Langton Capital – 2018-11-22 – M&B, more on MARS & EIG, Patisserie Holdings & other:
M&B, more on MARS & EIG, Patisserie Holdings & other:
A DAY IN THE LIFE:
Still busy with meetings. On to the news:
MITCHELLS & BUTLERS FULL YEAR NUMBERS:
Mitchells & Butlers has this morning reported full year numbers to 29 September and our comments are set out below:
• M&B reports full year LfL sales +1.3% with growth of 2.2% in the last seven weeks
• Revenues are up to £2.15bn from an adjusted 52wk £2.14bn last year
• Operating profit is down a little at £303m versus £308m with PBT of £178m against £180m in 2017.
• EPS is 34.1p against a 52wk adjusted 34.4p last year and there is no dividend
• M&B says that it has maintained LfL sales growth and that momentum is gathering ‘from [its] second wave of initiatives’
• M&B reports ‘in the first seven weeks of the new financial year like-for-like sales have grown by 2.2%.’
• M&B reports ‘the eating out industry has faced a number of challenges over recent years. The number of restaurants in the UK increased by 11% over the past five years, outstripping demand growth and resulting in pressure on sales per site across the sector.’
• The company continues ‘over the same period, the sector has continued to face strong cost headwinds with the combined result of these two factors being a number of CVAs and business closures amongst our competitors in the past year.’
• Re the market, M&B comments ‘in the twelve months to September 2018, the number of restaurants in operation in the UK fell by 1.0% reflecting the competitive pressure in this highly fragmented sector.’
• Demand is being impacted by factors ‘including Brexit, political uncertainty and limited growth in real wages.’
• The group says ‘despite this, turnover in the eating out market as a whole continues to grow, with forecast growth of 1.5% in 2018 indicating that leisure spend is currently being protected to some extent by consumers.’
Balance Sheet, Debt etc.:
• M&B has completed 232 ‘return generating’ capital projects. The group has expended £171m on capital projects including 7 openings of new sites
• Net debt was £1.69bn at the year end or some 4.0x EBITDA (2017: 4.2x)
• M&B says that it is ‘prioritising estate investment and [intends to] de-leverage against a challenging back drop as previously outlined, no final dividend declared.’
• M&B CEO Phil Urban comments ‘focus on our three priority areas of building a more balanced business; instilling a more commercial culture; and driving an innovation agenda has continued to move the business forward over the financial year.’
• Mr Urban continues ‘the implementation of the second wave of initiatives from our transformation programme has resulted in sustained like-for-like sales growth, continued market out-performance and a return to profit growth in the second half despite Easter moving into the first half.’
• M&B says ‘we continue to work hard on driving efficiency gains and profitable sales growth through the ongoing roll out of initiatives to mitigate the cost headwinds impacting the industry.’
• Mr Urban concludes ‘overall, the Company is positioned well to continue creating shareholder value in the long term.’
• M&B has reported figures a little ahead of market expectations and reassured that recent positive trends with regard to LfL sales have continued.
• Cost headwinds remain a problem and demand is somewhat uncertain for the year ahead.
• But these are industry-wide rather than M&B-specific issues and the group is pulling what levers it can to maintain and grow profits.
• In recent years, M&B has expended a great deal on capital spending. The returns here will have shored up the overall numbers.
• The market is competitive and M&B’s brands are involved in discounting.
• The group has a large estate and all changes will take time to come through. Competitors will not stand still. Smaller operators will be more nimble but other, larger players, are facing much the same challenges as M&B.
• M&B may have turned the corner but it may be doing so just as the market becomes somewhat more challenging. The lack of a dividend should not come as a shock but it may lead would-be holders to question just when (and how) they could profit from M&B’s recovery.
• However, the group is optically cheap and its performance is improving.
MARSTON’S RESULTS MEETING:
Following the announcement of its full year results this morning, Marston’s hosted a meeting for analysts and our comments are set out below:
Trading – General:
• In addition to working its existing assets, Marston’s retail growth strategy remains to focus on new builds, food and accommodation. Re the latter, MARS has 1,500 rooms and is aiming for 4,000 in the medium term.
• In common with the industry as a whole, sourcing labour is becoming more difficult. MARS reports that only 6% of its staff is from the EU
• In advance of Brexit, MARS is confident that its supply chain is ‘robust’
Trading – Destination & Premium:
• LfLs were down on the year but were on an improving trajectory. Margins are down but are in line with expectations.
• Costs will be mitigated in FY19. The group will save labour costs where it can. May move more to bar service for food with less service at table.
• The consumer is exhibiting some caution when it comes to food. Consumers are focusing more on social responsibility
• Discounting & oversupply is a feature of the food-led market. This is more apparent across the casual diners.
• Delivery is also becoming a feature
Trading – Taverns:
• Taverns had a ‘good year’. Given the warm summer weather and the World Cup, comps will be tough in Q4 2018/19.
• Business rates changes in the Budget will aid tenants. Capacity is down. There were 57k pubs in 2008 and there are now nearer 48k
• Pubs have proved to be adaptable & MARS has introduced its franchised model. That said, pub closures will continue. The group believe that most of the pubs are closing are no longer sustainable or relevant or both
Trading – Beer Company:
• Synergies have come through as anticipated. Another £1m or so should be forthcoming. Margins contracted but this was as expected & due to the changed mix of sales. Group exports are +81% year on year.
• MARS has 27% of the premium bottled ale market. Some 90% of the beer company’s output is now not sold in MARS pubs
Balance Sheet, Cash Flow & Debt:
• Capex will be reduced. Debt will fall more rapidly. The group may pay off some of its securitised debt to replace it with cheaper money. This will involve some costs.
• The pension deficit should be cleared by FY20. At this point, contributions will be stopped.
• Financing is ‘appropriate’ and group wishes to close the discount to NAV per share of 151p. The group is targeting £15m p.a. from disposals on an ongoing basis.
Conclusion & Outlook:
• The group is 93% freehold & it does not expect to be impacted materially by IFRS16.
• Trading in the current year has started well with all divisions in LfL growth. The group will update on Q1 trading at its AGM on 23 Jan 2019
• Marston’s has reassured that current trading in FY19 is ahead of last year. The maintained dividend appears to have been taken well and the group’s comment that it intends to reduce debt by 1x EBITDA over the next 5yrs will please a number of observers.
• All being equal, the weather will normalise and there is no World Cup next summer. Premium & Destination will be up against soft comps but the reverse will be true for Taverns.
• Overall, MARS’ shares trade on a PER of around 7x with a yield of 7.6%. They are prima facie cheap and, though 100% UK-exposed, current trading is positive.
• Lodges, craft brewing and food (in the longer term) remain growth areas. Marston’s benefits from a freehold estate and its dividend is secure.
EI GROUP RESULTS MEETING:
Following the release of its FY results, EI Group hosted a meeting for analysts and our comments are set out below:
Trading in General:
• EI Group reports that the execution of its strategy, outlined three-and-a-half years ago, remains on track
• The good summer was worth perhaps £2m. The current year has begun ‘in line with expectations’
• Growth has compensated for disposals and profits are stable. Rental income is flat
• There were 83 unplanned failures in the year, a three-year high. At 1.8%, this is deemed to be within normal bands
• The group remains willing to sell either poor assets or gold bricks. ‘Around half’ pubs disposed have remained as pubs
• New corporate bond covenants allow 20% of the proceeds of disposals to be returned to shareholders. This is in addition to the £20m buyback announced today
• The travails in the casual dining market do not impact these pubs
• Relatively few properties have moved to Free of Tie leases. More could follow as there are 54 pubs currently with the Adjudicator
• The Budget benefit re business rates will go to tenants
• The group confirmed that it has begun to investigate a disposal of some or all of these assets. A major disposal would require an EGM.
• Most of the units here are trading as pubs. There may be ‘around twenty’ C-stores.
• Of the 412 pubs in this division, the group may wish to take a number back to manage itself
• LfLs are strong both at managed partnerships and at the own-managed Craft Union and Bermondsey companies
• The group intends to ‘retain the skills’ it has accessed via its partnership with managed experts
• One of the managed expert companies may be ready to sell in FY20
Balance Sheet, Debt etc.:
• Any ‘monetisation’ events could help bring debt down markedly. As assets would be sold, EBITDA would also fall
• EIG currently believes that share buybacks represent the best use of capital. A dividend will be considered in due course
• EIG’s evolution continues.
• Operating a managed and tenanted business is 1) harder work but 2) it offers a flexibility not available to a purely leasehold business.
• Comps next year could be rather challenging but, at this stage, FY19 is trading in line with expectations. The group believes that the best use of its own cash at present is to buy back stock. We generally concur and would suggest that EIG’s shares are not expensive.
PUBS & RESTAURANTS:
• The Financial Reporting Council has said that it is investigating Grant Thornton in regard to its audit of Patisserie Holdings in the years 2015, 2016 and 2017.
• Patisserie Holdings’ shares remains suspended after the discovery of financial irregularities & the subsequent departure of its CFO and CEO. Emergency funding was required by the company which chairman Luke Johnson said was only three hours from collapse. In addition, the group’s CFO and CEO had cashed in options that had not been disclosed to shareholders. The group has indicated that it should earn around £12m at the EBITDA level (down more than half on earlier estimates) once it has relisted and restated its historic figures.
• Grant Thornton has said that it will cooperate with the FRC. This is the first mention of irregularities stretching back more than one year. The group IPOd in 2014 and purchasing shareholders at that time will be interested to know whether the accounts on which they relied were accurate.
• The SFO is currently investigating CFO Chris Marsh. Chairman Luke Johnson has said that he intends to devote more time going forward to his role at CAKE.
• Tortilla has stated that LfL sales have risen c6% in the year to date, the MCA has reported. The group have taken advantage of the rise in delivery by opening their own dark kitchen, a site dedicated only to delivery.
• A gay couple have been asked to leave a Wetherspoons site after sharing a kiss, the Morning Advertiser has reported. The pubco has responded that they do not comment on individual cases but did add: ‘in general, as long as people are well behaved in our pubs, they can do as they wish and if that means a man kissing a man – no problem’.
• Ei Group, the UK’s largest pub company, is trialing a range of new energy-saving projects including refrigeration, as it looks to help its publicans reduce their carbon footprint. Paul Harbottle, group commercial director at Ei Group, said: ‘Buildings that operate more efficiently have a reduced energy demand. That means lower operating costs and greater profitability for our publicans. It also leads to a reduced carbon footprint and improved environmental performance, something we know is hugely important in today’s world’.
• Chief Executive of UKHospitality, Kate Nicholls, has warned that the Scottish Government’s announcement to tackle alcohol abuse must be proportionate. Nicholls commented: ‘Scotland’s hospitality and tourism sectors are also some of the country’s best assets, including its pubs, bars, nightclubs and restaurants. They provide employment and investment in every region and any measures undertaken by the Scottish Government should be proportionate. They should avoid the unintended consequences of placing additional burdens or costs on valuable employers’.
• The British Institute of Innkeeping (BII) has announced Mark Robson, Managing Director of Red Mist Leisure, as its new Chair Elect.
• NewRiver claims £1.7m of a potential £3m synergies have so far been realised from its acquisition of Hawthorn Leisure. NewRiver acquired Hawthorn for £106.8m in May, with synergies expected to complete by the end of 2019 financial year.
• A shortage of Swedish diary substitute Oatly in the UK means coffee shops may have none left in stock this week.
• Horizon reports global travel retail spending is predicted to drop by $15m in 2018 to $382bn compared to 2016.
HOLIDAYS & LEISURE TRAVEL
• Hoseasons reports bookings from millennials up 37% in the last three years, with managing director Simon Altham claiming they were making up for missed staycations after years of cheap foreign holidays.
• STR reports Europe hotel occupancy up 2.4% to 77.4% in October 2018, with ADR up 6% to €116.15 and RevPAR up 8.6% to €89.89.
• Hollywood Bowl completes a £250k rebrand of its Wigan AMF Bowling site into a ‘new-generation’ Hollywood Bowl. Wigan follows recent refurbs in Bristol and Poole and is the company’s ninth investment project of 2018.
FINANCE & ECONOMICS:
• Government borrowing rose more than expected in October. The monthly deficit rose to £8.8bn from £7.2bn last year.
• Year to date borrowing of £26.7bn remains £11.2bn below that last year at this stage.
• Sterling down at $1.2784 and €1.1217
• Oil up at $63.79
• UK 10yr gilt yield up 1bp at 1.39%
• World markets better yesterday with the Far East up today.
o Betting on a first round loss for Mrs May’s proposals in the House of Commons. Followed by a bit of tweaking & then parliamentary approval.
o Mrs May in Brussels yesterday. But no breakthrough so going back again. This is beginning to look a little orchestrated. Agreement expected by Sunday with parliamentary vote early December.
PRIOR DAY LATER TWEETS:
• Later tweets: MARS – all divisions in growth, current year started positively. Co to shift emphasis to paying down debt
• RTN bid to buy Waga hits another buffer as Threads says no. Deal now quite tight. What is plan B…?
• Sugar tax raises less than half projected figure. Just because a castle is never attacked, doesn’t mean it didn’t fulfil its purpose
START THE DAY WITH A SONG:
Yesterday’s song was Kinky Afro by Happy Mondays. Today, who sang:
Watch out, the world’s behind you,
There’s always someone around you who will call
It’s nothing at all
RETAIL NEWS WITH NICK BUBB:
Intu Properties: Amazingly, the much revised “PUSU” deadline today for the John Whittaker consortium over its bid for Intu Properties has been revised again…The Takeover Panel has given them until the end of next week to deliver the goods and complete the financing, having been assured that nothing has come up in due diligence so far that would stop the mooted c210p bid (although some thought a couple of months ago that would need to be sweetened)…
Majestic Wine: The interims statement from Majestic Wine is headlined “steady as she goes”, but if you thought that meant that the group had been able to hold profits in the face of increased investment and a challenging market then you might have to think again, as H1 adjusted PBT was 63% down at £2.5m and the company is dampening down short-term profit expectations…
Mothercare: The beleaguered Mothercare has said nothing about current trading since its CVA and equity restructuring back in June/July, but the message back then was that the patterns seen in the second half of the last financial year were continuing: “with challenging conditions in the UK and some stability visible in our International operations” (UK sales were down 4.6% LFL in Q1). However, the shares have drifted back below the 19p placing price of the emergency fund-raising, so expectations were low ahead of today’s interims. And the news is that the UK LFL sales decline ballooned to -11.1% in H1 overall, “reflecting wider market uncertainty and negative brand coverage in connection with the Group’s refinancing”.