Langton Capital – 2019-04-24 – PREMIUM – Loungers, Heineken, US restaurants, craft brewers etc.
Loungers, Heineken, US restaurants, craft brewers etc.
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
Easter is still upon us & bits of Langton are scattered across Europe. The email this week could be a little shorter than normal. On to the news:
THE MARKET HAS NO BRAKING MECHANISM, JUST A CRASHING MECHANISM: We’ve seen that re Casual Dining restaurant overcapacity; will the same thing happen to the craft brewers? 24th April 2019:
• The free market is great, but it isn’t perfect. If returns on capital are high in a particular area – or even if, more cynically, investment funds are easy to source in a particular area – capital will flood in. Overcapacity will result, margins will fall, discounting will become a feature and, unless something happens to stop the process, as sure as night follows day (or a hangover follows a drinking-binge), busts will result. It’s the casual diners today; could it be the craft brewers tomorrow?
A likely scenario: Light the blue touch paper…
• Nothing is perfectly predictable, but the following is certainly possible and possibly certain.
• Craft beer touches a nerve. Early movers (often not the first) make out like bandits.
• Lifestyle-type companies look ‘attractive’ and a number of craft brewers, those that have tempered lifestyle with good business practices, sell out to the majors.
• The availability heuristic means that we focus on big news (sharks, lightening & plane crashes rather than high cholesterol and diabetes) & therefore ‘know’ that the industry is full of hundred-baggers
• This has a predictable impact on capital flows
A likely scenario: Reality bites…
• The majors realise they could do all this themselves, there is no ‘pixie-dust’, buyers dry up but capital continues to flood in
• Beer aficionados who love the product continue to fling their fifty-quids at the industry but the larger investors, those that had hoped to make a capital profit, begin to get cold feet
• Meanwhile, ‘brand-building’ craft brewers continue to lose money, they need new capital in order to remain in business & more of them continue to spring up
A likely scenario: The lessons of history…
• The Internet was a good idea in 1999 but nearly everyone lost a fortune. Capital flooded in but only trickled out. Reality bit, the king had no clothes on and the inevitable happened.
• The casual dining industry is in secular growth. But capital has poured in. Many operators are losing a lot of money. Many players, including crowd-funded operations, will need to turn a profit shortly or their funds will dry up.
• Craft brewers? Well, who knows? But if it quacks like a duck and walks like a duck…
A few facts:
• Accountants UHY Hacker Young reports that a net eight craft brewers opened their doors in 2018. Some 395 opened in 2017 and 179 made their appearance in 2016.
• There are now 2,274 breweries in the UK. Up by over 900 since 2013. Some might argue that that’s enough.
• There were last more than 2,000 breweries in the UK in the 1930s.
• The big brewers are doing it themselves. UHY Hacker Young reports the market is ‘difficult for new entrants’ as the majors are investing in their own ‘craft’ breweries.
• Some are beginning to question what, if anything, ‘craft’ actually means.
• We would suggest that there may be an advantage to being the first to exit the market.
• The accountants says ‘craft breweries need to ensure their business model is sustainable and profitable at an earlier stage and not just rely on the idea they’ll constantly be able to grow their way out of trouble.’
• True that.
• Supermarkets have limited shelf space, consumers need only a few dozen rather than a few thousand cans to choose from etc.
• None of this is new. It’s just being viewed in a different, altogether less charitable, light.
• SIBA says ‘whilst some smaller brewers are closing due to increased market competition, other independent craft breweries are seeing impressive growth and the consumer demand for craft beer has never been higher.’
• SIBA, CAMRA & others are driven by the purity of the concept, the independence of the brewer etc. Consumers, often, just want a decent pint.
GENERAL NEWS – PUBS & RESTAURANTS:
• Loungers has announced that it is to list 41.6m shares at a price of 200p per share. Some 30.8m new shares and 10.8m existing shares will be placed.
• The placing will raise £61.6m for the company (to pay some of its debt-holders down) and £21.7m for selling shareholders.
• Loungers reports that the market cap of the company will be £185m based on the placing price. The group had indicated an equity value of perhaps £225m to £275m with a free float of up to 75%.
• Selling shareholders include Lion Capital and founders of the group Alex Reilley and Jake Bishop. The group says the Company’s founders and members of the senior management team ‘will have raised approximately £21.7million (before expenses) pursuant to the Placing.’
• Lion Capital will retain 39% of the issues share capital of the listed company with the executive directors & senior managers holding another 16%.
• Loungers’ shares will trade from 29 April. CEO Nick Collins comments ‘today is a significant milestone in Loungers’ journey as it has long been our ambition to list the Company on the public markets. We are delighted that our unique business has resonated strongly with investors.’
• Loungers continues ‘we welcome all of our new shareholders to the Loungers’ family and look forward to the Company’s continued growth and future success.’
• Heineken has reported Q1 numbers saying that beer volumes rose 4.3% organically ‘with growth in all regions.’ CEO Jean-François van Boxmeer comments ‘we had a positive start to the year with volume growth across all regions despite the later timing of Easter, underlining our continued focus on growth and the breadth of our geographic footprint. The Heineken brand volume was up 8.3%. Our outlook for 2019 remains unchanged, we anticipate our operating profit (beia) to grow by mid-single digit on an organic basis.’
• English and Welsh sparkling wine consumption in the UK increased by 6% in 2017 to 4m bottles, overtaking sparkling wines from Australia, the US and Germany combined.
• Coca Cola Inc yesterday reported numbers ahead of Wall Street estimates. Boosted by strong demand for its low-calorie product as well as flavoured waters, Coca-Cola reported sales of carbonated drinks up 1% in Q1 with total revenues up 5% at just over $8bn.
• Coca Cola reports that, with its carbonated drinks, tea business and water bottlers – and since acquiring Costa from Whitbread earlier this year – it is now a ‘total beverage company’. The group earned 48c per share in Q1 against analysts’ estimates of 46c.
• Chief Executive of the BBPA, Brigid Simmonds has commented on Altus Group’s report that shows pub closures slowing down: ‘It is great that pub closures decreased last year, and Altus Group is right that the Government’s support on business rates for smaller pubs has helped ease the decline. However, too many pubs are still closing because of huge tax pressures from elsewhere, especially from eye-wateringly high beer duty and VAT, so we cannot be complacent’.
• SSP has taken a 49% stake in a joint venture with the Indian K Hospitality Corp food services company. SSP will own shares in subsidiary Travel Food Services Private Limited, as the group looks to expand its presence in India.
• Starbuck’s main rival in China, Luckin Coffee, has announced plans to IPO in the US, aiming for a valuation of up to $800m.
• MatchPint has collaborated with ETM Group to celebrate the end of the football season by launching a new beer, The Match Pint.
• NRN in the US reports that bento boxes have now been ‘discovered’ by parents across the country.
• An estimated two million bottles of wine and spirits were destroyed in a fire at a warehouse in Bordeaux last week.
• The New York-based hotdog brand, Nathan’s Famous, is set to expand into the UK, targeting 25 units in five years.
• The latest Miller Pulse survey of restaurant sales in the US shows that LfL sales increased by 1.9% during Q1 of 2019. Traffic (footfall) remains poor (down a somewhat worrying 2.4%) but spend per head rose by 4.3%.
• NRN in the US reports that mix changes helped but that out and out price rises are largely what drove ‘growth’.
• NRN reports that, in the US, ‘industry same store sales may have been a lot worse if not for the heavy lifting by the quick-service segment. QSR sales were up 2.4%, or 100 basis points stronger than in the fourth quarter of 2018.’
HOLIDAYS & LEISURE TRAVEL:
• Thomas Cook has declined to comment on the speculation that the Chinese conglomerate, Fosun International is interested in acquiring the group. Fosun, the Club Med owner, has been increasing its stake in the travel company reaching 17% worth around £64m.
• Thomas Cook shares rose c18% yesterday on bid-talk.
• Holiday company Minoan has announced that it is to place up to 63.9m shares at 2.75p and 3.00p per share.
• A number of brokers released buy notes on Lyft yesterday.
• STR has reported the US hotel industry grew in Q1 2019, with occupancy up 0.4% to 61.8%, average daily rate increasing 1.1% to $129.02 and RevPAR climbing1.5% to $79.68.
• The owner of the Tune Hotel brand is to launch two new brands, Ormond Group and MoMo’s, to cover the luxury and lifestyle segments respectively.
• Whitebox Advisors, the US hedgefund that predicted the 2008 global financial crash, has been building a multimillion-pound bet against Thomas Cook. Following the speculation surrounding a potential Fosun bid for the travel agent, its shares have risen sharply.
• The French hospitality firm Accor has seen Q1 sales rise by 34.2% to €987m. Chairman and CEO Sebastien Bazin said: ‘In a turbulent macroeconomic environment, the group’s first quarter revenue performance highlights the effectiveness of our transformation and the soundness of our strategy. Europe remained strong, while South America continued its robust recovery’.
• The Hong-Kong based Chanco Investment Group is set to open its first London hotel called the Page8 hotel on St Martin’s Lane.
• Volcanic ash clouds have been thrust two kilometres in the air after Mount Agung on the Indonesian holiday sland of Bali erupted over the weekend.
• Shares in Snapchat parent company Snap rose yesterday after the app reported that it grew user numbers for the first time in three quarters in Q1 this year.
• Twitter Inc has recorded better than expected quarterly revenue and sign-up figures, sending shares int the social media platform up 13% to a nine-month high.
• The Guardian has reported a problem gambler who lost £125k on online casinos has accused them of ignoring obvious signs of her gambling addiction. The former accountant has claimed the online casinos, LeoVegas and Casumo offered her bonuses to keep betting instead of offering help.
• The Chinese live streaming service files company, DouYu is set for a $500m US IPO.
FINANCE & ECONOMICS:
• President Trump has said that he will react against ‘unfair’ EU trade tariffs against Harley Davidson motorbikes.
• Sterling down a little at $1.2933 and €1.1531. Oil little changed at $74.36. UK 10yr gilt yield up 3bps at 1.22%. World markets mixed with Far East lower in Wednesday trade. UK set to open down about 18pts.
• Politics, Brexit etc.:
o EU elections now less than a month away. Remain vote could be split between Change UK, Lib Dems, Greens & Labour as Tories look like becoming the definitive Brexit party. Alongside, of course, the Brexit Party (capital P) and UKIP.
o Mrs May says talks with Labour are important by difficult. Independent reports PM as suggesting Labour is dragging its feet.
o Senior Tories are to vote this week on whether to change the rules to make it easier to force Mrs May from office. Currently, the PM cannot face another confidence motion until December this year at the earliest.
START THE DAY WITH A SONG:
Yesterday’s song was Kurtis Blow with ‘These are the Breaks’, today who sang:
Street’s like a jungle,
So call the police
Following the herd
Down to Greece
RETAIL NEWS WITH NICK BUBB:
• ABF (Primark): Today’s interims from the food conglomerate ABF cover the 24 weeks to March 2nd, but, as usual, most of the focus will be on the strong performance of its huge Primarkbusiness, where operating profits jumped by 25% to £426m (an 11.7% operating margin), despite a 1.5% fall in overall LFL sales (albeit the UK was up by 0.6%). Full year profit guidance is unchanged, although customer reaction to spring/summer ranges is said to have been “encouraging”.
• Boohoo: When mighty Boohoo last reported, back on Jan 15th, cumulative sales growth was running at a heady +47% after 10 months of the financial year and the full-year outcome announced in today’s finals for y/e Feb is +48%, so the last 2 months of the year were also strong. On the back of that adjusted PBT for the year was up by 49% to £76.3m and trading in the first few weeks of the new-year is said to have been “encouraging”, with Boohoo targeting to edge up its underlying EBITDA margin to 10% (albeit helped a little by the impact of IFRS 16). Apart from the operational and financial performance of the business, the big focus at the 9.30am analysts meeting will be on how the highly regarded new CEO John Lyttle comes across and what he says about his first impressions after 5 weeks in the job.
• Today’s Press and News: On a quiet news day after the Easter weekend, the sale of most of its remaining Sainsbury supermarket properties by British Land gets a lot of coverage, with the FT highlighting that British Land wants to reduce its overall exposure to Retail property and Lex column noting that the 5% yield obtained from a New York-listed property company wasn’t bad and thundering that “Investors may be willing to pay up for long leases, with pre-agreed uplifts and strong covenants. But they should be choosy”. The FT also flags the Sky News story that Majestic Wine is advancing its plan to focus on the Naked Wines Online business and has appointed Rothschilds to find a buyer for its store portfolio/chain. And the Daily Mail and the Times note that the CMA is expected to deliver its final verdict on the Sainsbury/Asda deal tomorrow.