Langton Capital – 2019-09-04 – PREMIUM – RTN, London hotel market, access to labour etc.:
RTN, London hotel market, access to labour etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
I had to drag around 6kg of water in the heat last week.
Well ‘had to’ might not be quite right but how a nationwide supermarket chain could offer 500ml bottles of water at 65p each or £2 for twelve I simply couldn’t fathom and, as they say, whilst you can take the boy out of Yorkshire…
Anyway, it’s always intrigued me as to just why the odd error creeps into pricing, particularly when it goes the wrong way, when buying more of something can leave you less well off.
And yes, many of these ‘errors’ are associated with offers on the smaller packs, but many aren’t meaning three can’t be much of an editing process taking place on the shop floor.
Or maybe there are thousands of errors and 1,000 less one gets picked up on internally, leaving one for grouches like me spot and hold up as though they’ve won first prize in the local marrow growing contest.
Enough of that. There’s almost too much news today. Some of it is bitty. Hence the notes section at the bottom of each news section.
RESTAURANT GROUP H1 NUMBERS – Analysts’ Meeting: RTN yesterday hosted a meeting for analysts at which it outlined which of its businesses were performing well. And which weren’t. 4 Sept 2019:
Following the release of its H1 numbers, the Restaurant Group hosted a meeting for analysts and our comments thereon are set out below:
• Wagamama, concessions & the pubs business have performed strongly. The leisure business has traded less well – it was ‘marginally’ down year on year, despite comps being easy due to the World Cup last year
• No details on the proportion of sales at Wagamama from delivery. But one dedicated delivery site is open and RTN will open two more
• No detail on the split between the group’s brands. Total LfL sales were +4.0% but, as Wagamama was +9.5% in the 3mths to April and +12.9% in the 9wks to end-July, the rest of the group was about flat.
• If concessions and pubs were in growth, then Leisure must have been in decline. Note Wagamama is c1/3 of total sales.
• RTN is also testing grab and go and Wagamama is active in the US where it is seeing ‘improved trading momentum’.
Near term intentions:
• The group would like to exit perhaps a third of its leisure sites. Executing on this will be key. It is right to ask how, when, to whom, for how much etc.
• RTN points out that, whilst c27% has been added to casual dining capacity over the last 5yrs, only 1% has come out. It does not expect capacity to be reduced rapidly
• RTN says that the wider market ‘is [currently] in decline’
• The group will add 4 pubs this year, 5 concessions and 5 Wagamama sites. It intends to convert a further 8 units to the latter format
• Little to say on Brexit, currency moves etc. The group is aware of potential issues re staffing and sourcing products
• Trading has become a little more challenging in recent weeks. Hot weather and the tail end of the World Cup last year should have provided some soft comps
• Like for Likes are up 0.2% in the last 6wks with Wagamama, the concessions & pubs performing well and Leisure in decline
• This due to a number of factors including hot weather (though it was hot last year, too) and weaker cinema releases.
• Other issues will include a wider industry malaise and lower footfall at retail parks
• Estimates are being pulled back by perhaps £4m to £6m. The write-downs in asset values will reduce depreciation (increase profits) whilst higher labour costs and worsening trade in the leisure business pull the other way.
• If the ‘benefit’ of lower depreciation and rental costs on written-down assets & onerous lease provisions of £112.7m is perhaps 5% to 10% p.a., this would amount to a £6m or so credit to the P&L
• This implies that a £6m downgrade implies a £12m worsening in underlying trade
• Cost headwinds for the current year will be £27m. Some £10m of it will be mitigated
• The Restaurant Group says that it must 1) deliver on Wagamama, 2) grow concessions & the pubs business and 3) right-size Leisure.
• The group rightly points out that 70% of its EBITDA comes from its ‘growth’ businesses. This forms an attractive base from which to grow but the presumably unattractive businesses still comprise a larger than 30% share of the number of units, revenues etc.
• Any reduction in unit numbers, which would be sensible, would potentially mean that overheads had to be apportioned over a smaller number of trading sites.
• Some £295m of assets have been written off over the last 4yrs. There were clearly very major strategic mistakes made under previous managements.
• The individuals have now gone. Advice to the group may be the unhelpful ‘don’t start from here’ but, as that isn’t an option, the company is addressing its issues.
• The Wagamama purchase, though opposed by a significant minority of shareholders, has diluted Frankie & Benny’s within the group as a whole. In moving on to close a large number of F&B’s, RTN is effectively changing its skin and, though this will take some time, it seems like a sensible course of action.
• Shareholders, of course, have the choice as to whether they stick along for the ride or not. Execution will be critical and, when or if RTN’s share price gets ahead of events, it could be sensible to take profits.
• See also comments in General News below.
GENERAL NEWS – PUBS & RESTAURANTS:
• Restaurant Group takeaways.
o Shares down 12%.
o Group looking to close 150 outlets. It travelled a long way down a blind alley before it turned around. Good news is, it has turned. Less good news is that this is not a seller’s market.
o There have been £295m of write-downs in the last four years. Each one, presumably, was meant to be ‘the last’.
o Write-downs will reduce depreciation and flatter profits going forward. They will not impact cash.
o The group’s plans in the US (for Wagamama) are very much under review.
o Overall cautious and realistic. The scale of the task is understood. That’s a step in the right direction. RTN says ‘given the well documented over capacity and continued like-for-like sales decline in the casual dining market, and cost headwinds we have taken a more cautious medium-term outlook.’
o Changing its skin (into Wagamama plus airports plus pubs) has been and will be both expensive and difficult. The real decision for shareholders was perhaps 3-4yrs ago. Did they want to be on board for this ride or did they want to leave the share register and buy back in. The shares have performed poorly but they may (and should and perhaps will) offer good value at some stage.
• Stockport-based Robinson’s Brewery has reported numbers to end-December to Companies’ House saying that revenues rose by 6.1% to £75.5m. PBT more than doubled from £3.2m in 2017 to £7.1m in 2018.
• Robinson’s tenanted pubs put in a solid performance with the group’s smaller, managed operation increasing sales by 24.7%, largely on the back of acquisitions. The group says that, over the last 5yrs, it has invested £26.7m of capital and complete 127 refurbishments. The group says ‘as a result, our tenanted and managed pubs are in extremely good shape, trading well and are in a strong position to continue to grow sales.’
• Spanish brewer Mahou San Miguel has raised its stake in US brewery Founders from 30% to 90%. Mahou San Miguel acquired its 30% stake in 2014. The deal is expected to close in January 2020.
• Drinks Business has reported that this year’s Champagne grape harvest could be up to 20% down on last year due to high temperatures over the summer. Growers say, however, that ‘the weather now is perfect and the so is the forecasted weather for the 10 days to come, with 25°C in the day, and 8°C in the morning – which we call the Champagne fridge, as we have nice weather during the day, and then cool conditions during the night, which is good for quality.’
• S4 Labour reports that food and drink sales were up by 6.1% in August this year versus last across the hospitality industry. That seems a little high. It says drinks business was up 11.1%.
• The Restaurant Group is to open its first Mamago Wagamama spin off on Fenchurch Street in the City later this year.
• Pub Aid reports that pubs contribute around £40m to grassroots sport with sports minister Nigel Adams saying ‘pubs play an important role in supporting local sports clubs. They act as sponsors, fundraisers and meeting places, saving teams significant sums every year.’
• Brigid Simmonds, CEO of the British Beer and Pub Association, says ‘the Pub Aid report showcases the vital role pubs play in helping grassroots sports teams to compete across the UK and to encourage sports participation and physical activity which is so vital to our health and wellbeing.’
• The Sunday Times has reported that plans to stop the free movement of workers immediately after 31 October have been scrapped as the government could have been open to legal action.
• PM Boris Johnson is reported to favour an ‘Australian points-type system. This would favour doctors and the like but not supply the fruit pickers and hospitality workers on whom a lot of agricultural and leisure companies rely. The Home Office says ‘freedom of movement as it currently stands will end on 31 October when the UK leaves the EU, and after Brexit the Government will introduce a new, fairer immigration system that prioritises skills and what people can contribute to the UK, rather than where they came from.’
• Hammerson may sell its £1.9bn stake in Bicester Village.
• M&S is expected to leave the FTSE today.
• Amazon is reported to have paid £220m of taxes in the UK, most of it on payroll.
• Lego is adding own-brand stores in the face of High Street turmoil.
• Why is it that executives are so often ‘thrilled’ and ‘excited’ to announce this, that and the other? I mean maybe they are. Maybe they’re ‘thrilled’ to report that they’ve changed the upholstery in the Dog & Duck but there can’t be some sort of competition going on as they rarely go the whole hog & admit that they’re ‘giddy’ or ‘ecstatic’. Noteworthy that private or quasi-private companies rarely use such language.
• Langton was told to come forth and receive eternal praise for its good works – but it came fifth and won a toaster.
HOLIDAYS & LEISURE TRAVEL:
• HotStats reports that, whilst REVPAR hit a high in July in the UK, gross operating profit per available room (GOPPAR) actually fell ‘sapped by rising costs.’
• HotStats says ‘July is historically a peak month for UK hotels, with high occupancy enabling premium pricing that helps fuel top-line performance.’ It says ‘this year was no different, with hotels recording a 1.0% increase in RevPAR to £117.25, led by 86.6% room occupancy coupled with a 1.5% year-over-year increase in average room rate to £135.52.’
• However, HotStats says ‘the revenue rise was roiled by rising costs, led by an increase in payroll, which was up 3.6% YOY on a PAR basis. As a result, GOPPAR fell by 0.7% in the month to £71.68 PAR. Though this was more than 70% above the YTD 2019 figure, it was yet another month of profit decline on the back of solid RevPAR growth.’
• STR says that U.S. hotels ‘are operating at peak profitability’ but it cautions that costs mean that margins are declining. In 2015, some 38.4% of revenue fell through to gross profits. The number for 2019 could be around 37.7%. STR says ‘to say there’s uncertainty about what lies ahead for the U.S. hotel industry is a bit of an understatement.’ It says 2020 could be the ‘Great Unknown’. STR is forecasting a ‘supply bubble’.
• Dalata Hotel Group yesterday reported H1 revenues rose by 12.2% to €201.9m, while PBT rose 6.7% to €37.8m. REVPAR was up by 0.7%. Dalata says ‘despite the ongoing uncertainty surrounding the timing and nature of Brexit, the outlook for the balance of the year looks positive.’
• Transport minister Grant Shapps has said that HS2 could cost £20bn plus more than expected. The cost is now put in the £72bn to £78bn range (around twice the cost of the UK’s EU divorce bill).
• HotStats reports GOPPAR was down by 0.2% in London. REVPAR was up by 0.7%.
• Some flights to Orlando have been cancelled due to Hurricane Dorian.
• A planned national strike in Italy on Friday could disrupt flights.
• HS2 had better be worth it.
• The Guardian reports that the bosses of three of the UK’s largest gambling companies (namely William Hill, Flutter and GVC) ‘have infuriated MPs by pulling out of a meeting at which they were due to face questions about their efforts to reduce the dangers of online betting’.
• MP Carolyn Harris says ‘these are men who run companies that feed addiction, amass vast profits from the vulnerable and take home huge pay packets, yet they are too afraid to appear before MPs. They seem to think they have better things to do than to explain their actions publicly. They are running scared and their actions are cowardly in the extreme.’
• Merlin announces court meeting and GM yesterday approved the takeover by Kirkbi and Blackstone.
FINANCE & ECONOMICS:
• Markit reports the UK Construction Purchasing Managers’ Index for August fell to 45.0 from 45.3 in July. Markit says ‘domestic political uncertainty continued to hold back the UK construction sector in August, with survey respondents indicating that delays to spending decisions had contributed to the sharpest fall in new work for over 10 years.’
• Sky speculates that the UK could already be in recession. As the technical definition is two consecutive quarters of negative growth, that may not be likely. However, the latest PMIs – the much larger services PMI is due out at 9.30am today – do suggest that the economy is slowing down.
• Sterling up at $1.2099 and €1.1023. Oil down a fraction at $58.48. UK 10yr gilt yield down 3bps at 0.40%. World markets generally lower yesterday but Far East up in Wednesday trade.
• Sajid Javid, who appears to have found the elusive Magic Money Tree, is set to announce an additional £2bn of Brexit funding.
• Some concerns that the chancellor’s sums don’t add up. If he reduces borrowing and GDP isn’t rising, there will be no more cash. Yet there are promises being made to teachers, health workers, police and prison officers, HS2 etc. And taxes will ‘be cut’. That just doesn’t make sense. If he is spending spreadsheet Phil’s rainy day fund, then what happens when it rains? The OBR has said that a ‘modest hit’ to finances post Brexit would cut government revenues by £30bn annually.
o BREXIT & POLITICS: BJ says ‘making progress’ in talks but Guardian maintains Brussels is ‘baffled’ as to how PM concludes that talks with the EU are making progress. C4 quotes Euro politicians as saying there are no negotiations taking place.
o Boris Johnson loses his first vote in parliament. He may not have succeeded in uniting the nation, but he has certainly united the opposition.
o Parliament votes to take control, Tories expel 21 members including Philip Hammond, Rory Stewart, Greg Clark, Kenneth Clarke, David Gauke, Dominic Grieve, Sam Gyimah, Oliver Letwin and Winston Churchill’s grandson Nicholas Soames.
o Labour says it will support calls for a General Election when the above bill is enshrined into law. Mr Johnson has said he will obey this law.
o BBC reports 38% of respondents support a Hard Brexit whilst 44% oppose it.
o The UK in a Changing Europe maintains that a hard Brexit would make a recession in the UK ‘highly probably’. The UN trade agency UNCTAD says it would cost £13bn in lost exports alone.
o Mike Pence has said ‘I remain confident that if both parties will come to the table and negotiate in good faith we truly believe that by the end of October a deadline can be met with Brexit.’ Not clear what he based that on.
START THE DAY WITH A SONG:
• The song is taking a short break due to exam commitments.
RETAIL WITH NICK BUBB:
• Halfords: The ominous 8% slump in the Halfords share price yesterday implied that somebody thought that today’s trading update (for the 20 weeks to Aug 16th) would be disappointing and the shorts will be pleased to see that Retail LFL sales were down by as much as 3.9%, as a result of “poorer summer weather and weaker consumer confidence”. However, the impact of that on the bottom-line has been partially mitigated by decent margin and cost control, so the profit outlook hasn’t slipped too much: management had previously guided to underlying PBT “broadly in line” with the disappointing £59m in y/e March and now they’re guiding to PBT in the £50m-55m range.
• Dunelm: Ahead of today’s finals (for y/e June), the homewares group Dunelm had guided to underlying PBT of £124m-126m, after reporting strong Q4 trading on July 10th, and the outcome is just under £126m, up a healthy 23%, so there are no surprises in the figures. But Dunelm has also said that “recent trading has continued to be strong” and it has had the confidence to announce a further special dividend, of 32p, despite Brexit uncertainty.
• News Flow This Week: The hapless Chancellor is due to announce his Spending Review at mid-day in the House of Commons…And after more drama today in Westminster, this evening brings the FTSE index quarterly review (and the expected exit of M&S from the FTSE 100). Tomorrow brings us the Dixons Carphone Q1/AGM and the Carpetright AGM, whilst the Naked Wines EGM to approve the sale of Majestic Wine Retail is on Friday.