Langton Capital – 2018-09-03 – WTB, RTN, JDW, GBK, Premier Inn, Wembley etc.:
WTB, RTN, JDW, GBK, Premier Inn, Wembley etc.:A DAY IN THE LIFE: Anyone with kids will know that faddiness regarding food goes with the territory. And said parents will know that, in the same way that the high street burger chains can’t stop themselves from slathering every burger with mayonnaise & ketchup and adding gerkins and various other botanicals, it’s hard to get simply plain pasta. Because, if you ask for plain pasta with a couple of sausages in most restaurants, particularly those with chefs where the latter’s feeling of self-worth overrides most other considerations, the’ll look at you as though you’ve just crawled out of a hole and then can’t help drizzling the product with a bit of olive oil and adding some sun-dried tomatoes and a sprinkling of oregano, black pepper, you name it. At the receipt of which your child lets you know, usually non-verbally, that this product is either going back to the kitchen or on the floor because it certainly aint going in their mouth. The dog’s usually happy with this outcome but, though our youngest is a bit older and somewhat less faddy than she used to be but she’s hardly out of the woods and memories linger. On to the news: WHITBREAD CONFERENCE CALL – SALE OF COSTA COFFEE TO COCA COLA: Whitbread has this morning announced that it has reached agreement to sell its Costa subsidiary to the Coca Cola Corporation for £3.9bn gross, proceeds payable in cash. The proposed transaction: • Whitbread has announced that it has ‘entered into an agreement for the sale of Costa Limited…to The Coca-Cola Company for an enterprise value of £3.9 billion’. • The sale will net £3.8bn. • The disposal represents an EBITDA multiple of 16.4x. • Transaction should conclude H1 2019. EGM in October. The deal needs shareholder approval. • The sale represents a ‘substantial premium to the value that would have been created through the previously announced demerger given the Coca-Cola system’s global product, distribution and vending platform’. • The board unanimously agree the deal. • Group says ‘a significant majority of net cash proceeds intended to be returned to shareholders.’ • The group will also ‘reduce financial indebtedness and make a contribution to the pension fund, which will both provide headroom for further expansion of Premier Inn in the UK and Germany.’ • CEO Alison Brittain says ‘this transaction is great news for shareholders as it recognises the strategic value we have developed in the Costa brand and its international growth potential and accelerates the realisation of value for shareholders in cash.’ • Ms Brittain says ‘the sale of Costa to Coca-Cola is another successful landmark in the 276-year history of Whitbread. Whitbread acquired Costa in 1995, for £19 million.’ • WTB says ‘Premier Inn, the UK’s leading hotel business, will continue to develop its highly successful and unique business model, with even greater focus and financial investment. Premier Inn will continue to take advantage of the considerable structural growth opportunities in the UK and accelerate its network expansion in Germany. This will deliver strong return on capital and significant value to shareholders over the long term.’ • The group will hold a Capital Markets’ Day early next year. Many details are to follow. Questions regarding strategy, the future etc.: • Any rival bids? The demerger would have happened unless there had been an approach that presented ‘strategic opportunities’. • What does a ‘substantial majority’ (of the proceeds back to shareholders) mean? The deal has been undertaken quickly. Some details to follow. Need to speak to pension trustees. Also will listen to the views of shareholders. • Was the company capital constrained prior to the announcement? No. Any constraints are internal and are in place in order to make rational choices between attractive options. • Will the money burn a hole in your pocket? The group will be ‘happy to maintain lower levels of gearing whilst it appraises opportunities’. The co ‘discards a large number of deals every month’. • Property values? Most of the business (ex the roastery) is leasehold. • The demerger has been on the cards for some time. This means some of the separation work has is currently being undertaken. • There will be limited ‘inefficiencies’ as a result of the business shrinking in size. The TSA will run for between 9mths and 2yrs. More details to follow. • Would you prioritise doing a deal in Germany over returning cash to shareholders? Won’t be drawn on deleverage. Current plans are to pay the bulk of the cash back to shareholders. Won’t be drawn on the amount to be paid back. Will it be less than £3bn? Won’t say. • Would you consider buying a new business? The group does ‘have skills in this area’. The group has a half-share in Pure. Never say never but this is not the primary purpose of the deal. • Preferences re special dividend or share buyback? No decisions made yet. Will be seeing shareholders. • Ongoing dividend policy? Will discuss further in Capital Markets’ Day. • Why return so much cash to shareholders? Want to get the balance right. • No comment on trading. Will update in October at H1. Don’t read anything into this. Langton Comment: • Comment: Whitbread’s shares have risen sharply on this news. The (proposed) exit offers a clean transaction, with the proceeds payable in cash. • Most of the proceeds will come back to shareholders. • Debt will be reduced, as will be the pension deficit. • Premier Inn is presenting opportunities in Germany. • Some may suggest that a PE-backed, leveraged bid for the company is not out of the question. This may or would be followed by a large sale-and-leaseback. • Any such transaction could benefit shareholders in the short term. It would raise risks but, as those would then be borne by the PE house, they may not concern today’s market. • WTB has an impressive freehold estate, good brands and international ambitions. Trading at UK hotels has picked up in August. A lowly-geared, largely freehold backed company has its attractions. RESTAURANT GROUP H1 RESULTS MEETING: Following the release of its H1 numbers earlier today, the Restaurant Group hosted a meeting for analysts and our comments are set out below: Overview: • General feeling of improved (or less bad) LfL sales, albeit against the backdrop of easier comps and the end of the World Cup and the heatwave. • The drop in LfL sales in H1 was due to lower selling prices, the World Cup & the hot weather. • Margins are down due to 1) LfLs down, 2) lower prices and 3) cost pressures. • Pubs and concessions performed strongly. • Group is to close a further 12 sites this year. This has led to additional exceptional costs. • Gross cost headwinds this year will be c£18m. Around half will be mitigated by company action. Some rent reviews are being appealed etc. Balance sheet etc.: • Of the 39 units to be opened this year, only 1 will be a leisure site. Some 21 are pubs (mostly by acquisition) and 17 are concessions. Between 10 and 15 units will be opened next year. • Debt £22.8m. Low with ref to EBITDA but substantial lease liabilities. • Freeholds around £145m vs £110m in the books. Current & future trading: • Pubs & concessions generate 51% of EBITDA. This speaks to both success in these areas and un-success in leisure and retail parks. The group now has 77 pubs. • Group needs to differentiate. This could be a challenge. Strategy to date: • Re-establish Frankie & Benny’s: o Tough gig. Needed to better the value, product, brand and environment. That is, everything. That said, progress has been made. Staff ‘re-energised and retrained’ etc. o Improve ‘other brands. Price cuts, kids’ menus etc. Now got 5 Firejacks. Coast to Coast being wound down. • Service customers better, delivery etc.: o Tech, click & collect, delivery. Some delivery-only experiments. Ditto ‘pay-with-app’ functionality. More targeted advertising. Talk of converting some delivery customers into ‘multi-channel’ customers. • Grow pubs & concessions business: o Pubs outperforming. Group will open first pub with accommodation next month. Making acquisitions in this area. o Concessions now 57 sites in 14 airports with 5 others in railway stations & 2 others. Good retention. Some 85% of sites rolled over. Newly-opened units will hit maturity during 2019. • Be lean & focus: o General housekeeping. Some success with landlords & on business rates. Questions & other: • Frankie & Benny’s refreshes? Done ten. Learned a lot and doing another ten. The investment case is being appraised. Around £20m to £25m of refurb proposed for FY19. Group is concentrating on its core, family market. • Discounting? This is a feature. RTN is taking part. Group is ‘happy with the response that it is getting’. Market is tough. Some competitors are literally fighting for their lives. • More on cost inflation? There are still some headwinds. Delivery costs margin but ‘customers may be more frequent’. From the point of view of the customer, the added delivery charge does mean that dining in this way could be expensive. • Weather. Hot weather is bad for retail & leisure units but positive for pubs. Overall, it is a negative. • Volume versus price. Group won’t split this out but, after price cuts over the last year or so, ‘there are still some price headwinds’. • Firejacks vs Coast-to-Coast? Conversions likely to continue. • Lease accounting from 1 Jan 2019. RTN doesn’t need to adopt it till 2020. Currently reviewing how to implement this. Will share information some time next year. • Food & Fuel was a competitive process. Future M&A? Could be to fill in geographic areas. Will be selective & opportunistic. Food & Fuel rent roll? Not given. Co EBITDA on a run-rate should be c£2.2m. • Staff engagement? Positive movement. • Sales split between pubs & concessions vs leisure brands? Won’t give it. Perhaps suggests that the 51% of EBITDA that comes from pubs & concessions is considerably higher margin. Only around half a dozen are tied – and then only for beer. • International ambitions for airports? Medium-term aspiration. • How much of the positive 2.4% LfL in the last 6wks is delivery? This has been growing. Won’t break out the figure. Say it ‘is not material’. • Some £800k per annum of rents will be ‘saved’ in that they have been provided for as exceptional costs. • Number of closed units? Some 12 of the 41 initially closed are still owned by the group and not trading. Langton Comment: • Restaurant Group says that it now has a ‘more balanced portfolio’. This is partly due to the decline at Frankie & Benny’s and the improvements (and acquisitions) in pubs and concessions. • Short term RTN must continue to execute on its strategy. Comps are becoming easier but price cuts will hit LfL sales and these and also cost increases will continue to impact margins. Increased reliance on ‘aggregators’ and delivery companies will be margin-negative. • Prima facie, with group is relatively cheap as it is yielding 6.3% but execution is key & the competition will not stand idly by whilst RTN gets its house back in order. PUBS & RESTAURANTS: • Whitbread: Various commentators have suggested that, shorn of its Costa subsidiary, Whitbread, which will comprise solely of Premier Inn, could attract a bid either from private equity or from a major global hotel company. • Amber Taverns has reported 52wk numbers to 4 February to Companies’ House saying that revenues increased by 14.3% to £74.2m with operating profits down some 19.5% at £7.0m. The company has changed its accounting policy regarding asset valuations and has put an impairment charge of £4.3m through its accounts. • Amber Taverns reports underlying EBITDA of £15.8m (up 12.6%) with LfL sales up 1.7%. Amber says the ‘directors remain confident that the company’s well-proven formula of a value offer in a modern community pub environment will generate further significant growth in profits in 2018-19 and that the company will continue to develop and expand its offering in the changing economic climate successfully’. Amber Taverns is ultimately owned by Kildale Topco Ltd. • YS Midco 1, the company that owns the Yo Sushi chain of restaurants, has reported full year numbers to 25 November 2017 to Companies’ House. The group says that total sales increased by 1.7% to £89.9m. After disposals, LfL sales were up by 4%. • Yo Sushi says six new sites were opened in the UK and 4 ‘legacy sites’ were closed in the US. YS Midco is ultimately controlled by YS Topco, a company incorporated in Guernsey. • Staff at two JD Wetherspoon pubs in Brighton will hold a ballot for industrial action, calling for higher wages and union recognition. A Wetherspoon spokesperson commented: ‘No complaint has been made directly to the company by employees at either pub, or by the trade union, in advance of receiving this ballot. The matter has now been raised with the area manager. He visits the pubs at least weekly and will investigate the matter further.’ • According to the Sunday Times, Gourmet Burger Kitchen has appointed restructuring advisors Deloitte to help carry out a CVA. GBK, owned by South Africa’s Famous Brands, reported like-for-like sales down 10.6% in the 22 weeks to the end of July. • Forest Distillery looks to grow exports of its Forest Whisky after securing pre-orders from Japanese customers. The distillery plans to increase exports to constitute 90% – currently 17% – of total revenue in the next five years. • Kate Nicholls, CEO of UKHospitality, has written to Philip Hammond to oppose the introduction of a tourist tax which will see at least a £1 surcharge added to hotel bills. • The 2018 harvest in France looks strong across the board and volumes are projected to rebound 25% overall after a tough year in 2017. The harvest is expected to be back up to around 46.1 million hectolitres (in line with the recent average) after frost and hail dropped production to 36.8m hl in 2017. • The president of the Prosecco DOC Consorzio, Stefano Zanette, has described this year as the ‘perfect’ harvest in terms of quality thanks to a warm summer followed by a cooling of temperatures. The harvest in the Loire regions of Anjou, Saumur and Touraine, which are important for grapes used in sparkling wines, has also been described as of ‘excellent’ quality. • The summer heatwave, England’s strong World Cup run and last November’s freeze on alcohol duty have been credited for HMRC’s £270m windfall from alcohol duty in the six months to July, up 5% on last year. Some 61% of the total came from the sale of wine and spirits, leading the WSTA to call on the Treasury to continue the duty freeze in the upcoming Budget, although the Chancellor still plans to increase excise duty by a projected inflationary rise of 3.4%. • Pizza Pilgrims has confirmed its next two openings — a City site next to Tower 42 on 1 October and another in London Bridge Arches planned for early November — per MCA. • Pernod Ricard chairman Alexandre Ricard has said that reverting to World Trade Organisation (WTO) rules would be the ‘worst case scenario [for] scotch’ but added that the drinks giant ‘will make sure that we have the flexibility to adapt’ whatever the outcome. Continuing, Ricard said, ‘We would love to have more visibility and clarity on which to adapt. The sooner we know the better we will prepare. The outcome probability [of the negotiations with Brussels] changes every single day.’ • Homebase is set to close 42 stores, putting 1,500 jobs at risk after creditors approved the plan to keep the company solvent. HOLIDAYS & LEISURE TRAVEL • Iata reports total revenue passenger kilometres up 6.2% yoy in July with monthly capacity up 5.5% and load factor up 0.6% to 85.2%. • Crossrail has been delayed for at least nine months to autumn 2019 as final infrastructure and extensive testing need to be completed. • STR reports July US hotel occupancy down 0.2% to 73.6% but demand increased to 120m roomnights sold. ADR grew by 2% with higher end chains recording the highest RevPAR growth. OTHER LEISURE: • Government demands will limit the type of sponsorships deals and naming rights regarding the potential £600m sale of Wembley Stadium to Shahid Khan. One person close to the talks said ‘there seems to be a new-found desire at the FA to move this forward at a pace’. FINANCE & ECONOMICS: • President Donald Trump has threatened to withdraw the US from the World Trade Organisation in a move that may see him impose more tariffs on China. • Nationwide reports that the rate of UK house price growth slowed over the summer. Houses are now 2.0% more expensive than they were a year ago. This is behind the current rate of CPI at 2.3%. the Nationwide says ‘subdued economic activity and ongoing pressure on household budgets is likely to continue to exert a modest drag on house price growth and market activity this year, though borrowing costs are likely to remain low.’ • Sterling weaker at $1.2926 and €1.114 • Oil down at $77.43 • UK 10yr gilt yield down 2bps at 1.43% • World markets: All down Friday. Far East lower in Monday trade. US closed today. • Brexit etc.: o Parliament back from holiday, Dominic Raab says details on the proposed deal with the EU are becoming ‘clearer and clearer’ o Michel Barnier says the EU is ‘strongly opposed’ to some elements of the Chequers’ proposal. o Boris Johnson says Chequers’ proposal (that he initially signed up to) means a ‘Brexit disaster’. He says UK will get ‘diddly squat’ from the EU. o Tory campaign manager Sir Lynton Crosby reported by Sunday Times to be working on a plan to undermine the Chequers’ proposal and replace Theresa May as Tory leader with Boris Johnson o Dr Liam Fox has refused to say that he agrees with Chancellor Philip Hammond’s view on the financial implications of a no-deal Brexit o Michel Barnier has warned EU companies that they may face disruptions to their supply chain in the event of a no-deal Brexit o RBS has warned that it would not be able to service some EU clients in the absence of a Brexit deal that covers services as well as goods PRIOR DAYS LATER TWEETS: • Later tweets: Whitbread to sell Costa to Coca Cola for 16.4x EBITDA or £3.9bn. Good price, shares soar. Most cash to come back to shareholders • Restaurant Group LfLs down 3.7% in H1 but +2.4% in last 6wks. Not bad performance. Shares somewhat better. Small downgrades • GfK confidence numbers show move to minus 7 from minus 10. That’s negative but is as good as it’s been at any time this year • GfK says ‘no sign – yet – of any crash in consumer confidence’ despite frenzied ‘Brexit babble’. START THE DAY WITH A SONG: Friday’s song was Move On Up by Curtis Mayfield. Today, who sang: “I thought I told you, this world is not for you”, The room is on fire as she’s fixing her hair You sound so angry, just calm down, you found me” RETAIL NEWS WITH NICK BUBB:
Footasylum: Having criticised the recently floated Footasylum for not providing more timely current trading information, we were pleased at first to see today’s first half trading update for the 6 months to Aug 25th, although it was unexpected…We were less pleased to see that it contains another profit warning, confirming our fears that investors were sold a pup when the company launched its IPO last November. Today’s news is that store sales have been disappointing in July and August, which has been exacerbated by “some unforeseen delays in the company’s new store openings and upsizes” and “a lower overall gross margin from a higher amount of clearance activity in stores”, so that, despite good Online and wholesale trading, “the Board now expects adjusted EBITDA for the full year to be significantly lower than previous guidance, at less than half of the FY18 adjusted EBITDA of £12.5m”. Saturday Press and News (1): The main spotlight in the Saturday papers was on the news that Whitbread has agreed to sell Costa Coffee to Coca-Cola for a massive £3.9bn, but the announcement that Homebase CVA plan was overwhelmingly approved by creditors on Friday morning also got plenty of coverage (focusing on the 1500 job losses that will come from the store closures). As for the Costa Coffee deal, Lex column in the FT thundered that “it proves that the UK can sell consumer products to Americans that are more mainstream than trenchcoats and Peter Rabbit tea towels” and said “it is a good buy by Coca-Cola”.
Saturday Press and News (2): In other news, the Times flagged the extraordinary news that Mike Ashley will not be attending the Sports Direct AGM due to “overriding demands for his time”, leaving Chairman Keith Hellawell to deal with things (“Ashley leaves ally to face music at annual meeting”), whilst the Daily Mail had a snippet on the Drapers story that the House of Fraser distribution warehouses have been closed again…The Daily Mail and the Telegraph both flagged the news from Poundland that it enjoyed 1.7% LFL sales growth in the 9 months to June 30th and that it is “profitable and stable”. The Features section of the Telegraph had a profile of John Lewis MD Paula Nickolds ahead of the relaunch of the Oxford Street store next week (“John Lewis as you’ve never seen it before”). Finally, the front page of the Evening Standard on Friday flagged the disappointing news for West End
Sunday Press and News (1): Mike Ashley and Sports Direct remained in focus in the Sunday papers with the Mail on Sunday leading its Business pages with a report that the tycoon faces a wave of shareholder criticism about his stewardship of the business ahead of the upcoming AGM, whilst the Sunday Times revealed that Mike Ashley has opened a new front in the House of Fraser saga by attacking the former HoF management team led by Chairman Frank Slevin for misleading suppliers and warehouse operator XPO Logistics about payment terms. The Mail on Sunday also flagged up City views that Boohoo could hit annual sales of £1.5bn within 3 years and that the shares look oversold, whilst its Business editorial highlighted the pressures on the High Street ahead of the key Christmas spending season, with Business Rates reform urgently needed, as Homebase and House of Fraser struggle for Sunday Press and News (2): The Sunday Telegraph had a big feature about the camera-shy boss of the Polish fashion chain Reserved, Marek PIechocki, and his plans for more UK openings, even though the Oxford Street flagship is still loss-making. The Sunday Telegraph also highlighted the row about the criticism by Shore Capital (Morrison’s house broker) of declining store standards at Sainsbury’s, whilst Oliver Shah noted in his Sunday Times column that Morrisons is still “on the shelf” and said that it is a test-case of whether big supermarkets need scale to survive and prosper. The Sunday Times also flagged up that directors of Ocado (mainly CEO Tim Steiner) have sold £150m of shares in recent months, the carpet chain Tapi has agreed to open 3 mini-concessions in Next Home stores and the City expects Dixons Carphone to report flat UK sales in its Q1 update on Thursday. News Flow This Week: Things are busier this week, as we head into September, kicking off tomorrow with the BRC-KPMG Retail Sales for August (with another broadly flat LFL outcome likely) and the Halfords Q2 update. On Wednesday we get the John Lewis Oxford Street revamp launch, with an analyst’s visit, whilst Thursday brings the Dixons Carphone Q1 update/AGM and the Carpetright AGM. |
|
