Langton Capital – 2019-03-20 – PREMIUM – Tasty, Ten, SOTP vals, overconfidence, CAKE admin etc.:
Tasty, Ten, SOTP vals, overconfidence, CAKE admin etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
I put my earphones down on my desk yesterday where, unbeknownst to me, they picked up a bit of bread with a smudge of Marmite on it.
Said bit of bread ended up stuck on my ear where it stayed for most of the day and looked, I’m told, rather like an earring but did anyone tell me?
No, they did not.
In fact, it was only when I twigged that various people were manoeuvring with cellphone trying to get an interesting shot to put on Instagram that I realised something was amiss.
Thanks a lot, guys. On to the news:
SUM OF THE PARTS VALUATIONS – ACCOUNTANCY No4 – 20 March 2019:
FROM THE ARCHIVES: Langton writing in Sept 2006, some 2yrs before the crunch:
• Sum of the parts valuations are a tool. Like any tool, they can be used for constructive or nefarious purposes
• In boom times, they are used to try to spread the boom to the darker corners of the market. This often does not end well.
Our view 12yrs ago:
• In 2006, we suggested re SOTP valuations that, if ‘used to the exclusion of other measures, a materially misleading valuation can be ascribed to companies.’
• Stockbrokers (during the dotcom boom) ‘took to driving price targets by seeking out the most expensive companies in Europe…in order to produce a target price.’
• Hence Yellow Pages companies (remember them?) became Google with a book publisher attached, bread shops were ‘Amazon plus a bakery’ etc.
• We suggested in 2006 that ‘this approach effectively sought to spread any overvaluation throughout the whole of Europe.’
• It was flawed for several reasons. No broker every used the above to drive SELL recommendations on Google, Amazon etc.
• And ‘no-one stopped to suggest that, if a company is never going to be broken up, it may never realise the sum of its parts – or anything close.’
• Analysis such as that above provides a ratchet. Valuations move up, then are anchored. Then they move up again – and are anchored again. And then they crash
• We’re not in this sort of situation at present – but we often are. Beware selling agents (be they marketing properties, IPOs or financial products) whose lips are moving
• We suggested 12yrs ago that there were exceptions. Whitbread (at the time more of a conglomerate than it is now) couldn’t be valued any other way, for example.
• We said that ‘managed break-up’ were likely in such cases. WTB had already sold its UK Marriott franchise & Pizza Hut and David Lloyd & Costa have since followed
OVERCONFIDENCE – BEHAVIOURAL ECONOMICS No1: 20 March 2019:
There are no supermen among us:
• It’s nice to think that human beings vary widely but, to a pig or a pigeon, we are all the same.
• Gender, race even levels of intelligence mean little in the scale of things. We have much more in common with each other than we often care to admit.
We have a degree of hard-wiring…
• It’s what got us out of the trees (overconfidence, optimism). It’s what gets us up in the morning (ditto), what drives us on (confirmatory bias) etc. etc.
• And we can’t get away from it. Arguably, we shouldn’t waste time trying, we should just be aware of it, temper some of our decisions accordingly
Overconfidence in practise:
• Most drivers lose the odd wing mirror. They scrape their cars when parking. But they thought they could ‘make it’ and 60%, 70% or more drivers think they are ‘above average’
• 100% of newly-weds are convinced they will not get divorced and it’s not down to intelligence because 90% of college lecturers rate themselves ‘above average’
• In business you need a degree of confidence. In fact, in calm seas, the more the merrier but, if things get choppy, it can bring you down. Tomorrow, we’ll look at confirmatory bias.
PATISSERIE HOLDINGS – INTERIM ADMINISTRATORS’ REPORT:
Horror movie alert, the hole gets bigger:
• KPMG has reported that Pat Val’s Black Hole is £94m.
• This compares with earlier estimates of £40m. It brings net assets down to £14m as at August last year.
• KPMG says ‘the cash situation continued to deteriorate’ between August and the January administration.
• This number will have reduced further due to the costs of administration etc. There could very quickly be almost nothing left.
• The £14m is before any debt owing (or potentially owed by) HMRC. The degree of the ‘misstatement’ was such that KPMG does not know what the liability is.
• The £10m loan from Chairman Luke Johnson & the £25m put in by shareholders in October, was quickly lost
• KPMG reports that, at some point between October and mid-January, the board ‘realised that the accounting misstatements were far worse than first estimated’.
• It should be noted that, as far as terminology is concerned, ‘far worse’ is far worse than ‘worse’.
• The disposals made have been widely reported. The costs of the administration to date are perhaps £2.4m. This figure could still rise considerably.
• Administration costs & dismissed staff (owed perhaps £3m to £4m and £835k respectively) along with HMG (unknown) must be paid before any other creditors get a look in.
• Having said that, the bulk of Mr Johnson’s £3m ‘wages’ loan could also be paid early. KPMG says ‘it was a condition of these loans [Johnson & part of Barclay’s loan] that any repayment be treated as an expense of the Administration’.
• Mr Johnson may get the £3m that he put in ‘to cover wages’ back. This because it’s been agreed that, as his cash was used to pay what would otherwise have been preferred creditors, it should have the same status
• Stonebeach, shorn of its tail & before interest & depreciation, managed to make a ‘profit’ of £167k for the 6wks to 8 March
• This is 1) not particularly good but 2) better than the former management was achieving
• Perhaps understandably, KPMG is very reluctant to be drawn in writing on the legal implications of any of the above
STRAINS ON CASHFLOW. RENTAL PAYMENTS – ACCOUNTANCY No5 – 20 March 2019:
• Whilst cash receipts for pub, bar & restaurant businesses (adjusted for seasonal issues) are relatively steady, costs tend to be lumpy. Staff, rent & the VAT man are not paid daily but rather monthly or even quarterly. This can lead to lumpy payments & explains why, in some situations, the bank calls the administrator in just after a bumper weekend (or Christmas) and just before rent, staff and other payments are due to be made.
• Profitable companies can go bust if they structure their cashflows incorrectly. Of course, a bust is much easier to achieve if a company is actually not making a profit into the bargain.
• Administrators to Patisserie Holdings KPMG have said that the directors called in administrators because they could not make the January payroll.
• That is consistent with a company that was not trading profitably and which had run out of sources of capital.
• But a bigger payment will need to be made on the quarter days, anachronistically based on feast days in the UK, 25 March, 24 June, 29 Sept and 25 Dec, when rental payments often have to be made (for the quarter in advance) and staff will also have to be paid for that month.
• The calendar Q1 quarter is often the worst of the year for revenues and March 25 is next week.
• Tomorrow a quick look at cash-flow versus profits and why provisions, which are useful in many ways, can mean that the difference between the two can widen
GENERAL NEWS – PUBS & RESTAURANTS:
• Q2 rents are due to be paid next week. So is the March payroll. VAT, for quarterly-paying companies, will be next month. Strains on cashflow (caused by an inability to pay the January payroll) are what brought the administrators in at Patisserie Holdings. More in Premium Email above.
• Tasty has reported FY numbers today saying sales fell by 6% to £47.3m ‘due to closure of sites and like-for-like decline.’
• Tasty reports adjusted EBITDA of £1.58m (2017: £3.5m). The group sold 3 restaurants & closed 1 in the year. It says ‘one further site has been exchanged and waiting for completion.’
• Tasty ‘does not intend to open any new restaurants in 2019, with management focused on restructuring and improving profitability from the existing portfolio.’
• Tasty says ‘as highlighted previously, the market conditions for 2018 continued to remain extremely challenging. In addition, unfavourable weather conditions and the World Cup impacted 2018 performance. The exceptionally cold and snowy winter supressed sales. During the World Cup and an unusually hot summer, customers favoured wet-led establishments and outside seating. Trading over the Christmas period was positive, though the uncertainty of Brexit has meant that 2019 has started slowly.’
• Tasty says ‘the challenging conditions continue to affect the casual dining sector as evidenced by the well-publicised closures across the market and on the high street.’
• Tasty has a revised funding arrangement in place. It’s £7m term loan has been extended to March 2022 and has cancelled its £5m revolving credit facility.
• Tasty says ‘Brexit and the general economic climate continue to affect trading. We expect 2019 to be a challenging year.’ The group remains cash positive but says ‘should a form of Brexit take place, there is risk of inflationary food pressure and supply of certain food items and labour remain uncertain.’
• NIESR suggests high employment numbers could be partly as a result of businesses declining to invest (due to Brexit & other uncertainty) and adding labour as a short-term fix. Pressures are adding to wage costs for a number of operators.
• UKHospitality Chief Executive Kate Nicholls has commented on the report produced by The Business, Energy and Industrial Strategy Select Committee, saying: ‘The Committee has rightly highlighted both the importance of the hospitality sector to the UK’s economy and the need for a nuanced approach to supporting it. The Government has signalled its intention to support our sector, not least in agreeing in principle a sector deal for Tourism and Hospitality, but there is much more work to be done together. UKHospitality, its members and the wider sector are very happy to work collaboratively with the Government to ensure we get the right support and an effective sector deal’.
• Also commenting on the BEIS Select committee’s report, Chief Executive of the BBPA, Brigid Simmonds said: ‘We welcome this BEIS Select Committee report on the Government’s Industrial Strategy and Sector Deals, which highlights the importance of the hospitality sector to the UK. It is important to note that the Government has committed in principle to a Sector Deal for Tourism, which we have already welcomed as a huge boost to pubs and the wider hospitality sector after putting in a lot of hard work to secure it’.
• The BBPA has warned about the possible negative impact upon the night time economy due to the decision by Phonographic Performance Limited (PPL) to increase Specially Featured Entertainment licences by 130%. Chief Executive of the BBPA, Brigid Simmonds said: ‘We are extremely disappointed by PPL’s decision to raise the tariff on the SFE licence by 130% on average. The night time economy is vital to the future of our high streets, but businesses that are crucial to that night time offer like pubs are already struggling, with on average three pubs a day closing their doors for good. This decision will be another big blow to hospitality businesses that are struggling to survive’.
• The UKHospitality have expressed concern about the same decision from the PPL, with Chief Executive Kate Nicholls commenting: ‘The decision to introduce a new tax for music venues could be potentially devastating. This new tax will see venues hit with an average 130% increase which we estimate will cost the hospitality sector upwards of £49 million’.
• Cash On Go, the financial services company has been ordered to not reuse an advert in which it tried to persuade people to take out a loan, in case they wanted to stockpile food because of Brexit.
• European private equity fund, PAI Partners appears to be the frontrunner in the auction for the concession catering business of France’s Elior Group. The deal is being brokered by Morgan Stanley and BNP Paribas and could be worth 1-1.5bn euros.
• D&D London opens Queensyard restaurant in Hudson Yards, New York, aiming to bring ‘a flavour of London to New York’. D&D’s last launch in New York – Bluebird – experienced a rocky start.
• Zonal appoints Henri Jooste as strategic product manager. Jooste will focus on supply chain solutions including stock management.
• Badiani, an authentic Italian gelato brand, signs for a 1,457 sq ft site at 303 Fulham Road, due to open next month.
• Hilco’s Office Outlet enters into administration, putting 1,200 jobs at risk at 90 stores around the UK. The administrators said the chain had suffered as demand for stationery supplies had continued to fall and its suppliers cut the credit terms on which it trades.
HOLIDAYS & LEISURE TRAVEL:
• A Rough Guides poll has found the average person aged over 40 still has seven countries to visit on their bucket list. New Zealand, Canada and Australia top the list, with more than six in ten already looking forward to at least one trip abroad in 2019.
• Saga hires advisory firm Duff & Phelps to explore the sale of its Titan Travel and Destinology brands. City sources claim the two businesses could collectively command a price tag of around £100m.
• Ten Entertainment Group has seen total sales up 7.5% to £76.4m, with LfL sales rising 2.7% for the 52 weeks to 30 December 2018. The group reported profits after tax climbing 57% to £81m. Chairman of the group, Nick Basing commented: ‘Our simple two-pronged strategy of investing in driving organic growth and developing scale benefits through high returning acquisitions is proving increasingly successful’.
• Commenting on current trading, Ten Entertainment said: ‘Sales in the first 11 weeks of FY19 have started positively, with like-for-like sales year to date at 5.1%’. The group continued with: ‘Whilst we remain mindful of the ongoing level of political and economic uncertainty, we are excited by the Group’s growth potential. The Group is well positioned in a market with growing demand for experiential leisure activities’.
• Ten Entertainment also announced today that it has acquired a new site in Southport. CEO of the group, Duncan Garrood said: ‘The site in Southport is a well-established centre in an excellent location. This addition is further evidence of the Group’s ability to successfully execute its strategy as it continues to grow the estate through selective acquisition and by driving organic growth’.
• Google has launched a new platform called Stadia that will remove the need for gaming consoles by streaming to any device.
• Everyman Media has reported that ‘Jonathan Peters, Finance Director, has notified the Board of his intention to resign after four years’ service to pursue a new corporate opportunity.’ It says ‘Jonathan will remain at the Company in his current role until 14th June 2019 to ensure an orderly handover of his role and responsibilities. The Board has begun a process to identify a successor and a further announcement will be made in due course.’
FINANCE & ECONOMICS:
• UK unemployment edges down from 4.0% to 3.9% with employment once again at a 40yr record high.
• UK average weekly earnings rising at 3.4%. With a tight labour market, there could be some risk of inflation. Certainly the capacity to cut rates if the economy slows has to be seen as rather limited.
• NIESR suggests ‘both regular and total pay growth will stabilise at 3.5 per cent in the first quarter of this year.’ It says ‘with CPI inflation slowing in January, this points to annual regular real pay growth of around 1½ per cent in the first quarter.’ As GDP growth is below this rate, productivity must be slipping further.
• NIESR says ‘prolonged Brexit uncertainty is contributing to a situation in which firms are refraining from investment while meeting additional demand for their goods and services by raising employment.’
• Sterling a fraction lower at $1.3253 and €1.1679. Oil up a little at $67.69. UK 10yr gilt yield down 1bp at 1.19%. World markets mixed with UK & Europe higher yesterday, US down & Far East mixed in Wednesday trade.
• Brexit, politics etc.:
o Brexit. Now exactly 1,000 days in with only nine to go. All sorted? Not so much.
o BBC tells us seven speakers of the House of Commons have been beheaded. Mrs May could be aiming to make it eight.
o Maths doesn’t add up but the prospects of a no-deal Brexit, a deal, no Brexit, a permanent limbo position & a People’s Vote all seem to have risen over the last 48hrs.
o Leaking Cabinet says 1) no agreement on way forward, 2) Mrs May has written to the EU asking for a 30 June extension, 3) her wish list also includes ‘an option to extend’.
o Michel Barnier has said that a long delay to Brexit would not come without costs. He wants to know why a delay is necessary, and what it would be intended to achieve.
o Trump advisor John Bolton has told Sky that the US is ‘ready to go’ with a new US-UK trade deal. The US runs a deficit with the UK and will want to push more stuff our way.
o Cabinet, Tory Party & Parliament frozen with indecision. June 2017 election not now looking too sensible.
o French EU minister names cat ‘Brexit’. Spends ages meowing at the door to be let out but, when you open the door, it just stands there.
PRIOR DAY LATER TWEETS:
• Q: How easy is it to exit leasehold sites? A: Not very. It’s one thing spotting a problem, quite another solving it.
• Exiting the ‘tail’. Can be done but, if several companies develop tails at the same time, there might be a rush for the exit
• Better-performing restaurant companies appear to be taking a long, hard look at the delivery companies, trying to assess who really adds the value
• Markit says consumers holding back on big-ticket purchases (cars & holidays) due to Brexit uncertainty. ScS however says sales on the up
• Unemployment drops below 4% (to 3.9%) for first time since 1975. Ave earnings up 3.4%. Some risks of inflation?
START THE DAY WITH A SONG:
Yesterday’s song was Give Me One Reason by Tracey Chapman. Today who sang:
We’ll drive our ships to new lands,
To fight the horde, and sing and cry
Valhalla, I am coming!
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:
Kingfisher: Today’s finals are overshadowed by the decision that has been taken about the future of the embattled CEO, Veronique Laury…which, laughably, is that the process of looking for her successor has begun, but in the meantime she stays on (her next appearance as a “lame duck” CEO is going to be at a Capital Markets Day on May 15th in London). Kingfisher has also announced that the former Screwfix/B&Q veteran Steve Willetts is retiring and that the Screwfix Germany store chain is being closed down. The results themselves are blighted by a poor outcome for the core business in France, Castorama, with overall “underlying” PBT 13% down at £693m, albeit there are, as usual, huge exceptional costs…
Waitrose Watch: Trading at Waitrose was messed up again last week by the later fall of Mothering Sunday/Easter this year and yesterday morning’s JLP weekly overview reported a 0.5% drop in gross ex-petrol sales (c0.5% down LFL) in w/e March 16th. The first 7 weeks of H1 are now running down c1% LFL (down 1.0% gross). The calendar shift is that as Easter is later this year (Easter Day is April 21st, compared to April 1st last year), Mothering Sunday is also later (on March 31st, compared to March 11th last year), so the distortions will continue for several more weeks…
John Lewis Trading Watch: Trading at John Lewis was also weak last week, as w/e March 16th was 2.4% down gross (nearly 5% down on a “LFL” basis, excluding new stores like Westfield), thanks to the later fall of Mothering Sunday/Easter this year.