Langton Capital – 2018-11-21 – Marston’s, SSP, Restaurant Group, sugar tax & other:
Marston’s, SSP, Restaurant Group, sugar tax & other:
A DAY IN THE LIFE:
Busy with meetings again today but here’s a thought for you, don’t you think it’s a bit odd when an item’s packaging weighs more than the thing that you’ve bought itself.
Because, and Amazon has brought this to mind, when you buy a pair of earbuds or a small connecting cable for your laptop or whatnot, it’ll often come in a moulded plastic container, in a plastic bag, in a cardboard box – and that can’t be right.
And when you shell out for a Kindle or a new phone or whatever, it seems like a crime to throw away the intricate cardboard sliding box that the thing comes in but, at the end of the day, what else are you going to do with it?
And, forgetting I’m in a rush here, what about the cost? Both environmental and financial because, if it costs 30p to 50p to can or bottle a short run of beer, why can’t we be persuaded to buy it draught? Or at least to buy it in larger cans…
Anyway, on to the news:
MARSTON’S FULL YEAR NUMBERS:
Marston’s has this morning reported full year results to 29 September 2018 and our comments are set out below:
• Marston’s has reported record revenues up 15% at £1.14bn and profits at an all-time high of £104.0m (up 4%).
• However, as a there are more shares in issue post the Charles Wells’ brewing business in mid-2017, earnings are slightly lower at 13.9p, down 2% on last year.
• All segments of the company are in growth. The group has reported 0.6% growth across its pubs as a whole
• The final dividend has been held, resulting in a full year dividend of 7.5p, unchanged on last year.
Trading – Destination & Premium:
• As previously reported, total pub sales are up by 3.3% for the year with LfL sales (across Taverns and Destination & Premium units) up by 0.6%
• Leased pubs are up around 2% in terms of LfL EBITDA, the same as the figure reported for 42wks.
Trading – Destination & Premium:
• As reported at Marston’s year-end, Destination & Premium sales are down 1.2% in the year as a whole having been down 1.5% to w42 and down 1.8% at the half year
• D&P sales were +0.1% LfL in the last 10wks. Food sales and accommodation are down LfL but wet sales are higher
Trading – Taverns:
• Taverns are +3.8% LfL for the year, the same as they were at week 42
• The World Cup & the hot weather have been helpful but momentum has continued into the autumn.
Trading – Beer Company:
• As reported in October, Marston’s beer company has performed strongly. Driven by the continued integration of the Charles Wells Brewing company, sales are up 47% compared with +79% at the time of the H1 statement.
• The underlying business is in growth. Beer sales have benefited from both the World Cup and from the continuing warm weather
• Around 90% of ‘own brand’ volume is now sold outside Marston’s own pubs.’
• Whilst not giving specific figures, Marston’s reports that its retail businesses are currently in LfL growth and that Beer Company is similarly growing
• We believe that Christmas bookings are good and that the ‘big occasions’ remain solid.
• Marston’s could face around £20m of cost headwinds this year – but it is intending to mitigate 100% of these.
• The group sees the LfL growth it needs in order to hold profits steady at 1% to 2%, substantially below the figures quoted by some competitors.
Balance Sheet, Cash Flow & Debt:
• The group reports that debt has risen to £1.39bn, up c£60m. This is as a result of the financing of Marston’s new-build pubs. Leverage is 4.6x EBITDA versus 4.8x last year.
• NAV is 151p per share and, as the group is moving to reduce debt further (see below), it will strive to close the discount at which its shares currently trade.
• Capex next year will be reduced by around £30m with around £20m of this coming from a reduction in maintenance capital spending and c£10m as a result of fewer new-build pubs.
• The group intends to strengthen its free cash flow by 1) growing EBITDA, 2) reducing capital spending, for example via the completion of its EPOS system & fewer conversions, 3) pension deficit contributions should cease after 2021 and by potentially paying off some higher coupon debt.
• The group aims to cut its leverage by 1x EBITDA over a 3-5yr period.
• Fixed charge cover is 2.5x and dividends should be covered 2x by earnings going forward.
Conclusion & Outlook:
• The group has 10 new pub-restaurants planned for the current year and five new lodges
• CEO Ralph Findlay reports ‘Marston’s has performed well in a difficult market.’
• Mr Findlay says ‘our balanced business model has stood us in good stead, delivering record sales and underlying profits with revenue exceeding £1.1 billion for the first time. Our Taverns wet-led community pubs and market-leading brewing business had an outstanding year, more than offsetting the effects of weather volatility and the World Cup on our food-led pubs.’
• Referring to its plans to cut debt, the group says ‘macro-economic and political uncertainty is reflected in our capital plans this year.’
• Marston’s comments overall ‘the outlook for good pubs and brewing remains attractive and Marston’s is well placed to leverage the opportunity this presents with our high quality, well invested estate, leading brands and great people.’
• The group concludes ‘we expect to make positive progress once again in the current financial year.’
• Marston’s has reported profits in line with expectations and EPS, on a lower tax charge, slightly ahead.
• The group has held its dividend, the shares yield 7.6%, and has given a signal that it will focus on debt reduction in the near term.
• Trading is positive in the first weeks of the new financial year and, as the group aims to mitigate most of its cost increases in 2018/19, the group should only need 1% to 2% LfL sales increases in order to hold profits steady against what is a tough trading backdrop.
• The World Cup and the warm weather have been, overall, helpful. But margins have fallen a shade and interest costs have risen. Drink has performed well but food sales were impacted earlier in the year by hot weather and by the World Cup (and earlier still by the Beast from the East).
• As has been noted for some time, what remains clear is clear that the balanced model has smoothed trading for Marston’s given the swing in trading performance (food has been tough and wet sales have been strong.)
• Marston’s shares trade on a PER of around 7x with a yield of 7.6%. Debt should begin to fall at a faster rate and the dividend is secure.
• The shares appear cheap. Trading is not easy but Marston’s has a estate of well-managed and well-maintained, largely freehold properties. It is selling product that the consumer would like to buy at a price they are prepared to pay.
• Lodges, craft brewing and food (in the longer term) remain growth areas. Marston’s is a major brewer and has a large wet-led element to its estate and is well-placed to grow and to create further value for its shareholders.
RESTAURANT GROUP / WAGAMAMA:
• Restaurant Group’s proposed purchase of Wagamama took a hit ahead of its 28 November shareholders’ meeting when top 5 shareholder Threadneedle let it be known that it would vote against the deal.
• Fund manager James Thorne is quoted as saying the rationale was understandable but that ‘the size and price of the deal at this point in the cycle throws up too many red flags.’
• Most shareholders have yet to make their views known though US holders Grizzly Rock Capital and Vivaldi have come out as opposed and Hambro is said to be backing the deal.
• Threadneedle says ‘the share price plunge reflects the depth of concern there is.’
• Smaller shareholders opposed to the deal have had – and still have – the option of simply selling their shares and walking away if they do not want to support the deal or hold shares in the aftermath.
• Shareholder advisory company Glass Lewis has said ‘we understand that the proposed acquisition of Wagamama fits with Restaurant Group’s existing industry focus on restaurant operations in the UK and we expect the combined company could likely benefit from greater economies of scale and a more attractive growth profile.’
• Glass Lewis, whose core competence, it has to be said, is probably not in opining on the pros and cons of restaurant integration and synergies etc., is not commenting on the price or on the execution risks.
• Shareholder Services (another proxy advisory group) is reported to be backing the deal.
• Proxy advisors are not staking their own money whilst Threadneedle, Hambros, Grizzly Rock and others, are.
• Restaurant Group is reported to have pulled out of discussions to purchase the Peach Pub Company, a bolt-on acquisition that could have helped to grow its pub estate.
• Langton comment: Whilst shareholders will not be voting until next Wednesday, after a degree of arm-twisting that took place in pricate, a lot of this is now being played out in public.
• And the stakes are high because the management, though it only owns 0.1% of the company, has put its reputation on the line and is reported to have pushed ahead with a deal despite a number of cautionary meetings with shareholders the week before last.
• These tough meetings must have been partly responsible for what we took to be a slight delay in the publication of documents, a shortened notice period before next week’s meeting and a very material Rights price discount to the pre-disturbance share price.
• RTN still proposes paying £4m per leasehold restaurant for a chain that, though iconic and well-respected, is relatively mature and which, though it is increasing sales and unit numbers, is not increasing its profits.
• Wagamama is facing the industry wide problems posed by higher occupancy and particularly labour costs and the lower margins offered via delivery sales.
• Indeed, the latter should be reducing labour costs but that does not appear to be the case.
• The meeting next week will be extremely interesting. At some point it would be sensible to consider the potential consequences of a shareholder rejection of the deal and options thereafter.
PUBS & RESTAURANTS:
• SSP has reported ‘strong full year results’ for the year to end-Sept with a special dividend of £150m. CEO Kate Swann is to leave the company.
• SSP says revenues came in at £2.56bn, up 9.5% at constant currency. Underlying PBT is £184.4m (up 24.0%).
• SSP LfL sales are +2.8% with ‘strong net gains of 5.1%: driven by North America and the Rest of the World.’
• SSP reports its margins are +70bps with basic EPS of 25.1p (up 23.6%) and a dividend of 10.2p (up 25.9%).
• SSP CEO Kate Swann reports ‘SSP has delivered another strong performance in 2018…We have continued to expand our global footprint, materially extending our presence in North America, delivering excellent growth in India and entering the important Latin American region with two contracts in Brazil. The new business pipeline is encouraging and underpins our confidence in future growth.’
• Ms Swann reports ‘the new financial year has started in line with our expectations and, whilst a degree of uncertainty always exists around passenger numbers in the short term, we continue to be well placed to benefit from the structural growth opportunities in our markets.’
• The group has separately announced ‘that after more than five years with the Company, Kate Swann has decided to step down from her role as Group Chief Executive Officer on 31 May 2019.’
• Ms Swann ‘will be succeeded by Simon Smith, currently Chief Executive Officer UK & Ireland.’ Chairman Vagn Sorensen says ‘succession planning is deeply embedded into the Group and following a thorough process, we are delighted with Simon’s appointment.’
• EI Group yesterday bought back 281,467 of its own shares at 175.3p each.
• The general manager of Wimpy, Chris Woolfenden has commented that the group may open corporate stores as the group looks to expand. However, the MCA has reported that the group aims to remain focused on growing its 78-strong brand via franshing.
• Ossett Brewery has opened a new craft beer concept in Leeds city centre.
• The sugar tax on soft drinks has raised £153.8m since it was introduced in April. The Public Health England (PHE) has stated that if the food industry does not continue to make enough progress on sugar reduction it could face further measures. The tax has raised well under a half of the projected figure as consumers and manufacturers have changed their behaviour.
• Re the sugar tax, the Treasury commented ‘today’s figures show the positive impact the soft drinks levy is having by raising millions of pounds for sports facilities and healthier eating in schools, as well as encouraging manufacturers to cut sugar in over half the drinks found in UK stores.’
• Brigid Simmonds, CEO of the Scottish Beer & Pub Association, comments on the Scottish Government’s new alcohol strategy saying ‘The SBPA and its members are committed to working with all stakeholders to continue to reduce the harmful use of alcohol…However, it is important that measures are targeted and proportionate to ensure Scotland’s pubs continue to flourish. Encouraging investment and innovation in non-alcohol and lower-strength beers and other drinks is also an important way to support those seeking to moderate their consumption’.
• Research by Adobe suggests UK consumers will spend over £2,000 each in the run up to Christmas, with many using Black Friday to make the most of any deals on offer. The ONS reports sales in Great Britain grew faster in November than in December for the first time in 2017.
HOLIDAYS & LEISURE TRAVEL
• A report produced by Allied Market Research has found that the global business travel industry will become worth c$1.7 trillion by 2023, a growth of 4.1%.
• Supercity Aparthotels will open a site in Manchester near Piccadilly station on 6 December, its first site outside the capital.
• STR reports US hotel occupancy up 0.8% yoy in October, with ADR rising 2.7% to $133.81 and RevPAR up 3.5% to $93.55.
• Stride Gaming has reported numbers for the year to end-August saying revenue rose 8.7% to £89m and adjusted net earnings were £14.7m.
FINANCE & ECONOMICS:
• Bitcoin has fallen below $4,300 to register a loss of 25% on the week.
• World markets down on Tech slowdown fears. All markets lower yesterday & Far East down in Wednesday trade
• Sterling down vs dollar at $1.2791 but up vs Euro at €1.1242
• Oil down sharply at $63.21
• UK 10yr gilt yield unchanged at 1.38%
o B of England emphasises importance of transition period. M Barnier has proposed extending this to 2022.
o EU officials to meet PM May on Sunday
o Spain says it will not agree the deal unless it there are changes with regard to Gibraltar. M Barnier says if these national demands proliferate, the deal will be harder for PM May to push through the Commons
o DUP has pulled its vote in support of the government in a number of further Finance Bill amendments
PRIOR DAY LATER TWEETS:
• Later tweets: CAKE: Relief that group has longer to sort out banking. But, 3mths ago, is this really where we thought we’d be today? Remarkable.
• HMG to produce analysis on ‘costs and benefits’ of leaving EU both with and without a deal. Should make interesting reading!
• Markit says UK business most pessimistic in at least 10yrs. Uncertainty has ‘weighed heavily on business investment’. Capex is at 7yr lows
• AO World says white goods market challenging with Bonmarche saying store LFLs have remained weak. Winter season started slowly
• Times says Threadneedle, 7.7% owner, will vote against RTN/Wagamama deal as ‘too many red flags.’ Management (own 0.11%) still keen
START THE DAY WITH A SONG:
Yesterday’s song was M.E. by Gary Numan. Today, who sang:
I had to crucify some brother today,
And I don’t dig what you gotta say,
So, come on and say it
RETAIL NEWS WITH NICK BUBB:
Kingfisher: Today’s Q3 update (for the 13 weeks to 31 Oct) was expected to be pretty underwhelming and so it is, with overall LFL sales down 1.3%, although gross margins have edged up by 40bps. In the UK, Screwfix was only 4.1% up LFL, whilst B&Q was 2.9% down, to leave total LFL down by 2.9%. In France, the trade-focused DIY business Brico Depot is up 1.1% LFL, but Castorama is down by 7.3% LFL and Kingfisher has warned that the outlook is uncertain because of “the ongoing impact of recent national demonstrations”. However, the embattled CEO Veronique Laury insists that the long-term strategy is on track and has thrown some meat to the wolves by announcing that the group will pull out of its sub-scale operations in Russia, Spain and Portugal…
ScS Group: Ahead of its AGM today, the Sunderland-based sofa specialist ScS has issued another trading update today (for the 16 weeks ended 17 October), which basically confirms the trends announced a month ago on the back of the decision to pull out of its 27 House of Fraser concessions by the end of January. Trading for the group as a whole is still in line with expectations, thanks to impressive 3.5% LFL order growth in the core business, albeit that was running at +4.5% after 12 weeks and the business in House of Fraser has slumped by no less than 53.4%…
John Lewis Trading Watch: The shadow of “Black Friday” this week is huge, but there may be more than that to the fact that John Lewis traded surprisingly badly again last week, according to yesterday’s weekly sales overview from JLP. The graph of JLP sales now includes Waitrose as well, so we can no longer see the “pure” John Lewis graph but the plane has clearly flown well into the side of the Christmas sales mountain, which augurs badly…The w/e Nov 17th saw gross sales as much as 6.8% down (over 9% down on a LFL basis, excluding new stores) and John Lewis actually admitted it was “a week of two halves”, with sales hit at first by the continuing mild weather then improving significantly at the end of the week, as the controversial new Christmas TV ad was launched and John Lewis price-matched early Black Friday promotions on Beauty and Electricals…Even so, Electricals were down by 6.3%
Waitrose Watch: Over at Waitrose, things weren’t quite so bad last week, but gross sales were still down by 1.5%, ex-petrol, in w/e Nov 17th (also c1.5% down LFL, as there is no net new space). The last 16 weeks are now cumulatively running down by c0.4% gross (despite the strong start to August for Waitrose), with the “Home and General Merchandise” category running 4.0% down.
Retail Sales Watch: Given the very poor John Lewis figures over the last 2 weeks (see above) and the “Black Friday” frenzy, all the focus in the sector now is on how badly November (the 4 weeks to Nov 24th) turns out on the High Street , but we haven’t seen the final word yet on how bad the outcome was for October…The Office of National Statistics (ie the ONS or what we mockingly call the “Planet ONS”) reported that non-seasonally adjusted total Retail Sales by value were up by 3.2% last month (ex-petrol), helped again by surprisingly good Small Retailers growth. But the BRC-KPMG measure of gross sales (which focuses on Large Retailers, but doesn’t capture the likes of Amazon) was only up by 1.3% (up by 0.1% LFL). So, who was right? The ONS? Or the BRC-KPMG? Well, the consultancy group, Retail Economics (RE), which was founded by Richard Lim (who used to run the monthly BRC-KPMG
News Flow This Week: Tomorrow is Thanksgiving Day in the US and we get the Majestic Wine interims and the Mothercare interims. The much revised “PUSU” deadline for the John Whittaker consortium over its bid for Intu Properties is tomorrow afternoon. Then Friday is…“Black Friday”.