Langton Capital – 2019-05-09 – PREMIUM – More on JDW, buy vs sell values, Time Out etc.:
More on JDW, buy vs sell values, Time Out etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
I learned something yesterday & that’s that the 60cm squared bits of clear plastic that I’m having to buy to repair the damage caused to the greenhouse by a hailstorm a couple of months ago cost more than fifteen quid each.
That’s fifteen English pounds, which is rather a lot.
I can see that I need about six but, though I’m told that glass would be cheaper, I’m not sure that I trust myself tottering around at the top of a ladder with a potentially lethal weapon in my hands surrounded by more of same.
Says the man who climbed up a tree with a chainsaw and then fell out. We’re nearer the end of the week than feels right but let’s move on to the news:
JD WETHERSPOON Q3 UPDATE: Following its Q3 update, JD Wetherspoon’s shares fell by 4.5% as the market digested news that comps were tougher and that broker forecasts implied a recovery in LfL growth to 6% or so next year. That may be a tad challenging. 9 May 2019:
• The group hosted a conference call for analysts and our comments thereon are set out below:
• Can you see through good Easter weather to comment on underlying trends? The quarter was ‘tapering down’ a little towards the period end.
• This is likely to continue in Q4. Will trend back towards inflation & comps are tougher.
• Food versus drink? No comment at this stage.
• Profits will ‘be in line with earlier expectations.’ Co broker is forecasting £102m inclusive of property gains of say £5 or £5.5m (vs £3m last year).
• Has estate trimming benefited LfL sales? Yes, but minimal. Around 100 pubs have gone over recent years.
• Group won’t be drawn on estimates of LfL growth going forward. The company’s broker is looking for a couple of years at 6% LfL growth.
• April pay increases & costs? Co ‘kept wages under review’. They were not increased in April as they had risen in November. Overall wage inflation could be 4% to 5% p.a. for the next 2-3yrs.
• Margins? Co will not comment at this stage.
• Repairs likely to continue at around 4% of sales.
• Interest costs next year should be ‘broadly similar’.
Balance sheet, debt etc.:
• Freehold reversions pipeline? Spent £71m y-t-d. They are opportunistic. Probably ‘not a huge amount more this year’.
• How many units could still be bought back? A two or three year average would imply £50m to £60m p.a.
• How many pubs to be sold / closed this year? Seven to date. There are 15 on the market at the moment. They will go over the next 12-18mths. There are no present plans to add to the number for sale.
Conclusion, current trading etc.:
• JDW reiterates that there has been no change to expectations.
• JD Wetherspoon has reiterated that trading is in line with expectations.
• Within that, LfL sales will slow (albeit still to high levels) in Q4 and into the next financial year.
• Current forecasts include property disposal profits and LfL growth of perhaps 6% for a couple of years.
• We believe the group is behaving sensibly in buying in its properties and would reiterate our suggestion that JDW is a good company. It does what it does extremely well, but it is not currently cheap and its low margins could prove to be a point of weakness if sales growth stalls.
BUYING A BUSINESS – VALUING IT ON THE WAY IN: LOOK AT THE INCOME IN THE BAD YEARS BUT PERHAPS THE BALANCE SHEET IF THINGS GO WRONG? When selling the dream, companies point to their earnings one, two, three or more years out. But balance sheets do matter. They tell you 1) how much it cost to put the business in place and 2) what you might get back on your investment if things went wrong. 9 May 2019:
• If all goes well, the projected P&L accounts tell you what a company may be worth over the longer term. That’s great but, beyond perhaps two, three years, there be monsters & nobody knows what will happen. Hence a glance at the balance sheet is useful as it tells you 1) what the people currently trying to sell you the business (or shares in it) paid to put it in this shape and 2) it gives you some idea of what a ‘business’ may be worth if things go wrong.
• We’ll skip comments on earnings as they’re well-rehearsed and / or we can cover them later. Here just a few words in praise of the humble balance sheet.
A few thoughts:
• CAKE was valued as an income stream. That proved to be an illusion. The balance sheet gave some support but, when push came to shove, intangible assets were worth very little and the administrators took an extremely harsh red pen to much of the rest
• The balance sheet tells you what the company cost to build. You can add in accumulated losses as an ‘investment’ if you like.
• The above gives a hint as to whether competitors will be tempted to step in.
• A company trading at one times book with high barriers to entry will attract little competition.
• A company trading at ten times book with low, no or illusory barriers to entry, will be swamped as new capital enters the market.
An eye to the downside:
• Almost any forecasts that go beyond year two or three have to be guesswork.
• That said, the balance sheet does offer at least a degree of grounding.
• Intangible assets within the balance sheet often represent the excess that a company has paid for an acquisition over and above its tangible value.
• They are therefore the capitalisation of hope and, though they may be meaningful sometimes, at times of financial stress, they are not.
• We believe that the multiple to book and the steepness of the barriers to entry should be positively correlated.
• That said, there is an incentive perhaps to overstate barriers.
• There are absolutely no barriers of any description to anything over the long term. Even Disney, Starbucks & the rest could be replaced. In times of old you would even mention the Royal Family or the church.
• In the short term, barriers exist. But a multiple to book will incentivise able and nimble companies to constantly assault them.
SELLING A BUSINESS – IT’S THE WAY YA TELL ‘EM. Beauty is in the eye of the beholder but, sometimes, when looking at competing descriptions of a business for sale, it’s hard to believe that you’re looking at the same company. 9 May 2019:
• The High Street has attracted capital over recent years. Some operators have struggled to add value. Losses are common (see earlier Premium emails). Many businesses need to raise additional capital in order to plug the resulting financial holes and, if or when that financing dries up, operators will either have to 1) become profitable, 2) sell themselves or 3) shut down.
Grab n Go operators:
• This has been a particularly competitive area.
• Visibly busy operators may simply not be able to sell enough gear in a two hour lunchtime slot to pay their costs.
• Expanding into breakfast, afternoons, evenings etc. is a good idea – but it’s not a secret, competitors will do the same thing & it doesn’t come for free
Pod’s recent comments:
• Pod, which has indicated to shareholders that it is looking to sell its business, has appointed RSM consultancy to help evaluate its options.
• The Caterer magazine quotes RSM as saying ‘Pod is a successful profitable business with a strong management team and a plan for continued reinvention and growth. We anticipate strong interest in supporting the management team to take the business to the next phase of its success.’
• We know that beauty is in the eye of the beholder but there seems to be some difference of opinion here.
• Ask an estate agent to describe a house that they’ve got on their books for sale….
Through a glass darkly…
• Pod yesterday indicated that ‘negative sales trends’ had continued & said that its turnaround would cost money as sites were tired & needed attention. The company reported accounts to 3 January 2019 to Companies’ House only last month saying ‘the market remains challenging with competitor expansion and a slowdown in consumer confidence in the second half of the year’.
• In its accounts, Pod indicated that it was facing cost headwinds ‘with increases in the Living Wage and upward rent reviews’. It said ‘given these challenges, cost control will continue to be crucial in achieving our targets for 2019’. Actions speak louder than words and the group is looking for a sale.
• The group generated sales for the year to 3 Jan 2019 of £17.4m with a loss before tax of £487k (versus a loss of £1.75m in the prior year). The group has lost some £8.5m since incorporation in 2004. Shareholders’ funds as at January this year were £1.1m.
GENERAL NEWS – PUBS & RESTAURANTS:
• New research from KPMG UK has found that the rising number of ‘zombie firms’ under sustained financial strain is threatening to cause a significant drag-effect on the UK economy.
• UKHospitality has shown disappointment at the Government’s mixed messages to the Housing, Communities and Local Government Select Committee report on high streets and town centres. UKHospitality Chief Executive Kate Nicholls said: ‘The Government’s stated intention to support struggling high streets, coupled with rejection of the Select Committee’s recommendations to deliver such support gives a mixed message. It is no secret that high streets have come under immense pressure in recent years. Hospitality businesses have evolved, weathered the storm and, in many cases flourished; but these businesses are at the front line on high streets and cannot be expected to continually work miracles as shops close and footfall dries up’.
• Food retail and hospitality operators have been asked to support a drive to reduce food waste by 50% each year until 2030, by the environment secretary Michael Gove.
• Time Out has announced that the Time Out Market Miami will open later today. It says that unit will offer a ‘culinary line-up featuring some of the city’s best chefs.’ Time Out says ‘located just off South Beach’s famous Lincoln Road, at 1601 Drexel Avenue, Time Out Market Miami brings the best of the city under one roof: its best chefs, drinks and cultural experiences, based on the editorial curation Time Out has always been known for. Across 18,000 sq ft, there are 18 eateries, a demonstration kitchen, three bars and space to showcase local culture.’
• Time Out opened first in Lisbon in 2014 in what is now Portugal’s most popular attraction. The group has eight new sites in the pipeline. In addition to Miami, Time Out Markets will also open throughout 2019 in New York (Q2), Boston (Q2), Chicago (Q3) and Montréal (Q4); followed by Dubai (2020), London-Waterloo (2021) and Prague (2022).’ The group says ‘as a result, at the end of 2019 there will be six Time Out Markets in operation, spanning a total of 185,000 square feet, offering almost 4,000 seats and food from 120 of the world’s best chefs.’
• Willie Macleod, UKHospitality Executive Director for Scotland, reacts to confirmation of the deposit return scheme for Scotland, saying ‘It is encouraging to see the proposed measures consider the difficulties that hospitality venues would face under an inflexible deposit return scheme’.
• The Scottish Beer & Pub Association replies to the Deposit Return System, saying ‘The SBPA has supported a DRS for plastic containers as part of our continued commitment to reduce waste, improve recycling and support a circular economy.’ but that the inclusion of glass is ‘deeply disappointing’.
• UKHospitality reacts to full ingredient labelling for pre-packed food by saying ‘The best way to keep customers safe is by empowering them to talk to staff members with the confidence that the information they receive is accurate and useful. We should not be discouraging customers from discussing allergens by relying on labelling alone.‘
• Fuller, Smith & Turner announces the reopening of The Anglers in Teddington following refurbishment.
• A marketing CEO estimates Starbucks got an estimated $2.3bn in free advertising after a modern coffee cup was spotted in Game of Thrones.
• Imperial Brands reports a slowdown in sales for its Blu vaping brand after the FDA said it would enact measures to curb teenage purchases of flavoured nicotine products.
• The Italian drinks company, Campari has seen sales increase by 9.6% to 370m euros in Q1 2019, beating analyst expectations of 6% growth.
• According to CGA ready-to-drink sales in the UK reached £472m in 2018, of which the on-trade contributed £185m.
• BrewDog announces sales of spirits brand LoneWolf across all channels will be managed in-house as of 1 July.
• Zonal appoints Darren Jackson as enterprise sales manager for its expanding Marketing Technologies division.
• PepsiCo announces plans to invest around $4bn to expand its operations in Mexico in 2019-2020. Just over $1 billion will be invested to build the new plant in Guanajuato, PepsiCo’s first new plant in Mexico in 20 years.
HOLIDAYS & LEISURE TRAVEL:
• Amadeus reports a global slowdown in growth in global travel agency industry air bookings in Q1. Asia Pacific registered the strongest deceleration, largely driven by a poor performance of India.
• French air traffic controllers and civil servants are set to strike on Thursday, protesting government civil service reforms. Passengers due to fly via airports in France are being advised to monitor the situation.
• Disney shares rose 1.5% to $137 in after-hours trading, as its theme parks boosted quarterly earnings past Wall Street targets. Revenue rose 3% to $14.92bn. Its biggest streaming bet, the family-oriented Disney+, is set to launch in November.
FINANCE & ECONOMICS:
• The Halifax has reported that UK house prices picked up in April following a fall in values in March. Halifax says property values were up 1.1% in April to take annual house price inflation to 4.3%.
• The European Commission has said that the threat of a trade war between the US and China is, alongside Brexit uncertainty, the most significant risk to the EU economy. The EC has cut its growth forecast for the 28-country bloc to 1.4% for this year, down from an estimate of 1.9% six months ago.
• Sterling up vs dollar at $1.162 but down vs Euro at €1.3009. Oil down at $69.87. UK 10yr gilt yield down 2bps at 1.14%. World markets mixed. Far East lower in Thursday trade.
• Brexit, politics etc.:
o No agreement between Mr Corbyn & Mrs May on an acceptable Brexit compromise.
o The NIESR has suggested that UK GDP ‘in the longer term is estimated to be around 3 per cent lower in a customs union than it would have been had the UK stayed in the EU. This is equivalent to a loss of over 2 per cent in GDP per head, worth around £800 per person per annum to people in the UK.’
o GDP would take more of a hit in the event of a Hard Brexit.
o The NIESR says ‘a smaller economy would generate less income with which to pay for public services. The authors estimate that there would be an effective revenue shortfall of around £13 billion a year that would need to be raised either by additional borrowing, higher taxes or reduced public spending.’
o ITV has said that Brexit (albeit alongside the absence of a World Cup) will hold back advertising in the first half of calendar 2019.
START THE DAY WITH A SONG:
Yesterday’s song was Venus in Furs by Velvet Underground. Today, who sang:
This punk, the feeling that you stay for,
In time I want to be your best friend
East side lovers living on the west end
RETAIL NEWS WITH NICK BUBB:
Morrisons: In today’s Q1 update, for the 13 weeks to May 5th, Morrisons trumpet another “positive” and “robust” quarter of LFL sales growth, but they only just managed to finish on the right side of the line, as the Retail LFL growth was just 0.2%, despite a strong Easter (with LFL sales up by 1.7%). The Wholesale LFL sales growth contribution remained good, however, at 2.1%, and, although the comps are tough in Q2, Morrisons still talk of “meaningful and sustainable” sales and profit growth ahead. Separately, there is an odd announcement about Morrisons helping out their Online partner Ocado by agreeing to temporarily give up using the new Erith CFC, in exchange for lower pick fees and the right to use another Online partner. It is unclear who that could be (Amazon?), but the Ocado announcement makes out that this relaxation of their agreement is in line with the terms of other recent
Superdry: We had hoped that today’s pre-close update would bring news of an improved Retail trading performance, given the weak comps and reasonably helpful weather, and that is indeed the case. Unfortunately, Wholesale and Ecommerce have let the side down and the new management team has had to issue yet another profit warning…Conf call at 8.30am
Watches of Switzerland: The press has been talking up the chances of an IPO from the private equity owned Watches of Switzerland chain, but we hadn’t realised that it was so close and that the process was kicking off today. It is unclear what the valuation of the business will be, after the book-building operation, but, as Rothschilds is the main adviser, it is unlikely to come cheap…