the pops in terms of YouTube hits – but did you know that the nursery rhyme ‘Wheels on the Bus’ is in there at no6 or no7 with over 2bn hits?
Admittedly it’s well done and putting a YouTube video in front of a crying baby is better than putting a drop of gin in its bottle – but two billion!
The site is likely to be making in the region of $10m per annum. I’m in the wrong job. On to the news:
FULLER, SMITH & TURNER H1 NUMBERS:
• FSTA reports revenue +6% at £209.3m. Adjusted PBT +4% at £23.8m and adjusted EPS +5% at 34.2p. H1 dividend +4% at 7.55p.
• FSTA H1 EBITDA +4% at £37.6m.
• FSTA H1. Group says its Managed Pubs and Hotels ‘outperformed the market, with like for like sales growing by 3.6% and a rise in like for like accommodation sales of 8.2%’
• Young & Co last week reported managed LfLs of 4.6% for the same period.
• FSTA H1. Says ‘Tenanted Inns like for like profit increased 3%, with 11 pubs sold and average EBITDA per pub rising 7%’. Young & Co reported 1.6% LfL income growth for the same period last week
• FSTA H1. Beer & cider volumes +1% vs flat market.
• FSTA H1. Group says it is continuing to invest. It has a pipeline of 4 managed sites.
• FSTA H1. Current trading. Says Managed sales +3.7% LfL in first 33wks of the year. This implies a little over 4% for the last 7wks. The 7wk figure compares with 4.9% reported by Young’s last week
• FSTA H1. Tenanted LfLs +2% at week 33 (were +3% at week 26) implying a modest slowdown in the last 7wks.
• Fuller’s maintains that it has a ‘well-invested, balanced business well-placed to mitigate continued headwinds.’ CEO Simon Emeny comments ‘I am delighted to be reporting good financial figures with all the Group’s key measures moving in a positive direction. This growth has been driven by our Managed Pubs and Hotels, which generate the largest share of our turnover and profit and have once again outperformed the market.’
• Fuller’s CEO comments ‘I cannot remember a time when we have faced such an array of additional cost pressures, particularly in our Managed Pubs, starting with the 26% rise in business rates.’ Mr Emeny concludes ‘although we have already faced and absorbed a number of prevailing headwinds, future economic and political uncertainty may still cause further challenges, however we are well-placed to face these.’
THE SQUEEZE IS ON:
• IFS reports the UK is set for its worst pay-squeeze since the 19th century. It says real wages will not be above 2008 levels until the early 2020s. The IFS says this is ‘astonishing’ and ‘unprecedented’
• IFS says ‘we are in danger of losing not just one but getting on for two decades of earnings growth. Let’s hope this forecast turns out to be too pessimistic.’
• Everyone has an axe to grind but the Resolution Foundation says the UK is on course for its longest fall in living standards since it began keeping records over 60 years ago.
• Resolution Foundation says real disposable incomes are set to fall for 19 successive quarters.
• OBR takes about 2.5% from its estimates of national income over the next 5yrs. Suggests lower trajectory may continue thereafter.
• Uncertainty, overspending, overborrowing, under-investment, poor skills and low productivity and Brexit and political uncertainty are reported to be the root causes. Nothing to worry about there, then.
• Advisors said to be ‘inundated’ with requests from vendors of businesses attempting to liquidate their assets.
• Resolution Foundation reports ‘faced with a grim economic backdrop, the chancellor will see this Budget as a political success. But that would be cold comfort for Britain’s families given the bleak outlook it paints for their living standards. Hopefully the OBR’s forecasts will prove to be wrong because, while the first sentence of the Budget document reads ‘the United Kingdom has a bright future’, the brutal truth is: not on these forecasts it doesn’t.’
MITCHELLS & BUTLERS FULL YEAR ANALYSTS’ MEETING:
Following the announcement of its full year numbers this morning, Mitchells & Butlers hosted a meeting for analysts and further comments are set out below:
• M&B maintains that it is back in growth. Revenues are up but both wet and food sales were down in volume terms
• The group is ‘encouraged’ by current trading. LfL sales, though below inflation, were a sector-leading 2.3% over the last 7wks.
• Though good, arguably given its capital spending and its London pubs, the company could have done better still
• Un-invested pubs are +0.7% in the first 7wks of the current year
• Cost headwinds were £60m in the year under review and will be £60m in the current year.
• Though the negative impact of Sterling’s drop will have washed through, the implication is that supply contracts will be renegotiated at higher prices
• Sugar tax and auto-enrolled pension increases will cost £4m and £1.5m in a full year respectively
• Delivery is thus far only a small (but growing) part of revenue
• Asset-write downs have taken place largely on retail parks. MAB says sites here have ‘struggled’ and adds that footfall has fallen. The group points out that its units are not the main reason why shoppers visit a retail park. The group is a customer-taker rather than a customer-maker
• The group is in ‘a far better shape than it was 2yrs ago’
• Accommodation is to become more of a focus
• The group finds it ‘frustrating’ that, whilst it is pulling itself together operationally, this is not coming through in terms of profits
• The group is launching ‘second wave of initiatives’ and it expects that this will drive revenues going forward.
• It says that its lead indicators are looking healthy but cautions that the macro-environment remains challenging.
• New concepts are behind best hopes in terms of results but the group says that they are a hit with customers
• Political uncertainty has been added to the mix since MAB updated in May. Should there be a regime change, the company says, its cost structure could be radically changed
• Discounting pressure is increasing. The group says ‘we could be heading into some very difficult times’.
• M&B has headroom of only £22m in terms of cashflow before cash would be trapped within its securitisation
• Should trading worsen, this could happen. The group will not decide upon its 2017/18 dividend until end-November 2018
• Whilst we have no guidance, we believe it prudent at this stage to assume that a dividend is not paid in respect of the year that has just started
• Cash needs to be used to service debt, to maintain the fabric of the business and to secure pension payments. It is only after the above that a dividend will be paid
• The group maintained that it is not earnings constrained but rather cash-constrained when it came to considering its dividend
• M&B could sell more pubs into its securitisation in order to bolster EBITDA. This would be at an arms’ length valuation as the group’s pensioners would not want to see PLC assets taken by bond holders at an under-valuation
• MAB has told it like it is.
• Or, to be more specific, it has told it like it sees it to be in the markets in which it operates.
• There will be some areas in which the read across to other operators is obvious (retail parks’ decline isn’t helpful for Restaurant Group, for example) and other areas where MAB’s problems are not shared by some other operators. Many pub companies, for example, have little or no exposure to retail parks. Many are not discounting, some have supply contracts stretching out further etc., etc.
• Re discounting and the impact on margin. Some operators’ brands, M&B, Greene King, Prezzo, Pizza Express, some Casual Dining Group brands etc. are getting stuck in in terms of discounting whilst others, Marston’s, JD Wetherspoon, some diners such as Franco Manca, for example, are not. The former are in danger of losing margin whilst the latter could suffer some sales loss.
• Some pub companies’ consensus forecasts are now for earnings declines, M&B, Greene King, for example whilst others, JD Wetherspoon, Marston’s are still looking for increases.
• A number of operators are bigger into growth areas such as accommodation and new build (Marston’s, JDW) whilst others are less involved (Greene King, M&B) or not involved at all.
• Still, M&B is a major operator and it has reiterated that trading is uncertain. It will (probably) husband its cash until it has more visibility and, in some respects, the group is acting in a way that a private company would.
• The dividend is discretionary in a way the debt repayments and pension payments are not.
• Nonetheless, MAB maintains that it is putting in a lot of hard work beneath the surface and it should be well positioned as and when the economy improves.
• Given uncertain earnings, an unclear dividend policy, a skewed share register and mindful of the group’s own comments re trading, would-be investors may wish to hold off for the time being, at least see how Christmas trading goes and perhaps revisit MAB as an investment at some point in the future.
PUB, RESTAURANT & DRINK PRODUCERS:
• London restaurant chain Bel Air has ceased operations just weeks after it cancelled an equity crowdfunding round on Seedrs. The group, which operates sites in the City, Shoreditch, and Farringdon, said earlier this week that it had shut down after failing to secure funding. Backers of the brand had previously been billed as including Zoopla founder Alex Chesterman and Five Guys investors Pembroke VCT.
• Delivery firm APC Overnight attributed a 30% rise in pre-tax profits last year to the nation’s booming craft beer industry. Chief executive Jonathan Smith commented: ‘We’ve seen a real growth in niche beers from micro breweries. There’s more breweries in the UK than any time in the last 50 years, and lots of them have got online businesses now, which we serve.’
• It is estimated that £10bn could be spent in the UK over the Black Friday period and £2.5bn will be spent in a single day, although some retailers have yet to jump on the bandwagon. High Street fashion chain Fat Face’s CEO said of the recent phenomenon: ‘It’s bad for customers, it’s bad for business, it’s bad for UK retail’.
• FTSE index review to see MERL drop out of FTSE100, Just Eat to enter. Restaurant Group to exit 250. It will become a FTSE Small Cap constituent.
• M&B dividend cut now somewhat taken for granted. Telegraph reports ‘Mitchells & Butlers cuts dividend as consumer spending and Brexit fears grow’. FT reports ‘M&B cancels dividend blaming UK uncertainty’.
• M&B’s dividend (or lack of one). Strictly speaking, whilst the co has said that it will not pay a H1 dividend for 2017/18, the dividend for the full year remains under review. A decision will not be made until November 2018. M&B is (perhaps understandably) blaming a lack of certainty for this lack of certainty.
• The 12 strong bar and restaurant chain ETM has reported FY results, showing group revenue up 11.6% to £18.2m, with group EBITDA down to £1.1m from 1.6m last year. The group opened three new sites in the last year. Co-founder, Ed Martin said: ‘This has been a significant and transformational year for ETM. We have strengthened our management team, invested in the right processes and infrastructure and will continue to offer a relevant and differentiated offer for our guests’.
• Tesco is offering 25% off wine, Prosecco and Champagne in the build up to Christmas.
• The coffee house, bar and restaurant group, Grind is launching a second crowdfunding campaign, as it has announced a new agreement with SSP to launch in airports and train stations in the UK and Europe. The crowdcube initiative is targeting £750k in order to open 10 new Grind sites in the next five years.
• UK food and drink exports rose by 15% year-on-year to £5.9bn in the third quarter of 2017, meaning that exports grew by 11% from January to September compared to the same period in 2016. Q3 export growth to non-EU markets (+18.2%) out-performed that to EU markets (+12.5%), raising the non-EU share of exports to 41.2%. The UK’s top three fastest growing export products are liquid milk and cream, butter and spreads, and vegetable oils and its five fastest growing export markets by value for the year to date were the Philippines (+289%), Latvia (+116%), Iceland (+73.2%), South Korea (+55%) and Romania (+48%).
• Healthy eating concept Pod is back into positive like-for-like sales following a tough summer of double-digit declines, per MCA. Newly-promoted CEO Alex Young admitted that Pod had been ‘standing still’ in recent years, while its competitors have made up ground.
HOLIDAYS & LEISURE TRAVEL:
• Monarch has won an appeal against a decision that had denied them of their right to sell its airline slots. Administrators for the failed airline, KPMG, had lost a High Court battle over ‘valuable’ runway slots it wants to exchange with other carriers to raise cash for creditors.
• Lyft is set to test self-driving cars in California after having a permit approved, marking a significant victory for the firm in the race to bring self-driving cars to market.
• CMC Markets reported a 58% increase in half-year profits to £29.8m with operating income up 19% to £89.6m. The spread betting firm’s results were boosted by high value client business.
• The liquidation of Ticketline (UK) means customers with outstanding tickets could miss out on a refund. The company provides tickets for live shows, sporting events and day trips. CVR Global are the administrators with Elias Paourou of CVR citing the competitive ticket industry as the reason for why the company ceased trading.
• Cineworld yesterday updated on trading saying that it achieved total revenue growth of 10.6% in the period from 1 Jan to 19 Nov – or 6.5% in constant currency terms.
FINANCE & MARKETS:
• ONS reports that consumers are continuing to push the UK economy whilst business investment remains ‘cautious’. ONS reports growth in the quarter to end-Sept was around 0.4%.
• Oil up around 30c to $63.44
• Sterling down vs dollar at $1.3289
• Pound weaker vs Euro at €1.1213
• UK 10yr gilt yield down 3bps at 1.25%
• World markets: UK down yesterday but Europe higher. US shut and Asia mostly up in Friday trade
• The number of cars built in the UK rose by 3.5% vs a year ago last month per SMMT. Output for the domestic market fell by 2.9%.
• Number of workers starting apprenticeships has fallen in the last 3mths of the academic year to 48k from 117k. This since the government attempted to make the schemes better.
• Brexit, lame duck politics etc.:
o Mrs May in Brussels today to sort everything out.
o What kind of negotiating team doubles an initial offer? Would you buy a house like that?
o Top EU Bank policymaker Francois Villeroy de Galhau says current divorce talks are driving a wedge between Britain and its friends. He says ‘we are indeed going through a difficult period which puts the friendship between our countries to the test.’
START THE DAY WITH A SONG:
Yesterday we had Mr. Tambourine Man by Nobel prize winner Bob Dylan. To end the week, who sang:
I love you from the bottom, of my pencil case
I love you in the songs, I write and sing
Love you because, you put me in my rightful place
And I love the PRS cheques, that you bring
RETAIL NEWS WITH NICK BUBB:
• Black Friday Watch: Christmas is still a month away, but today is likely to be the biggest shopping of the year, as Black Friday has arrived (at last). The weather has calmed down, to encourage shoppers to get to the shops, but most will be shopping Online and there is no shortage of apparent bargains to be had. Even the bookshops have joined in (we like the concept of “Blackwell Friday” from the venerable Oxford book retailer Blackwell’s). But the shock news is that even Next is joining in the promotional frenzy today, with a “70% off” Sale Online and instore, having previously held firm against the self-defeating discounting…
• BDO High Street Sales Tracker: We flagged on Wednesday that, after 6 bad weeks in a row, John Lewis had a slightly better time last week, thanks to matching the Electricals promotions breaking out ahead of Black Friday. But today’s BDO High Street Sales Tracker for small/medium-sized Non-Food chains last week flags that w/e Nov 19th saw Fashion Store LFL sales drop by 2.7% (versus modest +0.8% LFL a year ago). Including Homewares and Lifestyle chains, total Store LFL sales were down by 2.4% last week (versus +0.3% a year ago). However, overall Online sales were quite strong, at +18.2% (versus +19.5% a year ago).
• Trade Press: There is, alas, no Retail Week magazine today, on the questionable basis that as Retailing has moved Online this week, for Black Friday, Retail Week should do the same…but the RW website has plenty of Black Friday coverage, including hour-by-hour coverage of Online traffic levels, and it broke the shocking story yesterday evening that Next is to take part in Black Friday this year. However, Drapers magazine has been published today and the Editor looks in her column at why “Black Friday is fast becoming a dark day” and thunders that “The cycle of price cutting must be broken before Black Friday casts an irreversible shadow over autumn and Christmas trade”. The main News story in Drapers is that Independent retailers have given into the pressure to discount over the period surrounding Black Friday, but it also flags that Helen Connolly’s Bonmarché medicine is taking effect
• News Flow Next Week: Next week the discounting bonanza continues with “Cyber Monday”…On Tuesday we move on to the Pets at Home interims and the Topps Tiles finals. On Wednesday we get the Motorpoint interims, the ASOS AGM is on Thursday and then the DFS AGM is on Friday. And with the end of the month coming up very quickly now, we get the widely followed monthly GFK Consumer Confidence Index first thing on Thursday.