Langton Capital – 2018-11-23 – Fullers, MAB, Tasty, bad behaviour, incentive & the rest…
Fullers, MAB, Tasty, bad behaviour, incentive & the rest…
A DAY IN THE LIFE:
More results at the end of a busy week. No Day in the Life – but see our ramble on Bad Behaviour below. Also, how do you know a bully is not a bully? He tells you he’s not. On to the news:
FULLER’S H1 NUMBERS:
• Fuller’s reports profits and earnings down. Coming a week after Young & Co reported increases, the group says that it has front-loaded some costs.
• Fuller, Smith & Turner has reported H1 numbers to 29 Sept saying revenues rose 6% to £222.1m and EBITDA was up by 2% at £38.2m.
• Fuller’s H1 PBT is down 1% at £23.6m with EPS down 1% at 33.83p. The H1 dividend is +3% at 7.8p.
• Fuller’s reports that its debt has risen and stands at 3.1x EBITDA.
• Fuler’s managed pubs & hotels were +4.1% in sales. Tenanted LfL profits were +4% and beer & cider volumes were +0.2%
• Fuller’s reports that currently, managed LfL sales are +4.4% to week 33 suggesting a pickup in the last 7wks. Tenanted profits are +2% (a recent decline) and beer and cider volumes are +0.5%
• Fuller’s CEO Simon Emeny comments ‘I am pleased to be reporting another good performance. Each division is delivering growth and we continue to benefit from having a well-balanced business. Our excellent management team has further strengthened the business through a clear vision, a strong set of values and a commitment to growth through offering an outstanding customer experience and recruiting, developing and retaining the best people.’
• Re the fall in profits, Fuller’s says ‘this should be taken in context. We made a conscious decision to front-load our investment programme – impacting our profitability by £0.9 million.’
• Fuller’s says that Brexit uncertainty remains but concludes ‘with a first-class team of people, a well-invested pub estate and a portfolio of outstanding brands, we are ready and able to face the future.’
• Fuller’s remains a well-invested company with an enviable geography. The fact that LfL sales increases of 4% plus were insufficient to hold profits may raise eyebrows. The group remains, perhaps, a little masculine in its offer. Young’s purchased Geronimo some years ago in order to widen its appeal.
BAD BEHAVIOUR: WHAT WERE THE INCENTIVES?
We’ve had some strange, irregular or plain bad behaviour over the years in the leisure sector.
• From fraud, through accounting irregularities to non-criminal (at least in the literal sense) overexpansion on the High Street, the marketing of bland, me-too concepts and then beggar-thy-neighbour discounting and all the rest.
But why do these things happen?
• Well, without ascribing too much blame we’d suggest a number of things:
• Bullying behaviour inhibits free speech. Bad news doesn’t travel and woopsies and the like get covered up.
• Living in a bubble doesn’t promote a breadth of vision. Note the Westminster expenses scandal defence, ‘I did it because we’re all at it.’
• You’ll find it hard to ‘cheat an honest man’. That’s not at all to say that every victim of fraud is partially culpable but, if you fall for the ‘West African princess with $20m in a bank account just waiting to be unlocked,’ you have self-selected for special treatment.
• Similarly, ‘confirmatory bias’ will incline those who think they are genius managers, investors or whatever, believe that they have margins twice the industry average because, well, they somehow deserve it.
We’re all only human.
• Confirmatory bias, overoptimism etc. are deeply ingrained into the human psyche. It’s what got us out of the caves. It serves us well but, if we stray too far from our DNA, we may find our instincts working against us.
• WYSIATI. What you see is all there is. You look at what is there, you rarely stop to consider what isn’t. Proving a negative, after all, is tough. Why bother looking if you’re not paid to do so? And even if you are paid to do so…
• Incentives have a lot to blame. You pay a striker to get corners, you’ll get corners.
• Charlie Munger says ‘never, ever, think about something else when you should be thinking about the power of incentives.’
• He says ‘I think I’ve been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I’ve underestimated it. And never a year passes but I get some surprise that pushes my limit a little farther.’
• Langton along with most observers probably doesn’t spend enough time looking at Remuneration Reports.
• But then again, some bonuses & options payments, as at CAKE, never make it into the Remuneration Report in the first place.
• Unintended consequences about. Note the comment on strikers and corners above.
• MIFID II is killing off research. There will be less information in the market. Share prices will become even less perfect than they were previously. There is no incentive to look at stocks, such as Patisserie Holdings, in order to prove a negative – i.e. it’s not as good as it seems.
• The ratings agencies (witness 2008-09) were paid by the companies they were beign invited to opine on.
• Ditto auditors. Witness, well, the instances are too numerous to mention.
• Non-executive directors may be of the pigeon variety. They fly in, create a mess, and fly out again.
• MIFID II means that Langton has no incentive to pen these words so, at this point, we’ll stop.
MITCHELLS & BUTLERS FULL YEAR NUMBERS:
Following the release of its full year numbers to end-September, Mitchells & Butlers hosted a meeting for analysts and our comments are set out below:
• M&B reports it has ‘maintained growth & had a good start to the current financial year…’ The group has been outperforming its peer group, other than over the World Cup, for some time (p19)
• The group cautions that cost headwinds persist & that the macro outlook is uncertain. There is no dividend this year.
• The year was atypical in that it included the Beast from the East, the World Cup and a very hot summer
• The group mitigated some £28m of the £60m of cost headwinds that it faced in the year under review
• Visitor numbers are down but spend per occasion is rising. Volumes are down 2% in drink and 5% in food
• H2 margins were up on a mix change towards drink
• Some 131 sites are now offering delivery. This could rise to c400
• M&B suggests that cost headwinds will increase slightly in the coming year to perhaps £65m to £70m. An element will be mitigated
• Re dividend. The group needs to pay its fixed charges, keep its assets spick & span and only then will it consider a dividend. There is a degree of caution & M&B will continue to de-gear
• CVAs are likely to continue. They are a halfway house & are really only kicking the can down the road. Capacity needs to come out
• The first Miller & Carter will open in Frankfurt in the spring
• Uninvested units are now said to be in growth and Xmas booking numbers are ahead of last year
• M&B believes that it needs LfL sales increases of around 3% to maintain profits
Balance Sheet, Debt etc.:
• The value of M&B’s property portfolio has been cut by a little under 1%. It stands at some £4.4bn.
• The group has almost completed the move for its refurbishment cycle from 10yrs to 6-7yrs. It will focus more on refurbing wet led pubs
• If the co continues to pay down debt and its pension liabilities, enterprise value will ultimately be represented mostly by equity
• Pension: The group would require bond rates to rise by around 1% to extinguish the pension liability. M&B is currently testing in the courts a move to increase pensions by CPI rather than RPI. This could, if successful, reduce liabilities by around £150m
• M&B sees the macro environment as uncertain and, as a result, it will focus on de-gearing and refurbishing its estate rather than on paying a dividend or making expansionary acquisitions.
• Cost headwinds, and industry-wide issue, remain a feature. The market is competitive and M&B’s brands are involved in discounting.
• Refurbishments should generate additional income as should delivery. Expansion in Germany is a potential area for growth and cost increases are being mitigate where possible.
• M&B’s shares remain cheap on most measures. The lack of a dividend may put off some would-be holders but, at the organic level, trading continues to improve.
PUBS & RESTAURANTS:
• A number of companies, quite understandably, have pointed out that the year to September 2018 was abnormal with the Beast, the World Cup and the hot weather. All things being equal, these will reverse in the next 12mths.
• We would expect the absence of the Beast (if there is an absence) to be greeted with relief by everyone but the football and the hot weather benefited wet-led pubs (for whom calendar Q3 comps will be tough to beat) and hurt the food-led operators.
• Tasty yesterday announced that ‘it has today entered into an agreement to revise its £7.0 million term loan facility with its existing lender Barclays.’
• Tasty says it will push out the final repayment date to March 2022 from July 2021. It will reduce quarterly repayments. The group says ‘as at 31 October 2018, the Company had cash balances of approximately £2.1 million.’
• Kate Nicholls, Chief Executive of UKHospitality has welcomed the agreement in principle between the Government and the EU, commenting: ‘Hospitality operators need to know they will have the reassurances provided by a deal. It cannot be stressed enough that a no deal Brexit would present the sector with severe problems and would have a serious impact on confidence. This agreement demonstrates a clear alignment on a direction of travel’.
• Theresa May is continuing to focus on getting businesses to back her Brexit deal. The Prime Minister has sent a presentation to all FTSE-100 companies outlining the 585-page withdrawal agreement.
• Brewdog is offering 20% off its online products for the Black Friday weekend.
• The delivery only rotisserie chicken restaurant, Clockjack has been liquidated, Big Hospitality has reported.
• The Amsterdam-based hospitality group, Entourage Group, has announced its intentions to bring the fast-casual dining concept, The Butcher and Toni Loco to the UK within the next six months, the Food Service Equipment Journal has reported.
• Per MCA, Taylor St Baristas is now a vertically integrated coffee group rather than a speciality coffee shop operator, according to co-founder Nick Tolley.
• Majestic Wines announces its decision to hedge against a Brexit no-deal by stockpiling wine, bringing in additional bottles to the value of up to £8m.
• Stephen Oliver joins the board of family brewer Robinsons. Mr Oliver previously spent 20 years at Marston’s and was the former managing director of the company.
HOLIDAYS & LEISURE TRAVEL
• Abta warns millions of Brits are risking their lives by taking winter sports holidays without appropriate insurance. Citing YouGov data, Abta says around 22% of British adults who have taken a winter sports holiday have never checked their insurance policy for ski and snowboard coverage.
• Airbnb is facing a class action lawsuit in Israel after the company withdrew listings of Israeli settlements in the West Bank. The lawyers claim the company is showing ‘outrageous discrimination’.
• Hunting parks in China are helping to drive the country’s domestic tourism which has grown at a rate of double-digits for a decade. Domestic tourism is worth 10% of GDP to China, with Beijing estimating it will generate Rmb6tn in 2018. Last month 726m Chinese people took domestic holidays during the country’s ‘golden week’.
• Amazon and Blackstone are bidding for Walt Disney Co’s 22 regional sports networks in a deal said to be worth as much as $20bn, according to CNBC & Reuters. Disney had agreed with the US Department of Justice to divest its 22 regional sports networks amid its acquisition of Twenty-First Century Fox Inc’s film and television assets.
FINANCE & ECONOMICS:
• Sterling up at $1.2871 and €1.1274
• Oil down sharply (again) at $61.91
• UK 10yr gilt yield up 3bps at 1.42%
o All agreed except the detail. What happened to ‘it’s not agreed until it’s all agreed…’
o Government minister Rory Stewart, when asked if Mrs May’s deal will make us better off than would remaining in the EU, says ‘I’m not saying that.’
o HMG to release financial implications ahead of meaningful vote.
o Gibraltar apparently an issue. People’s Vote still being mooted as support for Mrs May’s deal languishes in the teens
o Gov now not saying that trade will be ‘frictionless’. Now jumped ship Dominic Raab had realised that trade and Dover was important.
PRIOR DAY LATER TWEETS:
• Later tweets: M&B reports full year LfL sales +1.3% with growth of 2.2% in 1st 7wks of current year. Capacity in restaurant industry down 1%
• Financial Reporting Council is investigating Grant Thornton w.r.t. audit of Patisserie Holdings in 2015, 2016 and 2017.
• M&B believes CVAs will continue. Sees them as just kicking the can down the road. Real capacity needs to come out
• M&B sees sales volume down 2% in drink, 5% in food. Spend per visit is up. Special occasions holding up, December bookings up on last year
START THE DAY WITH A SONG:
Yesterday’s song was Sunday Morning by Velvet Underground. Today, who sang:
Hey hey, I got some money, I just got paid, got some money and I can’t wait for 6 O’Clock,
I’m outta’ heeeere
RETAIL NEWS WITH NICK BUBB:
• Trade Press: Retail Week magazine has not been published this week, but Drapers magazine is out today and it should be noted that the Editor, Keely Stocker, was justly named “Editor of the Year (Business and Trade publications)” at the prestigious British Society of Magazine Editors Awards on Tuesday night. And she looks at Black Friday in her column, flagging that “many UK retailers have become addicted to the Black Friday drug and feel that they have no choice but to take part or risk losing trade” and thundering that “Blanket discounting makes for a dark Friday”. The main News story is that “Indies hold their nerve against Black Friday pressure” and there is an accompanying column by the owner of the A Hume country clothing store in Kelso arguing that “Black Friday undermines trust between retailer and customer”. Drapers also highlight that “Dragons’ Den” star Peter Jones has
• BDO High Street Sales Tracker: We flagged on Wednesday that sales at John Lewis slumped badly again last week, despite a pick-up towards the weekend on the back of the new Christmas TV ad and cooler weather, but today’s BDO High Street Sales Tracker for medium-sized Non-Food chains for last week, w/e Sunday Nov 18th, highlights that BDO Fashion sales were only 3.7% down LFL last week (including Online). Total BDO sales (including Homewares and Lifestyle sales) were down by 4.0% (-4.6% in terms of Store LFL sales and up by only 2.9% Online), ahead of Black Friday…
• News Flow Next Week: After “Black Friday”, the discounting promotional hype continues with “Cyber Monday” (groan), but there is plenty of company news to keep us busy next week, kicking off on Tuesday with the QUIZ interims, the Pets at Home interims and the Topps Tiles finals. Thursday brings the Motorpoint interims, the ASOS AGM and the Hotel Chocolat AGM. Then Friday brings the DFS AGM, the monthly GFK Consumer Confidence index and the much revised “PUSU” deadline for the John Whittaker consortium over its bid for Intu Properties.