Langton Capital – 2018-11-02 – CAKE, MLC, Paddy Power, Restaurant Group & other:
CAKE, MLC, Paddy Power, Restaurant Group & other:
A DAY IN THE LIFE:
So, with the clocks going back, wasn’t it meant to be lighter in the mornings?
Because it doesn’t quite feel that way and, with the tomatoes withering, frost on the grass and fireworks going off around us and the smell of bonfires in the air most evenings, it’s hard not to conclude that summer is over.
Still, that’s the way it goes and, with seven weeks or so of proper work to get under our belts before the wind-down to Christmas, we’d better pack the shorts away and get down to it. On to the news:
MIFID II & PATISSERIE HOLDINGS, RESTAURANT GROUP ETC.:
• You don’t get what you don’t pay for. Incentives at work etc.
• Other than the high margins, there weren’t many Red Flags flying at CAKE.
• Certainly, there were none that the directors noticed, and analysts were broadly supportive or neutral.
• And the more sceptical observers, other than those prepared to take the very risky route of shorting the stock, had little incentive to investigate matters.
• This because secondary commissions are negligible and MIFID II, amongs other things, has made it very difficult for ‘clients’ to be told what they do not already know other than by brokers with whom they established a relationship last January.
• New information cannot be taken by a broker to a ‘client’ with whom he or she is not already registered. This stifles the flow of information. Unintended consequences abound.
• Less dramatically at Restaurant Group, where there may be £30m or £40m of fees knocking around, brokers on the ticket will unsurprisingly be ‘positive’.
• They will be on modest retainers and large success fees so how do you think they will behave? Ask a barber if you need a haircut, you’ll need a haircut. Pay a striker to get corners & he’ll play for corners.
• Hence good news abounds but scepticism is stifled as there is little incentive to play for secondary commission in the shares (pitifully low) and negative news can only be communicated to registered clients.
• Even a modestly successful broker will not cover all shareholders & will therefore only be able to disseminate information selectively.
RESTAURANT GROUP & WAGAMAMA:
• FT’s Lombard says Restaurant Group’s Wagamama deal has similarities with Pidan, or thousand-year-old eggs. It says they are both expensive and they stink.
• Bit rude. We believe the deal offers RTN a (rather expensive) way to pivot, to cut its dividend and to utilise some sites more profitably. But yes, this is a pretty rich multiple.
• Much depends on what price the group can get its Rights Issue away at. This will be the subject of some debate with the issue’s underwriters. RTN’s shares rose 7% yesterday to 259p but they are 35p below their Monday level.
• We expect to see the deal advisers (and there are tens of millions in fees sloshing around out there) to attempt to pitch the Rights to the pre-disturbed price. Failing that, some might suggest there will be a move to support RTN’s share price.
• The deal is ‘fully underwritten on a standby basis by JP Morgan’. We don’t know quite what that means but, if the Rights is priced too aggressively, JP Morgan may end up owning a larger chunk of the UK restaurant industry than it had bargained for. If the issue price is pitched ‘too low’, then the deal will be dilutive.
• The deal is very likely to conclude but there is a non-negligible chance that it will not. This could leave a hole where RTN’s newly-stated strategy currently resides.
• Wagamama does offer growth but it’s interesting to note that, although revenues rose by 15% in the year to FY18, profits hardly budged.
• This is likely due to rising costs (yes), discounting (a little) and the growth of its low-margin delivery business (a lot). We have suggested regularly that giving customer details to delivery companies is like inviting a fox into your henhouse.
• The price of exclusivity. We note that, if RTN does not proceed with the deal, it is obliged to pay a £6m break fee to Wagamama.
• Jane Holbrook, the Wagamama CEO, is to leave the business. We do not see this as a positive.
• We have more on selling the dream, deal fever, wonky incentives, tunnel vision when it comes to deals etc. but that will have to wait-.
PUBS & RESTAURANTS:
• Patisserie Holdings has secured support from holders of 99% of its shares for the rescue deal which will see it issue more shares at 50p.
• Chairman Luke Johnson will see £10m of his £20m of emergency loans repaid.
• Mr Johnson said that, when the issue of shares at a 90% discount was agreed, the company was only 3hrs from going bust.
• CAKE did not update on trading or on the investigation into its financial irregularities. Nor did the company comment on whether or not CEO Paul May and CFO Chris Marsh would be obliged to pay back the profits they made on the disposal of options (twice) earlier this year. More significantly, the company did not comment on whether the irregularities went back to the time of the IPO in 2014.
• Chairman Luke Johnson is currently resisting pressure to step down from the company’s audit committee, the investigation into the financial irregularities and even the board itself as he says he has cut back on his executive duties elsewhere in order to pay more attention to CAKE.
• Starbucks has reported Q4 and full year numbers saying that Q4 revenues rose 11% to $6.3bn with comp sales +3%.
• Starbucks says China comp sales are +1%. The company earned 62c in Q4. US comp sales were +4%. Mobile orders are up to 14% of US sales.
• Starbucks has reported that GAAP margins in Q4 fell by 280bps to 15.7%. CEO Kevin Johnson reports ‘Starbucks record Q4 performance reflected meaningful improvement in virtually every critical operating metric compared to Q3.’ He says ‘as we enter fiscal 2019, we are executing against a clear growth agenda, with a focus on our long-term growth markets of the U.S. and China.’
• Starbucks reports ‘in Q4, Starbucks delivered improved sequential results in both our Americas and China/Asia Pacific segments.’
• Diverse Dining Ltd, which operates the Shake Shack franchise in the UK, has reported results for the year to December 2017 to Companies House saying that revenues rose to £21.4m from £10.8m and losses increased to £7.7m from £4.5m. The company has accumulated losses of £16.5m since incorporation.
• The Royal Society for Public Health has found that high streets with too many betting shops, fast food outlets and payday lenders coincide with a shorter expectancy, of up to 2.5 years.
• Riccardo Illy of Illy Coffee is seeking an investment partner for its non-coffee division which includes wine, chocolate and tea.
• The beer giant Molson Coors aims to launch its line of marijuana-infused drinks as soon as cannabis edibles are made legal in Canada next year.
• The UK has been named the fourth most expensive place to buy alcohol and cigarettes, costing nearly 60% more than our European counterparts.
• Compass Group have confirmed Karen Witts appointment as CFO, stating she will take up the post on the 8th April 2019.
• Molson Coors’ announced that Q3 net sales were up 1.8% y-o-y to $2.93bn with net income climbing 17.9% to $338.
• The parent company to Applebee’s and IHOP, Dine Brands Global, has stated that off-premise business boosted sales in Q3. Dine Brands’ saw net income increased to $23.6m from a loss of $450.3m last year. CEO Steve Joyce commented: ‘When I joined Dine Brands as CEO a little over a year ago, I knew this company had untapped potential. I believe we had to execute on three strategic priorities to realize our full potential and position our strong brands for long-term success’.
• BJ’s Restaurants Inc has reported its best performance in LfL sales in 29 quarters, up 6.9% in Q3 2018. CEO Greg Trojan commented: ‘Our sales momentum drove another quarter of exceptional market-share gains and fueled strong financial performance. “Our broad-based third-quarter operating and financial strength again reflects our ability to offer everyday value throughout our menu, which is as diverse in price point as it is in flavor profiles’.
• Analyst Nelson Blackley claims ‘major anchor [retail] stores’ are in a ‘downward spiral’ due to an excess of shopping centres with similar retail offerings. Experts claim that more than 200 shopping centres are at risk of going into administration.
HOLIDAYS & LEISURE TRAVEL:
• Millennium & Copthorne has reported Q3 numbers saying that revenue cumulatively for the 9mths slipped 2.4% to ££730m and PBT fell by 16.1% to £99m. Chairman Mr Kwek Leng Beng commented ‘the Group experienced mixed trading results for the first nine months of the year, with hotel revenues flat for the period on a like-for-like basis and lower profit due to continuing cost pressures.’
• MLC reports ‘the hospitality sector is facing challenging trading conditions, including significant supply growth, technological “disruption”, industry consolidation and rising minimum wage requirements and labour costs in key jurisdictions. These challenges, which are impacting the availability of talent and reducing margins, are exacerbated by geopolitical headwinds, such as the uncertainty surrounding Brexit and global trade tensions.’
• Rocco Forte Hotels has announced that it intends to double the number of hotels in its portfolio in the next five years. Founder, Rocco Forte commented: ‘We should be in Paris; we should be in Madrid; we should be in Moscow’.
• The Home Office has opened a consultation on whether introducing alcohol licensing laws at airports in England and Wales could help tackle the problem of drunk and disruptive passengers. Home Office minister Victoria Atkins said ‘This government is committed to ensuring that the travelling environment for airline passengers remains safe and enjoyable.’
• Kate Nicholls, CEO of UKHospitality, addressed the new airport licensing act by saying ‘New legislation would be unnecessary and unfair and demonise pub-goers who deserve the right to enjoy a drink when going on holiday and the vast majority do so responsibly… The problem lies more with drinking duty-free purchases on board, which is already illegal but poorly enforced.’
• Brigid Simmonds, CEO of the BBPA, claims that the new ‘Licensing Act on airports may be unnecessary and overly restrictive, there is much more airports and airlines can do to help tackle disruptive passengers…The BBPA is already working with a number of airports and will continue to do all we can to ensure that alcohol is sold in a responsible way.’
• HVS chairman Russell Kett says the UK’s hotel sector has stood firm in a tough year. London has outperformed the provinces over the past three months with hotel occupancy up 3% to 88.2%, boosting RevPAR by 4%. However, intense competition meant ADR rose just 1% to £158.03 in London, compared with 2% in the provinces to £77.69. RevPAR in 2019 is expected to show a 1% increase in London, with a 2% increase anticipated in the regions in line with GDP forecasts.
• STR reports US hotel occupancy up 1.2% to 70.7%, ADR increasing by 4% to $134.39 and RevPAR up 5.2% to $95.02 in the week ending 27 October.
• Paddy Power has seen revenue up 12% to £483m in constant currency in its Q3 results. The group however, saw EBITDA fall 3% to £100m, driven down by retail sales declining 4%. Peter Jackson, chief executive of the group commented: ‘Q3 was a good quarter for the Group. In Europe, the encouraging momentum that we saw in Q2 accelerated further, with online revenue up 15%. This momentum, which was evident in both Paddy Power and Betfair, is driven by enhancements in product and good execution in promotions and marketing’.
• The Sports minister, Tracey Crouch has resigned due to the government delaying the reduction of the maximum stake on fixed-odds betting terminals.
• Twenty-First Century Fox Inc Executive Chairman Lachlan Murdoch has stated that it is still an ‘open question’ whether the company will buy back the regional sport network it sold to Walk Disney Co in July.
• The share price of Apple has tumbled in the after-hours trading as the group’s forecast revenues over the Christmas period missed expectations.
• Ebay reports Q3 net profit up 38.6% to $721m. Revenues were up 6% to $2.65bn, in line with analyst expectations.
FINANCE & ECONOMICS:
• The Bank of England yesterday left base rates at 0.75%. The Bank has warned markets not to necessarily expect a rate cut in the event of a no-deal Brexit. In the event of no agreement, the Bank said there was ‘little monetary policy can do to offset’ the impact.
• UK Manufacturing PMI fell to 51.1 in October, down from 53.6 in September. The reading is the lowest since July 2016. HIS Markit’s Rob Dobson comments ‘October saw a worrying turnaround in the performance of the UK manufacturing sector. At current levels, the survey indicates that factory output could contract in the fourth quarter, dropping by 0.2%.’
• HIS Markit comments ‘looking ahead, manufacturers still maintain a positive outlook for production over the coming year, with 48% forecasting expansion. That said, the second half of the year so far has also seen confidence remain low compared to its long-run average, with views on prospects darkening again in October amid rising Brexit-related uncertainties and escalating global trade tensions.’
• Nationwide reports British house prices rose at their slowest pace in more than five years at 1.6% in the year to October, down from 2% in September. The Nationwide says ‘the squeeze on household budgets and the uncertain economic outlook is likely to have dampened demand, even though borrowing costs remain low by historic standards and unemployment is at 40-year lows. We continue to expect house prices to rise by around 1% over the course of 2018.’
• The US has criticised the UK chancellor’s plan to hit technology giants with a new digital services tax.
• Sterling up on deal hopes at $1.3008 and €1.1383
• Oil down at $73.36
• UK 10yr gilt yield up 2bps at 1.46%
• World markets all up yesterday though UK down on strong Sterling. UK indicated to open up 71pts.
o Some suggestions that a services deal could be near. The ‘look-how-hard-we-tried’ cynics may be correct in that it is in the interests of both sides to take it to the wire.
o Dominic Raab suggests deal in 3wks.
o Brexit backer Arron Banks investigated by the Serious Crime Agency over allegations of overseas, perhaps Russian, funding.
PRIOR DAY LATER TWEETS:
• Later tweets: Patisserie Holdings. Today’s meeting – Questins, questions…but no answers. Says ‘will not be providing any new information…’
• CAKE. Q re facts of debacle, competence, scale of problem, smoking gun(s), board composition etc. all currently going unanswered at 9am meet
• RTN: The word ‘pivot’ is overused but this is one. Divi cut, go for growth, overseas, franchises, take on debt etc.
• RTN – Waga is high growth but its past is clearer than its future. Jane Holbrook isn’t coming across. Execution will be key
• RTN – critical what price it can achieve Rights at. Will no doubt focus on discount to ‘pre-disturbed’ share price. That may not wash…
• Big ticket. Carpetright says is drowning more slowly. LfLs negative in Q2 but sees ‘improvement in the trend…’
• Long odds on RTN deal failing to complete. But shares sharply lower, hiccup is possible & would leave hole where strategy currently is etc.
• Patisserie Holdings EGM. 99.7% of shares back placing at 50p, c90% discount to price before accounting irregularities uncovered
START THE DAY WITH A SONG:
Yesterday’s song was Champagne Supernova by Oasis, today who sang:
Now I know that you’re up tonight,
Thinkin’ “How could I be so reckless?”,
But I just can’t apologize,
I hope you can understand
RETAIL NEWS WITH NICK BUBB:
• Trade Press (1): The striking front cover of Retail Week magazine today is a photo-montage of an Amazon delivery drone above Regent Street, to flag up the main feature on “The Amazon effect” (“How di¬fferent would retail look without the online titan?”). RW also have feature articles on ASOS (“How the etailer plans to drive sales past the £4bn mark”), Debenhams (“How the battered retailer aims to revive its fortunes”) and the Beauty market (“How beauty stores of the future can be transformed”). And in his column the Editor reviews the recent furore about the beleaguered Philip Green, thundering that “Green is at odds with spirit of the times” and that “At the heart of company success today is frequently the wider culture”, highlighting that in the same week that Green was making headlines for all the wrong reasons, Pablo Isla, the modest CEO of Zara owner Inditex, was named the
• Trade Press (2): In Drapers magazine today the Editor also discusses the allegations about Philip Green in her column, asking “Is this fashion retail’s #metoo moment?” and thundering that “Business leaders must realise this type of “banter” is not acceptable”. In terms of News stories, Drapers focus on the news that the Business Rate cuts in the Budget will not be enough to save the High Street, Jaeger is to step up its store opening programme under new owner EWM, the lifestyle brand Seasalt has reported good results, Selfridges has opened its refurbished Menswear floor in Oxford Street and Oasis is to open 5 concessions inSainsbury’s in the spring. Drapers also have a review of the upmarket new shopping and restaurant district Coal Drops Yard (which has just opened in King’s Cross).
• BDO High Street Sales Tracker: We flagged on Wednesday that Home sales at John Lewis again struggled last week and today’s BDO High Street Sales Tracker for medium-sized Non-Food chains for last week, which was half-term in many areas, w/e Sunday Oct 28th, highlights that their Homeware sales (including Online) were down by 5.3% (the eighth negative week in a row). But BDO Fashion sales were up 3.1% last week, against weak comps, and Total BDO sales were up by 2.9% (-0.3% in terms of Store LFL sales and up 8.1% Online).
• News Flow Next Week: A very busy week kicks off first thing on Tuesday, with the BRC-KPMG Retail Sales survey for October (the 4 weeks to Oct 27th), followed by the Morrison’s Q3 update and the ABF (Primark) finals. On Wednesday we get the much-awaited Marks & Spencer interims. Then on “Super Thursday” we get no less than 8 separate scheduled company updates: the Sainsbury interims, the Burberry interims, the Halfords interims, the Game Digital interims, the Inchcape Q3, the Howden trading update, the Superdry pre-close update and The Works pre-close update! And by tradition the much-hyped Christmas TV adverts start at the end of next week, with most focus on the latest John Lewis offering…