Langton Capital – 2019-05-10 – PREMIUM – MLC, barriers to entry, crowds, JDW, Cote etc.:
MLC, barriers to entry, crowds, JDW, Cote etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
When you’re in the middle of ‘history’ you may not know it and, looking into how to organise a postal vote, it occurred to me that we’re between elections just now.
The locals are out of the way and the Euros are upcoming and, whilst the ruling party might like to contend that they don’t mean a great deal, it’s interesting to note that the Tories in York, with only two seats, were pushed into fifth place behind the Liberals (21 seats), Labour (17), the Greens (4) and independents on three seats.
And that’s not a comfortable place to be. On to the news:
BARRIERS TO ENTRY: DO THEY EXIST? NO, REALLY, DO THEY EXIST? Time is an influencer as, like no costs are fixed in the long term, we would suggest that no (or virtually no) barriers to entry exist over the longer term. Hence, when valuing a company, we should be careful 1) whether we believe in them at all and 2) how long they may last & what we should pay for them. 10 May 2019:
• As we mentioned yesterday, barriers to entry are often used to justify valuations – but what does that mean? We would suggest that, if a company trades at a multiple of its book value, it must have (or be perceived to have) barriers to entry otherwise capital would flood in (at book value) in order to capture the excess value.
What does that mean?
• So, does the fact that some companies trade at a multiple of book ‘prove’ that barriers exist?
• Well, yes and no.
• Yes, in that Glaxo & others ‘deserve’ some sort of premium to book because of the hard work, market position, patents etc that it has.
• But ‘no’ because we are just taking a snapshot of a moment in time and, just because a multiple to book exists at this instant, doesn’t mean that that premium isn’t being eroded away at that very moment.
• E.g. casual diners used to trade at multiples to book. You build a restaurant for £600k and, hey presto, it’s ‘worth’ £2m when the company is sold.
• Now, because of the capital that was sucked in as a result of the above, many me-too, low added-value restaurants would change hands, if a buyer ever came forward, at a discount.
Why balance sheets matter:
• Where there is no rocket science involved, e.g. bars & restaurants, the ‘pixie dust’ can’t be kept secret and competitors will follow innovative operators
• Hence multiples of book should be viewed with some scepticism. Certainly, a brand could warrant some premium. But what if the brand is tarnished? What if there is no brand at all?
• Staff move between operators & operational improvements are quickly shared across the industry.
• A look at the balance sheet will show what the multiple of book is. Limited barriers to entry, a bit of a brand and a multiple of 1.2x to 2.0x sounds OK. Anything much more might be a bit of a stretch.
BOOK REVIEW: THE PSYCHOLOGIE OF CROWDS (PSYCHOLOGIE DES FOULES) BY GUTAVE LE BON – PUBLISHED 1895: Still one of the defining works on crowd behaviour, M Le Bon’s work was published over 125yrs ago. In it, he examines why the sum of the parts (the morals, behaviour etc of the individual) does not equal the whole (the behaviour of the crowd). 10 May 2019:
• It’s long been known that crowds (be they literal crowds, cults, religions or political factions) do not follow the same mores as those exhibited by individuals. This can be useful (Wisdom of Crowds etc) but, more often, it is a bit disturbing.
• Crowd behaviour is arguably behind religious excess, nationalist extremism, Stock Market bubbles etc. It is worth remembering that a democracy is nothing more than a large crowd.
The Psychology of Crowds – Gustave le Bon (published 1895):
• Titled Psychologie des Foules in its native French, Le Bon posits that crowds behave differently to the sum of people in them.
• Crowd-think is more important in a democracy. Political leaders may need to be adept at manipulation.
• Crowds may not reason, but they can be quick to act.
• The exhibit a collective mind. The crowd can be mental (e.g. behaviour in the UK following the death of Diana) rather than a physical presence
• A crowd feels that it is invincible & it will go to extremes. It may make statements (e.g. I don’t care about the economic impact of Brexit) that it does not mean individually
• There are no checks & balances and ‘there is a refuge in anonymity’.
• Contagion is a feature. There are too few strong individuals to struggle against the crowd. E.g. juries can deliver strange verdicts.
• Crowds can be criminal or heroic. They are ‘impulsive & irritable’. They think more with their spinal cords than with their brains.
Dealing with crowd behaviour in the real world:
• Crowds may be unrealistic but dogmatic re their aspirations. Collective hallucinations are well-documented. Crowds are an intellectual leveller – and not in an upward direction
• A crowd ‘goes at once to an extreme’. Suspicions immediately become evidence. Individuals are freed from responsibility.
• Orators must be firm & rely less on reason. Dogma, repetition & lies will sway a crowd. Crowds are not nuanced, they demand absolutes. They respect force and see kindness as a weakness. They ‘despise the feeble’. E.g. liberal snowdrops.
• More humanely, ‘personal interest is rarely a driving force.’ Crowds can be self-sacrificing. The individuals within a crowd may regret this later.
• The ideas presented to crowds ‘must be simple. They may even be contradictory. Old ideas can become sentiments & these influence crowds’.
• Crowds are very credulous & impressionable. They react to big gestures.
Application to major movements, religion, political dogma:
• Cults are characterised by supposed superiority, a fear of power, a desire to spread ideas, inability to discuss dogma & blind submission.
• Writing in 1895, Le Bon said religion can be non-religious, e.g. the Reign of Terror only 100yrs earlier. Intolerance & violent propaganda are features. A crowd may demand a God. This needn’t be a deity. It could be an idea.
• Books II and III look into beliefs and behaviour. We’ll cover that next week.
GENERAL NEWS – PUBS & RESTAURANTS:
• JD Wetherspoon are planning to open its eighth Ireland site in Waterford. A spokesperson for the group commented that its Irish sites are trading well and they continue to lookk for further sites.
• GBK has managed to increase profits to £4.6m in the year to 28th February 2019, up from £3.7m the year before. GBK entered into a CVA in Novemeber 2018 following poor sales.
• Anheuser-Busch InBev has announced that its Asia Pacific (APAC) subsidiary, Budweiser Brewing Company APAC Limited, has filed an application to list a minority stake of its shares on the Hong Kong Stock Exchange. AB InBev says ‘this is a step consistent with exploring such an opportunity.’
• KFC’s marketing team have encouraged customers to try its new burger before they ‘turn vegan’. The group’s marketing campaign stated: ‘Let’s be frank – we’ve timed this burger badly. It’s coming out during a time when unprecedented numbers of people are eschewing meat, and embracing the aubergine. There’s every chance you yourself, if not already vegan, are seriously considering it. If so, we can’t guarantee that the I Love You Bacon Burger’s creamy Baconnaise, sticky Bacon Lovers’ Relish and smoked back bacon will change your mind’.
• Cote Restaurants has reported slightly overdue full year numbers for the year to 29 July 2018 to Companies’ House saying that revenue rose by 4% to £146m with adjusted EBITDA down by around 9% to £17.9m.
• Cote has said that it will discontinue its Jackson & Rye and Limeyard brands due to ‘challenging market conditions’. Cote will focus on its c93-strong chain of French-style Cote restaurants. Director Strahan Wilson says ‘in the light of an extremely challenging trading environment the directors are very satisfied with the performance of the business. In a year that has seen widespread closures across the sector, the directors are pleased that the main brand, Côte Restaurants, continues to deliver sales growth and remain committed to investing in opening new restaurants.’
• Numbers from TDn2K show that restaurant sales in the US fell by 0.4% in LfL terms in April. Journal NRN says sales have been negative during two of the last three months. NRN says ‘although these results were undoubtedly disappointing for restaurant operators, it is too soon to start worrying about a true downturn for the industry.’
• In the US, TDn2K says ‘April was a soft month for restaurants. Putting these results in context helps us remain cautiously optimistic about the current state of the industry.’
• NRN confirms that similar trends re costs are being experienced by restaurants across the pond. It says wage costs have been rising and look set to continue doing so. The journal says that restaurateurs are increasingly looking to technology to help them cope.
• The HARRI Hospitality & Food Service Wage Inflation Survey in the US says that, perhaps unsurprisingly, the no1 response to rising wages is to put menu prices up. Some 71% of restaurants have resorted to this. Some 64% cut employee hours, 45% ‘rework’ their F&B offerings and 43% cut staff numbers.
• The new Public Health (Alcohol) Act 2018 introduced in Ireland is set to restrict alcohol advertising and requires drinks companies to apply health warnings on labels.
• The Australian brewery Little Creatures has opened its first UK taproom and restaurant in King’s Cross, London.
• Morrison’s yesterday that it is to look at new opportunities in the ultra-fast delivery space via potentially working with Amazon & Uber. CEO Dave Potts would not disclose any details of the “range of commercial discussions” that the company believes exist.
• Alibaba will redesign its marketplace to better compete with Amazon on a global scale.
• Advisers are warning millennials not to rely on inheritance money in order to buy their first home. One in seven young adults expect to inherit money before they are 35, although in reality the typical inheritance age is between 55 and 64.
• Brewdog is launching Instamatic, a ‘zesty IPA’ for the spring market. It has also unveiled its latest alcohol free offering, Punk AF, which ‘sees juicy, tropical fruit meet grassy and pine notes, all on a solid malt bassline. Available now in four packs of 330ml cans for £5.10.’
• Reliance Industries acquires Hamleys for an undisclosed sum. Reliance is owned by India’s richest man, Mukesh Ambani.
HOLIDAYS & LEISURE TRAVEL:
• Millennium & Copthorne has reported Q1 numbers saying total revenue slipped by 0.9% to £215m with REVPAR up 2.2% but PBT down by 58% at £11m.
• MLC says its ‘operating performance was negatively impacted by refurbishment affecting major hotels in two of the Group’s key gateway cities – London and Singapore. The Mayfair London property was partially closed in November 2017 and then fully closed in July 2018. The Orchard Hotel in Singapore has been under phased refurbishment since middle 2017.’
• Re current trading, MLC says ‘for the first 21 days of April 2019, like-for-like Group RevPAR increased by 2.2%.’
• MLC chairman Mr Kwek Leng Beng comments ‘despite the uncertainties and challenges in the global economy, we remain focused on making the best use of our hospitality assets. The Group is prioritising the refurbishment of our key gateway city properties to reposition our hotels, whilst seeking to minimise the short-term negative impact on our trading results.’
• The department for transport recommends a 50p levy per person on all flights to insure against the future collapse of UK-based airlines. This would aim to prevent failures such as Monarch in 2017, which saw 85,000 passengers repatriated by the CAA.
• Air Charter Service reports it has been ‘inundated with phone calls’ as football fans are desperate to get to the Liverpool vs Tottenham Champions League final in Madrid on 1 June.
• The ONS reports visits overseas by UK residents dropped by 2% in January yoy to 4.5 million. However, overseas spending increased by 6% to £2.9bn.
• Choice Hotels reports Q1 net income of $30.1m, with adjusted EPS up 25% yoy to $0.84. Adjusted EBITDA was up 8% to $72.4m.
• STR reports US hotel occupancy up 1.2% to 69.1%, ADR up 2.3% to $133.43 and RevPAR up 3.6% to $92.21 for the week ending 4 May.
• Uber’s IPO will be priced at $45 per share, valuing the company at $82.4bn and helping the company raise $8.1bn.
• Goals Soccer. It’s been 6wks since the group’s shares were suspended on the discovery of a tax liability (said to be around £12m) and investors & observers are little the wiser as to the company’s future prospects. The mis-declaration goes back a number of years.
• The British Medical Journal publishes a report claiming that the economic cost of gambling-related harm has been ‘significantly underestimated’. The authors of the paper are calling for gambling laws to be radically overhauled.
• Facebook co-founder Chris Hughes calls for the break up of Facebook, saying ‘We are a nation with a tradition of reining in monopolies, no matter how well intentioned the leaders of these companies may be. Mark’s power is unprecedented and un-American’.
• Facebook was quick to reject Chris Hughes’ call to break up the company.
FINANCE & ECONOMICS:
• Stock markets fell sharply yesterday on increased Sino-US trade war worries. Donald Trump has vowed not to back down whilst Beijing has said that it will retaliate as the US imposes tariffs on $200bn of Chinese sales into the US.
• Donald Trump has increased tariffs on $200bn of Chinese imports. The hike came despite American and Chinese negotiators meeting yesterday in Washington. The rises will increase the cost of living for US consumers and could lead to retaliation.
• Sterling little changed vs dollar at $1.3009 but down a shade vs Euro at €1.1584. Oil up at $70.20. UK 10yr gilt yield unchanged at 1.14%. World markets down yesterday with Far East mixed in Friday trade.
• Brexit & politics:
o No progress on Labour / Tory Brexit talks. Jeremy Corbyn says there have been no concessions & that Red Lines remain a problem.
o FT says re Mrs May ‘many at Westminster are wondering more than ever whether there is any purpose left to her beleaguered premiership.’
START THE DAY WITH A SONG:
Yesterday’s song was Can’t Stop by Red Hot Chilli Peppers. Today, who sang:
Now he’s getting a tattoo,
He’s gettin’ ink done
He asked for a ’13’, but they drew a ’31’
Friends say he’s trying too hard
RETAIL NEWS WITH NICK BUBB:
• The Works: Amidst all the excitement about Morrisons and Superdry first thing yesterday we missed the profit warning from the gifts and stationery chain The Works, but the subsequent c19% share price fall attracted the attention of the always excellent “Markets Live” webcast on FT Alphaville yesterday and Bryce Elder, the FT stockmarket correspondent, thundered that The Works “Always seemed a desperately unhappy place to shop, like someone had put Woolworths surplus stock into one of those remaindered book stores that has a permanent closing down Sale”. The company (which opens its 500th store today, in Winchester) reported decent 3.0% LFL sales growth for y/e April, but that implied only flat LFL sales since Christmas, with the slow end to the year resulting in adjusted PBT “around the lower end of current market expectations”.
• BDO High Street Sales Tracker: Sales at John Lewis were hit last week by the reduced promotional activity compared to last year, despite the helpfully cool weather. The BDO High Street Sales Tracker for medium-sized Non-Food chains for last week, w/e Sunday May 5th, was not too bad, however. BDO Fashion Store sales were down by 1.2% LFL (including Online), not helped by a tough comp. Total BDO LFL sales (including Homewares and Lifestyle sales) were up by 0.9% last week (down by 0.7% in Store sales, but up by 10.3% Online).
• Trade Press: The front cover of Retail Week magazine today is a rather sombre photo of the Sainsbury CEO Mike Coupe, with the headline “Comeback Coupe?”, to flag up the main feature on “Sainsbury’s boss in the spotlight”. RW also have features on “Biding Its Time” (the Watches of Switzerland boss on why now is the moment for the IPO) and “B&Q’S Latest Makeover” (the DIY giant unveils a new small store B&Q format). And in his column the Editor looks at the struggles of Arcadia and thunders that “Arcadia’s woes reﬂect the need to stay relevant”, noting that “perhaps it is time for a new style of CVA – a ‘consumer value attributes’ test”.
• News Flow Next Week: A busy week kicks off on Monday with the Dignity Q1. Tuesday brings the Land Secs finals and Wednesday brings the British Land finals, in the world of Retail property, but the main event on Wednesday is the Kingfisher Q1/Capital Markets Day. On Thursday we get the Burberry finals and the Asda/Walmart Q1 update, as well as the Next AGM and the first closing date for the Spectre “offer” for Bonmarche.