Langton Capital – 2018-11-28 – On the Beach, T Cook, RTN, CAKE, staffing & other:
On the Beach, T Cook, RTN, CAKE, staffing & other:
A DAY IN THE LIFE:
How hard do you find it to throw away old clothes?
Because, unless your gardening gear is snaffled to make a Guy to burn on 5 November, old clothes tend to lie around until they either get worn to rags, eaten by the dog or decompose naturally and turn to dust.
And slippers are the worst because, unless the soles drop off and risk causing you to take a header down a flight of stairs, why would you throw them away?
They’re reliable, comfy and, after close contact with your feet for months, they have the power to keep the dog away when you want to relax so what more could you ask for? On to the news:
PUBS & RESTAURANTS:
• Restaurant Group shareholders vote on Wagamama today. Close, but proxy votes could swing it for the management. All that will then be left to do is deal with the share issue indigestion and execute the deal.
• Employment levels are reported by the Low Pay Commission to have held up, despite rises in minimum wages. Firms are said to have restructured their workforces but numbers have not fallen.
• Discounts still thick on the ground in the run up to Christmas. M&B brand Harvester offering 40% off food. Prezzo and Giraffe also 40% off food and Pizza Express up to 25% off.
• Sky reports that ‘ailing Patisserie Valerie seeks new auditor after scandal.’ Grant Thornton is apparently to be replaced.
• CAKE has sacked, replaced or is replacing its CEO, its CFO and its auditors. Chairman and major shareholder Luke Johnson is staying with the company & has said that he will work for free and reduce his commitments elsewhere in order to focus on CAKE.
• Marston’s has won Energy Management Team of the year, 2018. The Energy Management Awards were presented for the 4th year. Marston’s also pointed out at its results last week that it is the first pub company to commit to sending none of its waste to landfill.
• ETM has reported full year numbers to 25th Feb to Companies House saying that it was ‘a year of continued growth and development for the business’. The group increased turnover by 34.7% to £27.0m with EBITDA more than trebling to £2.7m.
• ETM reports a PBT of £969k and it has now made an accumulated £3.8m of profits since incorporation.
• GBK has also reported full year numbers to 25th Feb to Companies House. Its story is a little less satisfactory as it says it lost £2.1m in the period and saw its net debt rise to £52.0m. The group nonetheless opened 10 new restaurants during the period. Since the year end, the group has undertaken a CVA.
• The chief executive of UKHospitality, Kate Nicholls has welcomed the tourism sector deal, commenting: ‘We are delighted that a sector deal has been agreed in principle. Securing a sector deal for hospitality has been a priority for UKHospitality and we have worked very hard to achieve it. The tourism and hospitality sectors are closely linked, with over 80% of tourism jobs within hospitality, so this will have a positive impact on our ability to recruit and retain the workforce we need’.
• The British Beer and Pub Association has also remarked on the tourism sector deal, with chief executive, Brigid Simmonds stating: ‘After a lot of very hard work to secure this deal for our industry, this is a great vote of confidence from the Government in our sector. Pubs are third on the list of things to do for overseas visitors to the UK; seven out of ten visit a pub whilst they are here’.
• The MCA has reported that the Breakfast Club is planning to launch a crowdfunding campaign to raise £750,000 as the group seeks to enter into its next stage of growth.
• Turtle Bay has seen sales rise 7% to £68.1m for the year to 24 February 2018, with group EBITDA at £12.1m down from £14.4m last year.
• The director of the food and drink federation has told MPs that companies looking to store extra fresh food supplies in the run-up to Brexit in March may be too late, as all UK frozen and chilled warehouse space is ‘for all practical purposes booked out at the moment’.
• Executives from Diageo, Nestle and the lobbying group the Food and Drink Federation have expressed support for Theresa May’s withdrawal agreement from the EU. The group commented: ‘It sets a direction of travel that we would support, allowing for frictionless trade through the interim period, resolving the questions on the border between Northern Ireland and the Republic of Ireland, and critically providing clarity for our workforce’.
• Meliá still remains innovative and pioneering, claims the group’s CEO GAbriel Escarrer Jaume: ‘We are the 16th-largest hotel company, but the only one that started with resorts, and that remains our main competitive advantage. We are number one in the Mediterranean rim, although we are not in North Africa, and the clear leader in Latin America’.
• Nestle has warned of the ‘very severe’ consequences of a non-deal Brexit, as the group stated that warehouses for frozen and chilled food are nearly full.
THOMAS COOK CONFERENCE CALLS / MEETING:
• Following its profit warning yesterday, TCG held separate conference calls / meetings for journalists and stock market analysts.
• TCG produced a 42-page PowerPoint, which is available on its website.
• As flagged up, the northern European heatwave (and the World Cup) delayed bookings & led to discounting.
• Margins were lower, tour operating came in around £88m below expectations but the airline was up by £35m.
• The meetings / presentations were pretty involved but key take-aways include:
o TCG says that, below the surface, it continues to make progress. It says 2018 is an ‘outlier’. Fundamental plans remain unchanged. The group was a little too optimistic at the start of FY18 and it has had to shelve a some projects.
o It will add 20 more own-label hotels this year, for example. This will put TCG in the top five in terms of beach hotel operators in Europe.
o TCG will commit less capacity to the UK next year. It should be able to add third party flights at short notice if required. This move will de-risk the business (at the potential cost of some margin).
o The group does not believe demand will be unduly impacted by Brexit. Non-EU destination bookings have been strong.
o Summer 2019 bookings in the UK are ahead of last year overall.
o Some £28m of costs that would in prior years have been charged as exceptional costs, have been put through the P&L. The accounts, though not dirty in the past, may be a little cleaner than they were before. The new CFO, Sten Daugaard, has revisited policies & decided on a more up-front approach to write-offs.
o The group says it ‘will manage exceptionals in a different way’. The group says it is being a little ‘more stringent’.
o Exceptional costs will continue as the group is still transitioning but they ‘are trending down’.
o Though the group did not go into detail as to its banking covenants. It said that it had ‘at least 20% of headroom’.
o CEO Peter Fankhauser says 2018 is nowhere near as bad as 2012. The market is better and Thomas Cook itself is in much better shape.
o The group may not get back to 2015 profit levels in one go. But 2019 has started well & UK bookings are up y-o-y.
o The dividend is suspended but not abandoned. A payment will be ‘reconsidered’ next year.
o The group ‘expects underlying growth in both its tour operating and airline businesses’ in the current year. There are no changes to free cash flow estimates.
• Langton Comment: Thomas Cook shares were above 145p in May this year. That’s only 6mths ago.
• Since that point, Fosun takeover hopes have ebbed away and, on the back of the World Cup and hot weather in its source markets, the group has disappointed on trading.
• More than once, it should be said.
• But yesterday’s drop, to 35p at one point, should be taken in context.
• TCG is much-changed over recent years and its finances have been overhauled.
• It has relied a little on ‘exceptional charges’ that had begun to look a little less than exceptional but underlying trading had been improving. It may be that discussion with auditors, in the wake of the Patisserie Holdings scandal, were a little more forthright. Non-executive directors may also have felt a little more compelled to suggest that some non-trading items were put through the P&L in the normal way.
• There is no suggestion that TCG has done anything wrong – either now or in the past. Just that the interpretation of already-disclosed information may be treated a little differently.
• The group says that its work to fundamentally improve the quality of its income is ongoing and it is differentiating its product.
• Reducing capacity next year cuts the risk that the group will need to discount and it is offering markets outside of the EU for would-be travellers who have concerns as to queues and the like post Brexit.
• Earnings are under review – not least which number ‘earnings’ should be derived from – but travel remains an aspirational product, TCG is well-positioned and the shares do seem to have dropped a little further than might be warranted.
HOLIDAYS & LEISURE TRAVEL
• On the Beach has reported preliminary results for the year ended 30 September 2018, stating revenue up 24.5% to £104.1m and PBT up 17.9% to £33.6m. Simon Cooper, Chief Executive of On the Beach Group plc, commented: ‘I am pleased with the Group’s performance, having delivered a 17.9% increase in Group adjusted profit before tax, in line with market expectations and a further improvement in the market-leading performance for Core EBITDA as a percentage of revenue at 42.4% (FY17: 40.5%). This performance was delivered despite the previously highlighted exceptionally hot weather that was prevalent over the summer in the UK and in the Nordics, which combined with the football World Cup, supressed holiday demand. Whilst this impacted our headline revenue growth during the period, the weaker demand also drove a significant reduction in the Group’s marketing spend, ensuring growth in revenue
• Commenting on current trading, On the Beach stated: ‘We are pleased to report a strong early trading performance, supported by a slightly earlier release of summer capacity by major low cost carriers, lower YOY seat prices for winter departures and a continued efficiency in marketing spend. This current performance is in line with our expectations and the Board believes the business is well positioned for the key trading period that commences in late December and continues into Q1 2019’.
• Research from Abta has found that holiday bookings are up 12% on the same period last year despite Brexit uncertainty. More people took an overseas holiday (a rise of 5%) this year than anytime in the last seven years, while domestic holidays declined slightly.
• Birmingham airport has reported its highest-ever passenger numbers for the month of October with 1.14m passengers traveling through, up 6.1% on last year. Destinations with the highest level of growth were Venice, Krakow, Prague and Naples. Simon Richards, acting MD at Birmingham airport, commented: ‘Recording our best October in the airport’s 79-year history signifies an exciting period for us. We have recently released our draft Master Plan, which explains how the airport plans to grow passenger numbers and deliver improved facilities for our airlines and passengers over the next 15 years, and these figures show that we are moving in the right direction’.
• William Hill shares are now around a third of the level they stood at in 2016. They have nearly halved in the last 12mths.
• Netflix is set to announce a major deal with the estate of Roald Dahl, as the group continues with its content acquisition spree.
FINANCE & ECONOMICS:
• Sterling down vs dollar at $1.2748 and slightly lower vs Euro at €1.1283
• Oil up at $60.99
• UK 10yr gilt yield down 3bps at 1.38%
• World markets: UK & Europe down yesterday but US up and Far East higher in Wednesday trade.
o Chancellor Philip Hammond & the Bank of England will set out their analysis of the economic impact of Brexit today. The analysis is likely to conclude the UK would be better off under the terms of Mrs May’s partial Brexit than in the event of a “no-deal” Brexit. Other analysts have suggested that the UK would be better off still if it stayed in the EU.
o Former Cabinet Minister Sir Michael Fallon has said that Theresa May’s half Brexit deal is “doomed”. He says that it is the “worst of all worlds”.
o The Public Accounts Committee has said there is a “real prospect” of “major disruption” at UK ports in the case of a no-deal Brexit.
o Michael Gove famously said that he was sick of experts. It’s not clear if that extends to dentists, heart surgeons etc.
o FT says half-Brexit deal could be ‘in its death throes’. Remainers favour a second referendum, the Labour Party wants an election, Brexiters want a no-deal Brexit and the overseas Press believes that the UK has taken leave of its senses. The country remains split & certainty is in short supply.
o A Norway Solution would, presumably, see the UK continue to pay into EU coffers, would still allow free movement and would remove the votes and vetoes that the UK currently has. A new PM would be needed to propose such a deal in the first place.
PRIOR DAY LATER TWEETS:
• Later tweets: Restaurant Group vote tomorrow, meeting starts 9.30am. Looking like a close call. Proxy votes could swing it for management
• Gregg’s rise on update, Thomas Cook falls. TCG meeting relatively reassuring but this was a profit warning nonetheless
• Mrs May pleads for backing for her partial Brexit. Pushing for leaders’ debate with Jeremy Corbyn. Only 15% public support
• Mrs May. Devoted leader or one of David Attenborough’s pea-brained penguins, marching boldly in the wrong direction? Tough call…
• Shaftesbury says its bit of W End holding up well. Resilient, broad-based etc. Seems to us like property values should be under pressure
• Topps Tiles reverses previous upward guidance saying last 8wks minus 1.9% in challenging trading conditions. Big ticket under pressure?
START THE DAY WITH A SONG:
Yesterday’s song was Down by the Water by PJ Harvey, today who sang:
You leave in the morning with everything you own in a little black case,
Alone on a platform, the wind and the rain on a sad and lonely face
RETAIL NEWS WITH NICK BUBB:
• John Lewis Trading Watch: After two very bad weeks, in the shadow of “Black Friday”, John Lewis traded surprisingly well last week, according to yesterday’s weekly sales overview from JLP. The graph of overall JLP sales now includes Waitrose as well, so we can no longer see the “pure” John Lewis graph, but we estimate that John Lewis alone did a massive £230m (inc VAT) of the total £380m of gross JLP sales in w/e Nov24th, up 7.7% (c5% up on a LFL basis, excluding new stores). But John Lewis was running its own deals and matching competitor promotions all week (rather than just on Friday), so discounting seems to have been more than last year, implying that gross margins were under heavy pressure. In terms of sales mix, Electricals were up by 5.7% in gross terms last week, Fashion/Beauty sales were up by 13.1% gross and Home sales were up by 2.3% gross. The last 17 weeks are now running
• Waitrose Watch: Over at Waitrose, things weren’t so good last week, despite the footfall boost from providing a “Click and Collect” service for John Lewis, with gross sales down by 1.5% again, ex-petrol, in w/e Nov 24th (also c1.5% down LFL, as there is no net new space). The last 17 weeks are still cumulatively running down by c0.4% gross (despite the strong start to August for Waitrose), with the “Home and General Merchandise” category running 4.2% down.
• News Flow This Week: Tomorrow brings the Motorpoint interims, the ASOS AGM, the Dunelm AGM, the Hotel Chocolat AGM and the AO.com EGM. 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.