Langton Capital – 2019-06-21 – PREMIUM – More on GNK, Hostelworld, discounts etc.:
More on GNK, Hostelworld, discounts etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
A bit stretched this morning due to an internet outage. Our area, EC2M, apparently has a ‘major problem’. Just guessing here, but could those diggers in the road that have been creating massive holes in the ground have anything to do with it? See our comments on costs and empty pubs in the City on a Sunday evening below. On to the news:
GREENE KING AGREES TO 850p PER SHARE BID: A few further thoughts. 21 Aug 2019:
• The three largest UK pub companies will shortly have changed hands. Both the pre-existing share prices and the bid prices cannot both be correct. It’s not clear whether the weight of (often overseas) money or the prices created in the market by marginal buyers and sellers, will end up to have won the argument.
• Somebody (the buyer) is in each case taking a positive view of the future. But it is also true that the seller has been persuaded that now could be the time to sell out.
Further considerations: We have several further questions, many of which we accept will never be answered.
A vote of confidence in the UK or a bolt for the exit?
• Viewed one way, this is a vote of confidence in the UK, Brexit, weak currency and all. It is Chinese money talking.
• Viewed from the other end of the telescope, it is a 230yr old company deciding that now, after Napoleonic and World Wars, Depressions, credit crunches and all the rest, is the time to turn their bricks and mortar, brand value etc into cash.
• Owners of GNK, which is 100% UK based and which can’t move its trading assets to any other country, does lock its owners into a post-Brexit Britain.
• With that in mind, putting eggs in more than one basket may appear sensible and a 51% premium to the day-before price might look rather appealing.
Re Greene King:
• Who drove the process? Was it demanded by CKA or supplied (i.e. pushed) by Greene King? Advisors are like matchmakers; they get off (i.e. paid) on a deal. Charlie Munger says that, no matter how important you believe that incentives are, they are more important than that.
• CKA reportedly already had a near-3% stake in Greene King. It owned pubs that were leased to the operator. Its interest may have developed over time.
• If GNK initiated the deal, who was it? Departed management, the NEDs or the new CEO? And does it matter?
Read across to other operators:
• The moves in Marston’s and Mitchells & Butlers’ share prices are understandable. They rose by 9% and 6% respectively on Monday. They rose by a further 2% and 7% in Tuesday trade.
• The move in Whitbread, which has a nationwide estate of largely (other than in London) freehold budget hotels and pub-restaurants, was also understandable. The shares rose 3% yesterday and held its gains today.
• JD Wetherspoon is increasingly a freehold play. It is not unreasonable for the market to question just what may happen to the company when or if founder Tim Martin decides to call it a day. There is little by the way of obvious succession planning. The group’s shares rose yesterday but fell 3% today.
• It was less clear just why Restaurant Group’s shares rose on Monday. The exhibited less of a spike at the time of the Greene King announcement (around 3.45pm) but rose by more than 5% on the day. The shares slipped, but only by around 0.5%, yesterday. Restaurant Group reports H1 numbers on 3 September
A little on the Li family:
• The FT reports that the Li family does know the British high street well. It owns pharmacy chain Superdrug and phone company Three.
• it part-owns Northumbrian Water and UK Power Networks.
• in buying Greene King, it is securing a part of the UK. This is sensible if the family wants to spread its risk. Greene King is over 80% freehold
GENERAL NEWS – PUBS & RESTAURANTS:
• Costs, staff-scheduling and prices. August is an odd time in the City. And Sunday and Monday are perhaps the quietest evenings but, as we’ve got family down, we found ourselves having a couple of drinks on both evenings and the results, though a-typical, were interesting nonetheless.
• By 8pm in a couple of bars, the staff, whilst they didn’t outnumber the customers, came pretty close to doing so.
• One bar closed on us. And, commercially, it was the right thing for it to do. Others stayed open because ‘we close at 10pm.’ A lack of labour scheduling flexibility probably means that, at certain times, there is not enough profit being made (say £3 to £3.50 in absolute terms with about 1.5 drinks per hour per customer being consumed) to even cover the costs of the product and labour.
• And bars feel, understandably, that they have to charge £5.50, £6.00 or £6.50 per pint in order to make enough money to cover their overheads.
• Such high margins attract competition, competion means more capacity and more capacity leads to lower footfall per unit. There’s not an obvious answer to this but, if bars can’t make a profit in central London when they’re selling beer at up to £6.50 per pint, then there’s something a bit wrong.
• Discounts available: Bella Italia & Café Rouge (Casual Dining Group), 40% off mains and 30% off food respectively. Toby and Harvester (M&B), kids eat for a quid. Prezzo 40% off mains, Pizza Express 25% off food.
• Consumer may become confused. Certainly, we are. Why would you ever pay list price at these restaurants? Everyday low pricing at JDW, Franco Manca etc.
• Delivery getting in on the act with Domino’s offering 25% off orders over £25.
• NRN in the US has said that same-store sales rose by 1.7% in the latest quarter. It says ‘Domino’s, Starbucks and Taco Bell led their segments in same-store sales growth.’
• In the last six years, the UK foodservice delivery market has grown to £3bn and is set to continue its forward movement with a 6.8% CAGR for the next two years, the MCA has reported.
• The BBPA has released its ‘Brewing Green Report 2019’, which has found that the UK’s brewing industry has reduced its CO2 emission by 42% in the last decade. The report also stated that UK Breweries now recover and re-use 98% of their waste.
• UKHospitality CEO Kate Nicholls has commented on the Government’s confirmation that it will immediately halt freedom of movement in the event of a No-Deal Brexit: ‘The Government has taken great steps to safeguard the rights of those EU citizens in the UK ahead of Brexit. Although the majority of staff in the sector are home-grown, businesses do need to look to overseas talent to augment their teams’.
• Diageo has acquired a further 3.3m shares in the United Spirits Limited, taking its holding to 55.2%.
• McDonald’s is launching its McCafe It Forward today, which will see 500 pre-selected ‘local do-gooders and coffee lovers’ across the US receive free coffees. The group said: ‘These individuals were chosen to kick off the chain of goodness because they’ve been recognized as a hometown hero or do-gooder by their community, or they’ve shared their passion for coffee on social media’.
• Trade union members at Diageo’s Leven, Cameronbridge and Shieldhall plants have voted in favour of strike action, due to pay disagreements.
• Casual Dining Group has introduced a suite of financial services for its employees, including on-demand pay across all its brands.
• Lowell Cafe in California is set to become the first restaurant to have cannabis on its menu in the state.
HOLIDAYS & LEISURE TRAVEL:
• Hostelworld says demand has been below expectations and costs have risen. It has reported H1 numbers saying nonetheless that its ‘roadmap for Growth [is] progressing well.’
• Hostelworld reports revenues of €38.8m (2018: €42.6m). Gross bookings were 3.7m versus 3.8m a year before. Net of cancellation bookings were 3.4m (2018: 3.7m).
• EBITDA is €8.9m versus €10.4m with adjusted EPS of 6.44c versus 7.93c in 2018.
• Hostelworld is to pay a reduced H1 dividend of 4.2c ‘in line with stated dividend policy.’ It says ‘we continue to review all options on how we return capital to shareholders.’
• Hostelworld says its ‘roadmap for Growth’ strategy to invest in our core platform is progressing well, with investment in key elements including core search experience, payments, customer booking experience, rate plans, 3rd party connectivity and supplier facing platforms’.
• Hostelworld CEO Gary Morrison says ‘while we are pleased with overall progress made during H1, particularly with regards to our ‘Roadmap for Growth’ strategy, booking demand over the peak summer period has been somewhat lower than anticipated.’
• It says ‘the first half financial performance was also significantly impacted by higher than anticipated inflation in performance marketing channels and the effect of the full global roll out of the free cancellation product being included for the whole period for the first time.’
• Hostelworld’s CEO concludes ‘we continue to operate in an attractive and growing market, and I remain confident about the opportunity to capitalise on the significant growth opportunities we have identified. I believe the operational and strategic improvements we have put in place in the first half, should enable us to return the business to volume growth during 2020 and we continue to assess opportunities, both organic and inorganic, which could enable us to accelerate that growth.’
• Permission has been granted for the conversion of Osborne House in Edinburgh into a 157-bedroom hotel.
• Travel Weekly suggests that ‘Club Med’s Chinese owner expects to face hurdles in the planned acquisition of a controlling stake in Thomas Cook Group.’ It says ‘there was a chance’ that Fosun will not take part in the re-organisation of Thomas Cook. Fosun says ‘like any merger and acquisition, the acquisition of Thomas Cook involves much difficulty.’
• US operator Brinker International, which runs the Chili’s and Maggiano’s Little Italy brtands, has reported increased profits for its Q4 of $46.7 million, or $1.22 a share. Brinkers says ‘speed is important in this day and age, and I think … we’re able to move more quickly when we have a large restaurant base that are company-owned. So, there’s strategic reasons that we like the company-owned model as a predominant model for us.’
• IHG has announced that it is to open a new InterContinental Hotels & Resorts property in Dallas. The group says ‘with 205 InterContinental hotels open worldwide and another 61 in the global development pipeline, IHG continues to expand the brand’s portfolio in the most sought-after destinations around the world.’
• STR reports that the U.S. hotel industry reported positive results in the three key performance metrics during July 2019. It says occupancy rose 0.4%, average rate rose 0.7% and REVPAR was up by 1.1% on the same month in 2018.
• Australian Casino operator Crown Resorts has reported a fall in its annual profits on the back of a slump in spending by VIP gamblers reports the FT.
FINANCE & ECONOMICS:
• The UK economy is bigger than previously thought per new estimates published by the Office for National Statistics. It says there is 1.3% more activity going on than it had previously thought. The UK economy is worth some £2tn.
• If Brexit shaves 1% from growth for 10yrs, that will be £1,100bn and counting by the end of year ten. The ONS says ‘these new figures are produced using new sources and methods, giving significantly improved estimates of how money moves around the UK economy.’
• Donald Trump has said he is considering a new, temporary payroll tax cut to help boost the US economy.
• Sterling up slightly at $1.2156 and €1.0956. Oil up at $60.35. UK 10yr gilt yield down 3bps at 0.45%. World markets lower yesterday with Far East mixed in Wednesday trade.
• Brexit & other.
o PM Boris Johnson has been told by Donald Tusk that his plea to the EU to scrap the Brexit backstop actually makes it more likely that a hard border will result.
o US Democrat Nancy Palosi has said that a hard border would threaten a US / UK trade deal.
o Mr Tusk says ‘those against the backstop and not proposing realistic alternatives in fact support re-establishing a border.’
o BBC’s Brexitcast suggests that Mr Johnson, aided by Dominic Cummings, is seeking to engineer a crisis in early September that will allow the PM to call an election and blame it on his opponents.
o Mr Johnson is to see German Chancellor Merkel and president Macron of France later this week. Substantive talks are not expected to take place.
o A no-deal Brexit could cost farmers £850m per year in lost profits warns the BBC on the back of research conducted by farm consultants Andersons.
START THE DAY WITH A SONG:
Yesterday’s song was Temptation by Heaven 17. Today who sang:
Here’s your ticket, pack your bags,
Time for jumpin’ overboard
The transportation is here
Close enough, but not too far
RETAIL WITH NICK BUBB:
• Grocery Market Share Watch: The latest monthly Kantar/Nielsen grocery market share figures (for the 4/12 weeks to Aug 10th/11th) came out at c8am yesterday morning and the Kantar survey was headlined “Hottest day fails to rally grocery sales”, flagging that the food price inflation rate has remained at 0.9%. However, the rival Nielsen survey was headlined “UK Grocery spend begins recovery following disappointing spring and early summer”, highlighting that industry growth picked up to +1.0% in the last 4 weeks, after falling by 0.5% in the previous 4 weeks. The Kantar survey focused on the last 12 weeks and we haven’t seen the separately disclosed 4 week figures yet, but the share price movements implied that Sainsbury did surprisingly well in the 4 weeks to Aug 11th and that Tesco and Morrisons were a bit weak.
• Waitrose Watch: The weather last week a year ago was nothing to write home about, so the comps on picnic and barbecue sales last week were a bit soft and it was therefore disappointing that yesterday morning’s JLP weekly overview, for w/e Aug 17th revealed that Waitrose saw yet another dip in gross ex-petrol sales last week, of 2.1%, to continue the weak start to Q3/H2…That left the last 29 weeks still down by 0.7% gross cumulatively, albeit store space must be fractionally down (after the sale of five Waitrose stores in June).
• John Lewis Trading Watch: The comps were less soft for John Lewis last week, but gross sales were still down, by 2.8%. In terms of sales mix, Fashion/Beauty sales were down by 4.3% in w/e Aug 17th and Home sales were down by 5.9% gross, but Electricals were up by 1.3% gross. There are no new stores in the figures, but overall John Lewis LFL sales, however, must still down over the last 29 weeks (as gross sales are running down 1.4%).
• MySale: We flagged yesterday that it was not clear whether the embattled Philip Green and his wife would be taking part in the emergency fund-raising for the struggling Aussie-based Online retailer MySale, but it was announced in the early afternoon that they had indeed (via their offshore vehicle Shelton Capital) taken up their full allocation of the 2p a share placing, to maintain their overall stake in the business at c20% (albeit the 110m shares required only cost them £2.2m, a mere shadow of the £48m that they paid pre-IPO for their original stake in 2015)…
• News Flow This Week: Apart from the Laura Ashley final results tomorrow, there is no other Retail company news scheduled ahead of the Bank Holiday weekend, although Inchcape and Hammerson have both announced new CFO’s this morning.