Langton Capital – 2019-05-16 – PREMIUM – Thomas Cook, MARS, Beyond Meat, Giggling Squid etc.:
Thomas Cook, MARS, Beyond Meat, Giggling Squid etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
Our office fridge got a little over-excited yesterday and froze everything solid.
And, whilst this was briefly amusing, it did make sourcing milk for coffees somewhat challenging and left opening cans of fizzy drink (or beer for that matter) in confined spaces potentially life-threatening.
Hence, having had our tea black (inertia prevented us from popping out for another pint of milk) and eaten our sandwiches with frozen lettuce accompanied by tooth-cracking tomatoes, we gave it a stern talking to and dialled it down a bit.
It had been at eleven. On to the news:
THOMAS COOK £1.46bn LOSS (ALBEIT VIA WRITE-DOWNS) IN FIRST HALF: TCG is trying not to scare the horses. But that’s a challenge when you’re reporting a £1.46bn loss and pointing to tough conditions for the remainder of the summer. 16 May 2019:
• Thomas Cook reports H1 results to 31 March. Revenues down £208m at £3.0bn with underlying EBIT loss of £245m vs a loss of £170m last year.
• Thomas Cook manages a £1.46bn H1 loss after writing down £1.1bn of goodwill.
• Thomas Cook net debt up to £1.25bn from £0.89bn.
• TCG says it faced tough comps from last year. There has been ‘margin pressure in Tour Operator’ and the goodwill impairment of £1,104 million in UK business [is] relating to 2007 merger with MyTravel.’
Airline disposal, strategy etc.:
• TCG says it has received ‘multiple bids’ for ‘all and part of Group Airline.’
• The group says summer 2019 is ‘challenging’. It adds ‘recent economic and political uncertainty has led to high levels of promotional activity.’ It says ‘this activity, along with higher fuel and hotel costs, will impact progress on FY19 EBIT.’
• Group reiterates that it has made good progress on differentiation & has attracted bids for its airline.
• TCG says ‘taking lessons from 2018, we have put a keen focus on cash and cost discipline across the group in the first half.’
• CEO Peter Fankhauser comments ‘the first six months of this year have been characterised by an uncertain consumer environment across all our markets. The prolonged heatwave last summer and high prices in the Canaries reduced customer demand for winter sun, particularly in the Nordic region, while there is now little doubt that the Brexit process has led many UK customers to delay their holiday plans for this summer.’
• TCG says ‘our current trading position reflects a slower pace of bookings, against a strong first half in 2018, and our decision to reduce capacity in order to mitigate risk in the tour operator and allow our airline to consolidate the strong growth it achieved last year.’
• TCG concludes ‘as we look ahead to the remainder of the year, it’s clear that, notwithstanding our early decision to mitigate our exposure in the ‘lates’ market by reducing capacity, the continued competitive pressure resulting from consumer uncertainty is putting further pressure on margins. This, combined with higher fuel and hotel costs, is creating further headwinds to our progress over the remainder of the year.’
• There isn’t much good news here.
• Low margin business with high fixed costs meets a drop in demand. Competition & discounting increases, margins fall etc. etc.
• One major question is, what was the share price (used to be nearly two quid, now 22p) already factoring in?
• A more important question, ultimately, will be ‘is this survivable?’ Because there are some very large numbers swinging around and profits were never very high to begin with.
• Certainly, this is a very high-risk potential investment. Returns could be similarly high but, with every possibility that another Brexit cliff-edge in the autumn could disrupt the lates market and next winter, we remain extremely cautious.
MARSTON’S H1 NUMBERS: Marston’s yesterday hosted a meeting for analysts and our notes thereon are set out below: 16 May 2019:
Following the release of its H1 number yesterday morning, Marston’s hosted a meeting for analysts and our comments are set out below:
• The numbers prompted modest upgrades
• The significantly higher average profit per pub between 2012 and 2019 (£73k to £113k) show just how much the quality of MARS’ portfolio has improved
• These numbers were ‘decent’ and represent a ‘solid’ with ‘improving momentum’ through the period and into H2.
• Costs will rise by around £20m in the current financial year. The bulk of this will be mitigated.
Trading – Managed & Franchised Pubs:
• The market continues to evolve. Consumer want experiences, they are health-conscious (vegan, lo-no alcohol beers etc.) and more ethical
• Technology continues to increase in importance. For the first time this year card overtook cash as a proportion of revenue at 52%. Some 75% of this is contactless & phone payments amounted to 10% of sales).
• Discounting is an industry feature but MARS is little-involved. It will invest around £2m in margin (selective price cuts) this year. Discounts focus more on food than drink
• Accommodation remains a growth area. Wet sales were good. Food LfL sales were down but they are once again in growth in H2
• Labour inflation is a little less intense in the provinces than it is in London & the major cities.
Trading – Taverns:
• Taverns did well as consumer spend on drink moved ahead and the weather was helpful. The 15 pubs acquired in the Aprirose purchase were closed and re-opened at a cost of some £0.4m
Trading – Beer Company:
• Brewing volumes are up 4% and there will be a minimum of £4m of synergy benefits generated post the Charles Wells acquisition
• Premiumisation alongside both localisation and the growth of world beers remained features. Lo and no alcohol beers are in growth
• MARS is the UK’s no1 beer exporter. It delivers to 1 in 4 pubs in the UK.
• The group is ‘very confident’ that profit growth in its beer business will continue. Bolt on acquisitions are possible
Balance Sheet, Cash Flow & Debt:
• Debt is little changed. Fixed cost cover is 2.5x (2018: 2.6x). This from an estate that is 93% freehold.
• The debt reduction plan is being driven by reduced capex, higher earnings, lower interest charges and disposal proceeds. Pension contributions should fall in due course.
• Capex will be more targeted. Project Showman involves a £2m spend on ambience across 40 pubs, Hatton is a £1m investment in 30 gardens
• MARS will open around 15 wet-led pubs and 3 lodges this year. Going forward, this will trend down to around 6 pubs and 4 lodges.
• The group will continue to ‘aggressively churn’ its estate. There are not likely to be any more sale & leasebacks in the next 3-4yrs
• Marston’s has confirmed that trading improved through H1 and that it remains positive into H2.
• Comps will get a little tougher but the group’s plan to reduce debt whilst growing earnings & maintaining dividend pay-outs remains on track.
• There were upgrades on the back of today’s numbers & MARS’ shares remain cheap. They trade on a PER of little more than 7x and a yield of almost 7.5%.
• As debt falls, EV is likely to remain unchanged and the equity valuation should rise. EIG has successfully executed on this strategy over recent years.
• MARS is on top of current trends (accommodation, experiences, premiumisation etc.) and the outlook remains positive. Despite uncertainties, real wages are rising and unemployment levels are at historic lows.
• Marston’s has a estate of well-managed and well-maintained, largely freehold properties. It is selling product that the consumer would like to buy at a price they are prepared to pay. The group is a major brewer and has a large wet-led element to its estate. Its managed houses are growing sales and holding margins. The group is well-placed to grow and to create further value for its shareholders.
GENERAL NEWS – PUBS & RESTAURANTS:
• Marson’s shares rose c4% yesterday as the group announced that its 6pt plan to reduce debt whilst growing earnings & holding its dividend remained on track.
• The group announced that it had stockpiled £6m of Spanish lager Estrella Damm in “anticipation of a disorderly Brexit”. The FT reports the group had stored the lager in a “very large” warehouse in Bedford in a bid to avoid disruption to supplies.
• Other companies reporting news. With markets better Compass Group rose 3% yesterday, William Hill fell by 3% and SSP was unchanged. Jackpot Joy & Cineworld were similarly unchanged whilst TUI rose by 2%.
• Shares in plant-based burger company Beyond Meat spiked c16% yesterday on news that Tim Horton’s has begun trialling the producer’s sausages.
• Giggling Squid has reported that, in the 12 months to April 2019, it opened eight Thai restaurants in the UK. It says the pipeline of sites for the remainder of this financial year remains strong. MD Andy Laurillard says ‘we are delighted that our contemporary take on high quality Thai cuisine, at a competitive price-point, continues to resonate with customers.’ He says ‘we have exciting plans ahead with a strong pipeline of new sites, as well as the infrastructure in place to support a significantly larger business, as we progress our measured expansion and growth ambitions.“
• The Craft Beer Co has opened a new site in Hammersmith London. Founder of the group, Martin Hayes commented: ‘This is a very significant moment for us, it’s the first time a landlord has approached us to partner with them and it’s also bringing our offer into a former big pub co site in a transport hub for the first time’.
• The Sun pub in Ulverston town centre is to offer smaller portions of popular dishes in a bid to tackle food waste.
• McDonald’s is now allowing franchisees in the US to decide which breakfast options to offer all day, having formerly requiring them to serve breakfast all throughout the day.
• Research from Yext has found that 27% of consumers search for a restaurant on their mobile using a third party platform before eating out. The study found that only 20% of customers start their search on a restaurant’s own websites.
• The US quick-service burger company, Jack in the Box has been assessing its options since December and has concluded it will take itself off the market and carry out a capital restructure.
• The government has stated that it will make it easier to find who owns empty buildings on the High Street in an effort to rejuvenate the UK’s retail sector.
HOLIDAYS & LEISURE TRAVEL:
• Budget hotel company Travelodge has lodged accounts to end-December 2018 with Companies’ House. The group reports it now has 575 hotels comprising 43,840 rooms across the UK, Ireland and Spain.
• Travelodge reports total revenues up 9% at £680m with REVPAR up 3.2% and EBITDA up 9.4% at £119m. The group opened 17 new hotels during the year with three more opening shortly after the year end.
• Travelodge reported PBT of £58.3m (2017: £47.3m) with exceptional costs reducing profits to a statutory £49.2m before tax. The group has an accumulated loss since incorporation of £32.3m with positive shareholders’ funds of £375m.
• Andrew Mackenzie of Begbies Traynor, administrator to Burning Night Ltd, has reported that there will be insufficient funds to repay secured creditors. It says that ‘it is anticipated that it [the major creditor] will suffer a significant if not a full shortfall on its lending’. This suggests that there will be nothing left for unsecured creditors.
• Thomas Cook is considering cutting 100 jobs at its UK base in Peterborough as part of a wider cost-cutting plan.
• Four European short-term rental property management companies are combining in an aim to compete with market leader Airbnb. The four to combine are the UK based BnbBuddy and the London Residents Club, the Italian based Hintown and the Portuguese RentExperience.
• Luton airport handled 17m passengers in the 12 months to the end of April, with 1.5m passengers using the airport in the Easter period.
• GVC has updated ahead of its capital markets day saying ‘as we reported in our trading update last month, we have had an excellent start to the year with strong momentum across all divisions continuing into the second quarter.’
• GVC says ‘we are making great progress on the Ladbrokes Coral integration and we have a clear roadmap for delivery in the US, where it remains early days, but there is no doubt that this is a great long-term opportunity for GVC.”
• The ASA has banned a William Hill advert for linking gambling to sexual success. The advert invited users of dating app Tinder to bet their way out of the ‘friend zone’.
• Aston Martin reports revenues up 6% to £196m in the three months to 31 March, beating analyst estimates. The company recorded a pre-tax operating loss of £3.2m.
• Superbet, Romania’s market-leading sports betting operator, receives $196.6m investment from Blackstone.
• Playtech, the gambling software company, has suffered a shareholders revolt, with Chairman Alan Jackson being voted out of his position over executive pay.
• Moody’s has reported that Walt Disney’s put/call arrangement regarding Comcast’s 33% ownership of TV streaming service Hulu is credit positive. Moody’s says ‘such a transaction would be credit positive for Disney because it would consolidate complete ownership and strategic direction of Hulu under the Disney umbrella, providing greater breadth and scale to its direct-to-consumer offerings and bundle.’
FINANCE & ECONOMICS:
• Donald Trump yesterday suggested that tariffs on European car imports into the US could be delayed by up to 6mths
• Sterling weaker at $1.285 and €1.1463. Oil up over a dollar at $72.1 and UK 10yr gilt yield down 4bps at 1.06%. World markets up yesterday with Far East mixed in Thursday trade.
• Brexit, politics etc.
o The Government is to bring Mrs May’s Brexit deal back to the House of Commons for a 4th time in the first week of June. Brexit supporters have suggested that they will vote the deal down (again). Talks with the Labour Party are ongoing.
o Were the deal to fail for a 4th time, Brexit Sec Stephen Barclay has said that it will not be brought back again. The UK would then either cancel Article 50 or crash out of the EU without a deal in October.
o Brexiteer Peter Bone said ‘I have talked to colleagues, some of whom voted for it last time, and they think it is dead and they will vote against it this time.’
o German Chancellor Angela Merkel said yesterday that everyone will be a loser from Brexit. Ms Merkel said ‘Germany, as a financial location, is benefiting from that but that doesn’t change the fact that ultimately Britain’s departure is a loss from my perspective.’
o Liz Truss is perceived to have begun her campaign for the Tory Party leadership by suggesting that up to 1m homes be built on the UK’s Green Belts
START THE DAY WITH A SONG:
Yesterday’s song was The Sound of Silence by Simon & Garfunkel. Today who sang:
Dream, if you can, a courtyard,
An ocean of violets in bloom
Animals strike curious poses
RETAIL NEWS WITH NICK BUBB:
Burberry: Ahead of today’s finals, there has been some concern about the outlook for Burberry’s key market, China, but there is nothing obvious on the subject in the statement, which reads quite bullishly: Marco Gobbetti, the new CEO, trumpets that “We made excellent progress in the first year of our plan to transform Burberry, while at the same time delivering financial performance in line with expectations” (adjusted operating profit was 6% down, but flat in constant currency terms). The CEO goes on to say “Riccardo Tisci’s first collections arrived in stores at the end of February and the initial reaction from customers is very encouraging. The implementation of our plan is on track, we are energised by the early results and we confirm our outlook for FY 2020″.
Asda IPO Watch: Obviously Asda used to be a quoted company until 20 years ago, so there is a City heritage to tap into in terms of IPO potential, particularly for fans of Archie Norman. But that was before the rise of Aldi/Lidl and although it is clear that over the last couple of years that the business has recovered some lost ground, it’s hard to see how Asda could present itself as much of a growth story for investors. However, it is certainly big enough to attract City support (Sainsbury valued it at £7.3bn a year ago on a debt-free basis) and it would appeal to income funds, given its strong cash flow and balance sheet profile, as well as to investors fed up with Sainsbury, ironically…
News Flow This Week: After all the speculation about a potential Asda IPO, the Asda/Walmart Q1 update will be out at lunchtime today (Asda will report on the calendar Q1, on an Easter-adjusted basis). The Next AGM is being held today at 9.30am in sunny Leicester, but no announcement is expected. This afternoon is also the first closing date for the Spectre “offer” for Bonmarche