Langton Capital – 2017-12-01 – More on MARS & GNK, crowd funding, Wagamama etc.:
More on MARS & GNK, crowd funding, Wagamama etc.:
A DAY IN THE LIFE:
Perhaps it’s just my personality but I’m relieved these days when the phone goes and it’s nothing serious.
When the car hasn’t been pranged, when a tree hasn’t fallen onto the greenhouse, when the boiler hasn’t broken, we haven’t suffered a water leak, when the electric hasn’t gone off, when we haven’t had a shopping trolley and next door’s bins thrown into our front garden etc. etc.
Indeed, I’d settle for a small negative.
The shopping cost a tenner more than I thought, the bulb’s gone in the bathroom, even the dreaded ‘we need to go to Ikea on Saturday’. All of that is preferable to something like ‘the car’s run out of petrol. It’s on the moors. The taxi back cost £100. And I forgot where I left it, I’ve left the lights on I’ve lost the keys. And you’re passport’s in the glove box. And remember we’re flying at 5am. And all your bank cards are in my bag. And guess where my bag is. And it’s snowing…’ etc. etc.
So, expectations management, that’s the key. Start with ‘I haven’t crashed the car’ and there may only be upside. Unless the next line is ‘problem is, somebody else did’ of course. On to the news:
MARSTON’S FY ANALYSTS’ MEETING:
Following the release of its full year numbers earlier today, Marston’s hosted a meeting for analysts and our comments are set out below:
• The group maintains that this has been a year of continued progress. Marston’s highlighted just how much it has changed since the financial crisis.
• It has sold ‘bad’ pubs and built good ones.
• Trading has been solid & MARS has achieved sales growth without resorting to discounting
• Wet sales are outperforming food sales at the moment. Wet sales are level (prices are up) but food sales are down in volume terms.
• The level of discounting has increased markedly recently. Marston’s is not taking part. This refusal to discount is helping margins but means that LfL sales are being held back a little.
• Brewing has ‘had an outstanding year’. The division has a ‘proven acquisition ability’. Further expansion in this area would not come as a surprise.
• MARS has virtually no retail park exposure.
• The number of MRO requests has been ‘insignificant’.
• Scottish minimum pricing should be either neutral or marginally beneficial.
• The group ’knows where its growth is coming from’. It will fully incorporate Charles Wells and this year will see a full year contribution from the nine pubs purchased in FY17 and from the 19 that the company has built.
• Lodges in particular can take 2yrs to build to maturity. The group can add 5-10 units per annum going forward
• There is ‘plenty of growth away from hotspots’. It is expanding into the latter space that has caused problems for a number of casual diners.
• In the current uncertain market, the group is slowing its opening programme – though it still expects to open 15 pubs and 6 lodges in the current year
• Costs are largely controlled for FY18. This contrasts with comments made by a number of other companies recently.
Balance sheet & cash flow:
• Marston’s securitisation does not need any near term attention and fixed charge cover has been maintained at 2.6x
• The group does not want to over-service this debt structure. Some 45% of group EBITDA comes from outside the securitisation.
Conclusion & Outlook:
• Marston’s CEO Ralph Findlay pointed out that the group is 94% freehold, has LTV debt of only 56% and has a net asset value of 147p per share.
• Whilst impacted by the wider economy, the company will achieve growth this year on the back of a full year contribution from Charles Wells, the new build pubs completed in FY17 and the assets purchased in the last financial year
• Marston’s numbers have pleased the market and the group’s assertion that it is at least to some extent the master of its own destiny has been similarly well-received.
• Christmas will be important. It always is but, to some extent, just how trade settles down into 2018 could have an even more material impact on how MARS and its peers are viewed by the market.
• Because, with the group’s shares little higher than they were at the heights of the financial crisis 10yrs ago, a material slowdown is arguably being factored in.
• And this may happen but, at the moment, there are few signs that the consumer is willing to turn his/her back on the affordable treats that, at the end of the day, may be said to make life worth living.
• Selling what the public wants, from well-maintained (and preferably freehold) units and at acceptable prices, is likely to remain the key to success.
• Even after this morning’s bounce, Marston’s shares trade at only around 8x earnings and, though there are wider economic concerns regarding the consumer, the shares would appear to offer good value at these levels.
GREENE KING H1 ANALYSTS’ MEETING:
Following the release of its H1 numbers this morning, Greene King hosted a meeting for analysts and our comments are set out below:
• Greene King reports this has been a challenging six months, particularly in value food
• CEO Rooney Anand reports trading became challenging around January 2016, and it remained more difficult since
• Managed pub revenues are down 2.2% in total and down 1.4% LfL
• Margins are down sharply from 18.1% to 16.4%. A step up in repair costs may not be repeated. Much will depend on the future direction of LfLs
• Pub Partners did well. Wet is doing better than food at the moment and the beer company had ‘a very good year’
• ROCE has been challenged. It fell but could increase again
• The dividend is held at H1. GNK points out that it intends to have a smoother dividend progression than that in EPS. A cut is very unlikely
• Local pubs, Farmhouse Inns & beer are doing very well. Managed pubs, especially value food, rather less so
• GNK has a number of brands, formats etc. It is also vertically integrated. This means that it has a number of levers to pull
• The group has had 60 or so MRO requests. The numbers are small in the context of the group as a whole
• GNK says it will invest more in its customer proposition. Presumably this means that it will selectively discount prices
• Food sales are +1.3% LfL in the last 6wks
• Some innovations re property (perhaps a sale & leaseback) could be in the offing.
• The environment, overall, ‘will remain challenging’
• There are ‘more significant cost headwinds in H2 & next year’
• Cost mitigation will be H2 weighted
• Fayre & Square will be gone by the April year end. It’s fair to say that this has not been a successful brand
• GNK suggests there have been c40 casual dining ‘negative events’ – profit warnings, administrators appointed, distressed sales etc. – and it believes the situation is ‘getting worse’
Cash flow & balance sheet:
• Greene King maintains that it has a ‘strong and flexible’ balance sheet. The group has bitten the bullet on a number of tranches of its securitisation. It is incurring £43m of costs to redeem a number of bonds & cut the yearly interest rate
• Effectively assets are moved out of the securitisation (which shrinks in size) but the replacement debt is short term. It will need refinancing again within 3yrs
• Greene King CEO Rooney Anand comments that he has never before seen such a sharp pincer movement in terms of declining demand and increasing costs
• Trading has been difficult and, though it has improved a little in recent weeks, it is likely that estimates will be cut for GNK for this year and next.
• Greene King has pointed to recently improved trading but, as it also suggests that costs will rise, and that trading is likely to remain difficult for some time, downgrades, perhaps of between 2% and 4%, are possible.
• And getting ahead of downgrades when forecasts are falling is as difficult as it is to get ahead of a rising trend meaning that, unless large cuts are made, there may be further downward tweaks should January and February prove to be tougher than usual or if spring disappoints, costs rise or whatever.
• Thus, and perhaps not correctly, multiple contraction often accompanies downward earnings revisions as the degree of certainty is deemed to be reduced.
• We believe that GNK is one of the UK’s better-positioned pub companies but it would appear to have paid a full price for Spirit.
• Its moves into food, though sensible over time, are working against it, it is not heavily exposed to accommodation and it will be impacted more negatively by rates increases than will some other operators.
• Nonetheless, with GNK’s shares now trading at a single-digit multiple, it is not expensive. However, given the direction of the earnings curve, would-be buyers may have time on their side, they may choose to hold off for the time being.
PUB, RESTAURANT & DRINK PRODUCERS:
• Press reports Marston’s making progress but suggests that Greene King is facing tougher markets.
• EI Group yesterday bought back 104,060 shares for cancellation at 149.1p.
• Moody Burger has launched its crowd funding campaign. It is looking for a £150k investment and already has £110,220 subscribed. The two strong chain has a pre-new money valuation of £750k. The co says ‘launched in 2016 Moody Burgers has two bricks and mortar sites and delivers restaurant-quality burgers directly to customers via their online ordering system. They are now raising investment to expand their delivery service and to launch two additional Moody Burger sites.’
• BurningNight Group is looking to raise £750k from investors giving it a pre-new money valuation of £15m. the six-strong chain was founded in 2010. It has sites in Manchester, Birmingham and Cardiff. The co says ‘BurningNight Group’s concept bars, Bierkeller Entertainment Complexes, offer distinct, multi-venue experiences. With sales now topping £19.5m & profits of £595k for 2017, they are now focused on the roll-out of their new brand, Sportskeller.’ The co has raised £418k of its sought investment with 16dys to go.
• Lakes Distillery is overfunding after initially looking to raise £1m off a £44m pre-new money valuation on Crowdcube. The operator’s fund-raise is now at £1.5m. The operator has sold 160k bottles of drink. It says ‘opened in 2014, The Lakes Distillery is England’s largest whisky distillery, receiving over 100,000 visitors annually and has sold over 160,000 bottles of their premium gin, vodka, and blended whisky; voted one of the top 5 best new distilleries in the world by Time Out USA.’ The group says it has an estimated 600k bottles of single malt produced for future sale. The price at which it sells the product must be pretty high in order to make the business worth the above pre-new money valuation.
• Per MCA, the UK branded burger market is forecast to outperform the wider restaurant market growing at a rate of 5.9%, valuing the market at £4bn by 2020, according to MCA analysis.
• US operator Jack in the Box Inc. has released disappointing Q4 results and has provided no update on its potential sale of Qdoba Mexican Eats to private equity. The group hopes to gain momentum with its value-focussed advertising campaign next year.
• Pub operator and brewer Brakspear has acquired its 11th managed pub, in Wendlebury near Bicester, called The Lion. Tom Davies, Brakspear chief executive, said, ‘We’re delighted to be adding the Lion to our managed estate. Its focus on top quality food and outstanding service in a relaxed and friendly atmosphere makes it a perfect fit with the ethos of our managed business. The addition of bedrooms creates an exciting opportunity which we are well-placed to maximise thanks to our experience of running several pubs with rooms in the Cotswolds.’
• The EU has banned sales of beer and saké to North Korea.
• Wagamama reports LfL sales up 6.9% in H1 to 5 November. Q2 LfLs were 7.1%, outperforming the market by 8.1% and meant the company has outperformed its competition for 3 years or 183 weeks. Revenue increased 14% to £157.4 million in the half-year with adjusted EBITDA up 2.2% in H1 to £23.5m.
• Statistics Units Alcohol Profile reports that Jersey islanders drink more alcohol per year than the rest of the UK with one in four residents over 15 drinking at hazardous levels. On the other hand, alcohol consumption levels in Jersey are down 17% since 2007.
• TGI Fridays announced an expansion of its partnership with Amazon, adding Alexa voice ordering and Amazon pay for online customers. CIO of TGI Fridays, Sherif Mityas, said the innovations will differentiate the casual-dining brand from competitors and also help the brand reach new audiences.
• Roger Ryman, the brewing director of St Austell brewery, claims that Britain has been ‘over-pubbed’ and not all pubs are competitive enough to survive in a challenging marketplace. Ryman said ‘It’s all about service and understanding what your customers want, and delivering it. You can’t just open your doors and wait for people to walk in.’
• Deltic Group has signalled it is still interested in Revolution Bars Group by building up a 3% stake despite a failed merger a couple months ago.
• Per MCA, Five Guys UK will open two smaller sites in Richmond and Chelsea, taking the company up to 79 sites by the end of this year.
• Deliveroo’s dark kitchens are set to offer £6 lunchbox deals for London City workers.
• Applebee’s will offer $1 Long Island Ice Teas, to be known as the Dollar LIT, with a company spokesperson saying ‘The Long Island Iced Tea is one of our top five bestselling cocktails’.
HOLIDAYS & LEISURE TRAVEL:
• HVS says that ‘the number of investors buying into leased hotels has also trebled since 2009 as the asset class has become an increasingly attractive investment target for institutional investors.’ HVS maintains that ‘while the likes of Marriott, Hilton, IHG and Accor have moved away from lease contracts in the past, operators such as Deutsche Hospitality (formerly Steigenberger), Mövenpick Hotels & Resorts and Dalata Hotel Group are continuing to opt for lease deals.’
• Wizz Air is set to expand its Luton operations after securing take-off and landing slots from the administrator of Monarch Airlines. Wizz Air will increase the number of aircraft based at Luton from five to seven in 2018, adding 28 new flights per week.
• TR reports that weekly US hotel occupancy was up 1.4% yoy, with ADR increasing 2% to $109.99 and RevPAR rising 3.4% to $56.52.
• Caesars Entertainment plans to sell Harrah’s Las Vegas real estate assets for $1.14bn in order to fund its acquisition of casino company Centaur Holdings, according to Reuters.
• China Lodging Group has closed 52 hotels in order to invest the cash from disposals into new opportunities.
• Royal Caribbean International will double its opportunities for a trip to Cuba next summer, with two ships heading to the island nation and two new destinations added to itineraries.
• US casino operator Penn National Gaming Inc is in talks with Pinnacle Entertainment about a potential cash-and-stock takeover of its the firm.
• More gamblers are opting to ‘ban’ themselves from online gambling as firms received nearly 50,000 requests to close accounts last year, up 7,000 from the previous year. The Gambling Commission reported that around £4.7bn was bet online in 2016-17. Spring 2018 will see the introduction of a website where gamblers can sign up to ‘self-exclude’ from gambling websites.
• Games Workshop updates on trading for H1 to 26 Nov. Group says it ‘estimates indicate sales of c. £109 million in the first six months of 2017/18 and an operating profit of c. £38 million for the period.’ Games Workshop says ‘over the first half we have seen sales and profit growth in all channels in constant currency terms with the momentum continuing throughout period. These results are in line with expectations for the year ending 3 June 2018 although the Board is aware that it is still early in the 2017/18 financial year.’ The group will announce H1 numbers on 9 Jan.
• Jackpotjoy yesterday successfully placed 5.56m shares at 802p per share. The placing raised gross proceeds of approximately £45 million. The co says ‘following the completion of the Placing, the Seller will cease to hold any ordinary shares in Jackpotjoy’s issued share capital.’ It adds ‘the proceeds of the Placing are payable in cash on usual settlement terms. Jackpotjoy will not receive any proceeds from the Placing.’
• Shares in Daily Mail publisher DMGT fell 23% yesterday to hit a near five-year low. The group warned of tough trading. It says its earnings may be ‘adversely affected by recent disposals and challenging conditions’. It says advertising market conditions were ‘likely to remain volatile’. The pro-Brexit paper did not say why conditions have deteriorated.
FINANCE & MARKETS:
• Net migration fell by 100k to 230k in the year to June, according to data from the Office for National Statistics. The ONS says ‘there has been a 43% decrease in the number of people immigrating to look for work over the last year, especially for EU citizens.’
• House prices rose by 2.5% in the year to November per Nationwide. The building society reports that stamp duty concessions to first time buyers will have a ‘limited impact’ on housing demand.
• Bitcoin fell by around 20% to $9k yesterday.
• Oil price down 55c or so at $62.86
• Sterling up vs dollar at $1.3534
• Pound slightly weaker vs Euro at €1.1349
• UK 10yr gilt yield down 1bp at 1.33%
• World markets: UK down yesterday with Europe also down but US higher. Far East mostly up in Friday trade. Early indications for UK to open c10pts down.
• Brexit, slightly less lame government etc.:
o Sterling up on hopes that UK will settle EU exit bill.
o Immigration down. See above.
o Boss of Fortnum & Mason says ‘brand Britain has been firmly damaged’ by Brexit uncertainty.
START THE DAY WITH A SONG:
Yesterday was, of course, Oasis and ‘Live Forever’. Will Noel and Liam Gallagher ever talk to each other again? The last we heard, Noel was telling his little brother (via the press) to take their feud ‘to the grave’… On a more cheerful note (we think), who sang:
Life is good,
And I feel great,
Cause mother says I was,
A great mistake
RETAIL NEWS WITH NICK BUBB:
• Games Workshop: Mighty Games Workshop tumbled 5% yesterday, as if something might be amiss, although it is still capitalised at as much as £630m…In fact, today’s pre-close update for the six months to 26 November looks fine: “preliminary estimates indicate sales of c£109m in the first six months of 2017/18 and an operating profit of c£38m for the period. Over the first half we have seen sales and profit growth in all channels in constant currency terms with the momentum continuing throughout period. These results are in line with expectations for the year ending 3 June 2018 although the Board is aware that it is still early in the 2017/18 financial year”. Oddly, the company doesn’t give growth rates, but in the first half of last year sales were £70.9m (so H1 saw sales growth of nearly 54%…) and the operating leverage from that growth has been pretty impressive as operating profits
• BDO High Street Sales Tracker: We flagged on Wednesday that John Lewis had a good time last week, thanks to the Online sales response to all the Electricals and Fashion/Beauty promotions around Black Friday. But today’s BDO High Street Sales Tracker for small/medium-sized Non-Food chains last week flags that w/e Nov 26th saw Fashion Store LFL sales dip by 0.8% (versus a weak comp of -3.8% LFL a year ago). Including Homewares and Lifestyle chains, however, total Store LFL sales were up by 1.1% last week (versus -3.0% a year ago). And overall Online sales were very strong, at +24.7% (versus +22.6% a year ago). Frustratingly, although the Store/Online split is valuable, BDO still doesn’t give a blended sales growth figure…
• Trade Press (1): The front cover of Retail Week magazine today is headlined “Online gain, in-store pain”, showing a chart of the rising number of Online transactions on Black Friday superimposed on a photo of a downward escalator…to flag up a feature on how there were mixed fortunes for retailers during Black Friday. In terms of News stories, RW highlights that Fenwicks has poached Sainsbury’s Argos commercial director Robbie Feather as its first CEO from outside the founding family, Ocado has penned an international deal with the French grocery giant Casino and John Lewis has come under attack from several of its concession partners for attempting to charge them for Online sales. In his column the Editor looks at the gloomy wage growth outlook from the Institute for Fiscal Studies and thunders “Get ready for more hardscrabble years”.
• Trade Press (2): The front cover of Drapers magazine today is a photo of Matchesfashion founders Tom and Ruth Chapman, to note their success in last night’s Drapers Fashion Awards and the Editor looks in her column at the recent store openings by Boden and Joe Browns etc and thunders that “Etail openings breathe life into the High Street”. The main News story in Drapers is that “Black Friday shoppers stayed at home to spend”, but it also flags that the Polish fast fashion chain Reserved has set a sales target of PLN100m (c£21m) within five years for its new Oxford Street store and that shoe suppliers fear big losses from the administration of the Shoon upmarket footwear chain. The main features are about lifestyle brand Boden’s first flagship store on the King’s Road (which is said to be modelled on founder Johnnie Boden’s home) and the Hong Kong clothing supply chain giant Li &
• News Flow Next Week: December starts quietly in terms of company news flow, although Monday brings the McColl’s Q4 update and the MySale AGM update. First thing on Tuesday we get the BRC-KPMG Retail Sales for November and then the Mulberry interims are on Thursday.