Langton Capital – 2018-05-16 – Marston’s, M&B, EIG, Cineworld, SSP, C&C & other:
Marston’s, M&B, EIG, Cineworld, SSP, C&C & other:
A DAY IN THE LIFE:
Busy with results today. On to the news:
MARSTON’S H1 RESULTS:
Marston’s has this morning reported H1 numbers to 31 March 2018 and our comments are set out below:
• Sales, including the impact of the Charles Wells beer & distribution acquisition, are up by 20% to £528.1m
• EBITDA is up by 5% to £95.0m and PBT is up by 8% to £36.3m
• EPS is in line with last year (on an increased number of shares) at 4.8p
• The interim dividend is being maintained at 2.7p. For the moment, we continue to assume a small increase to the final payment
• Total sales (LfLs covered below) are flat across Destination & Premium, up 2% in Taverns and up by 1.4% across Leased & Tenanted pubs. Beer Company sales are up by 29%. Total pub sales, despite the snow, are up by around £600k.
Trading – Destination & Premium:
• Total managed and franchised LfL sales are level with last year. Within this, Taverns are up by 2.9% and Destination & Premium units are down by 1.8%
• All of the Destination & Premium shortfall on last year is due to the snow in late February and March
• Margin is down by 0.7%. Of this, around 50bps is underlying (this is in line with expectations) and 20bps is due to the snow
• Average profit per pub was up by 1%
• Heavy discounting continues in the market as a whole and, though Marston’s is not taking part, price rises may not be advisable in the immediate term
Trading – Taverns:
• Taverns’ LfL sales are +2.9%. This represents a pickup since week 16, at which time LfL sales were up by only 2.6%
• Wet-led sales held up well, even during the snow. Fewer customers rely on cars & trade is a little less weather-dependent
Trading – Leased Pubs:
• Leased income is up 2% on a LfL basis. The estate is performing well. Wet sales are holding up. The LfL sales performance is in line with that at week 16
Trading – Beer Company:
• Marston’s beer company has increased own-brewed beer volumes by 29%, largely on the back of the Charles Wells’ acquisition
• Margins are lower by around 3% as Charles Wells’ business operates at a lower margin with more national customers and it has more licensed brands. In addition, the enlarged distribution business operates at a lower margin. Margins should pick up in H2
• Synergies are progressing as planned. The group will generate at least £4m of savings.
• Organic volumes are in growth. Marson’s now accounts for almost a quarter of the premium cask market in the UK
Balance Sheet, Cash Flow & Debt:
• Marston’s operating cashflow is some 6% higher
• H1 generally sees a cash outflow (the final dividend is paid in the period etc.) and the bulk of this should reverse in H2
• September 2018 debt should be only marginally higher than September 2017
• Pro-forma debt to EBITDA is 4.8x. Fixed charge cover is 2.6x.
• Marston’s pub estate has been valued at £2.1bn. A £30m impairment has passed through the P&L but, for the most part, asset values are higher. NAV is 142p per share
• The group has concluded its Sept 17 triennial pension review. The deficit has fallen by £10m to £40m and the £8m p.a. deficit reduction payments will remain in place for the time being. The deficit should be cleared by 2021/22.
• Marston’s has opened 6 new pubs & bars in H1 along with 6 new lodges.
• For the full year, it expects to open a further 9 pubs & bars with no further lodges.
• Next year’s opening programme may be edged back to around 10 pubs & bars with 5 new lodges expected to open
• The slower rate of openings will save around £25m in capex but it could lead to some minor reductions to FY19 estimates
Conclusion & Outlook:
• Marston’s has reassured that trading is in line with expectations.
• The snow has been little more than an irritant, but the group is considering slowing openings and husbanding its cash a little more actively going forward.
• The group does not comment on current trading but our understanding is that, whilst April was tough initially, when the sun shone, pubs performed very well.
• CEO Ralph Findlay comments ‘we are pleased to report another period of good growth in revenue and underlying profit before tax.’
• Mr Findlay says ‘strong trading in Brewing and Taverns and Leased pubs offsets the adverse impact of poor weather on ‘drive-to’ pubs in our Destination estate, further validating the resilience of our model.’
• Referring to its slightly slowing openings programme, MARS says ‘we have made modest and prudent adjustments to our capital plans to reflect the current economic and consumer climate.’
• CEO Mr Findlay says ‘Marston’s is a balanced business and we are confident that the medium-term outlook for the eating-out and wet-led pub sectors remains good and that targeting an increased profitable share of a growing market through an unremitting focus on quality, service, standards and value for money remains key.’
• Marston’s has acknowledged the impact of the snow on its Destination & Premium business. It has nonetheless outperformed the market and wet-led sales have been more robust. Beer sales are strong and synergy benefits continue to be mined from the Charles Wells acquisition.
• The consumer is under pressure and Marston’s is making a couple of defensive moves with regard to capex, new openings etc.
• Nonetheless, the group’s shares trade at around 8x earnings and yield around 6.7%.
• The group has an attractive, well-managed and well-maintained estate of largely freehold properties. Food and lodging are growth businesses and Marston’s shares are not trading on a demanding rating. The company, overall, is selling product that the consumer would like to buy at a price they are prepared to pay.
MITCHELLS & BUTLERS H1 RESULTS:
Mitchells & Butlers has this morning reported H1 numbers to 14 April and our comments are set out below:
• M&B reports total revenue of £1,130m (H1 2017 £1,123m). Operating profit is £137m (H1 2017 £145m)
• PBT has come in at £69m (H1 2017 £75m) with EPS of 13.0p (H1 2017 13.7p)
• The group says ‘as previously advised the Board is not declaring an interim dividend but will make an assessment of pay-out at the end of the year’
• M&B reports LfL sales growth of 1.6%; growth adjusted for impact of snow of 2.5%. The group has previously reported LfL sales up 2.2% in the first 14wks of the financial year
• The group says it saw LfL sales growth of 5.8% over Easter weekend ‘which moves into the first half’
More on current trading:
• M&B says ‘we remain focused on our three strategic priorities; to build a more balanced business, to instil a more commercial culture and to drive an innovation agenda.’
• It says ‘we are pleased with further progress against actions implemented in the previous financial year which is translating into a sustained improvement in sales performance.’
• M&B promises a ‘new wave of initiatives covering sales and service, labour, stock, external spend, menus and pricing, return on investment, digital marketing and stock and cash leakage which are in their early stages of development, and we believe have the potential to further transform the business.’
• M&B says ‘the benefits of actions taken are evident in our sales performance, with like-for-like sales growth in the first half of 1.6%.’
• The group cautions ‘the first half was also punctuated by periods of exceptionally bad weather, including widespread snow, which we estimate has cost c.£12m in lost sales and impacted the half year growth by 0.9ppts.’
• Re the external environment, M&B says ‘the macro environment we operate in remains challenging. Consumer confidence has remained low and this, compounded by inflation growing at a higher rate than wages, has resulted in a reduction in consumers’ disposable income.’
• Re supply, M&B says ‘increased supply over recent years has created a highly competitive environment, particularly in the food led sector.’
• The group says ‘although net supply has slowed in the past year the overall result of increased new entrants is that c.4,000 more restaurants were open at the end of 2017 than in 2013.’
• Over supply has led to discounting & this has pressured margins.
Balance Sheet, Debt etc.:
• The group undertook capital expenditure of £104m in the period (up from £93m last year)
• M&B has opened 4 new sites and converted or remodelled 220 units.
• Free cash flow was negative £3m (2017: negative £18m)
• Net debt was £1.7bn vs £1.8bn a year ago
• M&B CEO Phil Urban comments ‘during the first half we continued to deliver like-for-like sales growth against a period of growth last year.’ Mr Urban says ‘this strong performance comes from the progress we continue to make in our three priority areas: building a more balanced business; instilling a more commercial culture; and driving an innovation agenda.’
• M&B says ‘success in this highly competitive market is dependent on a continuous stream of improvements, and that is what we are focused on delivering.’
• It says ‘as previously announced, margins are being adversely impacted by increased costs, most notably from wage inflation, property costs, energy and food and drink costs.’
• The group concludes ‘in light of this, our operational teams have performed well to deliver flat underlying profitability in the period.’
• M&B’s statement is broadly reassuring. The group is focussing on sales.
• Margins are lower and this has weighed on profits.
• M&B has an extremely attractive estate but it still has much to do. Today’s announcement suggests that sales growth is back on track and should be in line with expectations.
• Trading is tough. Discounting is getting worse and costs are rising. M&B may have turned the corner but it may be doing so just as the market becomes somewhat more challenging. There is no real guidance as to the dividend. Or lack of it.
• However, the group can only play the ball that it is bowled and, with this in mind, it is doing all that it can.
E. I. GROUP – H1 ANALYSTS’ MEETING:
Following the release of its H1 numbers this morning, EI Group hosted a meeting for analysts and our comments are set out below:
• Flat EBITDA disguises material changes to the composition of earnings beneath the surface
• The movement of leased units to managed, commercial leases or managed expert has generated sufficient income to make up for lost lease and beer sale income
• Commercial properties are +7% LfL but, over time, this will trend towards the rate of inflation
• Managed properties are +6.6% but this too will moderate.
• Rents, overall, have been maintained but, on the change of tenant, there has sometimes been a ‘rebalancing of rent payable’. That is, it has been cut.
• Unplanned failures in the half were c30. This may be a normal number going forward. It compares with >250 in H1 2013
• The South has traded more robustly than the North and the Midlands
• Where MROs have been introduced, EIG has seen a c0.8% drop in income. The reduced income, to the extent that it is dry rather than wet rent, may be of a higher quality.
Evolution of business model:
• The group maintains that its strategy is on track. Evolution may take a little longer due to the low level of take up of MRO leases.
• EIG has a full pipeline for managed conversions to the end of this financial year. It will convert around 175 p.a. thereafter
Balance Sheet, Debt etc.:
• EI Group has utilised its income from disposals to fund capex
• Excess cash generated for the year should be around £20m. This has been used to fund share buy-backs. The group will update on its buy-back plans at the finals.
• Managed expert businesses are being built in order to exit the opco on a c5yr timeline. EIG will retain the freeholds.
• Likewise Commercial Properties will be sold when the yield is attractive. All managed expert pubs are outside the securitisation & about 50% of Commercial Properties are similarly unencumbered
• CEO Simon Townsend said the model was ‘robust’, the strategy was ‘on track’ and the ‘transformation’ was ongoing.
• The group is becoming a ‘multi-disciplinary asset manager’. The group is firmly in the execution stage.
• Clearly one size did not fit all. Having accepted this (in 2015), EIG is actively doing something about it.
• EIG has reassured that it remains on track and the group’s shares have risen c4% on the back of today’s news.
• There remains some not-insignificant execution risk but, to date, the signs are encouraging.
• As mentioned earlier, we believe that EIG’s shares are cheap but normalisation remains critical. It will be some time before would-be shareholders can expect to see EIG in its finished form. Buy-backs are useful but a dividend would be helpful as a gesture of commitment going forward.
PUB, RESTAURANT & DRINK PRODUCERS:
• C&C Group has reported a 4.9% drop in revenue, translating into a 6.3% fall in adjusted EBITDA and a 5.2% decline in adjusted diluted EPS for the 12 months to 28 February. The Tennents and Magners maker attributed the results to ‘competitive pressure in Ireland, one-off AB InBev impacts and currency (€2.4m). C&C managed to keep its free cash flow conversion high at 70.5% in a year of strategic investments including a €42m stake in Admiral Taverns and a further €11m on craft brands. Its acquisition of Matthew Clarke came in April 2018.
• C&C CEO Stephen Glancey commented: ‘With Net Debt(vii)/EBITDA(iii) of 2.37x at 28 February 2018, leverage at year end remained low. This enabled us to move quickly and opportunistically for Matthew Clark Bibendum, which we acquired post year end out of the administration of Conviviality Plc… A strategically important acquisition for C&C, this greatly enhances our route-to-market in the UK on-trade… In terms of outlook, trading in March and April for C&C Group has been in line with expectations, and we are confident in our outlook.’
• SSP revenue rose 11.9% at constant currency rates to £1.18bn in the six months of 31 March 2018, with like-for-likes up 2.8% thanks to ‘air passenger travel and retail initiatives’. Underlying profit before tax jumped up 40.3% to £48.7m and underlying earnings per share increased 33.3% to 5.6p, while its interim dividend grew 50% to 4.8p.
• Commenting on the results, Kate Swann, CEO of SSP Group, said: ‘SSP has delivered another strong performance in the first half of 2018. Operating profit was up 32.6% at constant currency, driven by good like-for-like sales growth, significant new contract openings and further operational improvements. We have continued to grow our presence across the world, particularly in North America and Asia and our new business in India is performing well. Looking forward, the second half has started in line with our expectations and whilst a degree of uncertainty always exists around passenger numbers in the short term, we continue to be well placed to benefit from the structural growth opportunities in our markets and our programme of operational improvements.’
• Darwin & Wallace will open its sixth site next month at 601 Queen’s Road, Wimbledon. The bar will offer an all-day casual dining experience with cocktails and locally sourced food.
• Samuel Smith’s chairman Humphrey Smith has admitted to not handing over documents requested as part of an investigation by The Pensions Regulator (TPR). The TPR said the information it initially requested had now been provided.
• Discounts akimbo. Byron 50% off burgers, Toby 2-4-1 on mains. Frankie & Benny and Prezzo 40% off mains. Pizza Express 25% off and Domino’s 30% off for orders over £20
• Wages rose by 2.9% on an annualised basis in the first quarter of this year.
• Unemployment fell by 46k in the first quarter of 2018 to keep the rate at a 43yr low.
• Real wages are now rising faster than inflation for the first time in a year.
• UKHospitality has told the government that further taxation and regulatory pressures risk risk dampening job creation in the hospitality sector. The statements follow the ONS releasing data indicating that there are 31,000 fewer jobs than there were compared to the same period last year. UKHospitality Chief Executive Kate Nicholls said: ‘The hospitality sector has done a fantastic job at creating opportunities, revitalising high streets and stimulating growth since the financial crisis. The sector has been a major driver of employment, creating 1 in 7 of all new jobs despite increasing cost pressures and legislative restrictions’.
• Ei Group has teamed up with Dave Ford and Bernard O’Neill, in its latest Managed Investments venture, The Old Spot Pub Company. Dave Ford said: ‘We are delighted to be working alongside Ei Managed Investments. The quality of Ei Group’s overall portfolio is very exciting for us, and, combined with our own experience in the sector, we look forward to opening some great new pubs’.
• Bakery and patisserie brand, PAUL, is to debut its Express format at St. Pancras on Monday 21 May.
• Elton Mouna Managing Director of Remarkable Pubs will be appearing on the James Max Breakfast show on talkRADIO on Friday 18th May from 6am discussing the Hospitality, Leisure and Pub industry. Elton who guests regularly on this business focussed news programme will be focussing this appearance on the changing soft drinks market post the introduction of the Soft Drinks Levy.
HOLIDAYS & LEISURE TRAVEL:
• According to Sky News, online travel agent Love Holidays has been sold to private equity firm Livingbridge for more than £180m. Livingbridge was previously an investor in On The Beach.
• Accorhotels has signed an agreement to buy Chilean hotel chain Atton Hoteles, which has a portfolio of 11 properties across Chile, Peru, Colombia and Florida and another three under development.
• Europe reported 125,966 rooms in 958 properties in construction in April, with three of the top five major markets in Germany.
• STR reports US hotel room construction down 2.2% yoy, marking the sixth decline in the last seven months.
• Cineworld, which has changed its presentational currency to US$ following its acquisition of Regal Entertainment Group, saw revenue growth of 10.1% in the period to 13 May 2018. The group comments on its openings: ‘The Group acquired 558 sites (7,305 screens) with the Regal acquisition, and a further two sites (24 screens) were opened in the US post acquisition. During the period the Group has continued to expand in its existing territories with two new sites (14 screens) opened in the UK and one in Romania (6 screens). This brings the total number of sites in the Group at 13 May 2018 to 793 with 9,548 screens. The integration plans for Regal are progressing well and the transaction benefits expected to be achieved remain in-line with those outlined at the time of the acquisition.’
• Paddy Power Betfair is in talks to acquire fantasy sports site FanDuel as it looks to capitalise on the sudden lifting of a federal ban on sports betting across the US. Barclays estimates the US gambling market could be worth $10bn in net revenues to gambling operators, a figure that excludes money given back to punters in prizes.
• Betfred has told ministers that almost 900 of its shops will become loss-making overnight if they make good on reforming Fixed Odds Betting Terminals (FOBTs). Sources said that several hundred staff at the company’s Warrington headquarters were also likely to be made redundant if the £2 move goes ahead.
• Facebook revealed some 583 million fake accounts when it published content removal numbers for the first time, although these accounts were not all active at the same time.
FINANCE & MARKETS:
• NIESR reports on today’s employment figures saying that more EU workers had left the UK workforce and fewer had joined. UK national numbers in the workforce had increased. The NIESR says ‘these trends, in particular the fall in EU nationals working in the UK, are likely to affect the UK’s economic performance and also services, with the NHS and social care under particular pressure’.
• Japan’s economy shrank in Q1 for the first time in 2yrs. The contraction was at an annualised rate of 0.6% per official data.
• Sterling down vs dollar at $1.3502 and up vs Euro at €1.1409
• Oil little changed at $78.20
• UK 10yr gilt yield up 5bps at 1.52%
• World markets: UK mixed with Europe higher yesterday. US down and Far East down in Wednesday trade.
• Brexit, politics etc.:
o Michel Barnier has said that disagreements still exists over the Irish border. He says ‘not much progress has been made’.
o Customs’ Union impasse continues. Jacob Rees Mogg has said he is ‘not remotely minded to take a conciliatory position on Mrs May’s customs partnership plan.’
o Boris Johnson, who remains in the Cabinet inner circle, has called customs proposals ‘crazy’
PRIOR DAY LATER TWEETS:
• Later tweets: EI Group reports underlying EBITDA near unchanged at £139m with evolution ongoing. Meeting reassures. Execution risk but all well at present
• David Miliband & others make the case for staying in the EEA. Brexiters say ‘will of the people’ is to cut all ties with Europe.
• Miliband, Tessa Jowell & others at front of mind. Weren’t our politicians somehow ‘better’ a decade ago??
• Premier Foods firing on most cylinders. Good news. International sales up sharply, innovation etc. good & overall sales up
START THE DAY WITH A SONG:
Yesterday’s song was Seven Nation Army by The White Stripes. Today, who sang:
Have I doubt when I’m alone,
Love is a ring, the telephone
Love is an angel disguised as lust
RETAIL NEWS WITH NICK BUBB:
Nick is back on Friday.