Langton Capital – 2019-03-14 – PREMIUM – Cineworld, ‘problem-appropriate’ decisions, crowdfunding etc.:
Cineworld, ‘problem-appropriate’ decisions, crowdfunding etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
So, Britain wonders, if we’re not going to have a hard Brexit, is it time to start eating all those Pot Noodles that we’ve been stashing in the cupboard beneath the stairs?
And the answer to that, of course, is who on earth knows because, once you’ve gone through the various permutations, the ‘this isn’t bound by law’ arguments and the like, we’re none of us much the wiser.
Hence, as Morrison’s suggests indicating that it’s canny Yorkshire customers are ahead of the curve, maybe we should still be stockpiling toilet paper and headache tablets.
Anyway, they’ll probably extend Article 50 later today so the least we’ll have to do is check the sell-by dates on all our gear. On to the news:
STRATEGIC SOLUTIONS TO OPERATIONAL PROBLEMS:
Executive summary – actions need to be ‘problem-appropriate’:
• With one bound, our hero was free (said the narrator of Dick Barton).
• Meanwhile, in the real world, operational problems may need to be dealt with at the operational level. There is some grinding it out to be done
• High profile, strategic decisions may be inappropriate when the problem lies at the operational level
• If you’re simply not very good at doing what you do, making a major acquisition may not be the most obvious, best or most successful course of action.
Don’t just do something, sit there…
• Note to politicians, some management etc. here’s an idea, don’t do anything
• The opposite is more often given by way of advice. Watchful waiting is quite frequently a valid course of action
• But, see here our comments yesterday on incentives, one should pay attention to who’s giving the advice & have half an eye on how they’re remunerated.
• A barber will always tell you that you need a haircut.
• An investment banker will rarely tell you that doing nothing is the best course of action. Because it isn’t. Not for him or her at least.
• And for management, the clock is ticking. Look at incentives again. They don’t want the success that they fostered to be banked on someone else’s watch, so they’re incentivised to hurry things along, do something dramatic, strategic etc.
But a strategic move may not solve operational problems:
• However strategic a move may be, it might not solve operational problems.
• Food & drink still needs to be the right quality & price to attract customers, sites need to be in the right location, branding needs to be appropriate etc.
• Of course, this is less of an issue if the corporate action is so large that it completely changes the nature of the business but, in this case, if the company in question is listed, it should ask itself is a complete change of clothing what its shareholders bought its shares for in the first place
• Indeed a ‘strategic move’ may deflect attention and delay work on operational issues
• There is a risk that management will be too busy high-fiving each other & being slapped on the back to deal with the real issues at hand
CROWDFUNDING – WHO IS THE IDIOT IN THE ROOM?
• The Internet has allowed some companies to disintermediate the fund-raising process, bypass brokers etc. and go straight to would-be shareholders
• This may be exciting & liberating or highly dangerous, depending on your point of view. It is very likely both.
• But what it has done is raise valuation aspirations on the part of companies. Grind, which looks like a pretty good – though still heavily loss-making – company, is valuing itself at £34m pre-new-money
• This equates to c15x balance sheet totals or 3.5x sales. The group has lost £1.35m last year and has lost £4m since incorporation.
• The company will need to get its head above water at some point. It may do so – but there are a lot of coffee shops out there already & the valuation maybe a tad rich?
The bare bones:
• Dragon’s Den has a lot to answer for. The crowdfunding industry was conceived in 2011 with players including Crowdcube, Seedrs and Venture Founders
• The sector has raised perhaps half a billion pounds from private investors since inception
• It has been disruptive, but disruptive new technology isn’t always a good thing and it has unintended consequences
• Data is patchy but AltFi reported in 2016 that out of 955 raises since 2011 there had only been 5 exits in the UK market
• Valuations are high, there is limited disclosure & liquidity & no clear exit route
• Investors focus on the (very few) big winners such as BrewDog, Meantime etc. This is very similar to the lottery market, which is heavily regulated.
• Investors have difficulty differentiating between a one in a million shot and a one in a billion chance – though one is 1,000 times more expensive than the other
• Thin regulation is dangerous. It may not cause scams, but it provides fertile ground for them to spring up
• In the US, a laser razor raised $4m before being shut down, while a company offering artificial gills for breathing underwater raised $850k & was also shut down
• The market is appealing to unsophisticated investors. Popularity plays a big part. Story stocks abound and outlandish and implausible pitches have the opportunity to succeed
• An MP told the Treasury Select Committee as long ago as 2015 ‘I’m concerned that it might be the next big regulatory or financial services scandal.’
• Whilst it sounds patronising, novice investors could be a danger to themselves.
• And in the real world, crowdfunding, where often much of the money raised is already committed by insiders, is raising expectations as to value. This could lead to a glut of offers and high-profile busts are a real risk
• The latest CGA Prestige Purchasing study into food costs has concluded that fish, dairy & soft drink prices are still rising.
• CGA Prestige says ‘fish has experienced the most significant year on year inflation in Food Price Inflation’ adding ‘high prices are being maintained by quota reductions for white fish, and with no sign of total allowable catches going up, year on year inflation is likely to continue into the long-term. There is a more positive trend in salmon prices, following good availability recently.’
• Oils & fats inflation has eased but ‘with production costs up due to feed shortages following last year’s harsh summer, Dairy prices have seen high year on year inflation.’
• Soft drinks inflation is at its highest since the survey began with CGA Prestige saying ‘much of the rise can be attributed to a shift away from alcohol consumption, reformulation of products and increasing varieties of adult soft drinks.’
• Prestige Purchasing says ‘the continued rise in year on year food and drink inflation for the sector will not be welcome news for operators who are also facing a challenging trading environment.’
• The future is looking a little more benign. Prestige says ‘the recent improvement in exchange rates should also help, providing of course that the outcome of Brexit over the next couple of weeks does not lead to major disruption to availability of products from the EU and introduction of WTO tariffs.’ There are a lot of ifs out there.
GENERAL NEWS – PUBS & RESTAURANTS:
• Warehouse companies are said to be doing well out of stock-piling. Morrison’s said that it is running low on toilet paper. Really, it did.
• JDW has confirmed that it is putting 16 pubs on the market. It regrets the fact that its customers and staff will be disappointed. A spokesman said the sale ‘is a commercial decision taken by the company taken after long consideration.’ The Morning Advertiser reports that the company this month put its prices up for the fifth time in two years. A company spokesman comments ‘we believe that we continue to offer excellent value for money meals in our pubs.’
• The Craft Beer Report 2019, published by SIBA has found that 98% of consumers don’t think craft beer can be made by global brewers like AB InBev. Mike Benner, SIBA Chief Executive commented: ‘This new research clearly shows that consumers believe craft beer comes from small independent brewers and not the global beer companies. Just 2% of consumers surveyed said that craft beer could be made by a global brewer, whereas 43% – by far the largest group – said craft beer is made by small breweries’.
• Mike Benner further remarked: ‘The most striking thing about the survey results is the clarity with which consumers see the importance of the brewery’s size when defining ‘craft beer’, as opposed to the brewery simply being local to them. People are used to buying beers from across the UK in their favourite pub, bar or retailer, and for them it is the size and independence of that brewery which defines whether or not it is a craft beer’.
• CEO Mike Benner also stated that SIBA has taken steps to help guarantee the authenticity of the craft beer sector: ‘SIBA launched the ‘Assured Independent British Craft Brewer’ seal as a way of differentiating beer from truly independent craft brewers from the mass produced products of global brands – many of which are now being marketed as craft’.
• UK Hospitality Chief Executive Kate Nicholls responded to the Spring Statement and No Deal Tariffs on food, saying ‘It is most welcome that Government is realising that the UK’s tax and regulatory environment needs to keep pace with the way the world is changing. In hospitality this is clearly manifested in the relatively unregulated worlds of home-sharing and online travel agents, which are dominated by big companies.’
• Regarding No Deal Tariffs, Kate Nicholls said ‘Tariffs are self-evidently going to increase costs for businesses and for consumers. Many businesses will really struggle to pass those costs on. With costs increasing on all sides, tariffs on food are hugely unhelpful for hospitality businesses.’
• Chief executive of the BBPA, Brigid Simmonds, said ‘With the number of pubs falling in the UK due to planned increases to beer duty – which are linked to RPI – we have called consistently for RPI to be switched to CPI when measuring inflation. The Chancellor made clear that the Government would respond to the House of Lords’ Economic Affairs Committee report, which also recommended the switch.’
• Admiral Taverns has been awarded ‘Best Tenanted / Leased Pub Company of the year’ at the Publican Awards 2019.
• The Inn Collection Group wins ‘Best Pub Employer – up to 500 employees’ at the Publican Awards.
• Ramco Foodservice claims only one in ten catering industry professionals is aware of the existence of a disposal service for second-hand catering equipment, meaning storage costs in the industry are needlessly high.
• CVC Capital Partners bids £500m to acquire a 30% stake in the Six Nations competition, following on from an acquisition of 27% of Premiership Rugby.
• Hadrian Border Brewery has celebrated its 25th anniversary in the brewing business by teaming up with the american brewer, The Airline Brewing Company, to create a new beer.
• Commenting on the outcome of Tuesday’s Meaningful Vote, Chief Executive of the FDF Ian Wright said: ‘Tonight’s result is another body blow for the country and the UK’s largest manufacturing sector. As we teeter on the brink of the cliff edge, just seventeen days’ away, confidence in our political leaders is almost gone. We can only hope that members of Parliament, tomorrow and on Thursday, will vote decisively – and act accordingly – to take a 29 March ‘no-deal’ exit off the table. We now need breathing space in which a clear way forward can be found’.
• Chief Executive of UKHospitality, Kate Nicholls has commented on the Government’s Meaningful Vote: ‘The hospitality sector has historically proven resilient and innovative, but the unprecedented confusion and uncertainty since the referendum has provided stern tests with no relief seemingly in sight. A no deal Brexit would be dreadful news for the sector and many businesses will face serious disruption if we crash out without a deal. Parliament needs to move to rule out such an outcome and then act swiftly and decisively to ensure we avoid it’.
• The WSTA has called on the government to take ‘urgent action’ following the failure to agree on Theresa May’s Brexit deal.
• Reports in India have indicated that Diageo is seeking to assert its ‘legal and substantial’ rights to $135m worth of shares in the Indian based United Brewing Holdings that had been pledged by Vijay Mallya and his son Siddhareth.
• Aber Falls Distillery commences production of a rye whisky, making it Wales’ first rye whisky to be commercially produced.
• Darwin & Wallace has won the ‘Best Sustainable Pub Company’ at this year’s Publican Awards. The award recognises the company’s consistent efforts to reduce waste across every aspect of each bar.
• The Gate, a plant-based restaurant brand, is set to open a new site in St John’s Wood following on from the success of its Marylebone, Islington and Hammersmith sites.
• Instacart expands its alcohol delivery service to 14 US states, partnering with nearly 100 retailers and doubling the number of its alcohol deliveries in the space of a year.
HOLIDAYS & LEISURE TRAVEL:
• GfK reports Summer 2019 bookings up 1% yoy in the week to March 9, driven by an 8% rise in all-inclusive bookings. Season-to-date bookings for the summer remain 2% up year on year and winter 2018-19 bookings up 4%.
• Abta research shows Brits would rather cut back on eating out and buying cigarettes than not go on holiday. Abta said the findings were evidence ‘taking a well-deserved holiday would remain one of the nation’s top spending priorities’. The survey showed 31% of 18-24 year-olds said curbing how often they ate out was five-times more likely than cutting back on a holiday.
• PPHE has announced a JV agreement with Largo 542 West 29th Street Partners LLC to acquire properties located at 538, 540 and 542 West 29th Street, New York. It says ‘the aggregated consideration for the acquisition of the Property was US$42 million plus associated acquisition costs.’
• Tui has vowed to maintain its flying schedule despite grounding five of its Boeing 737 Max. The company is drafting in other aircraft to ensure holiday flights are not disrupted.
• Per Sky News, a case study of people from Derby show that they are putting holidays on hold as the outcome of Brexit remains unknown.
• STR reports February London hotel occupancy +0.6% to 78.0%, ADR up 1.1% to £133.52 and RevPAR +1.7% to £104.14.
• Cineworld has reported full year numbers to end-December saying that pro-forma revenue rose by 7.2% with adjusted EBITDA up 9.4%.
• Cineworld total revenue was $4.1bn with adjusted EBITDA of $925m. The group has an adjusted PBT of $417m. Diluted EPS is 22.4c.
• Cineworld chairman Anthony Bloom says ‘2018 was a transformative year for Cineworld Group. The acquisition of Regal on 28 February made us into a global operator and the second largest cinema chain in the world. By the end of 2018, the Group was operating 9,518 screens in 790 sites across 10 countries.’
• Cineworld says ‘looking to 2019 and beyond, it is clear to me that it will be another exciting time for the Group. Our well diversified cinema estate, along with continued investment in the UK and ROW circuits and our development plans for the US leave us well placed to take advantage of multiple opportunities to generate cashflow and grow earnings.’
• CEO Mooky Greidinger says ‘we are pleased to announce strong full year results following the successful acquisition of Regal. We are well on our way to achieving the successful business integration following a strong performance and record box office results in the US.’
• The group says that there is a ‘strong film slate for the remainder of the year.’
FINANCE & ECONOMICS:
• Chancellor Philip Hammond told the Commons yesterday that the UK economy remains ‘remarkably resilient’. He nonetheless cut growth forecasts for this year from 1.6% to 1.2%, broadly in line with cuts to forecasts across Europe and by the OECD for a number of European countries.
• The numbers are based on an ‘orderly’ Brexit. Hammond has £26.6bn of taxpayer’s money that he says is available to bolster the economy in the event of post-Brexit weakness.
• Sterling up to $1.3243 & €1.17. Oil up to $67.73. UK 10yr gilt yield up 5bps at 1.20%. World markets: UK, Europe & US up yesterday but Far East down in Thursday trade.
• Brexit, politics etc.:
o Nasty party & incompetent party continue to battle it out at the despatch box.
o Commons votes to prevent No-deal Brexit, will vote later today on asking for an Article 50 extension. Question over whether this carries legal weight. There will need to be some rationale for the delay.
o Sterling up to a 7mth high on above vote.
o Tariffs will be cut on 87% of imports in the event of a no-deal Brexit. This may be temporary. Many food products would retain tariffs in order to transfer cash from consumers to farmers.
o Morrison’s has reported its customers seem to be stockpiling some basic products.
o Buyers & sellers are said to be sitting tight during the present Brexit uncertainty per the RICS.
PRIOR DAY LATER TWEETS:
• Solutions must be ‘problem-appropriate’. No point discounting to solve a strategic problem etc. See Premium email
• Langton from the archives. Cheap money, the prequel. What happened last time around. Caution, horror movie. Rating: 18. See Premium e/m
• Coffer Peach Tracker says delivery, discounting & small drop in supply still not enough to prevent negative LfLs. Ooops.
• NPD says pub footfall down 0.2% in 2018. But LfL sales up (so prices up). Either premiumisation or price-gouging depending on your view
• JDW puts parcel of pubs on market. JDW, which has put up prices five times in the last two years, reports H1 numbers on Friday.
• ERG was looking for a ladder to climb down. Geoffrey Cox kicked it away. A few wobbly Tories switched sides. More votes today, tomorrow
START THE DAY WITH A SONG:
Yesterday’s song was California Dreamin’ by The Mamas and The Papas. Today, who sang:
I reached inside myself and found,
Nothing there to ease the
Pressure of my ever-worrying mind
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.
RETAIL NEWS WITH NICK BUBB:
DFS: The sofa retailer DFS has announced surprisingly strong interims today (for the 22 weeks to Dec 30th) and although acquisitions gave things a boost, LFL revenue was up 6%. However, DFS has confused things by saying that it expects the market to remain particularly challenging in 2019 given the current political and economic uncertainty: “Although identifying underlying growth rates over short term periods is extremely difficult, we note that year on year order intake in the second half of the financial year to date has been lower than the first half. Assuming no further weakening of this environment, our profit expectations for the financial year remain unchanged”.
Debenhams: Extraordinarily, with most people focused on the Brexit “no-deal” debate in the House of Commons, Sports Direct chose to issue an RNS announcement at 6.31pm last night, to say that it is prepared to replace its £150m refinancing needs with an interest-free loan, on the condition that it issues it a 5% chunk of equity and makes #MadMike the CEO! Amazingly, Debenhams hasn’t this time sent him away with a flea in his ear, but has announced this morning that it will give “careful consideration” to the proposal and “engage constructively” with Sports Direct. Tactically, that might be the right way to respond, but Debenhams would have to desperate to take the plan seriously…
News Flow This Week: The Signet Q4 results will be out in the US at lunchtime and the prestigious “Retail Week Awards” are announced this evening. And tomorrow John Lyttle takes over as CEO of Boohoo…and the embattled Philip Green celebrates his 67th birthday!