Langton Capital – 2018-06-06 – Marston’s, Barclaycard, McDonald’s, B King, Merlin etc.:
Marston’s, Barclaycard, McDonald’s, B King, Merlin etc.:
A DAY IN THE LIFE:
A bit busy, what with pub & lodge visits, swapping Panini World Cup stickers (see below) and the like so running a bit behind. On to the news:
MARSTON’S VISIT TO NEW BUILD PUBS, LODGE ETC.:
• Marston’s has been building new pubs since its 2009 Rights Issue. More than 200 have now been constructed. Locations have been specifically chosen, layouts (south-facing beer gardens, play areas etc.) have been tailored to the retailer’s needs and there is no tail. Lodges have recently been a feature and are expected to be allocated more funds going forward.
Trading, capital spending etc.:
• At its H1 numbers last month, Marston’s indicated that it would scale back its new openings programme. The group points out that:
• The market has been very difficult to read over recent months. Varied weather, an early Easter, sunny Bank Holidays and now the World Cup have meant that comparables have, well, not been very comparable.
• Economic indicators are mixed. Retail sales are poor but real wages are now back in growth. A degree of caution may be called for before committing funds.
• The ‘car-crash’ in casual dining has yet to work through. More sites may become available and supply may be reduced.
• Marston’s has been adding to its land bank and has the capital, the sites and the people to step up its opening programme quickly if circumstances warrant it.
• Re discounting, Marston’s maintains that this is endemic and is a reaction to oversupply. Marston’s makes selective offers (often via in-pub table talkers) but does not voucher in the way that the casual diners do. For permanent discounters, it is hard to see a road back.
• Customers are loyal only to the discount and it is not possible to give discounts only to wavering would-be customers. All customers may avail themselves of vouchers and margins will suffer.
• An alternative to price cutting, Marston’s maintains, is better service, a more pleasant ambience, interesting buildings etc.
New Build Pubs:
• These should be built to the operator’s specifications re location, size, layout etc.
• Marston’s has built over 200 new pubs since 2009. Over 60% of its Destination pubs are less than 10yrs old. Where freehold, these have generated a ‘double digit return’ on capital. It is hard to dispute the group’s claim that this has represented a better use of capital than would have a major acquisition such as Orchid or Spirit.
• Freeholds are typically funded and built from Marston’s own resources. A number of freeholds have then been sold and leased back over a 30-40yr period at rents below 4%. There are no covenants.
• As regards trading, Marston’s maintains that the food market is reasonably strong, but competition is intense. Themes (if one is to avoid discounting) include premiumisation, convenience and provenance. Venue ‘character’ and the price sensitivity of its patrons tend to be inversely correlated.
• Smart retailing includes upselling and stacking fridges by margin (craft beers at eye-level, standard lager on the floor) etc. but this can lead to bill shock which, in turn, leads to a reduction in the frequency of visits.
• Marston’s believes that there is a role for the bar even in a food-led pub. Bars should be interesting and, in busy times, they will be a profit centre as patrons wait for their table or linger in the bar after they have eaten.
• Repeat visits (maximising lifetime spend) is critical. Customers should not be gouged.
• Delivery is more of an issue in town centres but it does have a role to play in the suburbs. Marston’s maintains that it should be marginal and not threaten to dominate one’s business. There is a clear negative impact on margins if this happens. Not only is margin paid to the delivery company but the newly built pub or restaurant is underutilised in terms of covers.
• Re costs, the chef market is tough. Competition for staff is more intense in the south than the north. Staff retention is more important than ever. Only 5% of Marston’s staff are from the EU. This is a feature of its units being often suburban rather than city centre.
• The Market:
The branded budget lodging market remains in growth. The country’s no1 and no2 operators, Premier Inn and Travelodge, maintain that, in addition to underlying growth, the independent market will continue to lose ground to branded operators.
• Marston’s has 1,500 rooms at present. This remains a modest number vs Premier Inn but MARS has a medium term target of 4,000 rooms at which it should be able to bring more distribution in-house and offer travellers follow on lodgings if they are undertaking a leisure or business trip around the country. Marston’s has current visibility on projects that will take it to 3,000 rooms.
• MARS used to work with Premier Inn and Travelodge but now aspires to open lodges itself. It offers free WIFI but has recently begun to charge for breakfast (in line with its peers). Its 19 metre rooms cost around £70k per room to construct. They are on a par with the best that Premier Inn has to offer and generate £41 REVPAR against the high £40s generated by Whitbread.
• Growth Plans:
Were there is an opportunity to build less than 40 rooms, these will be constructed above pubs on a ‘stack’ system.
• Lodges of 60-80 rooms plus will be free-standing but they should be next to a c200 cover pub. The group’s 104 room Ebbsfleet Lodge is adjacent to the group’s newly built Spring River carvery pub. The area comprises a new town with a planned 15k houses. Other pubs will be built in time & Marston’s may be in the bidding for sites, the opportunity to expand Spring River, or both.
• Ebbsfleet (land, lodge, pub) cost some £12m. The site is generating £75k per week or so and rising and should contribute £1.5m in EBITDA per annum. Where units are sold and leased back, rent should be covered 2.5x or more by EBITDAR.
• Short term, the group is charging for breakfast and getting savvier with regard to pricing. Longer term, it will rely less on OTAs (online travel agents). These currently take c70% of business and charge 15% to 18%. The group may add rooms to existing sites.
• Longer Term Prospects:
Land costs are rising less rapidly than they were 3-4yrs ago but construction costs are in double-digit growth. Build time is around 2yrs. Smooth planning could shorten the timetable but this is an aspiration rather than an expectation. Housing is the main alternative use but developers know that they need to maintain balance.
• The lodge business could be separated from the core, pubs & brewing organisation. Marston’s is unlikely to be tempted to sell in the short or medium term. Turnover on a large site could be £50k per week from the pub and £30k from a busy lodge. Lodge margins are obviously higher as there is no product actually being ‘consumed’.
Langton View: Running pubs well takes a great deal of effort.
• Units need to be located, built, staffed and serviced. Their product needs to be produced (or brewed), marketed, prepared, sold and served.
• And behind the scenes, everything (staffing, admin, finance, property function etc.) must run smoothly and invisibly and this is simply not something that can be done from a distance and with a spreadsheet.
• And when it comes to the nitty-gritty of running a pub and brewing business, Marston’s is second to none.
• The market is challenging but eating and drinking out remains an affordable aspiration for most consumers. Lodges are a growth industry and Marston’s is the largest producer of premium cask ale in the country.
• The group’s shares are trading at less than 7x this year’s (and next year’s) earnings & they offer a yield of more than 7%. Despite issues such as oversupply and rising costs, this looks to be an attractive entry point.
PUB, RESTAURANT & DRINK PRODUCERS:
• Barclaycard has reported that its measure of consumer spending rose by 5.1% year on year last month. This is the largest increase in 13mths. Barclaycard said spending on non-essential products & services was up 4.6%. Barclaycard sounded a note of caution, however, saying fewer consumers had confidence in their household finances in May than they had earlier in the year. Less than 10% of consumers had yet to feel any positive impact from rising real incomes.
• May Services PMI comes in at 54.0, a 3mth high. The figure drove Sterling slightly higher and rekindled talk of an interest rate rise. Markit comments that the numbers ‘signalled a solid upturn in overall business activity across the service economy.’
• Markit comments ‘the improvement in service sector activity adds to evidence that the economy is on course to rebound in the second quarter but… raises questions about the outlook.’ It says ‘disappointing inflows of new work suggest that growth could wane in coming months as Brexit-related uncertainty continues to weigh on spending decisions and dampen business confidence.’
• Events and bar-restaurant company Camm & Hooper has reported accounts for the year to 27 August 2017 to Companies’ House saying ‘the City sites exceeded expectations this year but the future pipeline business suggests that the uncertainty due to Brexit remains’.
• C&H says sales grew by 32% to £6.64m with site EBITDA up 23% to £2.0m. PBT fell to £187k from £290k.
• Alistair Murdoch, the boss of Burger King UK has stated that the fast food chain is still profitable and sees a ‘significant’ opportunity for growth, while also acknowledging the need for future investment to correct some of the ‘missteps’ that have held it back over the last few years. It will launch up to 25 new units this year, and between 30 and 50 a year over the next few years, as part of an effort to regain scale having dropped from a peak of 700 stores to 500.
• Greene King has introduced a new vegan menu at more than 100 of its Flaming Grill pubs. Flaming Grill stated: ‘Meat reducers and flexitarians can now enjoy the iconic traditional fish and chips, with a clear conscience as they enjoy the UK’s first truly sustainable ‘fish’ made entirely from plant-based ingredients’.
• McDonald’s is to add self-order kiosks to 1,000 stores each quarter for the next eight to nine quarters and is continuing to explore delivery in the US.
• As reported in the Times on Monday, Wagamama continues to ‘review [its] strategic growth options’. This usually means that the group in question is for sale. The business, which was formed in London in the early 90s by Alan Yau, has around 130 restaurants in the UK with five in the US. The group reports that it has outperformed the wider casual dining market for 208 consecutive weeks.
• The use of psychological pricing is anticipated to increase with restaurants reports the MCA. The MCA found that restaurants have been moving away from £#.#9 price points and switching to £#.#5.
• The BBPA has reacted to the Treasury’s consultation on cash and digital payments in the new economy, stating: ‘A shift towards digital payments across the world of commerce is clearly taking place. Whilst this can be good for busy pubs where payments at the bar are much faster for customers, Government intervention towards such innovation needs to be well thought through. If not, cash-based businesses such as pubs could be unfairly burdened. In due course, it would be good to see an increase in the maximum limit for contactless payments from £30 to £50’.
• Princes Gate, a Wales-based bottled water company, has been acquired by Nestle for an undisclosed amount.
HOLIDAYS & LEISURE TRAVEL:
• Merlin’s first Peppa Pig World of Play will open in Shanghai by the end of the year, with four other sites secured in Beijing, Dallas, Michigan and the New York area which will open in 2019.
• Caesars Entertainment will enter the non-gaming hotel space. President of Hospitality Bob Morse said ‘As the gaming business was beginning to level off a little bit, the hospitality business was growing like crazy. I’m a brand guy, this is what I come from … I said, ‘We’ve got a great brand here, and we’re not taking advantage of this’.
• STR and Tourism Economics forecast the US hotel industry to continue with ‘record breaking performance levels through 2019’. For 2019, STR and Tourism Economics projects a 0.1% occupancy increase to 66.2%, a 2.3% rise in average daily rate to $132.74 and a 2.4% increase in revenue per available room to $87.93.
• Hotel and extended-stay hotel RevPAR are set to be very similar over the long-term, according to the STR and Tourism Economics.
• Visitors to Turkey are being warned to avoid large gatherings due to elections taking place on 24 June, which the Foreign and Commonwealth Office says ‘may result in rallies and demonstrations around the country.’
• AccorHotels intends to buy the French government’s 14.3% stake in Air France-KLM, although discussions remain at an early stage.
• Transport secretary Chris Grayling has again blamed Network Rail for well-documented travel disruption and said that early analysis shows the problems rose from late delivery of infrastructure upgrades, including the Bolton electrification scheme.
• The cabinet has signed off on plans for a new runway at Heathrow Airport in a ‘historic moment’ for the UK. Transport secretary Chris Grayling said the £14bn runway, which could be completed by 2026, would be funded entirely privately – but MPs warned that taxpayers would end up footing the bill for billions in road improvements and other upgrades and warned that the UK’s carbon emission targets would be threatened by the increase in traffic around the enlarged airport.
• Carnival shares fell yesterday as the cruise line operator faces a triple whammy of higher fuel prices, overcapacity, and hurricanes in its key Caribbean market during the fourth quarter, according to a note from Morgan Stanley. Oil was also on the mind of Willie Walsh, boss of British Airways’ parent IAG. Speaking at an event in Australia, the former pilot said fuel was ‘having an impact because it’s much higher [priced] than we expected’.
• Sydney has joined the growing number of cities around the world regulating the type of holiday lettings allowed on Airbnb, with new rules limiting lettings to 180 nights a year when a host is not present and making it so that a 75% majority of owners in apartment blocks can ban short-term lettings in similar instances.
• Ten Entertainment Group’s chief executive officer, Alan Hand, will step down and leave the business on 14 December 2018 ‘for his own personal reasons’. Nick Basing, Chairman said: ‘We respect Alan’s wish to step down. Working with him closely for nearly 10 years in this business has been a pleasure and I am disappointed not be continuing this successful journey together. I would like to express the Board’s and my gratitude to Alan for the significant contribution he has made and wish him well.’
• Aston Villa football club faces a financial crisis after the suspension of its chief executive amid last-ditch talks with UK authorities over a missed tax payment worth millions of pounds. The Birmingham-based club is ‘in dialogue’ with HM Revenue & Customs after missing a tax payment, with continued failure to pay likely to result in a winding-up petition that threatens the future of one of oldest clubs in English professional football, people close to the situation said.
FINANCE & MARKETS:
• Mexico has imposed tariffs on American products including steel, pork and whisky.
• Sterling up on PMIs at $1.3405 and €1.1384
• Oil up at $75.91
• UK 10yr gilt yield down 1bp at 1.29%
• Brexit etc.:
o The FT reports that, despite meetings with politicians in Downing Street, business leaders are still unclear as to the government’s interpretation of what Brexit means. Reuters says government only said that a decision was ‘imminent’.
o Jeremy Corbyn has said that Labour would take the UK out of the single market.
o Britain has applied to joint the WTO’s procurement agreement. This is a step towards maintaining trading relationships post Brexit.
o Calais, Zeebrugge & other ports have said that they will not be ready for Brexit unless they are given information as to what it means quickly. Calais boss Benoit Rochet said ‘we don’t exactly know what Brexit means.’
• And now to the important business. With the pain of four years ago neatly tucked away and ignored the Langton Team’s latest investment is developing very well, but is in need of a little help. The world cup is just around the corner and we have begun the four yearly ritual of completely a panini world cup sticker book and have exactly 52 duplicates up for grabs. So get in touch if you think there could be business to be done (but no more Pogbas we already have 3!). List of swappable cards by request.
START THE DAY WITH A SONG:
Yesterday’s song was Everyday I Love You Less And Less by Leeds’ Kaiser Chiefs. Today, who sang:
Just lying smiling in the dark,
Shooting stars around your heart
Dreams come bouncing in your head
RETAIL NEWS WITH NICK BUBB:
WH Smith: Today’s Q3 update covers the 13 weeks to June 2nd and Stephen Clarke, the low-profile Group CEO commented: “We have delivered a good sales performance in the third quarter in both our Travel and High Street businesses”. That translates into +3% LFL sales growth in the lucrative Travel Division and -1% LFL in the much-maligned High Street Division to give +1% LFL overall and margin management has been such that, as usual, the message is that “We remain confident in the outcome for the full year”.
News Flow This Week: There is still no sign of the Games Workshop pre-close update, but tomorrow brings the Wesfarmers Strategy Day down in Australia (hopefully with more detail on the sale of Homebase/Bunnings UK) and a Joules pre-close update.