Langton Capital – 2019-05-24 – PREMIUM – More on M&B, Fevertree, TCG, recent failures etc.:
More on M&B, Fevertree, TCG, recent failures etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
So, we banned biscuits from the office earlier this week but then I found a packed of Oatie Crumbles and ate them all. Or at least I ate as many as I could before somebody spotted me and then I had to share the rest but, rather than sneaky or even sneaky and greedy as well, I view myself as a victim of society.
And where’s the Jeremy Kyle Show gone when you need to vent your frustrations and blame the world around you for something that should have been within your gift to prevent?
But, here’s the key thing, if you know who’s putting crack cocaine in my morning biscuits, please let us know. There’s a class action there going begging and we could cut you in.
Anyway, we popped over to SW1 yesterday to see what was going on with the Westminster Circus. And the answer was, not a lot. But we did get to have a chat with the shouty Stop Brexit man and wave at a couple of gun-toting coppers. On to the news:
MITCHELLS & BUTLERS’ H1 NUMBERS:
Following the release of its H1 numbers, Mitchells & Butlers hosted a meeting for analysts and our comments are set out below:
• M&B believes that it has traded well, that it has beaten the market & that its transformation programme(s) are coming to fruition
• Sales have benefited from mix changes and modest price rises. Volumes in both food and drink are down – but by less than 1%
• Two year LfL sales are +5.7%. This is ‘partly capex’ but uninvested units are also in growth. The company will be through its initial refurb programme ‘in two to three years’.
• Growth has been experienced in both invested and uninvested sites & across all regions and all of the group’s c14 brands
• All major sub-sectors within the company beat the Coffer Peach Tracker. The group has beaten the tracker for 11 straight quarters
• The H1 benefited from no repetition of the Beast from the East but suffered as Easter moved into H2
• Costs will rise c£65m this year and by £60m to £65m next. Perhaps a half of this can be mitigated
• Big occasions continue to stand out. Mothers’ Day this year was the third best day (including Xmas’s) that the company has ever had
• M&B is looking more closely at delivery. It maintains that it already has the physical capacity to operate dark kitchens. It has 170 businesses currently delivering & will consider a delivery only brand
Balance Sheet, Debt etc.:
• M&B states that capex will be H2 weighted. Remodels are yielding a 35% return on EBITDA
• The group continues to de-lever. Debt being redeemed from the securitisation costs 6% – this should be earnings enhancing
• The group is ‘on a journey’. Similar to EIG and MARS, more of the EV, over time, should accrue to equity
• The first Miller & Carter in Germany opens next week. Germany could be a focus for growth.
• Similarly, the group is turning its attention to accommodation. M&B has 900 rooms but believes it could 1) build more, 2) increase occupancy and 3) raise rates
• M&B will open ‘around ten sites per year’
• Debt is coming down & this will continue. A share buyback sounds unlikely. The pension deficit will be extinguished by 2023. A dividend may then be reinstated. The group is unlikely to buy in the freeholds that it leases
• Indeed M&B sold five pubs at nearly 2x NBV in this half year
Outlook & Conclusion:
• M&B concedes that the macro situation is uncertain – but it is beyond M&B’s control. The co is getting on with the day job. Costs are likely to continue to rise, poor operators will fail & CVAs will continue to be a feature of the industry
• M&B says ‘there is no silver bullet’ but maintains that, cumulatively, its initiatives are positively benefiting the gorup
• These are reassuring numbers from M&B. The group has grown sales at a brisk pace whilst raising margins. This is due to mix changes & premiumisation rather than volume growth but, over time, the group believes that volumes will grow.
• Growth could be driven by further capex, by growing the accommodation business, by bolt on acquisitions, more delivery or expansion in Germany.
• Macro problems include costs, uncertainty, market discounting and the like but, by their nature, these are industry-wide rather than M&B-specific issues.
• Although they have reacted favourably to today’s announcement, M&B’s shares have been weak recently and trade at under 7x earnings with substantial asset-backing. There is no dividend, however, and the share register remains dominated by the company’s two large shareholders.
• Investors will be reassured that trading remains relatively good and that margins are being held.
THE ANALYSIS OF FAILURE: Whilst success has many fathers, failure is often illegitimate. But it is nonetheless worthy of study. 24 May 2019:
• Emperor Hirohito broadcast in August 1945 that ‘the war situation had developed not necessarily to Japan’s advantage’. What he meant was that his country had lost a war and an empire and that some 20m people had died in the Far East theatre in the process. The failure of the odd restaurant chain pales in comparison but there are often parallels.
It’s the way ya tell ‘em – High Street High Rollers:
• Failure can be repackaged as success. Ask many politicians. But, if somebody wees on your leg and tells you it’s raining, you’d be better advised to accept the evidence of your own eyes rather than take the word of a nutter
• Financial success and glamour are occasionally inversely related. High profile high rollers can be financially holed below the waterline and, if not obvious to suppliers, staff and customers, this can lead to problems.
• Whilst it is possible to lose money for many, many years and then become a giant success story, there are arguably many more losers that follow a well-worn path.
• Selective memory brings to mind the successes while the failures died unreported.
• And it’s possible to be both things at once. There are high profile, glamorous losers out there and, when the inevitable has happened and companies have failed, it will all look obvious with hindsight – but it’s less easy looking forward.
• Perhaps best here not to name names. Companies that fall into these categories are most-often private. The level of scrutiny in the public market is much higher. But disasters to happen.
• Companies that raise new equity and report good like for likes, may have developed a tail, they may be trying to sell loss-making, high-rent units and the numbers at Companies’ House may make disturbing reading.
Other common themes:
• An inherited problem. Whoever takes over from Mrs May will have a challenge on their hands. Grabbing the wheel just before the car hits the wall may be 1) the best you can do under the circumstances but 2) be doomed to failure nonetheless. Think about defunct brands etc.
• Bad luck. This is an overplayed card but is sometimes, perhaps often, valid. Thomas Cook had a wobble-on already when the current management took over (see above). But they steadied the ship but then faced Brexit, currency swings, increased competition and disrupted booking patterns.
• Technological or legal change. This can be part of an ongoing process or it can come completely from left field. In Langton’s industry, MIFID II has turned the business model upside down. In online gambling, the US moves to enforce regulations in the late noughties upset trading for many companies. Arguably, they had been building houses on the sand, however.
• Societal changes. These most often take place slowly and, arguably, operators have time to react. Think the tobacco companies. In F&B, they may happen more rapidly (internet, delivery, growth of veganism etc.) but arguably break clauses etc should be built into leases to take account of this.
• You are not very good at what you do. This is perhaps the most common cause of failure. Here it is generally poor execution and lack of attention to detail that does the damage rather than a lack of flair or drive. Nobody said it was easy. A picture of a very long list of corporate tombstones here comes to mind.
GENERAL NEWS – PUBS & RESTAURANTS:
• Fever-Tree update. Tough comps given last year’s weather but group remains confident etc.
• Fever-Tree has updated on trading ahead of its AGM saying ‘2018 was a year of significant progress for Fever-Tree. The Group reinforced its market leading position in the UK, successfully established its own operations in the US and the business made real progress across Europe.’
• Fever-Tree adds ‘the beginning of 2019 has seen further encouraging operational progress across our key international regions as the Group continues to invest in widening and deepening its distribution networks. Whilst we are mindful of last year’s exceptional summer trading performance in the UK, we remain confident in achieving Board expectations for the full year ending 31 December 2019.’
• The City of London has pledged to crack down on dishonest operators who display false food hygiene ratings in their windows. Angela Towers, head of the Food Standards Agency’s food hygiene rating team, said: ‘People have a right to trust that the hygiene rating displayed in a restaurant’s window is accurate and we are pleased that the City of London Corporation has taken action against a small minority of food businesses who have sought to mislead the public’.
• Heineken has launched a campaign to encourage exploration of the alcohol-free beer and cider sector. The campaign is called Say Yes, and will consist of a series of adverts promoting zero alcohol Heineken ranges.
• Taco Bell has signed a deal with franchising group Burman Hospitality Private Limited, that will see 600 restaurants opened in India and more than 100 units in Australia and New Zealand.
• The BBPA has welcomed the relaunch of the Great British High Street Awards for 2019. BBPA Chief Executive Brigid Simmonds commented: ‘The high street is an important part of any town or city in the UK and the Great British High Street Awards are a fantastic way to celebrate this. It is great that Visa are supporting the competition again this year and we urge high streets up and down the country to enter’.
• James Horler has been appointed a director of Notes Music & Coffee. Mr Horler is currently a director at Ego Pubs, Ping Pong and 3Sixty Restaurants. He was CEO at La Tasca and was a director of Patisserie Holdings until his resignation in January this year.
• Truman’s has announced plans for a new brewery in Walthamstow, east London, set to open in Spring 2020. Truman’s CEO James Morgan commented: ‘Having maxed-out capacity at our current home in Hackney Wick, it gives us a springboard to grow for many years to come while flying the flag for east London brewing. It’s exactly where we want to be’.
• US food delivery service DoorDash has just closed another round providing it with $600m and doubling its valuation to more than $12bn. DoorDash is market leader in the US, just ahead of GrubHub and UberEats.
• The outbreak of African Swine fever that is ravaging pig farms in China is leading to an upward move in pork prices worldwide. The FT reports that, in the US, analysts have singled out Chipotle as being particularly affected.
• 2 Sisters Food Group will close its chicken factory in Witham, Essex, putting up to 555 jobs at risk. The group said products made at the site could be produced ‘more efficiently elsewhere’.
HOLIDAYS & LEISURE TRAVEL:
• Thomas Cook has reacted to Press reports that it had had approaches for its Northern Europe airline saying that it ‘notes the media speculation regarding a potential sale of its Northern Europe business. Thomas Cook Group confirms that it has received a highly preliminary and unsolicited indicative offer from Triton Partners for its Northern Europe business, comprising its tour operator and airline in Norway, Sweden, Finland and Denmark.’
• TCG says it ‘is currently evaluating this offer alongside the ongoing strategic review of its Group Airline, announced in February 2019. The group has received multiple bids, including for the whole, and parts, of the airline business and the Board of Thomas Cook Group will consider these approaches with the aim of maximising value for all shareholders.’ The company says ‘there can be no certainty that a transaction will be concluded with Triton Partners. Thomas Cook Group will make a further announcement as appropriate.’
• Sky had earlier reported that Triton, one of the largest buyout firms in Europe, ‘has approached Thomas Cook Group about a takeover of its Nordic airline and tour operator that could help the British company improve its fragile financial outlook.’ TCG’s Northern Europe business operates under the brands Ving, Tjareborg and Spies.
• Thomas Cook credit rating has been cut to CCC+ by Fitch and S&P Global Ratings. Meanwhile, Triton, one of Europe’s largest buyout firms, is understood to have approached Thomas Cook about a takeover of its Nordic airline and tour operator.
• The Great British Staycation reports people of all ages said they were planning to enjoy more holiday time at home in 2019. Top locations to visit are the South West (31%), Scotland (22%), Yorkshire (20%) and Wales (20%).
• Wow Air’s bankruptcy is having a noticeable impact on Iceland’s economy. It’s estimated that Iceland’s economy is ‘now set to contract 0.4%, compared with a previous estimate for growth of 1.8%.’
• STR reports US hotel occupancy up 0.8% to 70.8%, ADR up 1.4% to $134.36 and RevPAR up 2.2% to $95.13 for the week ending 18 May.
• STR reports April European hotel occupancy down 0.3% yoy to 72.0%, ADR up 3.3% to €110.09 and RevPAR up 3.0% to €79.29.
• Alistair Pritchard, partner and head of travel at Deloitte, told the 14th annual Barclays Travel Forum that a widely-expected slump after the 2016 Brexit referendum failed to materialise. Quarterly analysis by Deloitte shows that consumers continue to prioritise travel on which to spend their discretionary income.
• Research by Audley Travel shows DIY holiday planning can leave consumers stressed and overwhelmed, with one in nine people feeling confused. UK adults spend an average of 51 days planning holidays, with women spending 15 days more time than men, according to the study.
• Landal GreenParks plans to double its number of UK parks to 10 by the end of 2020, with the company reporting growth of more than 200% in bookings, revenue and capacity in the last two years. Paul Hardingham, managing director, Landal GreenParks UK, said demand had been strong not just from the domestic market but also from other markets coming to the UK, particularly at its Scottish park.
• PE house LDC agrees to sell Away Resorts to Swiss PE house Bregal Freshstream for an undisclosed sum believed to be in the region of £100m.
• Endeavor, the entertainment giant valued at $6.3bn in 2017, announced plans to IPO on Thursday. Endeavor owns the Miss Universe beauty pageant and the UFC mixed martial arts franchise.
FINANCE & ECONOMICS:
• Sterling up slightly vs dollar at $1.2659 but down vs Euro at €1.1319. Oil down at $68.52. UK 10yr gilt yield down sharply at 0.94% (yesterday 1.01%). World markets lower yesterday but Far East mixed in Friday trade.
• World shares had a bit of a hiccup yesterday and oil prices fell by 5% on worries that President Trump could be escalating his trade spat with China into a technology cold war. Suggesting that Huawei could be a part of any trade-deal solution only added to that speculation. Oil down sharply too.
• Brexit & politics:
o The UK voted yesterday to elect 73 MEPs to send to the European Parliament. Exit polls are not allowed as parts of Europe are still voting. Results should be known on Sunday evening.
o The FT reports that EU newspapers are viewing Mrs May with frustration, despair, pity and light mockery. It says she is being treated with much more fury and contempt by the British press.
o FT reports Mrs May ‘is in the final stretch of her unhappy, error-strewn premiership.’ It can’t have been very good for her health.
o Brexit bill will not now be brought forward before early June at the earliest. Jeremy Hunt has said that Mrs May should drop her Brexit bill as it is ‘clear it wouldn’t pass’ through the House of Commons. Meanwhile, Andrea Leadsom has resigned and Sajid Javid has told Mrs May that he does not agree that the prospect of a People’s Vote should be included in No10’s apparently-doomed Brexit bill.
o Mrs May is to meet Sir Graham Brady today to provide details as to when she will resign. The clock is ticking, her Brexit withdrawal bill 4.0 will not now be put up for discussion until early June at the earliest and rival Tory politicians are vying to tear the wheel from her grasp.
o FT says Mrs May’s premiership is now ‘crippled by a cabinet revolt’. At least she has a long weekend to look forward to.
o Guy Verhofstadt has said that Brexit is a ‘tragedy for Europe’ but added that all countries apart from the UK will be broadly OK. Referring to the EU elections yesterday, Mister Verhofstadt said ‘I’m quite confident that the outcome of these elections in Britain will see an enormous support for the pro-European parties.’
o Hard line Brexiteers like Goldilocks. Can’t find any porridge that’s the right temperature.
START THE DAY WITH A SONG:
Yesterday’s song was Another Brick in the Wall by Pink Floyd. Today, who sang:
Well here we go again,
You’ve found yourself a friend that knows you well
But no matter what you do
You’ll always feel as though you tripped and fell
RETAIL NEWS WITH NICK BUBB:
• Mothercare: Today’s finals were delayed a day because of “the complexity of our financial year ended 30 March 2019 – which included the £117.5m refinancing and associated UK and group restructuring, the disposal of both Early Learning Centre and our Head Office property” and the results do indeed look complicated, not helped by a 53 vs 52 week comparison. But, despite the big losses and write-offs, there is an honest and upbeat tone to the statement (a section in the Chairman’s statement is headlined “What went wrong?”), net debt is down to just £6.9m (from £44.1m a year ago) and the company says that the “International business is showing signs of moderate recovery”, whilst CEO Mark Newton-Jones notes that “In the early stages of this financial year, we are seeing some improving UK trends”.
• Planet ONS Watch: In the real world, as per the overall BRC-KPMG figures for April (the 4 weeks to April 27th), Retail Sales were reasonably good last month, given the later fall of Easter and the pick-up in the weather, but we will find out at 9.30am what “seasonally adjusted” life was like on the High Street on that bizarre parallel world, the Planet ONS (aka the Office of National Statistics), via their official Retail Sales figures…City economists (who still, unaccountably, treat the dubious-looking ONS figures as the gospel truth) generally expect a small dip of 0.1% in month-on-month seasonally adjusted sales volumes, although Capital Economics have pencilled in a 1.0% fall in April (to give year-on-year volume growth of 3.9%), for what it’s worth. We will be focusing, as usual, on the year-on-year, non-seasonally adjusted sales value figures and the key split between Large
• News Flow Next Week: After the EU Election results on Sunday night and the Bank Holiday on Monday, things are quiet in terms of company news next week, but the latest monthly Kantar/Nielsen grocery market share figures are out on Wednesday morning and the latest monthly GFK Consumer Confidence survey is out on Friday.