Langton Capital – 2018-11-15 – Young & Co, Dart Group, Cineworld, Brexit & other:
Young & Co, Dart Group, Cineworld, Brexit & other:
A DAY IN THE LIFE:
Bit busy this morning. On to the news:
60 SECONDS ON THE ROOT OF DEMAND – CONSUMER CONFIDENCE:
We may get a post-deal bounce but, below, we look at the root of demand.
The market in perspective:
• Working backwards from spending decisions:
• Confident consumers spend more. Stable employment (or no fear of unemployment) buoys confidence. Investment drives employment
• Business confidence drives capital investment. Certainty is correlated to business confidence. Certainty is lacking re Brexit, Sterling, trading relationships, interest rates etc.
• Whilst directionally true, causality is debatable & timing is uncertain
Consumer confidence – recent evidence:
• GfK (31 Oct) says UK consumer confidence is near 5yr lows. It points to Brexit uncertainty & interest rate concerns
• Real wage growth is sluggish, the government is weak & divided
• Job fears are not (yet) a major issue (though joblessness blipped up in October)
• Big-ticket spending feeling the pressure: SMMT: new car registrations down 7.2% for the year-to-date 2018, Furniture, carpet & other suppliers citing volatile markets & house prices are rising below inflation
• Holiday demand (we love our holidays) is still OK, but signs the consumer is worried about what happens on/after 29 March (Brexit day)
Where to from here?
• With the EU leading Dominic Raab around by the nose, Brexit uncertainty remains
• Domestic political instability is an ongoing feature, Labour currently inhabits the extreme left & interest rates look set to rise further
• The above means that consumer confidence may remain fragile
SHOULD YOU REALLY BUY YOUR WAY TO SUCCESS?
• We sent out the below ‘build or buy’ tweet yesterday.
• Restaurant chains; build (JDW, Costa, FUL) or buy (GNK/SPRT & RTN)? Room for both but skillsets (and risks) are very different…
• Indeed, there is room for both but JDW & Costa haven’t done badly creating businesses without paying goodwill and smaller operators such as Franco Manca are doing likewise.
• Meanwhile, whilst bolt-on acquisitions have worked well for Marston’s and Greene King, the latter is suffering a degree of indigestion following its purchase of Spirit Pub Company a full two-and-a-half years ago.
• And now Restaurant Group’s directors and advisors are proposing that its shareholders pay £559m (or £4m for each of its 138 leasehold restaurants) for noodle chain Wagamama.
• There is an element of the tortoise vs the hare here in that buying additional units is quick but building them is more certain – and less risky, for that matter.
• And it is feasible as there are units available on the High Street and elsewhere and then-smaller JD Wetherspoon added nearly 400 pubs in the 5yrs to 2003. It effectively built a Wagamama every 18mths and paid no goodwill whatsoever.
RESTAURANT GROUP – WAGAMAMA:
• Two Restaurant Group shareholders, GrizzlyRock Capital & Vivaldi Asset Management have come out in opposition to their company’s proposed purchase of Wagamama at £4m per restaurant.
• The two shareholders say ‘at today’s share price, the £315 million rights offering management is asking shareholders to provide for the transaction is nearly 70% of current market capitalization. This amount both in absolute size and especially percentage of the current market capitalization is far too large.’
• Shareholders say the ‘proposed transaction would destroy shareholder value’. The add that ‘massive’ debt would weaken the company’s balance sheet and that execution risk is not being factored in.
• The shareholders say that the proposed transaction has already caused the group to lose £150m in market value.
• GrizzlyRock Capital and Vivaldi Asset Management between them own 1.9% of RTN and say ‘we unequivocally oppose the proposed Wagamama transaction as overly risky and expensive for Restaurant Group shareholders.’
• The shareholders say ‘management grossly miscalculated their cost of capital and shareholder willingness to participate in a transaction. Given a roughly 25% decline in share trading price since the deal announcement, many other shareholders apparently share our negative view of the transaction. We urge management to pay the nominal, £6 million, deal break fee and continue operating the current business on behalf of shareholders.’
• The opposing shareholders say ‘management has been successfully executing the turnaround plan for Restaurant Group’s struggling Leisure assets.’ It says that the company should stick to its knitting. They conclude ‘shareholder value would be maximized by management walking away from this destructive transaction and focusing on operating the current business.’
• Langton Comment:
• There is indeed a £6m break fee but, were this acquisition to go wrong, and execution remains key in that regard, £6m would be a small price to pay in order to avoid such a material move.
• Cutting the dividend and raising money to strengthen the balance sheet may be good ideas but that does not mean definitively that the deal that accompanies them is also beneficial to shareholders.
• Management says that the deal would be enhancing after 2020 and say that it provides the company with a ‘multi-pronged’ growth strategy. No shareholders have come out publicly as strongly in support of the deal. The near 60% discount of the Rights price Management owns around one tenth of one percent of the group’s equtiy.
• RTN would take on Wagamama’s £225m of 4.125% bonds in addition to putting in place a revolving credit facility and raising money via its Rights Issue.
• It has said that the 15 conversions from existing brands to Wagamama would cost around £1m each to enact.
• The deal would need to be executed whilst RTN deals with the everyday issues of competing with nimble competitors on leisure & retail parks, discounting, menu re-shaping, expanding its pubs and concessions business etc.
PUBS & RESTAURANTS:
• Young’s has reported revenue up 8.8% to £156.8m as well as a rise of 4.7% in adjusted EBITDA to £40.4m, in its half year results ended 1 October. The group stated that the hot weather has led to a 5.2% climb in LfL sales across its managed estate and up 4.8% in its tenanted pubs. Chief Executive of the group Patrick Dardis commented: ‘Propelled by the hottest English summer on record, our beautiful riverside locations, stunning gardens and growing number of roof terraces helped to deliver 5.2% like-for-like sales growth in our managed houses, continuing our trend of exceptional summer performances with average like-for-like sales growth of 5.6% over the past seven years’.
• Remarking on current trading Young’s continued with: ‘we’ve started the second half of the year well; total sales in the past six weeks are up 7.2% and up 3.9% on a like-for-like basis’.
• The MCA has reported that Pizza Hut Restaurants is offering delivery for the first time. The group had been restricted with regards to delivery due to its deal with global brand owner Yum! which operates the separate Pizza Hut Delivery business.
• The West End has announced plans to open its first permanent covered food market. The market will be called Seven Dials Market and will have room for c26 traders and a seating area. The market will be operated by KERB. The managing director of the KERB, Simon Mitchell commented: ‘We’ve worked closely with upwards of 150 brilliant independent food entrepreneurs over the last six years and see Seven Dials Market as the next step for us and them in this journey’.
• Costa Coffee has extended its Coffee Club loyalty scheme to Costa Express machines. Scott Martin, founder and managing director at Costa Express, said: ‘With the expansion of the Coffee Club loyalty programme scheme available via our machines, Costa Express customers on-the-go can enjoy quality coffee and benefit from the same rewards and VIP invitations as in-store customers’.
• Dunkin’ has continued with its brand evolution, releasing new nitro and cold brew espresso beverages.
• Debenhams shares have lost over a fifth of their value, as reports of difficulties with suppliers ahead of Christmas circulate.
• Christie & Co and UKHospitality have released a report stating that Government-implemented costs have reached their highest levels in over a decade.
• Thwaites has reported half-year LfL sales up 5% in its tenanted pubs, with group turnover increasing 4% to 49.9m.
• Donald trump has criticised France for implementing tariffs on US wine, stating that it was preventing US producers from selling their wines in France.
• Regal Rogue is seeking a majority investment to maximise its growth in 2019 across AUS, UK, USA and the Nordics.
• House of Fraser will close four more stores in the New Year, all based in shopping centres owned by Intu. Mike Ashley said the landlord had been unwilling to reduce rents for the troubled shops.
• Darwin & Wallace has updated on its new outlet, 17 Dickens Yard, which will open in Ealing this month. The operator says ‘our two beautiful big bars are stocked with premium spirits, house-made syrups, craft beers and delicate wines and our quiet corners are cushioned and cosy.’ It adds ‘our food and drink menus are carefully curated to reflect the feelings of the changing seasons and this November, No 17 Dickens Yard will be filled with warming wintery drinks.’
• Moody’s has reported that Premier Foods’ proposed disposal of Ambrosia is credit positive. It says ‘the transaction would be credit positive for Premier Foods because the company intends to apply proceeds to reduce net debt and invest in other activities that are growing above the group average.’
• Moody’s says ‘the divestment would reduce Premier Foods’ size and diversification, but the likely reduction in financial leverage and faster growth and recovery from additional investments in remaining activities would compensate for that loss.’
HOLIDAYS & LEISURE TRAVEL:
• Dart Group, owner of the Jet2 brands, has released H1 numbers to end-September saying that revenue rose by 36% to £2.2bn and adjusted profits were up by 68% at £339.4m.
• Dart, which will make H2 losses due to seasonality, earned 186p per share in H1 vs 119p last year. The H1 dividend is 2.8p (up 87%).
• Dart says ‘Summer 2018 has proven to be a particularly strong season for our Leisure Travel business, as demand for both our flight-only offering from Jet2.com and our higher margin package holiday product from Jet2holidays proved buoyant throughout.’
• Dart comments on the full year saying ‘looking ahead, significant cost pressures such as fuel and other operating charges, plus the necessary continued investment in our products and operations including that required to retain and attract colleagues, are emerging headwinds. This, coupled with the overall uncertain UK economic outlook particularly related to Brexit and how it may impact on consumer spending, means we remain unclear how demand will develop in the medium term.’
• Overall, Dart says ‘we continue to have confidence in the resilience of both our Leisure Travel and Distribution & Logistics businesses.’
• The prospect of visa-free travel post-Brexit has been dubbed the ‘best news yet’ with Abta welcoming the news. The European Commission said ‘This proposal is entirely conditional upon the UK also granting reciprocal and non discriminatory visa-free travel for all EU member states.’
• Hotelbeds acquires HolidayTaxis Group, with the transfer specialist set to be incorporated into the company’s ancillary arm Beyond the Bed.
• PwC’s ‘Hospitality Directions: US November 2018’ reports Q3 lodging performed below expectations with ADR up 2.1% yoy and RevPAR up 1.7%. The report predicts that full-year 2018 results will see increase in average daily rate paired with a slight dip in occupancy which will result in RevPAR growth of 2.8%
• STR reports a US hotel development pipeline of 194,591 rooms under construction, up 6.2% yoy with 14,295 rooms being built in New York City.
• Cineworld has updated on the 11 months to 11 November saying it has increased revenues by 11.6% over the period. Cineworld comments ‘on a pro-forma basis, Group admissions increased by 5.9% compared to the same period in the prior year.’
• Cineworld says ‘the Group remains on track to deliver a performance for the year in line with our current expectations.’
• Sky News reports the reduction in the maximum stake on fixed-odds betting terminals will be brought forward from October 2019 to April 2019 after Theresa May was facing a mass resignation of ministerial aides.
• Sound Leisure, the manufacturer of jukeboxes has secured its first order from Japan. The deal will see vinyl jukeboxes delivered to luxury Tokyo retailer, Flat 4.
• Pirate Studios, the music technology company, has secured a strategic investment of $20m from Talis Capital, the London-based VC family office.
FINANCE & ECONOMICS:
• Inflation held at 2.4% in October. The NIESR says ‘CPI inflation was unchanged at 2.4 per cent in the year to October 2018. Based on our analysis of 135,000 goods and services in the basket, however, we found evidence that inflationary pressures were subsiding.’
• Germany’s economy contracted by 0,2% in Q3.
• Sterling up at $1.3011 but down against Euro at €1.1477
• Oil up at $66.08
• UK 10yr bond yield down 2bps at 1.48%
• World markets down yesterday. Far East mixed in Thursday trade.
o Draft EU deal now published. Cabinet meets for five hours. ‘Signs’ up to it but is split per BBC. Everyone absorbing the detail.
o Early feedback suggests Rees Mogg & his crowd will vote against, ditto DUP, Labour & SNP.
o Suggesting government has taken two and a half years to basically agree to the EU’s 2016 terms
o Various commentators point out this is a deal that 1) can be achieved but 2) nobody wants.
o DUP concerned it locks Ulster to Ireland. SNP would like the same deal, please.
o Philip Hammond appeals to business to support the deal as the best outcome of a bad lot.
o IMF says UK households would be £6k worse off in the event of no-deal. Earlier HMG calcs show that a deal would cut this loss but that the economy would still track lower.
PRIOR DAY LATER TWEETS:
• Later tweets: Restaurant Group: Paying £559m for Wagamama. LDC points out High St closures +16.9%. Wouldn’t now be a good time to build your own?
• Build your own restaurant chains? No premiums, no goodwill, perhaps some F&E for free, cap contribution, rent free etc. Too slow for some?
• Waga is 138 sites; could you build your own? Sites available & JD Wetherspoon opened c500 pubs, many freehold, in 5yrs to 2003
• Sites may be premium-free, could have landlord contributions, fitout £600k to £800k so get 140 for <£100m. The rest is goodwill…?
• Patisserie Holdings. It’s all gone quiet over there. Group initially intended to relist its shares on 18 October. That didn’t happen.
• Wages up, inflation not far behind? Should be manageable at present but if GDP +1.5% and ‘acceptable’ inflation is 2% then wage growth over 3.5% will be inflationary
• British Land asset values down 4.5%. Says ‘seen polarisation play out in context of CVAs with best stores seeing little or no reduction…’
• Kantar survey has M&S Food as much as 3.3% down. Halo certainly slipped. Waitrose doing OK last week per J Lewis
• Restaurant chains; build (JDW, Costa, FUL) or buy (GNK/SPRT & RTN)? Room for both but skillsets (and risks) are very different…
START THE DAY WITH A SONG:
Yesterday’s song was Not Nineteen Forever by The Courteeners, today who sang:
Yesterday I got so scared,
I shivered like a child,
Yesterday away from you,
It froze me deep inside
RETAIL NEWS WITH NICK BUBB:
• Card Factory: Given the difficult trading conditions on the High Street and continuing decline sin footfall, you’d have thought that the discount card chain Card Factory might have struggled in its Q3 (to Oct 31st), but today’s update is surprisingly solid, as Store LFL sales were up a tad in the quarter and total LFL sales (including Online) was up 0.4%. The Board’s underlying EBITDA expectations for the full financial year remain unchanged at £89m-£91m and the embattled CEO, Karen Hubbard, says: “Given our new ranges and our seasonal performance to date, we approach our Christmas trading period with confidence”.
• Intu Properties: You’d have thought that the management of the beleaguered Intu Properties would be waiting for the revised “PUSU” deadline on Nov 22nd for the John Whittaker consortium for its takeover bid before making any big new decisions, but life goes on and they have bravely resisted Mike Ashley’s pleas to cut the rent on the 4 HoF stores in its centres and so Lakeside, Metrocentre, Nottingham and Norwich will close at the end of January.
• Planet ONS Watch: Despite the boost to clothing sales last month from the colder weather, the slowdown in supermarket sales meant that the overall outcome for the BRC-KPMG Retail Sales figures for October was pretty subdued, but we will find out at 9.30am what “seasonally adjusted” life was like last month on the High Street on that strange parallel world, the Planet ONS (aka the Office of National Statistics), via their official Retail Sales figures…City economists generally expect a 0.2% rise in month-on-month seasonally adjusted sales volume, although Capital Economics have pencilled in a 1.0% fall in October (to give year-on-year volume growth of 1.6%), for what it’s worth. We will be focusing, as usual, at the year-on-year non-seasonally adjusted sales value figures and the split between Large Businesses and Small Businesses (as the ONS persistently thinks that the latter are
• News Flow This Week: The Asda/Walmart Q3 results will be out at mid-day (remember that Asda reports for the calendar quarter, so their update won’t include October).