Langton Capital – 2019-04-02 – Hostelworld, DPEU, G4M, discounts, rising costs, IPOs, Loungers etc.:
Hostelworld, DPEU, G4M, discounts, rising costs, IPOs, Loungers etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
We found out over the weekend there are dogs out there called mini Great Danes – but isn’t that a bit like labelling a normal hamburger a ‘standard sized Giant Whopper’?
And what’s the dog to be called?
Presumably, just ‘Dane’ and what kind of mental problems is a dog going to have if it’s labelled too small to be a ‘proper one’ but it’s still too large to fit into a standard sized minibus?
Anyway, we’ve got a number of results this morning so we might have to leave that one in mid-ponder. On to the news:
INITIAL PUBLIC OFFERINGS – A BRIEF SUMMARY: 2nd April 2019:
• Many IPOs perform poorly. The sellers are better-informed than the buyers, they may be exiting their entire holding, the optimism bias may be at work etc. Here, with Loungers now confirmed as coming to the market, we summarise comments made over the last couple of weeks or so about IPOs in general rather than any one company in particular
Quality of the company…
• Investors in some cases may not get past this question. There is rarely a good reason to invest in a bad company. Companies, rather unhelpfully however, rarely announce to the world that they are ‘bad’
• But ‘good’ companies have to be sorted into those with a good past, those with a good future or simply those with a good story. Some companies will have all three.
• And then we get onto 1) promises regarding the future (and here we know empirically that the past may not be a good indicator of the future) and 2) price.
Good story or good company?
• Stories appeal to human beings more than spreadsheets or simple facts. Think parables, metaphors etc. Some stories are useful illustrators of the facts and others are, well, just stories
• A good story can easily be extrapolated by would-be purchasers into a good future. That will not always be appropriate
• Because the optimism bias means that people are pre-disposed to think that they, their friends, their client, their company or their country are better than all the rest, marketers will (usually) be telling what they believe is the truth. Unfortunately, they will sometimes be right, and they will sometimes be wrong.
• Familiarity bias means that evidence of one’s own success is immediate and apparent whilst the success of competitors can be discounted. This adds to the credibility of a story but it may not guarantee success
• Confirmatory bias means that evidence of ones own genius is embraced whilst evidence to the contrary may be ignored
• Over-optimism can lead to over-ambitious opening programmes. These may be projected into the future. It may foster a belief in barriers to entry that may, in fact, be weak or non-existent
A few useful general questions:
• Ask how relevant the past is to the future. Will the economy, the market or the behaviour of competitors or customers change?
• There are no barriers to entry in any industry over the longer term. Hence, how long will it take for an expensive IPO to become ‘cheap’. If growth is projected out more than a couple of years, there are grounds for concern
• Are valuations skewed? Is this the top of the market? Will IFRS16 make the balance sheet look much weaker? Has crowd-funding anchored valuations at too high a level? Are the vendors selling all or most of their shares? Just who is the idiot in the room?
• Who is incentivised to do what? The sellers want to sell. Advisors want their fees. Again, who is the idiot?
• Has there been a dash for growth? What does the tail look like? There will always, always, always be one. Are these leasehold units? Will they be hard to turn around or to get out of? Will the next 20 units be as good as the last 20?
• What multiple of tangible assets is the company coming at? 1.5x or 2.0x assets for an unbranded business may be fine. Much more is a bit of a stretch. New buyers are being asked to pay more than book. For what?
• What does the company look like on a portfolio of measures? LfLs can be pushed at the expense of margin and vice versa. A balanced scorecard is appropriate.
• Many IPOs lose money. See our Premium Emails dated 25th, 26th & 27th March for comments on the circa 40% of recent leisure IPOs currently trading at 50% discounts or more and the 2/3 of retail IPOs currently at a discount.
• Some are, of course, but one needs to ask with regard to any new IPO, why is this one different?
• More heuristics, it’s time we did a book review, comment on CVAs (are we seeing landlord push-back) & other.
GENERAL NEWS – PUBS & RESTAURANTS:
• Loungers, which operates 146 bars under the Lounges & Cosy Club brands, yesterday announced its intention to list its shares on the stock market.
• Current majority-owner Lion Capital bought into the group in December 2016. The group has a ‘relaxed, casual’ offer & benefits from all-day trading. Loungers maintains that it has a broad demographic appeal with revenues spread more evenly over day parts and days of the week than is common in other on-trade retailers.
• Loungers reports LfL sales up 6.4% in the 24wks to 7 October 2018. The group intends to open around 25 sites per annum with the aspiration to operate 500 units over time. The IPO should complete by the end of this month. See Premium Email for more general comments on IPOs, their timing, pricing etc.
• The FT points out that ‘the listing comes at a time when established casual dining chains are suffering following a period of overexpansion.’ It also points out that some nimble operators can ‘take advantage [of the current mess that others find themselves in] by expanding into prime locations at reduced costs.’
• The FT suggests that the valuation, at up to £300m for 143 sites (which cost c£600k in the case of Lounges or £1m for Cosy Clubs) is a little high. Vendors are selling stock and ‘a £300m valuation assumes this model can keep on working in ever more pro-Brexit towns.’ It says ‘if there is one political lesson to be learnt in recent weeks, it is that you cannot try to be all things to all people . . . at least, not for very long.’ See Premium comment on IPOs in general, recent loss-makers, how we focus too much on the odd winner (e.g. Fevertree or Gear4Music) and not enough on the run of the mill performers.
• Costs on the up. National minimum wage up from yesterday and pension contributions from employers also rose.
• Should have been an April Fool’s joke but wasn’t? The Manchester Evening News (on 25 March, not 1 April) has reported that a Sam Smith’s memo has been circulated saying ‘the brewery’s policy is not to allow customers to use mobile phones, laptops or similar inside our pubs. If a customer receives a call, then he or she should go outside to take it in the same way as is required with smoking.’
• Locate foot, locate gun, pull trigger? Well, yes. There are, arguably, only two companies that we would even begin to credit this story to. And one of them is Sam Smiths. The other? Suggestions on a red-white-and-blue Brexit postcard…The Sam Smith’s memo continues ‘the brewery’s policy is that our pubs are for social conversation person to person.’
• Discounts back now that Mothers’ Day is behind us. Toby (M&B) offering 50% off mains. Café Rouge (Casual Dining Group) is 25% off mains, as is Pizza Express. Prezzo is 2-4-1 on mains (c50% off) and Domino’s is offering 35% off for orders over £30.
• DP Eurasia has reported FY numbers to 31 December 2018 saying it has seen ‘continued top line growth driven by strong online performance and network expansion.’
• DPEU reports the number of stores is up to 724 (from 643) with group system sales up 9.3% in Turkey and up by 16.0% in Russia.
• DPEU says system sales have been strong in the first two months of this year. CEO Aslan Saranga comments ‘we are pleased to report another successful year for 2018 despite the macroeconomic volatility we have faced in Turkey.’ He says ‘our performance continues to be strong in both of our main markets.’
• DPEU concludes ‘year-to-date February 2019 started with a 2.5% like-for-like growth in Turkey, where the effects of the macroeconomic volatility impacted consumer spending. We continue to target margin preservation in Turkey. In Russia, like-for-like growth is at 7.7% for the same period. The Board expects the full-year adjusted EBITDA for 2019 to be in line with expectations, with cost control measures compensating for the lower like-for-like expectation in Russia. Cost control measures will include stricter food and labour cost control, headquarter streamlining and logistics productivity increases.’
• A committee of MPs are suggesting the Big Four accountancy firms should be separated into audit and non-audit businesses, one step further than the CMAs proposal for an internal split between the operations. The calls follow the collapse of businesses such as Carillion and Pat Val.
• Starbucks offers to pay tuition costs for UK staff for courses taught online by Arizona State University, with the scheme being trialled in 100 sites.
• McDonald’s will take a near 10% stake in New Zealand-based app developer Plexure for $3.7m. CEO Steve Easterbrook said ‘This investment is a testament to our belief in Plexure’s ability to deliver strong results for our business as well as the talent and technology they’ve cultivated.’
• Impossible Foods announces the rollout of the Impossible Whopper, a plant-based burger, in 59 stores in St. Louis, Missouri. Impossible Foods, based in Redwood City, California, launched its first faux meat patty over two years ago.
• Impossible Foods files for Form D financing, with existing investor Temasek reportedly considering to invest $75m in the round. Impossible said consumer demand for its plant-based ‘Impossible Burger 2.0’ had so far exceeded initial expectations.
• Grind has closed its fund raise on Crowdcube having hit its capped target of £3.5m.
• Mothership HQ Ltd, which operates venues The Queen of Hoxton, The Shoreditch Book Club, The Hoxton Square Bar & Kitchen and Patterns in Brighton, has reported full year numbers to end-July 2018 to Companies’ House saying that turnover rose to £9.86m from £9.31m in the prior year and EBITDA edged up by 5,6% to £1.27m.
• Mothership reports a PBT of £535k (2017: £585k) with retained around £280k to £1.14m. The group has positive net assets of £1.77m. Mothership reports ‘the group continued to perform well.’
• The Food & Drink Federation has said that pushing for a no-deal Brexit is ‘hugely irresponsible.’ It says ‘for UK food and drink, a disorderly EU exit in under a fortnight would mean some empty shelves, much restricted choice and higher prices.’
• Adults on the National Living Wage are set for a 4.9% pay rise, from £7.83 per hour to £8.21 per hour. The rise will affect around 1.6m people with business minister Kelly Tolhurst saying ‘Our minimum wage rates are among the highest in the world and, through our modern industrial strategy, we are determined to end low pay and workers get a fair day’s pay for a fair day’s work.’
• Simon Wilkinson has been appointed CEO of Byron Hamburgers. Wilkinson was CEO of La Tasca for four years from 2011.
• Poetic License Distillery, based in Sunderland, has secured a distribution deal with Asda which will see the supermarket stock its strawberries and cream gin.
• Salcombe Brewery Co announces Nectar Imports will start stocking its Salcombe Pale Ale, Island Street Porter and Salcombe Gold beverages.
HOLIDAYS & LEISURE TRAVEL:
• Hostelworld has reported FY numbers to end-Dec saying it has driven bookings up by 4% to €82.1m. Adjusted EBITDA is €21.4m, up 19% decrease. Adjusted Earnings per Share is 18.33c, down from 22.73c last year. CEO Gary Morrison reports ‘we are pleased to have reported continued growth in our core Hostelworld brand gross bookings of 4% during the year and to have successfully developed the ‘Roadmap for Growth’ programme.’
• Hostelworld says it ‘is operating in a highly competitive market, which is growing. We have a very relevant brand which is trusted by a loyal and engaged customer base.’
• The group says ‘we anticipate that organic growth will be self-funded from our existing cash resources and cash generated from the business’ and says ‘trading in the first quarter of 2019 is in line with the Board’s expectations.’
• Wizz Air has updated on trading saying ‘trading in the fourth quarter of the financial year ended 31 March 2019 is in line with expectations.’ It says ‘demand across the Company’s markets remains robust.’
• UKHospitality reveals accommodation businesses will be the hardest hit by the annual increase in business rates. From 1 April, accommodation businesses will see an annual rate hike of £27m and miss out on £73m of sector business rates reliefs.
• Indian hotel franchise Oyo Rooms raises more than $100m from Airbnb at a valuation ‘significantly higher’ than the $5bn valuation when SoftBank invested $1bn in September. Airbnb and Oyo are reportedly exploring deeper collaboration going forwards. Oyo is currently adding more than 700 properties a month to its portfolio.
• easyJet warns Brexit uncertainty is hitting demand for the carrier’s flights this summer, alongside increased costs due to higher fuel prices and foreign exchange rates. The airline said ‘Whilst easyJet will deliver H1 results in line with expectations, macroeconomic uncertainty and many unanswered questions surrounding Brexit are together driving weaker customer demand in the market, such that we are seeing increasing softness in ticket yields in the UK and across Europe.’
• PPHE Hotel Group agrees final planning consent for its art’otel in London, Hoxton. The site is a mixed-use scheme and will now consist of five floors of office space and seventeen floors comprised of 343 hotel rooms and suites.
• Lyft commits a minimum of 1% of profits, or $50m a year, to improving city infrastructure through its City Works programme.
• Gear4Music has updated on trading saying sales in the 13-month period to end-March were +36%. It says ‘as previously reported, during the period the Group was impacted by lower gross margins than has historically been the case. In addition, our York distribution centre reached maximum capacity during our peak Christmas trading period which affected anticipated sales growth and also resulted in higher than expected distribution costs.’
• G4M says it is seeing ‘some short-term courier cost inflation and a clean-up of overstocked and slower moving inventory.’ This will impact profits but ‘the Group will return to a more profitable growth trajectory during the new financial year.’
• G4M says ‘we continue to see a significant opportunity to win market share in the UK and across Europe. Although profitability for this financial period has been impacted by a combination of growth-related factors, we have taken decisive action to address the underlying causes, and we are confident that these will not recur in the new financial year. Consequently, we will continue to focus on growing margins and believe our long-term growth strategy remains firmly on track.’
• The Guardian points out that the Escape Room World Championships will take place in Shoreditch, London, next week. There are currently around 1,500 escape rooms operating in the UK. Operated by Escape Hunt PLC, Dr Who rooms ‘have just arrived in Bristol, Leeds, Oxford, Manchester, Reading and Birmingham’.
• Huawei reports overall revenue up 19.5% to $107.4bn in 2018, driven by strong performance in China.
FINANCE & ECONOMICS:
• The March UK manufacturing PMI rose to a 13-month high of 55.1 on the back of stockpiling ahead of potential Brexit disruption. Markit says that the boost to the UK economy could prove short-lived. Data from construction (today) and services (tomorrow) could give a clearer picture.
• Markit says ‘manufacturers are already reporting concerns that future trends could be constrained as inventory positions across the economy are unwound.’ It says it is ‘also picking up signs that EU companies are switching away from sourcing inputs from UK firms as Brexit approaches.’
• Sterling up at $1.3064 and €1.1664. Oil up at $69.13. UK 10yr gilt yield up 5bps at 1.05%. World markets strong yesterday with Far East up in Tuesday trade.
• Brexit, politics etc.:
o The House of Commons has failed to agree on either of four proposals put to it last night. The idea of a confirmatory vote on whatever is decided won the most support in terms of votes for, whilst Ken Clarke’s proposal for a customs union came nearest to victory.
o Unclear yet on the potential for MV4, a General Election, a government of national unity or a crash-out on 12 April
o Goldman Sachs reports that the current Brexit impasse is costing the UK some £600m per week in lost income. UK investment is said to be under downward pressure.
PRIOR DAY LATER TWEETS:
• ‘Story stocks’ are great but, ultimately, making a sustainable profit matters. Loss-makers keep to need coming back for capital. See Premium Email
• The perils of extrapolation…building a ladder up your apple tree doesn’t mean that you can build one to the moon. See Premium Email
• Wahaca Restaurants has reported FY numbers to end-June 2018 saying sales rose 3% to £47.9m with loss before up £100k or so to £4.854m.
• GfK reports UK summer 2019 bookings down 10% yoy for the week ending 23 March, with the prior week also down 7%.
• Tui warns it could lose up to 26% on its annual profits if Boeing 737 Max 8 aircraft remain grounded across the summer peak flying season
• HotStats reports UK hotels’ operating profit per room fell 4.4% yoy to £35.44 in February, despite a 0.5% increase in RevPAR.
START THE DAY WITH A SONG:
Yesterday’s song was Golden Skans by Klaxons. Today, who sang:
Caviar and cigarettes,
Well versed in etiquette
TOPICS FOR CONSIDERATION IN PREMIUM EMAIL:
• Thematic pieces including Pubs vs Restaurants, Delivery, Experiential Leisure, Crowd Funding, CVAs, Employment 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:
• Superdry: The vote on the return of Julian Dunkerton at today’s EGM is being held at 11.30am in the City, so the result should be out by lunchtime. A few weeks ago the Board seemed likely to brush aside the challenge quite easily, but after the defection of some big institutional shareholders to the Dunkerton camp the vote could be very close, with much depending on the size of the turnout…
• Debenhams: Over at the beleaguered Debenhams, one small consolation of the current financial mess is that there isn’t time to hold an EGM for shareholders to vote on the ludicrous plan of Sports Direct to install #MadMike as CEO, but that didn’t stop Sports Direct from making yet another announcement yesterday morning, encouraging other shareholders to write to the Board to express their discontent, via a letter template on the corporate website. We were amused by the response of Bryce Elder, the FT stockmarket correspondent, on the FT Alphaville “Markets Live” webcast yesterday morning: “You’ll have seen the template letter he sent out to the Debenhams Board, for shareholders who can’t write…Which I guess is possible, cohort-wise, given that they’re Debenhams shareholders…”.
• Joules: The fashion chain Joules confirmed yesterday morning the weekend press story that it has started to look for a new CEO, after the incumbent Colin Porter signalled his wish to step back from a full-time executive position (having just taken up the non-exec Chairman role at Moss Bros)…
• Today’s Press and News: The news that none of the “soft Brexit” options won a majority again in the House of Commons last night came too late for the early edition of the FT, but the FT leads its late edition with the headline “Brexit deadlock continues as MPs reject all options for second time”, whilst the Telegraph runs with “May threatens Election as MPs hit stalemate” and the Times goes with “MPs reject Brexit plans in lifeline for May deal”. We’ll leave the last word, however, to the I newspaper, which runs with “April fools” on its front page. In other news, the FT flags that Colin Porter is to bow out after a successful 5 year stint as CEO of Joules, whilst Lombard column in the FT weighs in on the Superdry situation in a piece headlined “Dunkerton: dry whine”, arguing that “voting in Mr Dunkerton would be exponentially disruptive”.
• News Flow This Week: The latest monthly Kantar/Nielsen grocery sales figures are out at 8am this morning, with the Superdry/Julian Dunkerton EGM being held at 11.30am. The Topps Tiles pre-close and the Signet Q4 (in the US) are out tomorrow. And there could be an AO World Q4 at the end of the week.
• Quote of the Day: With the reputation of the House of Commons in tatters after yesterday’s failure to agree a consensus on the way ahead on Brexit, here’s a helpful insight from Hilaire Belloc (although he was referring to the Catholic Church): “No merely human institution conducted with such knavish imbecility would have lasted a fortnight”.
• Nick is currently in the US.