Langton Capital – 2019-04-11 – PREMIUM – EasyHotel, unlisted companies, costs, IPOs etc.:
EasyHotel, unlisted companies, costs, IPOs etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
So, the Mighty Hull City are still 200-1 against for promotion and, after three straight wins and a run of six wins earlier in the year, that might not be a bad price.
Anyway, then I woke up and it was time to come to work.
But on the subject of football, I’m ploughing through the 1960s & 70s books, the 5x 1,000-page tomes penned by Dominic Sandbrook, at the moment & am on to football. The years of Don Revie, Brian Clough and the like are currently flying by.
The rationale for taking on such a task being to see just what sort of Jeremy Corbyn-like Nirvana this Brexit mess might be propelling us towards. So, the miners have just asked for a 36.5% pay-rise, oil prices have quadrupled, there’s no electricity in the evenings, the balance of payments has just lurched into the red and Ireland has just kicked off. Oh dear. On to the news:
UNLISTED COMPANIES: More freedom to manoeuvre or less accountability? Or both? 11th April 2019:
• The arguments are well-rehearsed.
• Companies list to provide a currency for acquisition, a means to motivate staff etc. (rarely to provide an exit for existing shareholders or to allow insiders to sell the dream to the next guy & allow them to cash out at the top of the market).
• Companies go private to provide themselves with a bit of space etc (not so that PE houses can strip capex, cut other costs & sell the market back what it already owned 3-5yrs down the line.
• We could wax on the veracity or mendacity of the above, but we won’t. Instead, we’ll look at how private companies can and do behave ‘differently’ and what this means for the market in general and for their listed competitors in particular.
Looking at Casual Dining Group v Restaurant Group:
• There are some similarities. Lack of a CEO, value destruction & ownership of perhaps tired or outdated brands etc.
• And there’s one big difference. Casual Dining Group is privately-owned whilst The Restaurant Group is listed.
• CDG (in its current guise) has accumulated losses to April 2108 of £563.9m with a considerable amount more to come in FY18/19.
• Some suggest the 2018 equity & debt owners lost around £800m. At least as far as pubs & restaurant go, this is a disaster of the first order of magnitude.
• RTN, on the other hand, still has retained profits but, as the shares are listed, the loss of value is more visible. The c200m shares in issue before the November Rights peaked at c540p and are now 116p. That implies a loss of value of around £848m (albeit peak to trough).
• The 290m Rights shares issued at 108.5p are around 7.5p to the good, implying a value-add of perhaps £22m to give a net loss of value of £826m.
Listed co v private co: different incentives, different approach to risk, etc.:
• Private companies only need declare information 9mths after their year-end. If they are late, they get a minor slap on the wrist. If they are very, very late, they will get a winding up order which gives them another 2mths to comply.
• Information is therefore sporadic. The headlines (on the back of press releases) in the trade press last July said that CDG had received a further £30m in capital. This was less than half the story.
• The devastating write-offs and loss of equity value (debt holders took over) were not revealed publicly until last week.
• Restaurant Group, on the other hand, has had to outline its problems almost in real time. This may provide some cathartic relief, but it may also lead to a different approach to business.
• Private companies may be tempted to (and may be able to) paper over the cracks. At least for a time. They may use upbeat language at a time when the facts are at odds. This is not a course of action available to listed companies.
• Denial may be an option in the private world. Not so for listed companies. Mindful of this, behaviour may be different. Greater risks may be taken, CVAs may be seen as an occupational hazard etc.
PRIVATELY OWNED COMPANY BEHAVIOUR: The risk of contagion. 11th April 2019:
• If private companies imply that there are no problems in the market (e.g. good news, we’ve got £30m more capital), do they react accordingly. And, if they do, what damage does this do to the wider market?
Talking the talk:
• It’s an option for private companies to talk-the-talk whilst they are most definitely not walking-the-walk.
• But they’re not dumb, so presumably they know this.
• They may be attempting to reassure staff or suppliers or misinform competitors but, in such a leaky market where the tenure of waiting staff and chefs can be measured in months rather than years, information gets out quickly.
• But if the private company continues to behave as if there are no problems (opening stores, discounting, agreeing crazy rents etc.), then the whole market will be impacted
• And, worse than that, big chunks of the market will have little choice but to join in, bidding up the cost of sites, chefs etc., fighting via discounting, advertising and special deals with delivery companies and the rest
• When in a hole, it’s best to stop digging. Similarly, when you’ve had enough to drink, best stop. The size of the hangover will be impacted one way or the other.
A WORD ON IPOs: There’s much to be said for listed companies but the timing, price and rationale behind the initial listing needs to be examined. 11th April 2019:
• Value is in the eye of the beholder. But we would suggest that, in many industries, licensed retailing amongst them, it should bear some relation to book cost.
Never mind the cost, look at the prospects…
• Share buyers sell IPO stocks to themselves – and this can be damaging to their financial wellbeing in some circumstances.
• If pubs, bars and restaurants cost c£700k to £800k to build, then any premium over book should reflect 1) barriers to entry (and there really aren’t any) and / or 2) growth prospects.
• An element of this is fair. Perhaps 1.2x book or whatever but, any more than that, and the execution risk becomes arguably too great to bear scrutiny.
• We won’t even begin to comment on the risk incumbent in long leases etc. See yesterday’s piece on the RTN leases for ‘sale’
• When it comes to forecasting, we would suggest that there are really three time periods. This year, next year and unknown because, beyond next year, there be monsters.
• If anyone tries a ten, fifteen or twenty-year discounted cash flow on you, ask them about execution risk, about politics, taxes, competitor reaction, demographic shifts etc. Either that or shut your eyes until they go away
RANDOM COMMENT CORNER:
1. Hotels: EasyHotel says its quarters were sequentially less good the one after the other. Says 2019 tougher than 2018.
2. Brexit & holidays: Travel Weekly respondents say tough given the uncertainty to date.
3. Brexit extension: This could lead to a spike in bookings. Good news but some damage will already have been done.
• More heuristics, it’s time we did a book review, comment on CVAs (are we seeing landlord push-back) & other.
GENERAL NEWS – PUBS & RESTAURANTS:
• San Miguel has recorded pre-tax profits north of £147m last year, while volumes increased 10.2% to 18.3m hectolitres. Alberto Rodriguez-Toquero, Mahou San Miguel’s CEO, said the results ‘demonstrated our capacity to anticipate market needs, leading and driving the category through innovation, premiumisation and generation of new experiences’.
• See IPOs covered more fully in the Premium Email. We’d just highlight that a large multiple of book value implies major barriers to entry. And where are they when you need them?
• The Morning Advertiser has reported that former employee of JD Wetherspoon, Jake Sloane has called on the pubco to do more to support staff as understaffing and work stress contributes to workers’ poor mental health. Jake has created a petition to ‘Stop Suicide in the Service Industry’, in which he has highlighted poor managment and understaffing as significant pressures on staff.
• Radio Alice is set to open its third site in London in Canary Wharf this summer.
• Research from CoffeeBI has found that 44% of coffee consumed out of home in the UK is drunk in the office, Beverage Business World has reported. The report stated that coffee consumption in UK offices is worth £212m, representing 35% in value of the UK market.
• Casual Dining Group reports LfL sales up 4.2% in the 13 weeks to date. CDG plans to open seven new UK sites as well as seven franchise sites in Ireland and the Middle East in 2019.
• Procurement firm Beacon warns the price of pork and bacon will rise due to an outbreak of African swine flu in China. The market price of pork in the last four week has increased by 38%, with bacon up 18%.
• Starbucks partners with environmental charity Hubbub, investing £1m in improving paper cup recycling facilities across the UK. The money has been raised via the ‘latte levy’ – a 5p paper cup charge introduced by Starbucks last year.
• Danny Meyer’s investment fund, Enlightened Hospitality Investments, has invested $15m in Dig Inn, a veggie-centric bowl chain.
• The new owners of Debenhams are drawing up plans to shut down more than 50 stores, affecting 4,000 jobs. The consortium of owners is led by Silver Point Capital and GoldenTree.
• Primark is set to open its largest site in Birmingham, covering 161,000 sq ft. The store will feature a Disney cafe plus two other eateries, a barber shop and beauty studio, as well as homewares and fashion.
• The FT reports 2019 is a continuation of the annus horribilis of 2018 for UK retail, blaming overexpansion and the availability of cheap debt. The FT comments that retailers cannot expect to be bailed out of the consequences of over-ambition and bad decisions. In order to mitigate the damage it calls for an urgent review of the tax burden on retailers.
HOLIDAYS & LEISURE TRAVEL:
• EasyHotel has updated on full year trading saying it has enjoyed a ‘fourth year of market outperformance for owned hotels.’ Good performance but says demand is softening.
• EZH says ‘despite the ongoing political and economic uncertainty facing the UK, the Group continued to outperform its hotel markets in the UK and across Europe during the period.’ It’s total system sales were +24% at £19.9m with revenue up 47% at £7.0m, owned hotel LfL REVPAR +5.4% but franchised LfL REVPAR down by 3.5%.
• EZH says ‘both the Group’s owned and franchised hotels significantly outperformed the market in the UK. Looking across the wider hotel market, falling consumer confidence has dampened total hotel demand, with RevPar up 0.4% during the period.’
• EZH adds ‘relatively strong market demand in London was off-set by a weaker regional market performance, with a marked deterioration in RevPar across the UK in Q2 as compared with Q1. As a result the short-term market outlook remains uncertain.’
• EZH says ‘the Group’s European franchised hotels performed less strongly than those in the UK, despite European hotel markets generally outperforming the UK. Trading is mixed on a country-by-country basis. As in the UK, overall market demand has softened in 2019.’
• EZH adds that it ‘has continued to extend its pipeline during the period. In the UK, the 145-bedroom easyHotel Bristol development was added, subject to planning permission. Further to the successful opening of the Group’s flagship Continental European hotel in Barcelona last summer, the establishment of the Group’s European development team has added a 209 room easyHotel at Paris-Charles de Gaulle Airport to the development pipeline. A planning decision is expected soon.’
• EZH CEO Guy Parsons says ‘ongoing political and economic uncertainty continues to impact consumer confidence as demonstrated by weakening quarter-on-quarter demand across the market, both in the UK and in Europe. However…easyHotel has continued to outperform its competitors as consumers seek out the best value for money.’ The company says ‘subject to our continued overall market outperformance as we enter our key trading period and whilst mindful of the ongoing uncertainty, the Board expects the outturn for the current financial year to be in line with its expectations.’
• Holiday bookings could spike on the back of the latest Brexit extension. The extension, to 31 October if necessary, should free up the summer from fears of airport queues etc. The big question will be, what damage has been done already? See Premium Email last week where we looked into the impact of rescheduled flights, changed destinations etc.
• Travel Weekly has polled a number of operators asking how Brexit has impacted bookings to date. Agents Advantage say ‘there’s some Brexit fatigue. The mass market is the most-impacted. It’s running flat on last year.’
• TW quotes Affinion International as saying ‘the higher end is still booking. We had a very flat March. But cruise and high-end bookings are doing OK and the average booking value is good.’ Baldwins says ‘January was seriously down. February was very good – almost a spike, and March has been static. We are struggling with bookings to Europe because people are worried.’
• Clouds, silver linings etc.
• TW quotes Cunard saying ‘this year is much tougher than 2020 for the cruise industry.’ Kuoni adds that it ‘is in that sweet spot…forward bookings are going through the roof. Much of luxury beach is around weddings and honeymoons, which Brexit isn’t going to impact.’ Sno says (hopefully) ‘there is huge pent-up demand but people just aren’t pulling the trigger’. Explore says ‘Europe sales are down by double digits, while the rest of the world is massively up. This means our average booking value is also up.’
• Saga says ‘customers are taking one long-haul trip instead of maybe three or four short-haul ones. So, the overall effect is that spend is down.’ A number of operators say that bookings to North Africa are up.
• Spain’s UGT and USO trade unions have confirmed a strike for Easter Sunday and April 14, with travellers being warned of flight disruption.The industrial action will comprise of 60,000 ground handling staff.
• Marriott acquires the remaining 40% of AC Hotels from its founder Antonio Catalan for £121m. Marriott now has 265 AC hotels open or under development around the world, including four in the UK.
• Marriott opens its 7,000th property The St. Regis Hong Kong, a 27-story luxury hotel, which features butler service and multiple restaurants.
FINANCE & ECONOMICS:
• The ONS reports that the UK economy grew by 0.2% in February. This is better than some expected but part of it is put down to stockpiling and the performance is described as ‘subdued’. Growth in the 3mths to Feb was 0.3%.
• The NIESR says ‘the UK economy is on course to grow by 0.4% in the first quarter of 2019 and, if current trends continue, by 0.3% in the second quarter.’ It says ‘the latest ONS data was better than we had expected, but recent survey evidence suggests that economic growth is likely to continue at a fairly modest pace for the first half of this year.’
• Sterling up a bit at $1.3099 and €1.1614. Oil back to 2019 highs at $71.45. UK 10yr gilt yield down 1bp at 1.09%. World markets mixed. Asia mixed in Thursday trade.
• Brexit etc.:
o The UK has been granted a ‘flexible extension’ until 31 October. Mrs May had wanted 3mths and some in the EU up to a year.
o The UK will now take place in EU elections next month. Mrs May still working hard, Bridge over the River Kwai-like, to do what many believe is the wrong thing.
o Mrs May’s red lines in tatters. No General Election (2017), No Money Tree (DUP 2017), Leave on 29 March (108x in H of Commons alone), Leave on 12 April, No Deal is Still on the Table, No Long Extension, Won’t Take Part in EU Elections etc. etc.
o Mrs May perfectly clear that she has never been perfectly clear.
o Donald Tusk says ‘the course of action will be entirely in the UK’s hands: they can still ratify the withdrawal agreement, in which case the extension can be terminated.’ He added ‘please do not waste this time.’
START THE DAY WITH A SONG:
Yesterday’s song was Carnival of Sorts by R.E.M. Today, who sang:
This is our decision to live fast and die young.
We’ve got the vision, now let’s have some fun.
Yeah it’s overwhelming, but what else can we do?
RETAIL NEWS WITH NICK BUBB:
• Tesco: Yesterday’s finals were well received, with the shares climbing by over 3.5%. There was some concern about the weak-ish Q4 sales figures, but Group operating profit of £2,206m was up by 34%, with the dividend up 92% and Dave Lewis, Chief Executive said “After four years we have met or are about to meet the vast majority of our turnaround goals. I’m very confident that we will complete the journey in 2019/20…I’m pleased that we are able to accelerate the recovery in the dividend as a result of our continued capital discipline and strong improvement in cash profitability”. Tesco also announced that “As we move beyond our medium-term ambitions, we plan to host a Capital Markets Day on 18 June to share some of the ‘untapped value opportunities’ available for Tesco”.
• ASOS: Yesterday’s interims from ASOS for the six months to end Feb were predictably bad, with PBT plunging from c£30m to just £4m, but CEO Nick Beighton (while admitting that performance across the first half was disappointing) said that “ASOS is capable of a lot more. We have identified a number of things we can do better and are taking action accordingly. We are confident of an improved performance in the second half and are not changing our guidance for the year”. And those reassuring words (and the absence of any more downgrades) were enough to squeeze the bears and send the shares up by nearly 8%.
• Dunelm: In contrast to ASOS, the Dunelm share price has been riding high, so even though yesterday’s Q3 update (for the 13 weeks to March 30th) from the homewares chain was even better than expected, the shares were “only” up by c3%. LFL sales were up by no less than 12.5%, with LFL store revenue up by 9.8% and LFL Online revenue on Dunelm.com up by 32.1%. Gross margins in the core business were up by 40bps and although there are some operating cost and investment pressures, Dunelm said that “we expect to report full year profit before tax slightly ahead of the top of the range of current analysts’ forecasts”. And CEO Nick Wilkinson said that “We are delighted that customers continue to respond well to our improving homewares offer as we help them create a home they love”.
• Today’s Press and News: The news last night that EU leaders had agreed a new compromise Brexit date of October 31st came too late for most of today’s papers, whose front page headlines are full of the hapless Prime Minister’s defiance of her many critics (eg “May defies Tory rebels with pledge to stay on” in the Times, albeit the FT has an article on page two headlined “Tories debate scenarios for May’s departure”). The main leader column in the FT, however, is headlined “Something has to give on UK’s ailing High Streets” (“Overcapacity is the main issue, but rates and taxes must be reviewed”) and the FT also follows up on the collapse of Debenhams with an article about the many mistakes that #MadMike made in his battle to win control for Sports Direct, headlined “Ashley boxed himself in at Debenhams” and noting that the “pugnacious billionaire should have been the main contender to
• Sports Direct: The Sports Direct share price continued to edge up yesterday, on relief that the company (probably) isn’t going to get more involved with the doomed Debenhams business, despite #MadMike’s increasingly desperate attempts to somehow reverse the administration process. But we stick to our view on Tuesday that Mike Ashley’s credibility as a businessman and as a gambler has been seriously damaged by his crazy antics over Debenhams…And although the press still seems to pull its punches on #MadMike (much as it once did on the now much discredited Philip Green), we were pleased to see the Times say yesterday that “As always with Ashley, there is the temptation to look for some shrewd play behind his apparently self-defeating and combative approach…but perhaps the simpler explanation is that he is losing his touch”.
• Primark Watch: The new flagship Primark store opens today in Birmingham, on the site of the former Pavilions shopping centre, but the Store Design expert John Ryan has already been to see it and in his Newstores blog yesterday he said that “at 160,000 sq ft, the new Primark in central Birmingham, is the biggest in the retailer’s estate and is nearly four times the size of the current store. Size is not everything, however, and what really sets this one apart is the nature of the services and the experience that is on offer. Practically, this means a store that has five floors, catering in the form of cafés and restaurants on every floor, plus semi-discrete Harry Potter and Disney outposts”.
• News Flow This Week: Today brings the WH Smith interims and the opening of the impressive new Primark flagship store in Birmingham.
• Quote of the Day: Here’s another useful insight from Hilaire Belloc (1870-1953): “Every major question in history is a religious question. It has more effect in moulding life than nationalism or a common language”.
• Nick is currently in the US.