Langton Capital – 2018-03-22 – Conviviality, EasyHotel, Adnam’s, Ten, discounting etc.:
Conviviality, EasyHotel, Adnam’s, Ten, discounting etc.:
A DAY IN THE LIFE:
Having previously commented on words like ‘broadly’ (meaning lower), ‘somewhat’ (meaning really quite a lot) and ‘challenging’ (meaning awful), it was interesting to see that Moss Bros said yesterday that it was going to ‘modify’ its dividend.
And it didn’t mean that it was going to put it up because, like Emperor Hirohito when he said in 1945 that the war had progressed ‘not necessarily in Japan’s best interests’, the company meant that it was going to cut it and the market, which generally looks through to the real meaning of whatever words are used, marked the shares down nearly a quarter.
Elsewhere, it was good to see that York, or Yerk as it is known by residents who live east of the River Ouse, has been voted the best city to live in in the country. It is a ‘mini-metropolis with cool cafes, destination restaurants, innovative companies – plus the fastest internet in Britain’.
All good stuff and, as the leader of the council said, the City is ‘dead chuffed’ with the accolade. On to the news:
PUB, RESTAURANT & DRINK PRODUCERS:
• Conviviality has updated on its fund-raising and says ‘customers and suppliers continue to remain supportive of the Company’
• Conviviality says ‘constructive discussions with our lenders are continuing’ and it is attempting to arrange a £125m fundraising.
• Conviviality ‘has held constructive discussions with HM Revenues and Customs re the £30.0m payment due on the 29 March 2018.’ The directors believe the £125m ‘will provide the necessary funding to recapitalise the business.’ These are almost the same directors that didn’t see a £30m tax payment coming but, at this stage, it’s perhaps best to bail out the boat rather than discuss just why it has sprung a leak. Conviviality intends to also make a €5m open offer to shareholders not involved in the placing.
• Re trading, Conviviality reports EBITDA for the year to end-April should be around £56m. It is now reducing that estimate to around £46m with debt of below £100m if the placing is successful. The group is still ‘in compliance with its existing banking covenants’.
• Conviviality’s shares will remain suspended until further notice and ‘a further announcement will be made in due course.’
• Adnams has reported FY numbers to end-Dec saying sales came in at £74.8m with an operating profit of £2.2m
• Adnams says last year was ‘a year of investment for Adnams’. Chairman Jonathan Adnams reports ‘2017 was a year of huge investment. We saw some inevitable disruption, but we delivered substantial change. We continue to focus on what matters most. To deliver a service and product which allows us to stand out from the crowd. To grow the business when and where appropriate, answering increasing market demand. And above all to delight our new and loyal customers in everything we do.’
• Adnams reports beer volumes +9.1% with online sales +15%. Operating profits were ‘well down on our 2016 result of £3.9m’. This was due to ‘exceptional investment’ and the associated ‘inevitable disruption in our business’.
• Re the outlook, Adnams reports ‘2017 was a challenging and busy year’ and says ‘the holiday hotel market has been challenged by cheaper competition and by a fast-expanding business in rental properties.’ It goes on to say ‘we are well positioned to take advantage of the investments that we have made.’
• The 2018 Britvic Soft Drinks Review claims the upcoming sugar tax has sparked ‘numerous high-profile’ product reformulations. The report said health and premiumisation continue to be two defining trends for the industry. According to the report, total soft drinks value sales through retail and foodservice were continuing to grow, hitting £15.2bn in 2017 up 1.4% on 2016. Quoting statistics from Nielsen the report revealed that premium new product development accounted for 43% of all launches, up from 30% in 2016.
• HelloFresh, the meal kit brand, has reached profitability for the first time internationally with the company announcing a 52% increase in group revenues to €905m in 2017.
• Nielsen has reported that meal kits ‘have carved out a unique—and profitable—niche in the U.S. grocery landscape.’ It goes on to say that ‘9% of Americans say they’ve purchased a meal kit in the last six months—that’s 10.5 million households. What’s more, 25% of consumers say they would consider trying a meal kit in the next six months—that’s more than 30 million households.’
• EI Group yesterday bought back another 248,430 of its own shares for cancellation at 118.5p per share.
• Japan could be a bigger market for champagne than the UK this year.
• New Look’s plan to close 60 stores and cut 980 jobs has been overwhelming supported by its creditors.
• An updated Pizza Express App now includes new features such as a restaurant finder and it will allow bill-paying by phone
• UKHospitality has written to Rishi Sunak MP, the minister for Local Government, about overhauling business rates relief and has urged the government to conduct a full review of the entire rates system. UKH Chief Executive Kate Nicholls said: ‘The introduction of discretionary relief for businesses was well-intentioned, but it has caused hospitality businesses a number of significant headaches. We have called on DCLG to act to ensure that hospitality businesses that contribute so much to their local communities are not punished and reiterated our call for a full review of the business rates system that is long overdue.’
• Casual Dining Group brand Las Iguanas is set to make its international debut in the summer, with openings lined up in Gibraltar and South Africa.
• Dunkin’ Donuts is trialling online catering orders in four US states, with some office party packs costing nearly $100 for baked goods and drinks. Sherrill Kaplan, vice president of digital innovation, said the party packs are geared for business and family gatherings.
• MCA writes that Hull-based burger concept KerbEdge is to open a new site in Darlington’s Dolphin Centre after receiving £40,000 from investor Matt Haycox. Director Adam Bryson told MCA: ‘Our plan is to look for more over next few years predominantly in northern sites in the M62 corridor, within one and half hours of our base. We want to expand at a rate that’s comfortable. The demographic and feel of an area is the most important thing, our customers tend to be young professionals. I feel we need to grow more before taking on well-established markets like Leeds and Manchester.’
• UKHospitality has warned the government that action must be taken to reduce costs for businesses or risk higher joblessness and the loss of vital hospitality businesses. The warning follows today’s data release showing an increase in unemployment of 24k. Last month, sector-specific figures showed a decrease of almost 54k employed in the last quarter of 2017. ‘Last month’s figures show that the hospitality sector has been hit particularly hard. Businesses that have driven the revitalisation of high streets since the recession are now, once again, feeling the squeeze. If the Government does not act to support businesses by cutting costs, then we are only going to see a continued deceleration of growth in the sector and a further increase in the rate of unemployment.’
• NewRiver REIT has acquired its first pubs since 2015 and is looking at a further 100 sites as well as group deals, per MCA.
• Hershey’s is considering the sale of crisps business Tyrell’s, having originally bought the division in 2016 for $392m.
• Carpetright is considering a company voluntary arrangement that would allow it to close unprofitable shops and lower rents as part of a turnaround plan. Chief executive Wilf Walsh said the firm’s previous management had opened too many stores that were poorly located with ‘simply unsustainable’ rents. The group is also reported to be looking to raise perhaps £40m to £60m from shareholders.
• Revolution Bars Group has removed plastic straws from its estate as part of the group’s sustainability campaign ahead of its new menu launches this month. Myles Doran, Commercial Director of Revolution Bars Group comments: ‘We have a huge responsibility as one of the leading premium bar groups in the UK to get behind the ‘no straws’ campaign. By switching to dehydrated fruit we’ve already saved a third on fruit garnish wastage and reduced the number of deliveries required to our bars. The new measures will significantly reduce the amount of non-recyclable waste in our restaurants and bars and hopefully encourage more businesses to follow suit. We need to start acting now if we’re going to make a real difference to our environment and wildlife.’
• AB InBev has committed to its 2025 Sustainability Goals, focusing on smart agriculture, water stewardship, circular packaging and climate action.
HOLIDAYS & LEISURE TRAVEL:
• easyHotel has updated on its opening programme saying it has ‘signed a franchise agreement with Continuum Hospitality Group for the development of a 146-room hotel in Malaga, Spain’.
• easyHotel says ‘the hotel is centrally located in the popular port city of Malaga, less than 5 minutes walk from the cruise terminal and just 200m from Malaga high-speed train station.’ The group says ‘the hotel will be developed and subsequently managed by Continuum Hospitality Group, backed by investor Extendam and is scheduled to open in 2019. easyHotel Malaga will be the Group’s second hotel now under development in Spain. The Group’s owned hotel in Barcelona is due to open in Summer 2018.’
• easyHotel also confirms ‘the opening of its new franchise hotel in the Netherlands. The 87-room easyHotel has now opened at The Hague Scheveningen Beach, one of Holland’s most popular seaside resorts.’ CEO Guy Parsons comments ‘we continue to expand our franchise portfolio in key international destinations and I am delighted that we are strengthening our presence in both of these important European tourist resorts, working alongside highly experienced partners.’ Mr Parsons adds ‘these additions will take our franchise portfolio to 1,728 rooms opened with 1,857 under development and the Board looks forward to announcing further opportunities in due course.’
• Travelsphere reports a 20% increase in sales in the last six months, following its introduction of its ‘Rock Solid Guarantees’ initiative.
• A stronger global economy is expected to increase airfares at a faster rate (1%) in 2018 than previously thought, the BCD has warned. The BCD blamed the rise on fuel prices and higher demand, with the group’s senior director, Charuta Fadnis stating: ‘Our initial forecasts for 2018 remain largely on target. Intercontinental economy airfares will increase slightly more than our original forecast as the global economy continues to strengthen’.
• New York City saw 62.8m visitors come to its city in 2017 representing a 3.8% rise on the previous year. Domestic travel to the big apple increased 3.9% to 13.1m with international travellers up 3.4% to 13.1m.
• Travel firms have told an ABTA Brexit Breakfast that they are already feeling the effects of Brexit at a grassroots level. HotelPlan UK said ‘we’re feeling the effects of Brexit right now – when you send stuff overseas you’re also obliged to comply with local labour laws… and they can make your life very difficult at a local level.’
• ICE research shows parents can save an average of £1,205 on the cost of a family holiday by taking their children out of school during term time. This comes after the company found that parents paid more than £4m in fines over the last academic year for taking their children out of school.
• Mark Tanzer, Abta CEO, has welcomed the agreement on a transition period for Brexit by saying ‘signs of realism [are] emerging’.
• Aslef has announced a 24-hour tube strike on Wednesday 11 April due to a row over the handling of a driver’s reported safety breaches.
• Ruby Hotels will open its first UK site in London with a focus on ‘lean luxury’. The Ruby Lucy will hold 76 rooms and is set to open on Lower Marsh, near Waterloo station at the end on 2019.
Ten Entertainment Group (TEG), the UK’s number two bowling operator, has released figures for the 52 weeks to 31 December 2017 after which it hosted a meeting for analysts. Our comments are set out below:
• Total sales for the year ending 31 December 2017 rose 8.9% on a pro-forma basis to £71m and like-for-likes grew 3.6%, of which 3% was down to footfall and 0.6% came from price.
• Adjusted EBITDA rose 14% to £19m and adjusted profit before tax increased by 18.2% to £13m despite higher depreciation and amortisation as a result of additional sites and refurbishment.
• Ten Entertainment Group reports adjusted diluted earnings per share of 16.18p, valuing its shares at 15.7 times earnings.
• Shareholders will receive a total dividend of 10p for FY 17 — a yield of 3.9% covered 1.6 times (adjusted for items such as IPO expenses).
• Net cash from operating activities grew 5% to £17.6m. Net cash outflow of £4.6m was driven primarily by £2.3m of new site acquisitions, £3.6m of capex, a £6.9m repayment of bank borrowings, and £4.3m of exceptional and one-off items (including £3.1m of IPO costs).
• TEG acquired three sites during the year (Blackburn, Eastbourne, and Rochdale) taking TEG’s total to 42, with six refurbishments of existing properties also completed in the period.
• ‘Pins & Strings’ technology transformation at another five units, further demonstrating the improved labour efficiencies and customer satisfaction that the concept provides.
Balance Sheet etc.:
• Ten Entertainment Group has used its IPO proceeds to pay down borrowings and the group’s net assets to increase from £4m to £53.2m.
• Debt has fallen from £50.3m to just £4.7, largely as a result of £42.4m of shareholder loan notes converting to equity.
• The bulk of TEG’s £72m of assets is comprised of goodwill and intangibles (£26.7m), property, plant, and equipment (£34.9m), and cash and equivalents (£5.6m). The group also had £1.3m of inventories and £3.5m of trade receivables as of 31 December 2017.
• Its £18.8m of liabilities are relatively evenly split between between finance leases (£4.2m), bank borrowings (£5.8m), trade payables (£6.8m), and £2m of other liabilities.
• A brief breakdown of UK bowling shows a market of roughly 320 sites (around 60 of which are operated by Hollywood Bowl and c40 belong to TEG).
• Ten Entertainment management speaks of a ‘polarisation’ of the market, with family-friendly value operators at one end and premium, higher priced operators at the other.
• It is in the family-friendly end that TEG and BOWL operate. It looks as if this sub-market is big enough for the both of them, at least in the medium term.
• TEG has identified 60 units that could fit its economic model. Considering its current base of 42 and its target of opening 2-4 sites per year, that is adequate space to grow — even with a direct listed competitor.
• CEO Alan Hand and CFO Mark Willis mentioned that TEG is often the only interested party negotiating with landlords — a useful bargaining position for driving down rents and seeking improved returns.
• In 2018, Ten Entertainment Group is targeting another year of like-for-like sales growth complemented by the acquisition of between two and four additional units.
• The group will look to revamp its food offer in the coming year, with an increased focus on sharing dishes.
• Sales in the first 11 weeks of FY18 have brought a like-for-like sales increase of 1.7% and notes: ‘there is further potential for growth in the experiential leisure market and the group is well positioned to benefit from this trend.’
• Ten Entertainment Group speaks of the increasing polarisation of the bowling industry as it takes on more of a ‘barbell’ shape. In Langton’s view, TEG is well positioned at the value and family-friendly end of a fragmented market with attractive big box economics.
• The group is pursuing a steady and predictable expansion, with growth coming primarily from like-for-like sales growth, innovation and investment in its estate, and bolt-on acquisitions of typically underinvested independent operators.
• Substitution risk will always be an issue in the bowling industry — today, groups like TEG have more leisure pursuits to compete with than ever before. Ten Entertainment is open to the possibilities of using its considerable space to tap into fast-growth, ‘experiential’ trends in leisure.
• Ten Entertainment Group is relatively well insulated from the headwinds affecting restaurants and pubs, such as higher labour costs and food prices. Of course, a broader consumer downturn remains a risk to the group, but its value positioning, low debt, and reasonably strong margins provide it with a degree of security.
• At c255p and around 16 times earnings, TEG shares are less of a bargain today than they have been in recent months. That said, this valuation is undemanding considering the returns on investment the group stands to make as it continues its steady growth.
• US gambling magnate Steve Wynn is to sell up to all of his $2.2-billion (12% of the company) stake in company after a court battle with his ex-wife.
• Barralina asset management has announced its intention to sell its existing stake in The Gym Group.The asset manager with undertake a placing of 5m shares.
FINANCE & MARKETS:
• Wage growth has picked up to 2.6%, just a shade below general price inflation of 2.7%. This is as up from 2.5% in the previous quarter.
• Unemployment rate ticked lower to 4.3% from 4.4% although there was a slight increase in the actual number of those unemployed.
• NIESR comments ‘the latest labour market statistics, out today, show an interesting picture of an increase in both employment and unemployment in the three months to January 2018: Over 75% of people aged 16 to 64 were in work, the equal highest since records began in 1971. The rate of unemployment is now also the joint lowest ever, but the number of unemployed people has increased. These figures indicate that, in the face of recruitment difficulties, including as a result of a large fall in net migration of EU citizens, employers are hiring people who have not been actively seeking work. This might be seen as a positive sign, but this pool is likely to be limited’.
• New Fed boss Jerome Powell has said that there are “concerns” among business leaders about President Trump’s recent protectionist acts.
• Sterling stronger at $1.4148 and €1.1457
• Oil up two bucks at $69.49
• UK 10yr gilt yield up 4bps at 1.53%
• World markets: UK down yesterday with Europe & US also down. Asia mostly up in Thursday trade
o Brexiters tipped dead fish in the Thames yesterday. Jacob Rees Mogg joined the protest when the cameras turned up.
o Theresa May is to meet EU leaders today. It is thought that she will attempt to steer the agenda towards Russia and away from Ireland etc.
PRIOR DAY LATER TWEETS:
• Later tweets: CVAs all the rage. But the threat to shoot yourself in the head needs to be credible, equity needs to be clobbered and, even so, is this really cricket?
• Prezzo’s CVA proposals (dated 2 March 2018) are on website. Asking for massive rent cuts and c30% of units to be handed back
• Harvester 50% off mains yesterday. Where is the road back? Prezzo CVA blames (in part) discounting. Then it cuts prices 40%…
• Labour shortages & higher costs driving operators to automation (or at the very least, de-skilling) in attempt to keep prices low
• Somewhat worryingly, the ONS singles out ‘cheaper hotel rooms’ as one of the reasons for the drop in CPI in February,
• QUESTIONS 6 & 7 in today’s email. Is the High Street healthy, sick or dying? And Matthew Clark (Conviviality) consequential risks…
• Wages up 2.6% in year to Jan. Shade below CPI (+2.7%). Unemployment rate 4.3%. Some 24k extra people out of work
• Later, later tweets: Moss Bros ‘will deliver profit at a level materially lower than current market expectations.’ Group ‘modifies’ (AKA cuts) its dividend
• ScS (big ticket) sees ‘softened’ trading in last 7wks. Sees market ‘remaining challenging’. Consumers protecting small ticket spend?
• Carpetright & Mothercare (market caps £28m & £27m) now micro-caps as High St trading remains poor, internet continues to bite.
• Carpetright & Mothercare both looking for extra-funding (along with Conviviality) with Carpetright also explorining ‘feasibility of a CVA’
• Sugar Tax. Who’ll pay it, consumers or pubs etc.? Will pressure operators to raise prices (more easily said than done) that’s for sure
START THE DAY WITH A SONG:
Yesterday’s song was Burn the Witch by Radiohead. Today, who sang:
Gonna take you off my list of to-dos
I’m gonna sing my soul, shake off these blues
‘Cause it’s alright, it’s alright now
RETAIL NEWS WITH NICK BUBB:
• “The Daily Retailer” is going to be on holiday now until after Easter. Nick will be back, bright and early, on Tuesday April 3rd.