Langton Capital – 2019-03-27 – PREMIUM – Goals, Carnival, IPO valuations, demotions etc.:
Goals, Carnival, IPO valuations, demotions etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
So, I set the percolator going yesterday without putting the jug back under the spout and, ten minutes later, had a couple of pints of hot coffee swilling around on the floor.
Not the way to begin the day and, though it no doubt killed some germs, boiling a couple of square metres of carpet tiles in coffee isn’t the best way achieve this and pouring said liquid down the back of the microwave and into the fridge has all sorts of sub-optimal potential electrical side-effects.
Anyway, the room will be smelling of coffee for some time but there are worse things, I suppose. A pint of already-sour milk and a couple of dead fish come to mind. On to the news:
INITIAL PUBLIC OFFERINGS – BEHAVIOURAL ECONOMICS 7: THE TRIUMPH OF HOPE OVER EXPERIENCE: 27th March 2019:
Are IPOs a license to lose money? ‘It’s different this time’ may be the refrain. But here’s the thing, it isn’t, really, is it…?
• There is a season for a reason, even with IPOs. It’s supply that drives IPOs, not demand. Would be investors can ‘demand’ IPOs until they are blue in the face – but they will only get them when sellers want to sell. And the clue there is in the wording. There’s a reason holders want to sell. And it’s not that they want to enrich the next buyer of their shares. IPOs can be late cycle and that they may come just as enthusiasm (and growth etc.) is coming off the boil.
The flavours to savour…
• Several factors play into how to judge an IPO. For example, is the company in question issuing new shares or is it providing an exit for existing shareholders?
• The former is arguably a more positive sign than is the latter.
• Better yet, the shares may be listed via an introduction, whereby no new shares are issued at all.
• IPOs can tend to come in ‘windows’ with similar companies all following each other onto the listed markets. This could speak to valuation. I mean, something’s incentivising all these guys to sell, isn’t it?
• Could it be a change in tech (retailers selling before the Internet deals them a kick in the nuts) or pub / restaurant companies about to go ex-growth?
• The fact that there are ‘windows’ and ‘seasons’ can lead to gluts. Effectively a rush for the exits.
A somewhat inglorious track record…
• Langton has been reviewing some of the leisure & retail sectors’ recent IPOs.
• In Leisure, 5 of 16 IPOs we reviewed have lost 50% or more of their value in the years since listing. The worst performers being Pat Val (down 100%), Comptoir (down 82%) and Revolution Bars (down 63%).
• The best performers in our list were SSP Group +230%, Just Eat (+190%), Fulham Shore +67% (which was an introduction rather than a placing) & Hollywood Bowl +38%.
• We accept that the upside (potentially infinite but a probability of zero) is greater than the downside (‘only’ 100% but with a non-negligible probability).
• Retail fares worse with 10 out of 15 companies being currently below their listing price. The worst performers here were QUIZ (down 89%), Game Digital (down 87%) & Bonmarche (down 79%).
• The best performers on our list were Boohoo +269% & Joules +74%. But the arithmetic average of the population is minus 5%. Strip out Boohoo and it is minus 24%
• The arithmetic average of all 31 companies looked at is plus 7%. Strip out CAKE and QUIZ at the bottom and BOO and SSP at the top and the average is minus 3%
• Finding an IPO that performs as well as SSP or Boohoo is rare. The macro argument is ‘don’t invest’ whilst the micro comment is ‘it’s different this time’
• IPOs may be overpriced, especially if incentivised by exiting shareholders. They are selling their ‘baby’ and, let’s be honest, they’re greedy
• Sellers control the timing. They can take advantage of current market sentiment and may value themselves on measures such as next year (or even the year after’s) projection of ‘underlying adjusted-EBITDA’, something that is not at all certain.
• It has been said that investors should look towards spin-outs rather than IPOs. These are admittedly rare but they give free reign to effective management teams, increasing the strategic flexibility of a company.
DEMOTIONS: WHY ARE THEY SO HARD? BEHAVIOURAL ECONOMICS 8 – THE PETER PRINCIPLE: 27th March 2019:
• The Peter Principle is that people are promoted to their highest level of incompetence. Think Mrs May. There are some exceptions to this ratchet idea, Alec Douglas Home, Ian Duncan Smith, William hague etc. but, as a rule, when PMs or CEOs or the like are ‘let go’, they tend to disappear to write their memoires rather than resurface and do something useful. Is this a) a sad waste of talent or b) a blessed relief for us all?
The Peter Principle:
• People tend to get promoted until something stops the process. This may be a desire to ‘get off the ladder’ but, more often, it is the discovery of an underlying well of incompetence.
• There is sometimes an ‘Oh my God, he / she’s useless at this job’ moment and, if an organisation does nothing to stop the process, an incompetent individual may occupy each of the rungs in a hierarchy. Think Tory Party, Labour Party etc.
• This leads to a Snakes & Ladders approach in that it might be a step by step ladder upwards but and express snake in a downward direction.
• There’s also the human angle. Booted individuals may be embarrassed, newly-promoted ‘bosses’ etc. may also be embarrassed & it’s considered best for all concerned if the demoted person slinks off into the night
• More heuristics, it’s time we did a book review, comment on CVAs (are we seeing landlord push-back) & other.
GOALS SOCCER UPDATES ON ACCOUNTING ERRORS:
• Goals Soccer points to ‘significant’ accounting errors.
• Shares suspended on AIM.
• Goals has updated on trading saying ‘the Company has continued to work with its auditors to assess historical accounting errors and policies adopted by the Company. The value associated with these errors is still to be finalised but remains significant.’
• Goals says ‘there has been a substantial misdeclaration of VAT, going back over several years. The final value of the misdeclaration has still to be established, but currently the figure stands at approximately £12.0 million. The Company also expects that the VAT accounting policies they intend to adopt may have an impact on profitability going forward.’
• Goals reports ‘the Company intends to enter into discussions with HMRC immediately and remains in discussions with our lenders to agree new facilities.’
• It says ‘the Company believes the above may lead to a material change in its overall financial position and the Company is currently unable to provide clarity to the extent of that impact without the receipt of further information. As a result the Company has requested that its shares be suspended from trading on AIM.’
• Goals reassures saying it ‘would also like to confirm that trading since 8 March 2019 has continued to be strong in both the UK and US, over the comparable period in 2018.’ It adds that it will make further announcements in due course as the results of the investigation become known.
GENERAL NEWS – PUBS & RESTAURANTS:
• AG Barr, producer of drinks such as Irn-Bru, reports revenue up 5.6% to £279m and profit before tax up 2.5% to £45.2m in the year to 26 January.
• The BBPA welcomes additional government funding for the ‘Pub is the Hub’ organisation, which focuses on bringing communities together.
• Hakkasan, owner of high-end restaurants and nightclubs, reports a pre-tax loss of £33m for the year ended 30 June 2018, up from a loss of £112m the year prior. Overall revenues fell 1.5% to £234m but revenues in the UK grew by 6% in the period.
• Salcombe Brewery Co. announces its Shingle Bay golden ale will be available to Ei Group’s pubs across the south from May.
• Shake Shack in Covent Garden will reopen its doors on 28 March after renovating the site and revamping the menu.
• Westons reports sales up 5% to £64.6m with the cider producer’s products now shipped to more than 40 countries.
• Cafe De Pierre agrees to take over Debenhams’ in-store cafes, previously run by Patisserie Valerie. Lux Group, parent of Cafe De Pierre, has also employed more than 150 ex-Patisserie Valerie staff who were made redundant as a result of closures.
• The SBPA has welcomed the move towards more regular revaluations, better administration and greater transparency through the publication of the Non-Domestic Rates Bill.
• UKHospitality CEO Kate Nicholls said the Non-Domestic Rates Bill ‘is a positive first step, but it is only a first step and it needs to be followed swiftly by continued action, not just in Scotland but across the rest of Britain. High street businesses have been devastated by increasing costs and hospitality businesses have been particularly badly hit.’
• Meatcure has announced that it is to close its remaining restaurant in Market Harborough. The owners have blamed spiralling costs and fewer customers. The company says on Facebook ‘to all our amazing customers we’re afraid to say it’s over. We gave everything and invested every penny we had into making Meatcure the exceptional restaurant that we all loved so very much. But unfortunately with excessive rents and rates, and rising costs and fewer people spending than ever before, and with no money behind us to give Meatcure the regeneration we believe it needed to stay current, we can no longer continue.’
• The UK Government will grants 76 pubs across England a share of £188,000 as part of the ‘Pub is the Hub’ scheme. The funds will enable the pubs to run additional services such as Post Office facilities.
• UK trade policy minister George Hollingbery signs the Cariforum-UK Economic Partnership Agreement, a move welcomed by the rum industry. The trade deal signed between the UK and the Caribbean will allow businesses to continue trading without additional barriers or tariffs.
• Data from ASKCI shows a drop in China’s wine imports, with volume down 13% to 118m litres and value down 10% to $6.04m in January and February.
HOLIDAYS & LEISURE TRAVEL:
• Carnival Corporation has reported Q1 numbers saying that the company generated U.S. GAAP net income of $336 million, or $0.48 diluted EPS.
• Carnival President & CEO Arnold Donald says ‘first quarter earnings included revenue growth from higher capacity and improved onboard spending, offset by the timing of cost increases and a drag from fuel price and currency compared to the prior year. First quarter adjusted earnings were better than the mid-point of December guidance by $0.07 per share.’
• Full year earnings are still expected to be in line with December guidance. Q1 gross cruise revenue was $4.6 billion compared to $4.2 billion for the prior year. In constant currency, net cruise revenues of $3.6 billion compared to $3.4 billion, an increase of 4.7 percent.
• Re the outlook, Carnival says ‘cumulative advanced bookings for the remainder of 2019 are ahead of the prior year at prices that are in line with the prior year on a comparable basis. Pricing on bookings taken since January have been running in line on a comparable basis to the prior year while booking volumes are ahead compared to the prior year. As a result, even with higher capacity, there is less inventory remaining for sale than at the same time last year.’
• Carnival reports ‘based on current booking trends, the company continues to expect full year 2019 constant currency net cruise revenues to be up approximately 5.5 percent, with capacity growth of 4.6 percent, and net revenue yields in constant currency expected to be up approximately 1.0 percent compared to the prior year.’
• PPHE yesterday reported that a number of its shareholders successfully sold in aggregate 9.3m shares in the Company at a price of 1,600 pence per share.
• PPHE Hotel CEO Boris Ivesha comments ‘we are very encouraged by the level of support for the Placing; I would like to welcome our new investors to the register and thank existing shareholders for their continued support. We believe that the Placing will allow for greater liquidity for investors by expanding the shareholder base and we expect this to achieve the free float required for the Company to qualify for inclusion in the FTSE UK series of indices.’
• A report called ‘Destinations at Risk: The Invisible Burden of Tourism’ warns over-tourism ‘will become increasingly difficult to manage’ arguing that ‘Countries have yet to fully confront the hidden costs of tourism.’
• Richard Pennycook, former CEO of Co-operative Group, will join On the Beach as non-executive Chairman. Pennycook will succeed interim chairman David Kelly. On the Beach said ‘the board will continue to review its structure to ensure it has the appropriate breadth and depth of experience while meeting corporate governance best practice.’
• Singapore’s sovereign wealth fund, GIC, takes a 25% stake in CitizenM, a Netherlands-based boutique hotel chain. CitizenM has 15 hotels with GIC’s stake giving the company an enterprise value of €2bn. The company will also receive a further €750m from the fund and other investors for its planned global expansion.
• Samsung warns Q1 2019 results will be below market expectations due to difficult business conditions, including larger price declines than anticipated, weak seasonality and strong competition with LTPS LCD display panels.
• Inmarsat has agreed a $3.4bn bid by a group led by PE house Apax & Warburg Pincus.
FINANCE & ECONOMICS:
• Sterling up marginally at $1.3182 and €1.1707. Oil up at $68.20. UK 10yr gilt yield up 4bps at 1.01%. World markets mostly lower yesterday with Far East mixed in Wednesday trade.
• Brexit, politics etc.:
o Indicative votes to commence today. More questions than answers. Will they be free votes? What order will they come in, will the government pay any attention to them etc.?
o Hundreds of JP Morgan staff have reportedly been told they may be asked to relocate out of the UK ‘at fairly short notice’ if there is a no-deal Brexit.
o Remain supporter & People’s Vote donor Julian Dunkerton has told Sky News that he believes a second vote is now likely. He said he did not believe that Mrs May’s deal will get support.
o Mrs May will meet Tory backbenchers today. Looking for a ladder to climb down, Jacob Rees Mogg says he will support her unchanged deal if the DUP does. The DUP says no. Her deal will come back to the Commons this week only if Mrs May thinks that she can win.
o Mrs May could have to go says Sky. Boris says there is ‘no point’ supporting the deal ‘without any sign the UK is going to change its approach in phase two’. Mrs May’s departure could provide this change.
o Sky says, ‘this parliament is broken and it is hard to see how Mrs May’s government can carry on.’
o Express says the government has ‘no secret plan’ to deliver Brexit. There is ‘no strategy to break the deadlock’.
o The Government has told the 5.8m people who have so far signed the ‘stop this nonesense’ petition that it wishes to carry on with it. It will not revoke Article 50 saying ‘revoking Article 50 would break the promises made by Government to the British people, disrespect the clear instruction from a democratic vote, and in turn, reduce confidence in our democracy. As the Prime Minister has said, failing to deliver Brexit would cause “potentially irreparable damage to public trust”, and it is imperative that people can trust their Government to respect their votes and deliver the best outcome for them.’
PRIOR DAY LATER TWEETS:
• Some brands have just run out of steam. More a problem for the casual diners than fast food. See Premium Email.
• IPOs. Selling the Dream. Can vendors, who are selling something, really promise to build a ladder to the moon? See Premium Email.
• Numbes from Fevertree, Vianet, Brighton Pier. DPP FY too. Says sales up but losses higher too.
• Majestic’s move online will involve the disposal of between some and all of its c200 stores. Radical solution to structural shift
• PwC cautious on London hotels. Says ‘weaker demand’ & ‘higher new supply’ will hold back revpar etc.
• MPs likely to vote on various Brexit options Wednesday. Mrs May to face ‘mutinous’ Cabinet. HMG could ignore votes
START THE DAY WITH A SONG:
Yesterday’s song was Every Little Thing She Does Is Magic by The Police. Today, who sang:
Sweep through the heather like deer in the glen,
Carry me back to the days I knew then.
Nights when we sang like a heavenly choir
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:
Mr Bubb is taking a well-deserved break.