Langton Capital – 2019-05-01 – PREMIUM – More on WTB, GNK. Rank numbers, Pizza Express, McD etc.:
More on WTB, GNK. Rank numbers, Pizza Express, McD etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
To see yourself as others see you.
It’s always a challenge and, after visiting the circus outside the Houses of Parliament a couple of weeks ago and clocking some of the nation’s most famous politicians beetling or shuffling around in the flesh, it’s clear that some of them operate from inside some sort of mental avatar.
Because if you’re as wide as you are tall and walk as though you had broomsticks tied to your legs and were trying to mop the pavement, you might not be a shoe in for the role of superman.
Although shuffling might help as Churchill was most likely a bit of a shuffler and being a bit overweight, drinking too much and having a suspect attitude towards foreigners, workers and the North of England whilst putting out that you’re BFFs is also a plus.
And the stick insect or rather-too-pleased-with-themselves journos were a bit of a sight but there was one guy who looked as though he may have been honest. He even managed to tear up a bit.
If you can name the above politicos and journos, drop us a line. On to the news:
WHITBREAD – IMPLICATIONS & COMMENTS: What did Whitbread say about B2B compared with B2C? What implications are there for the rest of the industry? And how can bad news plus bad news add up to good? 1 May 2019:
Underexposure in London & B2B business in the provinces:
• Whitbread is a well-asset backed, very straight company that has been a great incubator over the years.
• It can be relied upon to tell us how it is – and, even if there is quite a bit of spin in the mix, it’s still very well worth listening to.
• WTB yesterday said that its hotels had underperformed the market.
• It said this was partly because they were underrepresented in London and quite heavily exposed to B2B business in the provinces.
• Perhaps counter-intuitively, B2B bookings are later and more frequently cut at short notice than are leisure bookings
• That ‘last 25%’ of bookings, that makes all the difference and which is broadly equivalent to the walk-in market in restaurants, can be volatile. And so it has proved.
• As WTB is more heavily represented in the provinces and London has a stronger leisure market, the group’s underperformance was nailed on
• Rank this morning says that its experience in casino performance in London vs the provinces was similar to that outlined by WTB
Other B2B players:
• Most of the leisure industry, by its nature, caters for B2C
• Some operators, however, including SSP and Compass, are B2B players as well and, though travel volumes will probably be a more important factor, they could get caught up in any business spending slowdown
• MERL and others have little to fear.
Can ‘underperforming’ be spun to mean ‘better-positioned’?
• To an extent it can, yes.
• But if the above was trotted out by a company without the track record for being straight that WTB has, it might be received with scepticism
• Underperforming is in the present, better-positioned implies future performance. The latter can’t easily be disproved.
• But there is the smell of spin here and it will need watching
And the group’s restaurants, what happened there?
• Whitbread reports that its restaurants saw LfL sales drop by 2% in the year to end-Feb.
• Coffer Peach numbers have the industry up by around 1% over the full year implying that WTB’s units underperformed
• Though the split of spending between residents and walk-in customers is not given, WTB’s restaurants do rely to a large extent on those staying overnight in Premier Inn lodges
• Hence the drop in the provinces has fed through to F&B sales
• WTB mentioned yesterday that it will prioritise its 80% occupancy target over price and the need to keep the tills ringing in its restaurants will be a factor here
WHITBREAD FULL RESULTS – ANALYSTS’ MEETING: Whitbread yesterday said that it was better-positioned than most to ride out the current slowdown. But it’s hotels underperformed the hotel market and its restaurants underperformed the restaurant market. Did we miss something? 1 May 2019:
Following the release of its FY numbers yesterday morning, Whitbread hosted a meeting for analysts and our comments are set out below:
Premier Inn & Restaurants:
• The UK network is still ‘building towards 110k rooms’. The group has 7k rooms in its pipeline in Germany.
• Margins were held ‘broadly flat’.
• Trading conditions in H2 have been ‘challenging’. This has continued into FY20 with REVPAR down 4.4%. Co says business travel is viewed by customers as discretionary in the short term
• The company can continue to take share from independents. Germany is even more fragmented than the UK. 80% of travel in Germany is domestic
• Co is still targeting 80% occupancy. The group is ‘pretty confident’ that it will get back the 1% slip last year.
• Group needs c2% increase in REVPAR to be flat on profits.
• Supply in the UK? Premier Inn is still the largest source of supply. There has been additional capacity into London & some other main cities
Current trading – hotels:
• Co says ‘a few months ago, we had not anticipated this level of downturn’. Each 1% move in REVPAR is worth £12m to £15m on the bottom line
• Investments are made on a 25-50yr basis and, over that time, cycles are almost inevitable. This does mean that projects that have already begun will add extra capacity even if trading is challenging. The company is confident on a 10yr view.
• Capacity was +5% in H2 with revenues up 2.0% and LfL revenues down over the period.
• The regions & business customers were down more than London and the leisure market. Whitbread is heavily represented in the regions. Around 50% of customers are business customers
• Weakness increased into Q1 of the current year. Co says ‘we are likely to be more resilient than most…in these more challenging times.’
• Forward bookings are ‘pretty positive’. This may be because leisure is holding up & leisure is an earlier-booking market. Short-lead bookings from business have been less good
• The group ‘prioritises occupancy over price’. Implies price cuts.
• Are people trading down? Co has lost a bit of share to Travelodge.
Germany – hotels:
• Returns in Germany will be lower for some time. WTB expects them to be ‘close to UK returns’ over the longer term. Returns should be up to 14%
• Aim to ‘replicate success in the UK, in Germany’. The Foremost Hospitality transaction should conclude later this year
• Losses in Germany will be c£12m in the current year
Capital, banking, balance sheet etc.:
• Maintenance capex was £151m with expansionary capital spend of £311
• The group will return to c3.5x lease-adjusted debt to EBITDA via cash returns over the medium term.
• Co will update on IFRS16 at its H1. Re last year, debt would have risen by £2.5bn with assets up by £2.1bn and shareholders’ funds therefore down £400m. There is no cash impact. EBIT would have increased slightly but overall profit would be lower – See Appendix II.
• There will be a greater focus on EBITDAR going forward
• Will UK openings slow further going forward? Co says it has ‘very clear line of sight’ to the target estate size in the UK. Would like to accelerate in Germany. There are no real constraints yet visible.
Return of capital:
• £100m to cover separation & transaction costs & tax. £380m has gone to the pension fund. £300m is retained to fund Germany. £500m is being retained for contingencies. The balance of £2.5bn will be returned to shareholders
• Co has thus far bought back £383m of shares. A tender offer to repurchase up to £2bn of shares will take place in June. The tender offer will need to be open for 20 business days & will be at a variable price in order to be fair to both exiting and longer-term shareholders
• The co would ‘love to make another bolt-on acquisition’. This is the only thing that would stand in the way of the above cash-back
• Whitbread has made it clear that trading is ‘tough right now’. The co says that independents are having an even tougher time of it. WTB may be able to take share and should continue to invest when others may not but, in the near term, it is losing share to Travelodge and its business-heavy and regional-site-heavy model is working against it.
• The group’s shares fell yesterday, and they are down 3% on this morning’s comments. A little more profit-taking could be on the cards.
GENERAL NEWS – PUBS & RESTAURANTS:
• Lost in the Whitbread noise yesterday was the news that its pub restaurants (Beefeater & Brewers’ Fayre & now Bar & Block) saw LfL sales fall by 2% last year ‘due to a more subdued casual dining market’. The market has indeed been subdued but the minus 2% figure does suggest that WTB has underperformed the market. See Premium Email.
• MCA has forecast the dining out the market to grow 1.9% in 2019, with the sector set to increase in value to £5bn in the next three years.
• Chief Executive of the BBPA, Brigid Simmonds has commented on the Pubs Code and Adjudicator review: ‘The BBPA welcomes this consultation as a valuable opportunity to assess the ongoing impact of the Code and the effectiveness of the Adjudicator, as well as to make suggestions for improvements’.
• Chief Executive of Fuller’s, Simon Emeny has told The Morning Advertiser that following the disposal of its beer and cider brands the group is set to begin work ‘under a new structure with an exciting future ahead as a pub company’.
• Pizza Express has seen a fall in EBITDA of 15.3% to £80.2m during 2018. The restaurant chain’s group chairman and chief executive Jinlong Wang has offered the following as reasons for the poor performance: ‘sector-wide labour and property cost increases in the UK combined with more challenging conditions in some of our less mature international markets’.
• McDonald’s Corp has beaten expectations in Q1 with LfL sales up 4.5%, driven by a boost from delivery in the US.
• McDonald’s also reported strong UK sales figures with the launch of its new Veggie Wrap and the Big Mac with bacon. Paul Pomroy, chief executive of McDonald’s UK and Ireland commented: ‘The backdrop has been tough. People still want to eat out but they are more discerning about where. Customers tell us they want choice, value, convenience, so this continues to be our focus going forward’.
• Beyond Meat, the plant-based meat substitute company has raised the size and price of its IPO later this week, giving the group a potential valuation of $1.5bn.
• Nichols, the parent company to Vimto, has total sales reach £30.6m in Q1 2019, with international sales up 24.4% to £6.5m and UK sales climbing 6.8% to £24.1m. The group commented on the outlook for the rest of 2019: ‘Whilst we believe that trading conditions will remain challenging in 2019, we anticipate that full year earnings will be in line with market expectations’.
• Figures from the Insolvency Service suggest that the number of companies going into administration was at its highest level in five years at the start of this year. It reports there were 451 administrations in Q1 this year, up 22% on the same quarter in 2018.
• James Yeomans, the founder of crowd-funded brewer Hop Stuff has appealed to customers to help the company to keep its bars open. The Sunday Times reported that a construction company had taken out a winding up order against the company and that its brewery landlord and the HMRC were pursuing the company for payments. Mr Yeomans says ‘owing to a fractious relationship since their purchase of the freehold six months after we moved in, the landlord chose to use this [late rental payment] as a foreclosure opportunity (or an opportunity to reset the relationship) which left us stranded.’
• The Hop Stuff founder says ‘please bear with me and the team – continue to visit the Taprooms which are still open and trading, and I will try to have an update and course of action for you ASAP.’
• The WSTA reports that rum sales exceeded £1bn in the UK last year with nearly 35m bottles sold. White rum is most popular though sales of spiced and flavoured rums rose to c10m bottles. The WSTA says ‘tt’s been another great year for rum sales in the UK. British drinkers have more choice than ever before when it comes to rum. Craft spirits are ‘of the moment’, and an increasing number of artisanal spirits producers are crafting their own interpretations of the spirit – often alongside their gin range.’
• Black Sheep brewery has acquired the Kith & Kin bar restaurant in Leeds. Black Sheep bought York Brewery and four of its pubs in December last year.
• Brewdog is offering 10% off products bought in its online shop ahead of the May Day Bank Holiday.
• Greene King’s shares ended yesterday down around 7.5% at 641p. They were over £7 last week. Over the medium term, the shares had moved steadily higher from their Oct 2018 lows of around 480p to last week’s 704p.
• A report commissioned by the Scotch Whisky Association has found that workers in the scotch industry contribute more to the UK’s economy than the energy sector. The average worker in the scotch industry contributes £210,505 to the economy whereas workers in the energy sector generate £173,511 per head.
• The parent company to Burger King and Tim Hortons, Restaurant Brands International has reported systemwide sales up 2.8% in Q1 2019. Tim Horton LfL sales were down 0.6%, with the group attributing the sluggish growth to extreme weather conditions.
• A survey conducted by MGH has found that 45% of US diners have tried a restaurant for the first due to a social media post.
• Dorset-based brewer, Hall & Woodhouse, announces the appointment of Matthew Kearsey as Managing Director, with Anthony Woodhouse as Chairman.
• Deliveroo plans to launch a clean and recycle service in partnership with Oxwash for plastic takeaway containers in Cambridge and Oxford. Deliveroo has suggested the scheme could be rolled out to more cities in 2020.
• Cask Marque creates a new accreditation scheme for beer, called Beer Marque. Pubs will be given a Beer Experience star rating based on several factors.
• Café Brera secures £212k funding to create a centralised London kitchen for its five sites.
• Laine Pub Company is set to acquire Urban Art Bar, a three-strong Birmingham pub group.
HOLIDAYS & LEISURE TRAVEL:
• Whitbread shares slid by more than 6% yesterday as the company’s comments on its Q4-and-into-FY20 slowdown sank in. The company, which is awash with cash following the sale of its Costa subsidiary to Coca Cola (which completed earlier this year), said that it is in a better position than most to weather any downturn. Its restaurants are losing custom but Germany could be a major opportunity (or a risk, or both). It did little else to sweeten the pill. See Premium Email for the company meeting notes.
• Whitbread gets a mixed but broadly negative press as a result of its comments on its current trading slowdown. The FT among others says that profits ‘plunged’ by 40%. Though there are exceptional costs involved, any capital-intensive business is likely to be sensitive to small changes in revenues – particularly if prices are cut in order to maintain volumes.
• Fosun increased its stake in Thomas Cook to 18% on Monday.
• Travelzoo reports wellness breaks are here to stay as 88% of respondents to a survey said mental wellbeing is just as important as physical wellbeing. 64% of respondents said they wanted to make their health and wellness a priority.
• Wyndham Hotels & Resorts reports Q1 revenues up 55% yoy to $468m with net income of $21m. Global RevPAR was up 7% with US RevPAR up 13% yoy. Adjusted EBITDA increased by 21% to $111m.
• Doncaster Sheffield Airport begins a £5m industrial development aiming to provide 45,000sq ft of industrial space for the region’s businesses.
• Rank Group has updated on Q3 trading today saying LfL revenues were flat for the quarter with total revenue up 1%.
• Rank says ‘Grosvenor venues improved in the quarter with like-for-like revenue flat following declines in the first two quarters of 2018/19.’ It adds ‘strong London trading in the quarter was offset by a disappointing Provincial performance.’
• Rank says ‘Mecca venues like-for-like revenue was down 1% in the quarter, with lower customer visits partially offset by higher spend per visit.’ Rank concludes ‘management’s expectations for the full year remain unchanged.’
• MGM has reported Q1 numbers saying revenues rose 13% to $3.2bn with net income down to $31m compared with $223m in the prior year. EPS was 5c vs 38c last year. MGM says ‘the current quarter included non-cash income tax charges totalling $0.07 per share on a diluted basis resulting from remeasurement of Macau deferred taxes due to the extension of our sub-concession agreement in Macau, the recording of deferred state taxes resulting from the Empire City Casino transaction and adjustments to our foreign tax credit valuation allowance.’ In the prior year, there were non-cash exceptional credits.
• Despite the reverse in fortunes at the net line, MGM says ‘the first quarter came in slightly better than our expectations with consolidated net revenues up by 13% and Adjusted EBITDA up 5%.’ Las Vegas was good and ‘our Regional properties performed exceptionally well with 24% growth in Adjusted Property EBITDA, or 9% on a same store basis.’
• Sales of Apple’s iPhones suffered their steepest-ever fall in sales in the three months to the end of March, with overall revenue for the group down 17% to $31bn.
FINANCE & ECONOMICS:
• Lloyds Bank’s latest Business Barometer suggests that business confidence has risen in London recently. Its barometer shows confidence rising by 2pts to 19% in the month. Lloyds says ‘it’s positive to see rising optimism about the economy boosting overall confidence for the second month in a row.’
• Confidence in the UK as a whole rose 4ppts to 14%. The optimism bias is on display with companies’ general economic optimism rising to 4%, while confidence in their own business prospects rose by three points to 23%.
• The SMMT has reported that the volume of UK car manufacturing fell for the 10th month in a row in March. The number of cars produced in the month was down 14.4% on the same month last year.
• Insolvency consultancy Begbies Traynor has suggested that the number of companies in ‘critical distress’ has risen by 17% in Q1 this year from levels of a year ago. Begbies says that the property and financial services sectors are worst-affected. Begbies believes that up to 14% of all UK companies are facing ‘significant’ financial distress. Begbies says ‘many UK businesses are currently in limbo and deferring major investment decisions.’ It says ‘this, combined with consumers holding back on big-ticket purchases, has resulted in increasing significant distress across many sectors’.
• Sterling up a bit yesterday at $1.3041 and €1.1625. Oil down a shade at $71.59. UK 10yr gilt yield up 1bp at 1.17%. World markets mixed. UK down yesterday, Europe & US up but Far East down in Wednesday trade
• Brexit, politics etc.:
o Labour’s National Executive Committee has met and has rejected the idea of campaigning for a confirmatory Brexit referendum under all circumstances. However, the party will demand a public vote if it cannot force the government to change its deal or call an election.
o The People’s Vote campaign has said that Labour’s luke-warm backing for a second referendum ‘risks demoralising activists’.
o Business secretary Greg Clark has said that the UK taxpayer will fund British Steel to allow it to pay £100m into an EU-run environmental scheme.
o Local council elections tomorrow. Home to the ‘protest vote’ the Tory Party may lose a large number of seats.
o FT reports ‘Brexit is bringing government and policymaking in Whitehall and Westminster to a juddering halt.’ There’s little room for anything else.
o Chancellor Philip Hammond has suggested that the three-yearly spending review for government departments may not be finalised over the summer.
START THE DAY WITH A SONG:
Yesterday’s song was ‘Girls from Mars’ by Ash. Today who sang:
She calls my name, pulls my train,
No one else could heal my pain
But I just can’t contain
This feelin’ that remains
RETAIL NEWS WITH NICK BUBB:
Next: Today’s Q1 trading update from Next (for the 13 weeks to April 27th) was expected to be pretty good and 4.5% full-price sales growth (4.0% ex finance income) is certainly nothing to be ashamed of and is ahead of the 3.2% growth that Next expected, given the weak comps in this period and a decent April. But the comps get much stronger in Q2 (given the fine weather a year ago) and Next have decided that it is too early to upgrade their full-year sales and profit guidance, which seems fair enough.
Sainsbury: The City was nervous that today’s finals might bring bad news and profit downgrades, with the weakness of the business exposed after the failure of its Asda merger plan, but the embattled CEO Mike Coupe has come out fighting, delivering better than expected underlying full-year PBT of £635m (up 8%) for the 52 weeks to March 9th and better than feared Q4 LFL sales of -0.9% (only -0.6% in Grocery). Ahead of a Capital Markets Day on Sept 25th to explain the new strategy, Sainsbury claim to be “accelerating investment in store estate and technology, while reducing net debt and maintaining our dividend policy”. In the short term, however, much depends on how convincing Mike Coupe is about the failure of the Asda plan and the group’s revised strategy at the presentation to analysts at 9.30am.
Grocery Market Share Watch: The latest Nielsen grocery sales figures yesterday morning (for the 4 weeks to April 20th) showed that overall supermarket industry sales value growth picked up strongly to 5.9%, given the later fall of Easter, with the last week alone up by 15.0%, thanks to the fine weather (the survey headline was “Late Easter Bank Holiday and Warm Weather Boosts UK Supermarket Performance”). The rival Kantar survey reported a rather worse outcome of only +4.0% for a similar 4 week period (to April 21st), on a “Till Roll” basis, albeit that was well above the 1.4% food price inflation rate. However, on a pure “Grocery” basis (ex-Non Food) overall sales grew by 5.3%, according to Kantar, boosted by Aldi/Lidl growth of 13.1% combined. Asda was the best of the “Big 4” on this basis, with gross sales up by 4.6%, whilst Morrisons was up by 3.0% gross, Tesco was up by 2.7% gross
Waitrose Watch: What the Retail calendar gives, the Retail calendar can take away…as shown by yesterday morning’s JLP weekly overview, for w/e April 27th, as the enforced closure of most shops on Easter Sunday meant that Waitrose was only able to trade for six days last week. Despite the benefit from the hot weather, Waitrose reported a 10.1% slump in gross ex-petrol sales in w/e April 27th (although they said that was “as expected”). That left the 13 weeks of Q1 up by 0.9% gross (up by c1% LFL).
John Lewis Trading Watch: The Easter calendar shift also worked against John Lewis last week, as sales in w/e April 27thwere hit by the absence of Easter Sunday trading in the stores, as well as by the weak footfall caused by the hot weather and tough comps in Fashion from price-matching a competitor promotion a year ago. In terms of sales mix, Fashion/Beauty sales were down by 9.5% gross last week and Home sales were down by 6.8% gross, but Electricals were 1.5% up gross. John Lewis LFL sales were over 4% down over the 13 weeks of Q1 (down 3.1% gross).
News Flow This Week: The Ocado AGM is being held at 10am today in the LSE building in the City. Tomorrow brings the N Brown finals and the Howden trading update. And the Intu Properties AGM update is on Friday.