Langton Capital – 2019-04-12 – PREMIUM – Tasty, Games Workshop, IPOs, major risks, holidays etc.:
Tasty, Games Workshop, IPOs, major risks, holidays etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
We popped over to Westminster yesterday to see what all the fuss was about.
And, after wading through masses of tourists, we clocked Downing Street, the Houses of Parliament and then the circus on College Green, which was the real purpose of our visit.
There we saw ERG action men Steve Baker and Mark Francois (the Daily Mash had a well-researched bio on the latter yesterday) pottering around as well as Jon Snow and a host of other minor flotsam whose names we didn’t know.
And, while celebrity spotting isn’t really our thing, it was guiltily interesting because it brings home that, amidst all the posturing and manoeuvring etc, these are real people.
So, heaven knows why some of them say what they do. It must be the Westminster Bubble, in which it’s possible to spout stuff that the most dedicated online Troll would be proud of. On to the news:
INCENTIVES AND IPOs: Never ask a barber if you need a haircut, says Warren Buffett. Is the ‘Bubble Inflation’ industry alive & well and living in EC One through Four? 12th April 2019:
How to lose friends & alienate people…
• The City likes IPOs. It likes restructurings & take privates as well but all in good time and everyone likes the notion of making good money for little effort.
• Add to that the suggestion that ‘confirmatory biases’ means that people like to be told what they already think, and you may find that any criticism of IPOs (and take privates etc.), risks falling on deaf ears.
A bit more comment:
• It’s all about timing, of course.
• But the natural state of affairs is that flair, effortless success, timing and good fortune tend to be overrated whilst hard work, stickability and faithful execution is for the birds.
• We’re being contentious, of course but, even if we’re only half right, there’s always a danger that bubble-inflators will inhabit an echo chamber where they push deals that, ultimately, prove to be sub-optimal
• We haven’t got enough friends to risk losing any more at this stage, so we’ll leave it at that.
IPOs – UBER SAYS IT ‘MAY NOT ACHIEVE PROFITABILITY’. Just why would invesetors invest in such a company? Valuation estimate $100bn. 12th April 2019:
• Naive perhaps, but shouldn’t the value of an investment be the discounted total of its future cash flows? And if those cash flows are negative, at least for many, many years at the start of the company’s listed life, doesn’t that produce a low or even a negative number?
A few comments:
• JM Keynes said the stock market was not about getting numbers right, it was about interpreting how other people would react to them and moving in first.
• JMK both made and lost a fortune but he had a point.
• Hence we accept that, just because a king has no financial clothes on, doesn’t mean that he’s not a king – particularly if everyone else in the crowd insists that he is.
• The $100bn company says that its sales rose last year to just over $11bn and it lost $3bn. It says that it expects expenses to ‘increase significantly’
• Uber aims to raise around $10bn in new monies
• Beware unicorns? Lyft is at a discount and soon-to-be-listed Pinterest seems to be valuing itself at around $11.3bn, below the level of its most recent private fund raise in 2017
Can we conclude anything useful?
• Some IPOs will be brilliant but look at the incentives. Existing shareholders want your money.
• More run of the mill IPOs will point to (potentially illusory) ‘barriers to entry’ and suggest that they have the pixie dust to succeed where others are struggling
• If they can persuade buyers that they will be on a PER of 9x and a yield of 6% within 3-5yrs, then they may be worth a look
• But even then, they need to execute on their business plan (with your money) and there are some companies out there on a PER of 9x and a yield of 6% already. Why take the execution risk that a newbie might, with a following wind, be as good as something that you can own already?
• Dynamic unicorns may suggest that they are the disruptors that are benefiting from technological change
• And they may well be. But see our comments below on existential risk. Uber is embroiled in a number of rows with regulators. The tax man must be watching what’s going on with interest.
• Don’t forget, there’s money to be both made and lost in the bubble-inflation industry. We know that Facebook went to a discount and then rose but there may be a top as well as a bottom to these valuations
EXISTENTIAL RISKS: Can they be avoided – or even spotted for that matter? 12th April 2019:
• Seeing what happened to Indivior earlier in the week, we’ve been pondering existential risks. Anyone who has ever seen the dread words ‘shares suspended pending clarification of the financial position’ will recognise these are the major, major risks that can actually lead to the collapse of a company.
• Putting to one side major external risks (war, depression, currency collapse etc.), companies arguable still face a number of existential risks. These, unfortunately, are often clearer with hindsight than they were at the time they happened. They often involve the taxman, other authorities (the Feds, the Gambling Commission), technological change, fraud or gross, gross mis-management.
A few examples:
• When a certain online poker company came to the market more than a decade ago, it said 1) it wasn’t clear whether or not its games really were illegal in the US, 2) even if they were, they were constructed and operated from Gibraltar and 3) even if the Feds still claimed jurisdiction, how were they going to ever bring their influence to bear.
• Anyway, when execs holidaying in Florida, passing through any US airport hub or landing in any country where the US could do a bit of arm-twisting, the company in question found out exactly how the Feds would exert their influence and the company’s share price collapsed.
• Indivior has been clobbered by the Feds, the bookies have been hit by FOBT changes and Goals’ shares have been suspended as a result of actions by the UK taxman. Many retailers have been destroyed by the Internet and Pat Val was brought down by fraud and / or by gross mismanagement.
But here’s the question – could any of this have been foreseen:
• Anyone reading the ‘risk factors’ in an IPO doc or even a report & accounts might be fearful of ever investing in shares.
• But people do invest because they either 1) weigh up the risks and believe they are worth taking or, more likely 2) they simply ignore them.
• And most of the time it’s ‘right’ to ignore the risks but that’s like saying the man without a parachute is ‘fine’ for more than 9,995 feet of his 10,000 feet fall to early. Mr Buffett says its perfectly possible to take unacceptable risks and get lucky
What to look out for:
• There’s no certainty here but single product (or service) companies with few or no or expiring barriers to entry must be risky.
• Companies where earnings or margins are more likely to fall than rise may similarly have red flags
• Nationalisation might be a threat. Competitors, authorities & regulators likewise.
• Bullying management might be a risk. Information flows are likely to be imperfect, the boss may only hear what he / she wants to hear and frauds could be a risk. Pat Val is an extreme example but that one did actually happen. You’d have been pushed to make it up.
• More heuristics, it’s time we did a book review, comment on CVAs (are we seeing landlord push-back) & other.
GENERAL NEWS – PUBS & RESTAURANTS:
• The Food & Drink Federation has said that it is ‘mightily relieved that the immediate threat of a catastrophic no-deal Brexit has been lifted.’ It says ‘government and Parliament simply must give us a coherent plan to lead us out of our current mess.’
• Tasty announces a conditional Firm Placing and Open Offer to raise up to £3.25 million before expenses. Group says the Firm Placing has been undertaken with new and existing institutional investors in the Company.
• Tasty says ‘the net proceeds of the Transaction will be used to pay down debt and for general working capital purposes’. Chairman Keith Lassman says ‘this is an important fundraise for Tasty as it will enable us to continue our strategic plans with vigour. We are delighted with the level of investor support for the Placing and we would like to thank our shareholders for their continued support.’
• Games Workshop has updated on trading saying ‘following on from the Group’s half year report in January, trading to 7 April 2019 has continued well.’ GAW says ‘compared to the same period in the prior year, sales and profits are ahead. Royalties receivable are also ahead of the prior year following the signing of new licence agreements.’
• GAW reports ‘the Board’s current expectation is that profit before tax for the year ending 2 June 2019 will be c£80 million.’ The group is also announcing a dividend of 35p per share ‘in line with the Company’s policy of distributing truly surplus cash.’
• Admiral Taverns has announced that CEO Kevin Georgel is to leave the company after nine years in order to become CEO of St Austell Brewery in January 2020. Admiral says ‘the process to appoint his successor is well advanced and a further announcement concerning this appointment will be made in due course.’ Admiral Taverns operates a national estate of circa 800 predominantly wet-led community pubs.
• UKHospitality has called on councils to put hospitality at the heart of plans for the Future High Street Fund. The government is accepting bids from local authorities for a share of the £675m fund to invest in high streets.
• Over 160,000 people have petitioned McDonald’s to add a vegetarian protein option to its menu across the US. Kathy Freston, author of the petition and a vegetarian activist commented: ‘I’m hoping to bring a positive change to America with a mainstream meatless option at McDonald’s! Healthy living should be about progress, not perfection, and this is an easy step that McDonald’s could be taking’.
• The Washington-based pizza group Papa Murphy’s has merged with Canadain franchisor MTY Food Group, in a deal valued at $190m USD. Jean Birch Chairman of the board of directors of Papa Murphy’s said: ‘The board of directors and our advisors have thoroughly evaluated all options available to us and are confident that this agreement provides immediate value to our stockholders at a premium over our current share price’.
• The Caterer has reported that Foxlow Soho, the neighbourhood restaurant operated by the Hawksmoor Group, will close later this month after receiving an offer on the site.
• The Fat Duck has seen profits decline to £297,788 from £533,145 for the 12 months to 27 May 2018, while turnover increase to £6.7m.
• Accolade Wines UK reports profits up 175% to £11.5m for the year to 30 June 2018. The company, owned by US-based Carlyle Group, saw turnover increase 0.72% to £477m.
• Punch acquires four pubs from Mitchells of Lancaster. Punch is investing approximately £30 million in its pubs this year and is progressing well on a three year plan to invest £80 million in its estate.
• FishWorks will open its flagship restaurant in Covent Garden next month, featuring 110 covers and a dedicated oyster bar.
• Caffè Nero launches coffee-cured bacon sandwiches as part of its new espresso-infused menu.
• Shake Shack announces its 10th UK site, located at intu Lakeside.
• In the US, restaurant same-store sales increased 1.2% in March, up from a 0.9% decline in February. Victor Fernandez, vice president of insights and knowledge for TDn2K said ‘Chain restaurants have a lot to be optimistic about given these latest results’ and that there are signs indicating a longer-term recovery.
HOLIDAYS & LEISURE TRAVEL:
• ABTA has welcomed the latest Brexit extension saying that it is ‘good news’. ABTA CEO Mark Tanzer says ‘unless a deal is agreed earlier, which would come with a standstill transition period, the UK will now not depart the EU before the end of October 2019.’ The news should allow consumers to book their summer holidays with something approaching confidence that the airports will be functioning when they get there. Abta CEO Mark Tanzer says the delay ‘should give people total confidence to book their holidays or business travel plans, knowing that nothing will change in the short-term.’
• The Brexit delay has been greeted positively by UK travel stocks, with EasyJet up more than 8% to 1144.5p and Tui up over 8% to 775.4p.
• Jet.com announces multiple expansions for summer 2020, including flights to Preveza in Greece and Zadar in Croatia.
• Marriott signs a new multiyear deal with Expedia with a Marriott spokesperson saying ‘the agreement continues Marriott’s long-standing distribution arrangement with Expedia Group for transient bookings, expands Expedia Group’s role related to Vacations by Marriott’. It is expected to launch in Q4.
• STR reports US hotel occupancy up 0.4% to 68.7% for the week ending 6 April. ADR rose 1.5% to $130.79 with RevPAR up 1.9% to $89.90.
• Uber has begun releasing documents relating to its upcoming IPO. In them, it says that it ‘may not achieve profitability’. Quite what that means is open to interpretation. The firm could be valued at $100bn. See Premium Email.
• Tui will launch Tui River Cruises next summer, acquiring three 155-passenger ships which will sail along the Danube, Rhine, Main and Moselle.
FINANCE & ECONOMICS:
• The RICS says that Brexit is responsible for the continued uncertainty in the housing market that is expected to see prices edge further downwards over the next few months. RICS says that homes are taking a little longer to sell with London and the South East the least good markets at present.
• IMF boss Christine Lagarde has said that the latest Brexit extension is a relief in that it avoids a ‘terrible outcome’. However, Ms Lagarde says that further Brexit uncertainty will continue to hold back growth in the UK economy. She says that any prolonged uncertainty would have a ‘negative impact’.
• Mrs May has defended her decision to extend Brexit, one of many things that she said she would never do. Talks with Labour go on.
• Bank Governor Mark Carney has suggested that the level of uncertainty facing British businesses has gone ‘through the roof’ due to Brexit. This is impacting investment.
• Sterling down a little overnight to $1.3074 and €1.1577. Oil down a shade at $71.08. UK 10yr gilt yield up 6bps at 1.09%. World markets mixed. UK market set to open about 6pts.
• Brexit, politics:
o Mrs May not clear yet what she is going to do with the next six and a bit months. BBC suggests it could be not long enough to do anything radical and not short enough to foster a feeling of urgency.
o Six months may not be long enough for the Tory party to change leaders suggests the FT. And, it hints, who would want to wear this mess?
o Anyone below say 45yrs will have ‘another chance’ whilst anyone above, say 55yrs, might be getting a bit trigger-happy. No names.
o Median age at which Mr / Ms Average more likely to vote Tory than Labour? Was 34yrs in 2016, 47yrs at the time of the 2017 election and 51yrs now.
o Tory party gets c47% of its votes from people above retirement age. Oh, dear. Sir John Major says there will always be room for a centre right party. It just might not be this one.
START THE DAY WITH A SONG:
Yesterday’s song was Time To Pretend by MGMT. Today, who sang:
My Tribe went down in the hall of fame,
Cause I’m the one who shot Jesse James
Pound for pound, I will never break down
(Big Bank!) No sir, I don’t mess around
RETAIL NEWS WITH NICK BUBB:
• WH Smith: The interims yesterday from WH Smith (for the six months to end Feb) were not of stellar quality, with headline PBT slightly down at £81m (before hefty exceptional costs), but that was in line with expectations and with the interim dividend up 8% and with management saying that the group was well positioned for the full year, the shares rose quite nicely. Travel Division trading profits were only 7% up at £44m, with £2m of the growth coming from a first time, part contribution from the successful InMotion acquisition in the US (problems at Madrid Airport were one headwind). On the other hand, High Street Division trading profits were only 4% down at £48m, with LFL sales only 2% down, despite weak Book sales. Interestingly, the Travel Division has been trialling combining the traditional WH Smith format with a pharmacy in partnership with Well Pharmacy (“the UK’s third largest
• Ted Baker: The slightly embattled fashion chain Ted Baker made two announcements at 7am yesterday. The first was that the acting CEO, Lindsay Page (the former CFO and COO) had been made the CEO with immediate effect, which was not a massive surprise, even if some shareholders had wanted fresh blood brought in. And it also announced that the independent investigation conducted into the allegations about former CEO Ray Kelvin’s conduct has now been concluded. Somewhat unsatisfactorily, however, there was no specific comment on the allegations and all we were told was that company HR practices have now been improved. Time will tell whether Ted Baker have thrown the baby out with the bathwater…
• Quiz: The struggling fashion chain QUIZ reported a trading update yesterday for y/e March, but there was no new bad news, with the company repeating its March 7th warning that full year EBITDA would be only c£4.5m, prompting a useful rally in the share price. Interestingly, QUIZ highlighted the recent announcement from Debenhams plc that, whilst they have entered into administration, the underlying operating companies continue to trade as normal, with suppliers expected to be unaffected. QUIZ operates 108 Debenhams concessions in the UK and 11 in the Ireland and also sells its product through the Debenhams website. Revenues from these Debenhams-linked activities represented 23% of overall QUIZ revenues in the last financial year…
• Sports Direct: The Sports Direct share price rose again yesterday, building on the relief that it isn’t going to get any more involved with the Debenhams business, but this time it was on the back of the announcement at 7am that it was restarting its share buyback programme, with the intention of buying £15m worth before the financial year-end on April 27th. This was a modest show of confidence in the group’s prospects, in the absence of any trading news, but, extraordinarily, the company then chose to make a supplementary announcement at 10.30am, to make the point that it was “for the benefit of our shareholders, whose support, including during the Debenhams refinancing process, we continue to appreciate. Our understanding of the importance of our shareholders and our actions towards them are in complete contrast to the actions of the Board of Debenhams, past and present”…!!
• Today’s Press and News: The news last night that the new compromise Brexit date is October 31st caused more UK political repercussions yesterday and one of the FT front page headlines is “May pins Brexit hopes on Labour as no-deal preparations wind down”, whilst page three of the FT is devoted to “Eurosceptic wrath fuels talk of May’s exit”. In terms of Business news, on the back of the flagship Primark store opening in Birmingham yesterday (which was hit by a power cut, according to the Telegraph), the FT flags that “Primark eyes first Online sales foray”, with management admitting that a “click and collect” service is under consideration. The FT also covers the WH Smith results (with Lombard column writing approvingly that “WH Smith finds Travel broadens the margin and revenue lines”) and the Ted Baker management change, together with the news that the beleaguered Philip Green
• News Flow Next Week: Next week is pretty quiet in terms of company news, ahead of the long Easter weekend, but Tuesday brings the Card Factory and JD Sports finals, whilst the ONS Retail Sales figures for March are out on Thursday.
• Trade Press (1): The front cover of Retail Week magazine today features a large photo of the estimable WalMart International CEO, Judith Mckenna, on the front cover, to flag the main feature on “A new Walmart for a new world: How international boss Judith McKenna is transforming the retail giant”. Retail Week also looks at “The Demise of Debenhams” (“Can the department store be salvaged after administration?” and “Superdry’s Slam Dunk” (“Can the co-founder make Superdry cool again?”. And the Editor focuses on the struggles of Debenhams in his column, thundering that “Debenhams needs new sense of purpose” and that “The question ultimately remains: what is Debenhams for?”.
• Trade Press (2): The front cover of Drapers magazine today flags up a special feature on the Sunglass market, but the Editor focuses on the struggles of Debenhams in her column (thundering that “Debenhams must act to head off demise”) and the main News story is that Debenhams resorted to a pre-pack administration as its lenders took control of the business. Drapers also flag that retailers in the trendy new Coals Drop Yard shopping centre near Kings Cross are horrified at how low customer footfall is, six months after opening. In terms of features, Drapers look at what Philip Day can do to turnaround the Bonmarche chain, study the impact of Brexit uncertainty on Turkish fashion suppliers and also interview the CEO of the ethical kidswear brand Frugi, but the highlight of Drapers is the second in its excellent “Hit or Miss” reviews of spring clothing in the High Street, this time on
• BDO High Street Sales Tracker: We flagged on Wednesday that sales at John Lewis were hit yet again last week by the calendar shift of Easter, but the BDO High Street Sales Tracker for medium-sized Non-Food chains for last week, w/e Sunday April 7th wasn’t bad, given its sales mix bias towards Fashion. BDO Fashion Store sales were up by 2.1% LFL (including Online), helped by soft comps and Total BDO LFL sales (including Homewares and Lifestyle sales) were up by 1.3% last week (down by 3.5% in Store sales and up by 23.3% Online).
• Quote of the Day: Here’s a random insight from Hilaire Belloc (1870-1953), which we pass on anyway: “Statistics are the triumph of the quantitative method, and the quantitative method is the victory of sterility and death”.
• Nick is currently in the US.