Langton Capital – 2018-11-13 – RTN dilution, divi cut, profit downgrade, UK hotels etc.:
RTN dilution, divi cut, profit downgrade, UK hotels etc.:
A DAY IN THE LIFE:
Watching the massive apples that have somehow managed to grow on the trees outside my office hit the ground with an earth-moving thump, it’s worth considering that, being hit on the head, Sir Isaac Newton-like by a massive piece of fruit is no laughing matter.
Of course, a coconut would be worse.
But there are relatively few of them in York in November. And the few that are here aren’t on trees meaning that, unless they were thrown from the supermarket roof or were rolled down a steep set of stairs at you, they couldn’t do much harm.
On to the news:
RESTAURANT GROUP – WAGAMAMA:
• Seeing the Rights Issue at 108.5p was something of a surprise. New shares, on a 13 for 9 basis, will comprise 59% of the enlarged group.
• The Rights price is little more than a third of the level the group’s shares were trading at before the deal was announced on 30 October (less than two weeks ago).
• Shareholders will vote on the Rights Issue on 28 November but, the group cautions, the Rights could go ahead even if the purchase of Wagamama falls through.
Raising money & cutting the dividend – even if the purchase does not complete:
• RTN says ‘the Rights Issue is not conditional on completion of the Acquisition…The Rights Issue may therefore complete while the Acquisition does not [and] the Directors’ current intention is that the proceeds of the Rights Issue will be applied to reducing the Company’s net indebtedness on a short term basis, while the Directors evaluate alternative uses of the funds.’
• Surplus cash could be returned.
• There is no firm indication as to whether the new dividend policy, around a 40% cut if it is to be twice covered, will be adopted if Wagamama is not purchased.
Deal is dilutive:
• RTN has retracted its earlier belief that the deal would be accretive in the first full year of ownership. To make the above suggestion on 30 October, RTN must have had a Rights price in mind. The fact that the deal will now be dilutive in year one suggests that the 108.5p is below the group’s initially intended issue price.
• RTN directors maintain that the acquisition will be ‘strongly accretive’ in FY2020 and thereafter.
• JP Morgan is now underwriting the deal on its own. Numis is no longer on that part of the ticket.
• Rights issues comprise xr ordinary shares and nil paid shares. The latter essentially ensure that non-participating shareholders do not lose value in the way they would if they did not participate in a heavily discounted placing.
• Shareholders can arguably be more relaxed about whether or not they take shares up meaning that, however large the discount to the TERP, underwriters are taking some risk.
• The nil paids, and there will be a lot of them, will trade between 29 Nov and 13 Dec.
• The deal is transformative. But that doesn’t mean that it is in the interest of shareholders. CVAs, administrations, financial irregularities etc are also ‘transformative’ – only not in a good way.
• RTN will have a lot on its plate if it is to acquire further pubs & concession outlets, integrate Wagamama and rebrand units where it thinks it makes sense to do so.
• Wagamama is a fine business but it is relatively mature.
• We haven’t seen the post-July 2017 refinancing balance sheet yet and don’t know what shareholders’ funds are. We would estimate the cost of fitting out a leasehold casual dining restaurant at between £600k and £800k.
• RTN is proposing to spend £4m per leasehold site. This figure, we believe, is the highest paid for a casual dining chain of size. Chains that have changed hands at prices above £2m per unit (Strada in 2005 to Richard Caring, Pret to the Reimann family etc) have typically been less mature or already proven in overseas markets or both.
• In its Q1 FY18/19 report (for the 16wks to 19 August), Wagamama reported that its LfL sales were up 8.5% in the UK and that it had traded ahead of the UK market for 228 straight weeks.
• Wagamama said that it was seeing ‘margin compression’ year on year due to ‘continued affordable investment in our people, estate and product, investment in our US business and external factors including National Living Wage and business rates increases.’
• We also believe that delivery was playing a larger role in sales growth and that this is at a lower margin than sales through Wagamama’s own restaurants.
Timetable, meeting etc.
• Shareholder meeting 28 November. The group did not give 21dys notice so presumably believes that it is in the interests of shareholders to move quickly.
• Some elements are fixed. The 108.5p Rights Price, the dividend cut (we think) and the issue ratio (13 new for 9 old).
• Other elements will move around – the current shareprice (down 6% as we write at 237p) and therefore the TERP and the price at which the nil paids will trade.
• Indeed, the outcome of the vote is somewhat uncertain. Shareholders will need to approve both the acquisition and the fund raise. The former is not possible without the latter – but the latter could be a stand-alone outcome.
• Whilst relatively unlikely, if the purchase were voted down, RTN would be well-funded but its strategy would be unclear. The stakes are pretty high as some directors may not feel inclined (or able) to stay with the company.
Langton comment, Press etc.:
• Langton commented nearly two years ago that cutting the dividend (incoming new management etc.) was a one off opportunity. It would appear that this was incorrect.
• The discount at which the new shares are being issued will result in more shares in issue and greater dilution. EPS will therefore be lower (more shares in issue) and this will impact the level at dividend (which will be twice covered going forward).
• Thank heavens this is a Rights Issue and not a placing. Shareholders have pre-emption rights and the value of the nil-paid shares should protect the position of shareholders not taking up their rights. In theory, at least.
PUBS & RESTAURANTS:
• Employers are struggling to fill vacancies partly due to the ‘sudden reversal’ in the number of migrants working in the UK, figures from the Chartered Institute of Personnel and Development have indicated. Gerwyn Davies, senior labour market analyst for the CIPD, said: ‘The data implies that the pendulum has swung away from the UK as an attractive place to live and work for non-UK born citizens, especially non-EU citizens, during a period of strong employment growth and low unemployment’.
• UKHospitality has warned that restrictions on migrant workers coming to the UK will severely impact the hospitality sector, with Chief Executive Kate Nicholls commenting: ‘The figures released by CIPD make alarming reading for hospitality businesses. With unemployment relatively low, businesses need to recruit from outside the UK to augment their home-grown teams and continue to grow. We have already voiced our concerns about the ability of employers to recruit post-Brexit, but the worrying reality is that numbers of non-UK workers are dwindling, and we haven’t even left the EU yet’.
• AB InBev is set to reintroduce Bass Pale Ale to the UK on-trade this December. A spokesperson for the group commented on the relaunch of the historic beer stating: ‘The pale ale category has many good players, but Bass is the only one who can say that it has been on board the Titanic, flew on the Concorde and embarked with Shackleton to the ends of the earth’.
• The Zonal online booking tool, liveRES, has served its 200 millionth guest. Since becoming part of the Zonal group, liveRES has seen a 60% y-o-y growth.
• Bojangles, the US based fast-food chain has seen LfL sales increase 04% in the third quarter to Sept 30.
• AMT is to serve coffees in compostable cups. The cups are made from a material derived from sugar cane crop and “will naturally break down at room temperature and will fully decompose within one year”.
• Premier Foods has reported H1 revenues up 1.3% with trading profit up 6.2% and debt down by £26m.
• CEO Gavin Darby says ‘we saw improved resilience displayed by the business during the hot summer experienced in the first half of the financial year; however we are presently experiencing some operational challenges with the implementation of the final Sweet Treats phase of our logistics transformation programme.’
• PFD says it is working ‘to identify other strategic opportunities to accelerate the Company’s turnaround.’ It says it is in ‘discussions with third parties regarding the potential disposal of our Ambrosia brand. Although there is no certainty that any transaction will complete, we will update shareholders in due course.’
• PFD says ‘we have a strong innovation plan in place for the second half of the year, and profit expectations for the full year remain unchanged.’
• CEO Gavin Darby is to step down next January, the 6th anniversary of his having joined the group.
• The US plant based meat startup, Beyond Meat, has launched its first international product, burgers in the UK.
HOLIDAYS & LEISURE TRAVEL:
• STR has reported strong October numbers for London’s hotel industry, with occupancy up 6.7% to 89.1%, average daily rate increasing 13.4% to £160.13 and RevPAR climbing 13.4% to £142.73.
• Clia UK deputy chair Giles Hawke says he would ‘bet money’ on there being consolidation in the river cruise market in the future, with ‘an ocean cruise line paying money for a river cruise line.’
• IAG is in talks with the Spanish government about preparations for a no-deal Brexit. IAG’s status as a European carrier could be thrown into jeopardy if prime minister Theresa May fails to reach a deal.
• Passenger numbers at Heathrow in October increased by 4.4% to almost seven million, with growth driven by airlines using larger and fuller aircraft. North America flights led the growth, up by 9.1% in part due to various NFL fixtures at Wembley.
• Gatwick saw record passenger numbers in October, with more than four million travellers using the airport, up 2% on the year before. Turkey was the number one destination for short-haul winter sun.
• Pragma Consulting reports digital platforms are being introduced in sports stadia to help clubs drive ancillary revenues. One such example is Borussia Dortmund partnering with Huawei to provide stadium Wi-Fi to supporters, providing exclusive content and offers that can only be accessed on the Wi-Fi.
• The gambling software group, Playtech, has stated that it is on track to meet its full-year earning guidance of €320m-€360m. The group had reported a 345 fall in profits in August following a crackdown on gambling syndicates in Malaysia.
• Theresa May faces defeat in the House of Commons next week as Tory rebels plan to halt the delay of cutting fix-odds betting terminals maximum bet from £100 to £2.
• Apple shares fell 5% yesterday following a profit warning from some of the firm’s suppliers. The loss on the day for the group’s market cap was over $40bn.
FINANCE & ECONOMICS:
• Sterling bouncing after recent drops. Trading at $1.2872 and €1.1443
• Oil down at $69.41
• UK 10yr gilt yield sharply lower at 1.45%
• World markets down yesterday, Far East mixed this morning.
o Downing St accuses Brussels of trying to bounce it into a deal.
o FT report that the treaty is pretty much ready to sign dismissed by No10.
o FT suggests that prospects of a 2nd referendum may be rising.
o Situation has all the hallmarks of grandstanding politicians taking something to the wire in order to prove how hard they have been working for their constituents.
PRIOR DAY LATER TWEETS:
• Later tweets: Restaurant Group, downgrade, very dilutive to existing shareholders, EPS dilutive in first full year. Still a good deal says management
• Deal fever, Bridge over the River Kwai, cart before the horse? Rights issue & dividend cut with an acquisition attached?
• RTN directors to stump up Rights cash for the 0.07% of the co they own. Advise the other 99.97% of holders to do same.
• Wagamama growth? Great co but ‘easy’ stuff is done, quite far down growth curve & now reliant on growing low margin delivery
• LDC says high street openings fell by 2.1% and closures rose 16.9% H1 this year versus last. The squeeze is on. Fewer (but bigger) busts
• RTN Waga. There’s that word again, results ‘broadly’ in line with market. That is, lower. JP Morgan u/writes deal (not JP Morgan and Numis)
• RTN Waga. Is £4m per leasehold restaurant a record?? Strada (which did at least more than double after sale) was £3.5m, Pret £3m etc.
START THE DAY WITH A SONG:
Yesterday’s song was Iron Man by Black Sabbath. Today who sang:
I want your tender charm,
Cause I’m lonely
And I’m blue
I need you
RETAIL NEWS WITH NICK BUBB:
B&M: Fresh from its big acquisition of the Babou discount chain in France, attention turns to the core UK business of B&M today, via the interims for the six months to end Sept. And we regret to say that overall PBT looks to have come in below best expectations, with adjusted PBT only 10% to £99m and UK LFL sales growth of only 0.9%. The spotlight here is on Q2, as Q1 saw 3.6% LFL sales growth on the back of the warm spring, which pulled seasonal sales forward from Q2. And B&M admit that sales in July and August were down…
Land Secs: This is a big week in the world of the beleaguered Shopping Centre landlords, with the interims from Land Secs kicking things off today. And the fall in the value of their shopping centre assets in the six months to end Sept is only 2.9%, prompting CEO Robert Noel to gush: “Landsec has delivered a robust performance in an uncertain market…In Retail, our focus on vibrant destinations that offer the most engaging experiences for retailers and consumers has served us well in tough market conditions”.
News Flow This Week: The latest Kantar/Nielsen grocery sales figures (for the 4/12 weeks to Nov 3rd/4th) are out at 8am. Tomorrow brings the interims from British Land. Then on Thursday we get the Card Factory Q3 update and the ONS Retail Sales figures for October, as well as the Asda/Walmart Q3 results and the revised “PUSU” deadline for the John Whittaker consortium over its bid for Intu Properties.