Langton Capital – 2018-10-16 – CAKE, Merlin, Gear 4 Music, austerity, Brexit & other:
CAKE, Merlin, Gear 4 Music, austerity, Brexit & other:
A DAY IN THE LIFE:
Here’s a business question for you: how do you give bad news to a bully?
Well, you either don’t or, like feeding a dragon, it’s best to do it carefully.
Or resign, walk away and not do it at all. This means that, over time, the staff at the businesses in question will self-select and be a certain type of person but, at the end of the day, the issue can mean that information does not flow as well in some organisations as it does in others.
This should be addressed by the non-execs but, often, they find themselves either beholden to their execs or similarly overawed.
On to the news:
PATISSERIE HOLDINGS – A DAY WITHOUT NEW NEWS…
• No new news from Patisserie Holdings but plenty to be thinking about:
• The numbers were wrong (1), so the earnings were wrong. Much of the growth was an illusion (2) so the rating was wrong (3).
• If the rating was wrong, then the share price was wrong (4). That being the case, transactions took place at the wrong level.
• That being the case, there were winners (5) and losers.
• Moving on we know that trust and reputations take longer to build than they do to destroy (6).
ONE & TWO:
• The company has conceded in its RNSs that its numbers, earnings and growth profile were misleading or wrong.
• Implication. The units are less good than earlier believed, there will be a tail. If the numbers are wrong, many of the units will shift to the left on the graph and there will be a tail. Some units could be inprofitable. If EBITDA is to fall for the group by 60% or so, it is hard to see how this will not be the case.
• Implication. Trading tail-end units in this environment is tough. Exiting them is even tougher. Get in line behind the CVAs out there etc. Operators tell us dealing with a small number of tail-end units is more time consuming than trading an equal number of better sites.
• We would suggest that the 23x earnings relied heavily on the growth profile which, as the company says, is not what it appeared.
• The rating multiplied by the earnings gives the shareprice. There is no rocket science here. If the inputs were wrong, then the share price was wrong.
• Observation. We are stating the obvious here, the 50p placing price tells us as much.
• Implication. But hold on, until Tuesday evening, buyers were paying 420p plus is good faith.
• Example. There was plenty of trade earlier last week and, as the company itself RNSd on 28 September, some member (or members) of staff bought 10,000 option shares at 316p each. The shares may or may not have been sold as there is no requirement for this to be announced for non-directors.
• There have also been sellers of the shares.
• Example. On 20 July, now-suspended CFO Chris Marsh made a profit on the sale of 666,666 options of £680,000. On 7 Feb, Mr Marsh made a profit of £1.27m on the sale of a further 666,666 options. Mr Marsh has retained 465,000 shares in the company.
• Example. On 20 July, CEO Paul May made a profit of £1.02m on the sale of 1m options. On 7 Feb, Mr May made a profit of £1.6m on the sale of a further 1m of options. Mr May retained 4.55m shares in the company.
• Example. On 29 June, non-executive director Lee Ginsberg sold two thirds of his shares (40,000 of 58,823) at 469p per share. On 2 Feb 2018, non-executive director James Horler sold around a third of his 147,116 shareholding at 367p per share.
• Example. In May 2014 the group IPOd at 170p per share. Existing shareholders sold to incoming shareholders. Whilst the shares performed well thereafter, some of that outperformance may not have been warranted and the 170p represents a multiple of 3.4x the 50p price paid to rescue the company last week.
• Caveat. Directors need to be able to sell shares and there are limited windows during which they can do so. There is no implication of wrong-doing here. Indeed, the directors have indicated that they did not appreciate that their company’s results, rating and share price were all wrong. What is certain, however, is that the directors got the better end of the above deals. No directors have bought shares in the last three years, though this is not unusual in growth companies.
• CAKE’s shares should relist Thursday and, whilst the company’s future may have been secured (in the absence of more shocks), it will be a long road back.
• We don’t yet know what happened & building trust will take time. There may be more announcements, resignations etc.
• Regarding the suitability of certain players going forward, no doubt conversations have been had and more will take place over the coming weeks.
• Directors may need to stick around to help clear up the mess (the stab-vest principle, Theresa May is familiar with it) but, after that, it could be better to clean the slate.
FURTHER QUESTIONS, OBSERVATIONS:
• We (kind of) get that EBITDA to Sept 2019 will be lower than previously forecast but why will sales be c10% lower. Were they misstated or are closures being factored in?
• If the former, then how did that happen & if the latter then what will be the exceptional costs and (reality check here) will you really be able to get rid?
• The forecast £120m of revenue for Sept 2019 is only £11,500 per week. The Philpotts and bottom-end Pat Val units could be doing less than £10k. It’s hard work at this level of turnover.
• EBITDA of £12m is forecast. Add in, say £5m for HO costs give unit EBITDA of £17m. This is less than £85k per unit. Again, not large numbers.
PUBS & RESTAURANTS:
• Vianet, the Internet of Things business insight provider, has reported that H1 profits for the half year ended 30 September 2018 are ahead of the same period last year. James Dickson, Chairman of the group, commented: ‘The team continues to make good commercial progress, particularly with our telemetry and payment solutions for the coffee vending market, where momentum is being boosted by good progress integrating the Vendman acquisition’.
• D&D London has reported LfL sales up 4% y-o-y despite disruption by the World Cup. Chief executive Des Gunewardena commented that his restaurants had ‘shrugged off Brexit worries and were trading significantly ahead of last year’.
• Smokehouse group Grillstock has ceased trading, less than a year after it was bought ut of administration, Big Hospitality has reported.
• Cutting ‘service’ cost (i.e. labour) is very tricky in the F&B industry. Forward ordering might help, persuading customers to pick up their own food at the counter & avoiding table service likewise. Not having to clean fat trays would be another big saving.
• Synergy Grill, which sells gas grills that use half the gas of normal grills and which require little cleaning as they have no fat trays, has announced that it has recruited former of head of Nisbets’ Uropa Brands business to take up the post of director for commercial and marketing projects.
• Food Service Equipment Journal reports ‘Synergy Grill markets the flagship grill of the same name and has won plaudits from the likes of TGI Fridays for its fat atomisation technology, which eradicates fat and reduces cleaning by 80%.’ Justin Cadbury CEO of Synergy Grill comments ‘Synergy Grill has the patented fuel injection technology and will have the same effect to grills as fuel injection overtaking carburettors had in cars. It is the future. Several hundred restaurants already successfully depend on its reliability and superior performance and Richard is joining us at a perfect time to extend this new technology.’
• The Inn Collection Group has launched an academy, known as the Innspiration training academy, to enable staff to further their careers in the hospitality sector.
• The administrators of the Burning Night group have put the business up for sale.
• Accessories chain Claire’s is reportedly considering closing some UK stores. The 370 store strong chain is believed to be accessing its options including a possible CVA.
• Meanwhile, in the US Sears files for bankruptcy after succumbing to debts and losses. The rise of internet shopping and fierce competition has led to the 886-strong chain failing to repay a £102m debt due this week.
• Contactless payments have over taken chip and PIN as the most common payment method in shops, now equating to 51% of all exchanges, Worldpay has found.
• McDonald’s is trialing a cold brew coffee in 74 location in the San Diego market.
• The chief executive of Grant Thornton has announced that she will step down from her position amid evidence of a revolt against her leadership. The auditing group has come under pressure recently as struggling Patisserie Valerie was one of their clients.
• UKHospitality has named Anna Clissold of Admiral Taverns as the Business Development Manager of the year in its 2018 Operations Managers Awards. Also winning awards were Paul Dutnall of ETM group and Kyle Gunn of M&B for best Area Manager and Rising Star respectively.
HOLIDAYS & LEISURE TRAVEL:
• Cello Aviation, an airline operating VIP charters based out of Birmingham airport, has collapsed.
• CEO of Edinburgh airport, Gordon Dewar, is calling for a cut in Air Passenger Duty to avoid a stall in growth due to Brexit uncertainty. Edinburgh airport reported passenger numbers up 5.8% yoy to 1.3m with Dewar saying ‘While this growth is helpful, we can’t escape the fact that Scotland is well below European average growth.’
GEAR 4 MUSIC H1 NUMBERS:
• Gear4music reports H1 numbers to end-August 2018 saying it is seeing ‘continued momentum with strong revenue growth heading into the Christmas period.’
• G4M reports H1 revenues up 36% at £42.5m with EBITDA of £652k against £717k last year. The group has made a net loss of £362k after a profit of £4k in the same period last year.
• G4M reports that its lower margin (of 22.7%) ‘reflects a strategy to gain market share of branded products during a highly competitive period.’ It says there is an ‘early indication of increase in H2.’
• G4M CEO Andrew Wass says ‘during the Period we are pleased to have achieved further market share gains, with revenue growth of 36% and strong growth both in the UK and internationally.’ Mr Wass says ‘we have strengthened our position as the UK’s leading retailer within the market, having invested into our customer proposition, market leading e-commerce platform, and scalable infrastructure.’
• G4M concludes ‘as we continue to invest and focus on gaining market share, I am pleased to report that we have seen particularly strong revenue growth since 1 September 2018 alongside notable gross margin improvements on the H1 period. As such, we remain confident of delivering another year of strong revenue growth and EBITDA in line with our full year expectations.’
• G4M has made a loss per share of 1.8p. Last hear in H1 it made 0.0p with 6.7p coming for the full year. The business is clearly seasonal but the market is expecting a rebound to 10.4p for the full year implying 12.2p in H2 compared with the 6.7p earned in H2 last year. This is looking a bit of a stretch. The group trades on an EPS multiple of about 50x.
MERLIN Q3 UPDATE:
• Merlin has updated on trading for the 40wks to 6 Oct saying the ‘performance year to date in line with expectations’ and the outlook is unchanged
• MERL says it has seen 4.7% organic revenue growth across the group in the year to date. This equates to 2.6% growth at reported currency. This is being ‘driven primarily by New Business Development, with like for like revenue growth of 1.4%’.
• MERL says ‘Resort Theme Parks organic revenue growth [was] 9.0% with particularly strong like for like trading due to successful product investment and favourable weather’. LEGOLAND Parks is up 6.4% ‘driven by the full year contribution of LEGOLAND Japan and the continued successful accommodation roll out, offset by flat like for like growth’.
• MERL reports ‘Midway Attractions organic revenue growth [was] flat reflecting the expected decline in like for like revenue, with the new openings schedule phased towards the end of the year’.
• MERL CEO Nick Varney comments ‘group trading has been in line with expectations, with variances by Operating Group reflecting the diversified nature of the portfolio.’ Mr Varney says ‘we have opened a record 644 rooms, and six new Midway attractions which has resulted in organic revenue growth of 4.7%. Continued strong guest demand for our themed accommodation offering and the ongoing trend towards short breaks has driven 27.7% growth in accommodation revenue.’
• MERL concludes ‘the cost environment remains challenging, with tighter labour markets in many parts of the world adding to the pressures resulting from legislative changes such as the National Living Wage in the UK.’ CEO Mr Varney nonetheless says ‘the underlying fundamentals of our markets are strong and we remain excited by the global opportunities that Merlin enjoys.’
• Tesla could start to produce Tequila called ‘Teslaquila’ after filing a trademark, according to CEO Elon Musk.
• Walt Disney has offered concessions in order to allay EU concerns regarding its $71.3bn bid for Twenty-First Century Fox Inc’s entertainment assets.
• Paul Allen, co founder of Microsoft, has died aged 65 from complications of non-hodgkin’s lymphoma.
FINANCE & ECONOMICS:
• Idea of ending austerity, spending an extra £20bn on the NHS per annum, coping with lower growth and not putting taxes up is for the birds.
• IFS says the only way to end austerity is to borrow a minimum of £19bn or put 1p on income tax in the short term with more cash needed later.
• Chancellor’s Budget is in a fortnight.
• Sterling up at $1.3147 and €1.1357
• Oil down a little at $81.14
• UK 10yr gilt yield down 3bps at 1.61%
• World markets: UK & Europe higher, US down and Far East mixed for Tuesday
• Brexit etc.:
o BBC speculates that brinkmanship could be an attempt to show that both sides really, really tried.
o Ford says a no-deal Brexit would be ‘pretty disastrous’ for British industry. European boss Steven Armstrong is ‘still confident’ of a deal.
o Brussels has given the UK 24hrs to get its story straight on Brexit after talks broke down yesterday. A day isn’t very long after 24 months of infighting.
o Northern Ireland, where the situation was known a full two years ago, is now said to be a ‘real problem’
o DUP leader Arlene Foster, who is said to be preparing for a no-deal Brexit, is reported to be hoping for a ‘sensible’ Brexit
o Theresa May is this morning attempting to rally ministers.
o EU officials have warned that no deal is ‘more likely than ever before’. See comments on brinkmanship above
o Labour Party still waiting in the wings and trying to keep its mouth shut whenever possible
PRIOR DAY LATER TWEETS:
• Later tweets: Pat Val debacle, rescue, illusory profits, reputation damaged, should re-list on Thursday. Directors’ share sales, arrest, poss. fraud etc.
• Tracker says ‘September delivers a late summer bonus for pub trade’ as managed pubs see like-for-like sales grow 1.9%.
• Tracker says restaurants LfL sales down 0.2%. London better than regions. London pubs the best segment of all at plus 3.0%
• Tracker silent on margins (hit by discounting & growing delivery element in sales). Lagging inflation with lower margins not what doctor ordered
• Paul May, currently still CEO of Patisserie Holdings at time of writing, has stepped down as a director of Restaurant Group.
• STR reports London hotel occupancy down 0.1% to 86.9%, ADR down 3.1% to £158.93 and RevPAR down 3.2% to £138.04 in September.
• EY Item Club says UK will see low economic growth for next 3yrs if we Chequers’ Brexit. No deal Brexit could be considerably less good
• Not good times for super stocks. Supercuts going for CVA, Superdry profit warning & superCAKE still suspended after humiliating rescue
START THE DAY WITH A SONG:
Yesterday’s song was Fly to the Moon by Frank Sinatra, today who sang:
In touch with the ground,
I’m on the hunt down I’m after you
Smell like I sound I’m lost in a crowd
RETAIL NEWS WITH NICK BUBB:
Footasylum: It appears that investors were sold a pup in the IPO a year ago and after two profit warnings the share price of the beleaguered Footasylum is a shadow of its former self, with the market cap down to just £34m. And today’s interims (for the 26 weeks to 25th Aug) make grim reading, with an adjusted loss before tax of £4.0m, versus a profit of £2.3m a year ago. The embattled former JD Sports veteran Barry Bown, the Executive Chairman, says “While we are pleased to be reporting good top line growth…our profitability has been impacted both by a lower overall gross margin from higher clearance activity in stores, as well as the extensive investments that are being made to position the Company for future growth”. However, there is some reassurance in the news that current trading is “in line with the FY19 expectations that were rebased at the time of the trading update of 3
News Flow This Week: The latest Kantar/Nielsen grocery sales figures (for the 4 weeks to Oct 6th/7th) are out at 8am. Tomorrow brings the ASOS interims. Then Thursday brings the ONS Retail Sales figures for September and the John Lewis Cheltenham store opening.
Peach Watch: If you’re wondering how the embattled casual dining sector fared last month, given the problems of Gourmet Burger Kitchen and Patisserie Valerie etc, we are grateful to the Leisure sector experts at Langton Capital for pointing out that the (oddly-named) monthly Coffer Peach Tracker survey of UK pub and restaurant sales came out yesterday, with September seeing overall sales up by 3.5%, including new openings (up 1.1% LFL). But the two sub-sectors again went in different directions, with pub sales up 1.9% LFL (driven by good drink sales, on the back of the warm weather) but restaurant sales down by 0.2% LFL. London again outperformed the rest of the country, in both sectors, with London pub sales up 3.0% LFL and overall sales up 2.0% LFL. Paul Newman, Head of Leisure and Hospitality at the accountants RSM (one of the sponsors of the survey of 49 leading companies in the