Langton Capital – 2019-09-16 – PREMIUM – JDW, Seedrs, insolvencies, Thomas Cook etc.:
JDW, Seedrs, insolvencies, Thomas Cook etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
Have you noticed it’s not just the sunlight that can cause a problem when reading on a Kindle out-of-doors because bugs, when they land on the thing, can move you on a dozen pages or so, and that can be rather confusing?
I mean when reading biographies, you can lose years of someone’s life. It may not be the schoolboy who’s suddenly got a family and a two-million-pound house in Islington, but rather you’ve skipped the whole of the 1970s and 1980s thanks to that army of ants that had to get from points A to B while you popped inside to make a pot of tea.
And insects can highlight the odd word, for example ‘cat’, and ask the thesaurus for an explanation, which is relatively harmless though it could suggest to your reading group that your vocabulary might not be all it’s cracked up to be.
Anyway, we have to concede that these are 21st century niggles that wouldn’t register as problems if you had bigger things to worry about. On to the news:
JD WETHERSPOON – ANALYSTS’ MEETING FOLLOWING RELEASE OF FULL YEAR NUMBERS: LfL sales higher, overall revenues up but margin, profits and earnings down. Outlook said to be ‘reasonable’. 16 Sept 2019:
Following the release of its full year numbers, JD Wetherspoon hosted a meeting for analysts and our comments thereon are set out below:
• Total LfL sales were +6.8%. Bar was +5.8% with food +8.3%. This represents a performance somewhat at odds with others in the industry. However, as JDW pushes further into breakfasts, its pizza offer, coffee etc., it is effectively opening up new markets.
• Fruit machine income was +10.3%. All pubs now have digital machines (though not all machines are digital). Hotel income was +3.9%. This is a small but growing part of JDW’s business.
• Property gains of £5.6m (through the P&L) this year contrast with £2.9m last.
• Costs for food & drink rose below the rate of inflation. Wages were up 12.9% and interest costs were up on higher swap costs. An element of the increase in wages was effectively discretionary
• LfLs composition. See by product type above. Was it new customers or did spend per head rise? JDW purposefully does not gather data on its clients.
• That said, sales increases are likely to have been driven by the wider offering. The group has expanded its offers re coffee, breakfasts, pizzas etc.
• Whilst sales are higher, earnings are down for the year.
• However, the company says that it targeted flat profits or small growth, found that LfLs were strong and subsequently used the flexibility that this afforded to ‘make an investment in wages’
• Delivery? This is ‘not being demanded by our customers’.
• Costs? Wages likely ahead of inflation, interest up another £2m to £3m and other costs roughly in line with inflation. Food and drink a little below. Quite a lot will depend on how Brexit plays out.
• Premiumisation? Some, e.g. with gin. Otherwise, it’s about providing a choice.
• Selling Ruddles at £1.39? Brewers seem a little perturbed but ‘this [the £1.39 price point] is only in a small number of pubs’. The base level is £1.69. This is a ‘permanent move’. Greene King (the brewer of Ruddles) has not been asked for a contribution
Balance sheet, debt etc.:
• Debt is higher ‘mostly on freehold reversions’. The group is targeting a yield of 6%. Some 61% of the estate is now freehold. There were modest share buybacks.
• The group built five pubs this year and exited nine. It will open between ten and 15 in FY20
• The average for reversions over the last three years has been c£60m. FY19 was a somewhat higher-than-average figure
• The group believes its freeholds are worth ‘comfortably more than book’. A figure of 25% above was mentioned as a rough estimate
• Earnings are likely to be broadly flat (ex-IFRS16) in FY20 but, beneath the surface, JD Wetherspoon is putting in a lot of work.
• Wages are being shored up, freeholds are being bought in, the freehold proportion of the estate is rising, hotel rooms are being added, shares are being bought back and the product base is being widened.
• There is a lot to commend here.
• Any Brexit distractions (chairman Tim Martin does seem to be spending quite a lot of time & effort being nasty to competitors, politicians, analysts, experts etc.) do not seem to be preventing the company from performing strongly on the ground
• Certainly, an element of the LfL progress is being ‘bought’ by low prices.
• This is risky in that it leaves little margin should sales fall, but it does increase barriers to entry and secures JDW’s market position
• JDW is not a ‘normal’ company. That has both positive and less positive implications. It does mean that there are some issues (e.g. succession planning) that could come from left field to become a major issue.
• On a positive note, the company can and does plan for the longer term in a way that some ‘normal’ companies do not.
• But Tim Martin, the energetic, enigmatic 64yr old half-billionaire, who founded the company, took a sabbatical in 2013, was off work for some time in 2018 after a burst appendix and is very, very vocal on Brexit. The perception is that he remains an omniscient presence.
The end game:
• Mr. Martin has 31% plus of the company and the shares, ultimately, will be his to do with as he will.
• The status quo may persist indefinitely – but a corporate event is not out of the question.
• A John Lewis-style solution is possible – but so is a sale of the company or a placing of shares and these outcomes could have different implications for the company’s share price
• Overall (and assuming ceteris paribus re the above), JDW’s shares are not cheap.
• Although an element of the low margin is discretionary (partly caused by high repairs, wages paid ahead of the curve etc.), the group does not have much padding if it starts to lose customers to the supermarkets.
• JDW does what it does extremely well but, for better or for worse, it remains an outlier in terms of performance and management style.
• With a PER of >20x and a yield of <1%, there could be room for a little profit-taking.
• But all bets would clearly be off if the company founder to were place his shares in trust for his employees or decide to sell them in the market or to sell the entire company to Tsingtao (to pluck a company name from thin air) for £30 per share.
• Serious note – we are not trying to subtly or otherwise suggest that we have any particular insight in this area.
GENERAL NEWS – PUBS & RESTAURANTS:
• Crowd funding platform Seedrs has reported full year numbers to end-December 2018 showing that the group lost £4.3m before tax on turnover of £3.2m. The group lost £3.8m last year. More to follow in Premium Email midweek.
• Review of the Cabana collapse in Premium Email tomorrow.
• Accountant UHY Hacker Young has reported that the number of restaurant businesses going insolvent has jumped 25% in the last year to 1,410 in 2018/19, up from 1,130 in 2017/18.
• Hacker Young says ‘the rapid growth of the causal-dining sector since the last recession had resulted in an over-saturated mid-market which is still going through a dramatic shake-out.
• Christie is inviting bids for Coughlans Bakery ‘a unique, family-run artisan bakery and café business.’ The business has 22 retail outlets and seven freehold sites, which include its head office and its bakery in Croydon. Christie says ‘having recently completed a realignment of the business with current demand, the company is seeking new investors to drive the business forward through the next phase of its life cycle and an ambitious expansion program.’
• The family of Owen Carey, the 18 year-old who died after eating a Byron burger, have demanded a change in the law. Carey’s sister Emma Kocher called for the introduction of ‘Owen’s Law’ to improve labelling of dishes, commenting: ‘The food industry should put the safety of their customers first and be proactive about protecting those with allergies’.
• Visit frequency in the UK Eating Out Market has fallen 4.5% in 2019 at lunch, the MCA has reported. This 4.5% decline at lunch is the largest the market has seen for four years.
• KFC has halted its initiative to introduce healthier baked chicken products due to low demand from customers. Jenny Packwood, head of brand engagement at KFC UK and Ireland commented: ‘It didn’t go brilliantly well. We tried and we failed to launch a non-fried product. We were unable to sustain sales. They were just not selling’.
• Jamie Oliver’s international restaurant brand is continuing to push its franchise expansion, despite the collapse of its UK business.
• Moody’s has reported that McDonald’s acquisition of Apprente, the conversational voice-based technology group, will enhance the consumer experience.
• Prestige Purchasing has appointed Phil McGuiness as its Chief Operating Officer. Chief Executive officer of the group, Shaun Allen commented: ‘I am delighted to welcome Phil to the leadership team of Prestige. This is an important appointment for the business, Phil is a perfect fit with our values and his experience will provide strong leadership across our operations to support our ambitious growth plans over the next few years and also ensure we continue to deliver the high level of service to our clients’.
• Research from Resolution Foundation has found that one in twenty UK workers are not receiving any paid holiday entitlement and one in ten say they do not receive a payslip.
• Sainsbury’s has announced that it could sell milk and fizzy drinks in returnable glass bottles in an initiative to halve the amount of plastic packaging it uses in the next six years.
• Sainsbury’s chief executive, Mike Coupe has stated that fresh food supplies would be hit by a no-deal Brexit, Sky News has reported.
HOLIDAYS & LEISURE TRAVEL:
• Thomas Cook is reportedly in last-minute negotiations with bondholders to approve a takeover by Chinese firm Fosun Tourism. Thomas Cook said it is ‘focused on completing the transaction’.
• The FT reports that TCG may have to delay a meeting of bond-holders as all the pieces are not yet coming together.
• It says ‘the company is locked in a series of last-minute negotiations as it looks to finalise the terms of the restructuring agreement with Fosun, its lenders and bondholders.’
• Some three quarters of bondholders will need to agree the proposals. The FT reports ‘a group of hedge funds [a.k.a. vulture funds] that have taken positions against the company’s debt using the credit-default swap market — using contracts that pay if a company is unable to repay its debt — could vote against the restructuring unless they get paid for their positions in the process.’
• Blackmail is such a dirty word.
• Re equity, the FT says ‘sources close to the business said that it was almost inevitable that shareholders would lose their money — which is likely to include the stakes held by management and staff.’
• STR reports London hotel occupancy down 0.3% yoy to 86.7% in August, with ADR up 4.8% to £151.58 and RevPAR up 4.5% to £131.39.
• In the US, STR forecasts 1.6% RevPAR growth in 2019 with CBRE forecasting just 0.9% full-year RevPAR growth. STR President and CEO Amanda Hite said a continued lack of pricing power could make it hard to even meet the most current average-daily-rate-growth projection of 1.4%.
• Aircraft began flying in and out of Heathrow as normal from around 5am on Saturday morning despite protest group Heathrow Pause planning to disrupt operations.
• Spotify acquires SoundBetter, a music production marketplace for artists, producers, and musicians to connect on specific projects, for an undisclosed sum. SoundBetter has about 180,000 registered users and has paid out more than $19 million to musicians and producers to date, averaging around $1 million per month currently.
FINANCE & ECONOMICS:
• Sterling up sharply at $1.2465 and €1.1256. Oil up on Saudi Arabia attacks at $66.19. UK 10yr gilt yield up 9bps at 0.76% on Brexit deal, cancellation, referendum hopes. World markets higher Friday with Far East lower in Monday trade.
• Brexit, politics etc.:
o Former PM David Cameron has said that Boris Johnson is unfamiliar with the truth & backed Brexit, something in which he did not believe, in order to further his career.
o Boris Johnson has said that ‘the rough shape of a deal to be done’ with the EU was now in place.
o EU officials have said that they do not recognise this statement. Mr Johnson meets with Jean Claude Juncker later today.
o Former PM David Cameron has said that Michael Gove’s behaviour has been characterised by disloyalty. He says Gove and Johnson acted ‘appallingly’. Cameron says a second referendum cannot be ruled out as we are currently ‘stuck’.
o The Liberal Democrats have said that, in the unlikely event that they win power, they will revoke Article 50.
o The FT suggests that Tory Eurosceptics are signalling that they might be prepared to accept a standstill transition deal with the EU until the end of 2022, a move that they had previously dismissed as Brexit in name only. However, it quotes a no10 source as saying ‘we don’t see the need for a longer transition period. It’s not something that’s being discussed.’
START THE DAY WITH A SONG:
Last Friday’s song was Mannish Boy by Muddy Waters, Today who sang:
I wish I could share,
All the love that’s in my heart
Remove all the bars
That keep us apart
RETAIL WITH NICK BUBB:
• Saturday’s Press and News (1): The front page headlines in the Saturday papers were all about the publication of the memoirs of the much reviled former Prime Minister David Cameron in the Times and an accompanying interview about his ill-fated decision to launch an EU Referendum in 2016 (“I’m sorry. I failed”), but the markets on Friday were excited about the prospect of a last-minute Brexit deal next month (with sterling rallying to $1.25) and the FT front page headline was “Johnson to fast-track any Brexit deal”. In terms of Retail news, the Times flagged the Sky News story that the US owners of the struggling Clinton Cards chain have put the business up for sale through KPMG, the Daily Mail focused on Kingfisher in its “Popular Shares” column (ahead of next week’s interims and the retirement of CEO Veronique Laury) and the FT highlighted that M&S is going to start growing
• Saturday’s Press and News (2): Sports Direct is rarely out of the news and the Business editorial in the Telegraph defended the Debenhams CVA against the High Court legal battle funded by Sports Direct (“Defeat for Debenhams would be “seismic” for the High Street…Landlords should be careful what they wish for”). And the Guardian (whose estimable Retail correspondent Sarah Butler managed to get into last week’s Sports Direct AGM) had an interview with and a profile of Michael Murray (Head of Elevation at Sports Direct) in the posh new Flannels store in Oxford Street (“Ashley’s son-in-law finds golden ticket as he goes upmarket with Sports Direct”). The article also contained a couple of priceless quotes from #MadMike at the AGM last Thursday: he advised shareholders not to buy anything in the Flannels store (“It’s eye-watering what some of the prices are for a pair of shoes”) and also
• Sunday’s Press and News (1): The criticism of Boris Johnson and Michael Gove by David Cameron was the main talking point in the Sunday papers and the Sunday Times continued with the serialisation of the memoirs of the much reviled former Prime Minister with the front page headline “Cameron’s fury at the “liars” of Leave”. In terms of Retail stories, however, the paper to read was the Mail on Sunday, which had a feature interview with the Chairman of the John Lewis Partnership, Charlie Mayfield, in which he said “Don’t say we’re like Debenhams” after the weak interim results last week (“Yes, losses hurt, but I’m getting John Lewis fit for the Amazon age”). The Mail on Sunday also flagged that Tesco is expected to announce profits of over £1bn in its upcoming interims and that Aviva is expected to take over the pension fund of Wyevale Garden Centres after the recent piecemeal
• Sunday’s Press and News (2): The Sunday Times also flagged that Next will buck the High Street trend when its reports its interims next week and it had a photo of “Devon’s Del Boy”, aka Chris Dawson, the boss of the Plymouth-based discount chain The Range, after it announced bumper profits of £74m last year and a £25m dividend for its owner. The Sunday Telegraph noted that the mooted sale of the mortgage book of the troubled Sainsbury Bank could release £1.3bn for Sainsbury and its Questor column looked at the Motor dealer Inchcape and said the shares are a Hold (“Despite tough markets, there should be more in the tank for Inchcape”). Finally, the Observer highlighted, ahead of Tuesday’s trading update, that Ocado has ambitions to be more than just a grocery supplier (“Quinoa with added robotics: the new offer from Ocado”).
Today’s Press and News: The headlines in today’s papers are pretty mixed, as interest dies down in the serialisation of David Cameron’s memoirs in the Times…The Daily Borisgraph leads with Brexit (“Johnson is confident he is closing in on a deal”), but the FT leads with the oil crisis in the Middle East (“Saudis seek to reassure markets as attachs halve oil production”).
News Flow This Week: As the Lib Dem party conference continues in sunny Bournemouth and David Cameron continues his TV interviews, all eyes will be on the Supreme Court tomorrow as it weighs up the legality of the prorogation of Parliament, but there is again plenty going on in the Retail sector to distract us from the Political drama this week, kicking off tomorrow with the Ocado Q3, the French Connection interims and the latest Kantar/Nielsen grocery sales figures. Wednesday then brings the Kingfisher interims, the Pendragon interims, the Games Workshop AGM and the British Land Capital Markets Day. On Thursday we then get the Next interims and the ONS Retail Sales figures for August, with the Applegreen interims on Friday.