Langton Capital – 2019-03-06 – Just Eat, Shep Neame, Paddy Power, IFRS16 & restaurants etc.:
Just Eat, Shep Neame, Paddy Power, IFRS16 & restaurants etc.:
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A DAY IN THE LIFE:
We’ve gone back to bar soap round our gaff because we’d come to the conclusion that squirty soap was some sort of filthy conspiracy on the part of the supermarkets and soap manufacturers to move money from our pockets to theirs.
And it’s better for the environment, of course, but I’d by lying if I said that seeing all that excess soap squirted around the washhand basin every day only to be swilled away and sent to money heaven didn’t have an impact on our decision.
Anyway, proof if proof were needed that you can take the boy out of Yorkshire but you can’t take Yorkshire out of the boy. On to the news:
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Today, we consider the Ed’s / Giraffe situation & suggest that pubs and freeholds are actually more versatile and flexible than are restaurants and leaseholds. We also look at Casual Dining Group. We’ll be looking at various behavioural economic issues before too long.
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IT NEVER RAINS BUT IT POURS – THE IMPACT OF IFRS 16: PUBS VS RESTAURANTS No4 – 6 March 2019:
• IFRS 16 (the capitalisation of leases) is intended to level the playing field when accounting for leaseholds & freeholds.
• It should explode the myth that leases are a lesser liability than freeholds when, in fact, the reverse may be true.
• This has implications when considering the outlook for pubs (largely though not wholly freehold) versus restaurants (mostly leasehold).
IFRS 16 basics:
• IFRS 16 will be adopted by listed companies for accounting periods beginning after 1st January this year
• Leases will need to be capitalised. This will materially increase ‘debt’ levels for many companies with leasehold assets.
• The balance sheet liability will be the net present value of future lease payments. This will be a big number
• As early as 2016, Ernst & Young said that Retail (including leisure retail) would be the most heavily-impacted sector in a sample of 3,000 listed companies analysed.
• E&Y believes that the median debt figure in Retail could increase by 98% with EBITDA ‘rising’ as rent payments will move above the line.
• The sample presumably includes many freehold-heavy companies (pub companies) suggesting that others (restaurants) could see much, much larger increases in ‘debt’ levels.
• This will lead to a lack of comparabitility with 1) the past and 2) with unlisted companies (which are not obliged in all cases to implement IFRS16)
• It will also explode the myth that having low levels of bank debt is the same as having low levels of fixed charges
Pub companies versus restaurants:
• Most pub companies (not necessarily bar-restaurant companies) have substantial freehold estates
• The likes of Greene King, Marston’s, M&B, EI Group, Punch (as was) & the regional brewers & private companies such as Stonegate are freehold heavy. JD Wetherspoon has recently been buying the freeholds for pubs that it used to lease
• Restaurant companies (Restaurant Group & unlisted companies such as CDG, Prezzo etc.) have very few freeholds & their numbers will change dramatically
DELIVERY – IS IT REALLY A BRAVE ‘NEW’ WORLD? DELIVERY VERSUS RESTAURANTS No1 – 6 March 2019:
• It’s a macro, micro thing. Delivery didn’t invent eating. Unless people eat more (debatable), they are simply eating differently
• This means that cannabalisation (in the macro sense) is 100% but at the micro level (sorting the winners from the losers) it is much more complicated
The evolving picture:
• To put it into context, GDP is rising by 1% or so. There isn’t any more money around so structural shifts (not cooking) can only be paid for by cost savings elsewhere.
• That said, whilst capital can be sucked into Deliveroo (accumulated losses since incorporation perhaps half a billion pounds & counting), customers may be the winners & shareholders the losers.
Delivery in steady state:
• We’re a long way from steady state but, if or when we get there, there will be more players in the chain providing food to the consumer (farmer, wholesaler, restaurant & now delivery company) all looking to make a profit either from 1) the consumer or 2) by beggaring each other.
• Whilst delivery companies, in an oversaturated market, have had the upper hand, this may not always be the case.
• Think the Hollywood studio’s relationship with its starlet in the 1920s versus a studio versus Tom Cruise, Brad Pitt or whomever now. Ditto music, football etc.
• Delivery isn’t ‘the talent’. We’d expect to see 1) push back from restaurants against delivery companies and 2) if delivery companies continue getting such bonkers access to capital, then they will buy or build restaurant chains themselves.
• Branded outlets => dark kitchens => unbranded dark kitchens => Deliveroo branded restaurants. It could happen. Indeed it kind of is happening.
• We’ll have a look at the dynamics between restaurants & delivery companies on the ground & consider how these might change.
GENERAL NEWS – PUBS & RESTAURANTS:
• Just Eat has reported full year numbers saying revenues rose by 43% to £779.5m and underlying EBITDA edged up by 6% to £173.9m.
• Just Eat reports a PBT of £101.7m for the year (2017: exceptionals impacted loss of £76.0m) with adjusted EPS of 17.0p against adjusted EPS of 16.8p last year.
• Just Eat says it has turned in a ‘strong financial performance with some 26m active customers. Orders in the UK are +17%.
• JE says delivery is an ‘£83 billion market opportunity’. The group is ‘creating a leading hybrid offering founded on our unrivalled marketplace, combined with the targeted roll-out of delivery.’
• Just Eat says ‘in 2019, we will leverage the improvements we have made in our marketplace business to drive order and revenue growth, while we now also expect to grow marketplace uEBITDA margins year on year.’
• The group continues ‘furthermore, we anticipate 2019 will see our Canadian business, SkipTheDishes, report its first full year uEBITDA profit, demonstrating the route to profitability for delivery.’
• JE says it ‘expects to report full year 2019 revenue in the range of £1.0 billion to £1.1 billion and uEBITDA in the range of £185 million to £205 million.’ Interim CEO Peter Duffy says ‘Just Eat’s continued strong growth and strategic investments saw more than four million new customers join us in 2018. We are creating a leading hybrid offering founded on our unrivalled marketplace, combined with the targeted roll-out of delivery. This gives our growing customer base access to the greatest choice of restaurants and drives even more orders to our Restaurant Partners, ultimately strengthening the network effects of our business. We have a clear plan for the year ahead as our highly experienced team works hard to accelerate the execution of our strategy and we remain focused on long-term returns for shareholders.’
• Shepherd Neame has reported H1 numbers to end-Dec saying that its managed pubs have outperformed the market and that underlying PBT for the group as a whole rose by 1.4% to £5.9m.
• Shepherd Neame reports underlying basic EPS +1.3% at 31.6p. It is to pay a dividence of 5.87p (up 2.1%).
• Sheps reports managed turnover +7.7% with LfL sales +4.1%. The group says ‘brewing and brands remains in transition following the termination of the Asahi contract and certain private label contracts including the Hatherwood range in Lidl: – Own brand beer and cider volume reduced by -1.0% – Total volume of brewed beer is down -30.8% or 36,000 barrels in the period of which 32,000 barrels related to the Asahi and Lidl contracts. Due to these lower volumes turnover declined -31.4% to £22.2m.’
• Shep’s CEO Jonathan Neame comments ‘the business derives its long-term strength and resilience from its three operating divisions. The managed pub performance has been strong, offset by lower brewing and brands volumes. The tenanted pubs have continued their robust underlying performance.’
• Re the outlook, Sheps says ‘in spite of the risks associated with imminent departure from the EU, we remain confident that our long-term strategy positions the company well for the future.’
• The February UK Services PMI came in ahead of expectations at 51.3, up from 50.1 in January.
• Markit says the latest PMI surveys indicate that the UK economy remained close to stagnation in February, despite a flurry of activity in many sectors ahead of the UK’s scheduled departure from the EU. The data suggest the economy is on course to grow by just 0.1% in the first quarter.
• Markit says ‘worse may be to come when pre-Brexit preparatory activities move into reverse. Many Brexit-related headwinds and uncertainties also look set to linger in coming months even in the case of PM May’s deal going through.’
• AB InBev is set to replace its chairman Olivier Goudet next month after concerns of a conflict of interest arose due to his role at JAB Holdings. Mr Goudet stated that he will be stepping down to ‘devote more time’ to his ‘growing responsibilities as managing partner and CEO of JAB.
• Scottish craft brewer and pub group, BrewDog has entered into the final stages of its plans to launch its first pub in Ireland.
• Brewdog has also launched announced that it has opened BrewDog Airlines, which will see passengers flown from London to Columbus, where its craft beer hotel is based.
• We Are Bar Group Holdings has reported full year numbers to end-September to Companies’ House saying that revenues for the year were £11.2m. Revenues were £13.8m last year. The group lost some £4.1m before tax after a loss of £1.9m in 2017. The group has now accumulated losses of £8.0m and has negative shareholders’ funds of £7.6m.
• A progress report from Deloitte, administrator to Gaucho Grill, shows that the accountants have raised and distributed some £11.4m from the administration to date.
• The craft beer bar and brewery Taphouse Brewpub has opened in the rejuvenated Fruit Market quarter in Hull.
• The average spend per bottle of wine has risen 9% per year between 2015 and 2018 in the UK premium on-trade, research from Liberty Wines has found.
• Carlsberg has taken a minority position in the Chinese craft brewery Jing-A for an undisclosed figure.
• JD Wetherspoon and Hungry Horse have been called out by the research group, New Action on Salt, as offering some of the saltiest children’s dishes on the high street, the Morning Advertiser has reported.
• The BBPA celebrates the National Apprenticeship Week with CEO Brigid Simmonds saying ‘I am a great believer in apprenticeships. I did not go to university and know and admire many people for whom an apprenticeship route into employment, or during their employment, was enormously valuable for them.’
• Amazon announces plans for grocery stores in San Francisco Seattle, Chicago, Washington DC and Philadelphia, with the first set to open in LA at the end of 2019.
HOLIDAYS & LEISURE TRAVEL:
• The International Hotel Investment Forum in Berlin has heard Thanos Papasavvas, Founder and CIO, ABP Invest Ltd, suggest that Mrs May will deliver Brexit and that the weaker EU economy will have significant impact in the UK.
• Mr Papasavvas says there will be opportunities for non-Sterling investors to invest in the UK and for medium to longer term investors, the UK represents a good opportunity. He seems to be suggesting that asset prices could fall in the medium term.
• STR has told the Berlin hotel conference that asset owners are increasingly looking to branded operators to manage their hotels.
• Christie & Co has told the conference that, in the UK, ‘some overseas buyers, particularly from Asia have withdrawn from the market until the uncertainty around Brexit has reduced’.
• Premier Inn has opened its first budget Zip hotel in Cardiff, with small rooms starting at £19 a night.
• Accor launches new lifestyle brand Tribe, targeting the midscale segment and aiming to surprise customers with an original, exciting and carefully curated offer that focuses on style rather than price.
• Yotelpad will open its first three European sites in the Lake Geneva area, starting in 2020. The three Yotelpad properties will total 483 rooms.
• Overall inbound tourism to Germany grew by 5% in 2018. The UK retained its position as the third most important source market for Germany with growth in overnight stays of 4%.
• Eurostar reports revenues up 12% yoy in 2018 to £989m, transporting a record 11m passengers in the year. The business travel market grew by 12 per cent in 2018, driven by Eurostar’s Business Premier service.
• PaddyPower has reported revenue up 9% to £1.9bn, with underlying EBITDA rising 5% to £475m (pre-US sports betting investment) for the year ended 31 December 2018. The group also reported that they plan to change the name of the group to Flutter Entertainment. Peter Jackson, Chief Executive of the group said: ‘The new financial year has started in line with our expectations. The acquisition of Adjarabet is further evidence that we are delivering against our strategy, and whilst there will inevitably be further regulatory challenges, we are excited about the growth opportunities ahead of us’.
• Britain’s largest bookmaker, GVC has called on regulators to not over penalise the sector, as chief executive Kenny Alexander said: ‘We are winning the battle on problem gambling, [but] the gambling industry has been used as a political football’.
FINANCE & ECONOMICS:
• Sterling down vs dollar at $1.3132 but up vs Euro at €1.1625. Oil unchanged at $65.35 and UK 10yr gilt yield up 2bps at 1.29%. World markets up earlier yesterday in UK & Europe but US down & Far East lower in Wednesday trade.
• Brexit etc.:
o Toyota and BMW have both warned that a no-deal Brexit would impact their investment plans.
o A report has suggested that the UK could cut tariffs on between 80% and 90% of goods in the event of a no-deal Brexit. Tariffs on B2B products could be cut (such as car parts etc.) but tariffs on many food products would have to remain in place to protect UK farmers.
o The Dept of Trade says ‘if we leave the European Union without an agreement, our tariffs will need to strike a balance between protecting consumers and businesses from possible price rises and avoiding the exposure of sensitive industries to competition.’
o Failing Chris Grayling has refused to resign following the £33m payout to Eurotunnel because his department was deemed to have bent the rules.
o Mrs May’s advisor Geoffrey Cox is in Brussels again attempting to get legally binding assurances on the N Ireland backstop.
PRIOR DAY LATER TWEETS:
• Later tweets: Pubs v restaurants. Less cost pressure & capacity. Freeholds more flexible than leaseholds. Pubs better positioned to be 3rd space
• Boparan calls a spade a spade, saying rising costs & oversupply have sunk its restaurant business. Also ‘softening of consumer demand’.
• Discounting still a major feature. 2-4-1s & 40% offs common. Margins will be under downward pressure
• No10 to pay £1.6bn of taxpayers’ money to Brexit voting Labour towns. Not an attempt at bribery it says.
• UK Services PMI stronger than expected at 51.3 in Feb after 2.5yr low in Jan. Sterling up a touch. Q1 still likely to be weakest since 2012
START THE DAY WITH A SONG:
Yesterday’s song was Come As You Are by Nirvana, today who sang:
The time to hesitate is through,
No time to wallow in the mire
Try now, we can only lose
And our love become a funeral pyre
RETAIL NEWS WITH NICK BUBB:
Waitrose Watch: Trading at Waitrose picked up a bit last week, but yesterday morning’s JLP weekly overview reported only a 0.9% rise in gross ex-petrol sales (c1% up LFL) in w/e March 2nd, despite the later fall of the half-term holidays this year for many areas and the warm weather. With no new store openings to speak of, LFL sales were only flat in H2, to the end of January, and the first 5 weeks of H1 are running up by c0.5% LFL (up 0.6% gross)
John Lewis Trading Watch: Trading at John Lewis has been weak so far this year, but last week, w/e March 2nd, was much better, up 11.4% gross (c9% up on a “LFL” basis, excluding new stores like Westfield), thanks to a weak comp versus the “Beast from the East” last week and the boost from price-matching the Debs/HOF Sale promotions and the fine spring-like weather. In terms of sales mix, Fashion/Beauty sales were up by as much as 23.3% gross last week, Home sales were up 5.2% gross and Electricals were 5.0% up gross. John Lewis LFL sales were c2% down in H2, but have been over 3.5% down over the first 5 weeks of H1 (down 1.1% gross).
JLP Bonus Watch: The much-awaited John Lewis Partnership finals and Bonus announcement will be out at c9.30am tomorrow. In terms of the key divisional outcomes, Waitrose worked hard to improve gross margins in H2 by cutting back on discounting and price promotions, so our expectation is still that Waitrose operating profits will recover from a very weak £169m to £196m, pre-exceptionals, in y/e Jan. However, at John Lewis H2 gross margins were under a lot of pressure, so, after a poor H1, full-year operating profits at John Lewis will not make pretty reading (we expect John Lewis operating profits to be down from £247m to £143m, pre-exceptionals). Heavy central costs and interest charges eat into those operating profits and there are always loads of “one offs” and exceptional costs flying around at JLP, but against “clean” PBT of £287m in 17/18 we have a 40% reduction to £172m pencilled
News Flow This Week: Tomorrow brings the Greggs finals and the much-awaited John Lewis Partnership finals and Bonus announcement
Grocery Market Share Watch: The latest Kantar and Nielsen grocery sales figures (for the 4/12 weeks to Feb 23rd/24th) came out at 8am yesterday and the headline of the Kantar monthly overview (which focuses on the full 12 week period) was “Grocery growth steady as Brexit deadline looms”. In passing, Kantar flagged that grocery price inflation has edged up to 1.4%. Their rival Nielsen ran with the headline “Online Grocery Market Grows as Convenience Remains a Key Motivator”, flagging that overall industry sales value growth slowed from +3.3% to +2.5% during the last four-week period.
TOPICS FOR CONSIDERATION IN PREMIUM EMAIL:
• Thematic pieces including Pubs vs Restaurants, Delivery, Experiential Leisure, Crowd Funding, CVAs, Employemnt levels (& costs) etc.
• Occasional ‘deep dives’ into stocks (Pat Val, RTN etc.), trends etc.
• Book reviews. Black Swans, The Honest Truth about Dishonesty, Dark Pools, Lean Start Up, Smartest Guys in the Room, Client Nine, Black Edge, The Billionaire’s Apprentice, Thinking Fast & Slow, Wizard of Lies & many others.
• Accountancy, Audit & other, thrill-a-minute topics
• Behavioural economics. Over-confidence, Hofstadter’s Law, confirmatory bias etc.
• Other. Guest contributions, From the Archive etc.