Langton Capital – 2019-09-19 – City Pub Group, Saga, Diageo, Black Swans & other:

September 19 2019

City Pub Group, Saga, Diageo, Black Swans & other:

A DAY IN THE LIFE:

Langton isn’t too au fait with the classics, unlike our current PM who seems to bring 3,000yr old Greek proverbs into the decision as to whether or not he should dunk his biscuit in his tea, but we do know that Tacitus said (something like) ‘they brought me a wasteland and called it peace’.

And that may be somewhat applicable to the current Brexit debacle.

Meaning that you can win a game, or at least not lose it, by kicking over the board. You can also tear off your clothes, set your hair on fire and run around the house screaming for good measure but it didn’t really mean that you won on the arguments, rather that you thought it was worth risking burning down the house to avoid a defeat.

And it’s in this environment that we’ve run out of superlatives, the Supreme Court is to opine on the PM’s honesty, the Queen is left a bit befuddled and the FT can run with the headline ‘Boris Johnson’s lies are plunging Britain into a dark morass’.

On to the news:

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There’s coverage of private companies including Seedrs, Cabana (in administration), Honest Burger, Pizza Express (a billion of debt and counting), Busaba, Bourne Leisure, Dishoom and Byron Burger. There are book reviews on Thinking Fast & Slow, The Honest Truth about Dishonesty & more. There’s info on listed company figures or events including notes on JDW, GNK, RTN & Loungers. In addition, there are thematic pieces on the August Tracker, LfLs as a measure of performance and input costs.

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PRIVATE COMPANY ACCOUNTS: CROWD FUNDER SEEDRS REPORTS TO DEC 2018 AS LOSSES CONTINUE: Seedrs is one of the largest crowd-funding platforms. It is disrupting the market but losses are accumulating. Carried in Premium Email on 18 Sept 2019:

Introduction:

• Seedrs was incorporated in 2009 aiming to disintermediate the market for financing small, growth companies.

• The ‘funding gap’ has been talked about for many years. Companies become too large to be funded by friends and relatives but not large enough to tap the traditional capital markets.

• If these companies are loss-making or have few tangible assets, then they may not be interesting to banks.

• Step in the crowd-funders. Peer to peer lending is a parallel market and both aim to cut out the middle man, put investors directly in touch with the companies that they are to fund.

• This is good (costs reduced etc.) but also risky as, with a bank, the depositors’ risks are spread over thousands of borrowers and in direct equity investment, there are rules and regs involved with listing.

• A few big winners (as with heavily-regulated national lotteries) have persuaded investors that the risks are worth taking.

• Many are in it for the fun (e.g. cheap beer with the crowd-funded brewers or simply bragging rights in restaurants etc.), some for the money.

• Nonetheless, whatever the risks, selling shovels to miners has always, in theory at least, been less risky than has been the mining itself.

Company comment:

• Seedrs points out that its ‘principal activity is to provide an online platform for investing in early stage and growth businesses.’

• The parent company is regulated by the Financial Conduct Authority.

• Revenues come in via fees paid by businesses that raise investment on the platform.There can also be ‘investor fees’ that ‘are contingent on the success of those businesses.’

• The majority of these fees have not been realised. They will be very illiquid.

• Seedrs says ‘to date the Group has realised a small portion of these investor fees; however the majority have not been realised, continue to be difficult to quantify at present, and so they have not been included as revenue.’

• The numbers ‘show a significant growth in revenue’ to £3.2m from £2.0m in 2017.

• The loss before tax is £4.3m vs a loss of £3.8m in 2017.

• Shareholders’ funds are £10.0m vs £13.7m last year and the company says ‘the Group is in its growth phase and the directors consider the results in line with their expectations and business plan.’

• Indeed, Seedrs goes on to say ‘the performance of the Group during 2018 has been very encouraging, with the platform achieving record levels of investment and fundraising activity.’

• Revenue rose by 56% whilst admin expenses rose by 28%.

Company comments on the market:

• Seedrs says ‘online investment in alternative asset classes is growing as an industry and continues to receive attention and support from the media, public and government.’

• It says ‘its commitment to developing a strong brand, an extensive customer base and a quality service will mean it remains a market leader.’

• The question, as always with J-curve companies, is ‘will the market ever be profitable enough to justify the initial investments?’

• Seedrs faces a number of risks including potential ‘regulatory change, cyber security, financial fraud, performance of the successfully funded companies and loss of reputation.’

• Many of these risks are also faced by other companies.

• The company says ‘the Group aims to grow significantly over the coming year, inreasing its revenues, improving efficiencies in its cost base and introducing new products’.

The numbers:

• Revenue has indeed risen by 56% and margins, though negative, have improved as admin expenses have risen at a slower rate

• The group raised £10m in new equity during FY17 but nothing in FY18. It will need to raise more at some point.

• Shareholders’ funds have fallen by the amount of the annual loss (post some adjustments) and the accumulated losses since incorporation are £15.2m.

• Accumulated losses will have increased further during FY19.

• Some £6.3m of the group’s shareholders’ funds were held in cash. Relatively little, at £407k, was deemed to be intangible. You would not expect to see debt at this stage in a company’s development

Other points:

• The auditor is KPMG. It will be reappointed.

• The directors make the point re ‘going concern’ that the directors’ business plans suggest ‘the Group will have sufficient funds, by raising additional capital, to meet its liabilities as they fall due for that period. As a result, these financial statements have been prepared on a going concern basis.’

• The directors concede that ‘the required additional capital that needs to be raised however is not yet committed and whilst the Directors, having previously raised such capital in recent years, have confidence in their ability to raise additional funds, there is no certainty that it will be successful at the time that it may be required.’

• Seedrs says ‘should a future capital raise be unsuccessful, the Group may be unable to discharge its liabilities as they fall due and, as a result, these circumstances represent a material uncertainty that may cast significant doubt on the Group’s ability to continue as a going concern.’

• These are realistic comments.

• KPMG says that, given the company’s losses, its ‘ability to continue as a going concern is dependent on additional capital being raised that is not yet committed. These events and conditions, along with the other matters explained in note 1.2, constitute material uncertainty that may cast significant doubt on the Company’s ability to continue as a going concern.’

• Post year end, the group looks to have raised a very small amount of capital in June 2019 – this looked like options as it totalled around £6,000 at a price of £6.21 per share vs the £23.59 that had been paid in 2017.

• There were 7 directors at year end. Two individuals resigned during the year and two new members joined the board.

Langton Comments:

• A start-up business, particularly a disruptor, is likely to incur losses for several years – just look at Amazon, Deliveroo etc.

• These losses need funding. That requires either a large dollop of capital up front, or a maintenance of confidence levels and a series of capital raises over the years.

• The last major fund raises from Seedrs were in Oct and Dec 2017, at £23.59 per share. Arguably, sentiment towards small companies, crowd-funding and the like have not improved since the group last tapped the market.

• To put it simply, for a J-curve to work, there must be an upward bit as well as the much more predictable downward bit.

• If crowd-funding is at or past its peak, then Seedrs may struggle to achieve profitability.

• Its next fund raise will be very interesting. The big question will be ‘is it be possible?’ Of almost as much interest will be ‘at what price?’

BOOK REVIEW: BLACK SWAN – Nassim Nicholas Taleb. One of the most influential financial books of the millennium to date, Black Swan has redefined the approach to risk. 19 Sept 2019: See premium email.

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GENERAL NEWS – PUBS & RESTAURANTS:

• The City Pub Group has reported H1 numbers saying that its strategic expansion has driven sales and EBITDA growth. The company reports revenues up 36% to £27.1 million (2018: £20.0 million) with LfL sales +2.6%.

• City Pub Group reports adjusted EBITDA up 20% at £3.6m with adjusted profits up 19% at £1.9m.

• City Pub Group executive chairman Clive Watson says ‘our targeted expansion of high-quality larger pubs with letting rooms has delivered strong progress for the Group in the first half. In the face of robust comparatives, we have delivered good like for like growth too. As our development sites begin trading during 2020, they will drive our performance onward. Our momentum has continued into the second half with strong sales growth.’

• Mr Watson says ‘we cannot ignore the uncertainty in the market due primarily to Brexit and the potential impact of a No Deal.’ He says openings will be reined back and adds ‘this will further strengthen our position and minimise the impact of any headwinds whilst continuing to deliver significant growth into the future.’

• Diageo has updated on trading saying ‘fiscal 20 has started well as we continue to build on the momentum and consistent progress we are making in the execution of our strategy. Our focus remains on delivering quality sustainable growth. This is supported by a culture of everyday efficiency that enables us to invest smartly in marketing and growth initiatives while expanding margins.’

• Diageo says ‘based on the current environment, we continue to expect fiscal 20 organic net sales growth to be toward the mid-point of the 4% to 6% range and organic operating profit growing roughly one percentage point ahead of organic net sales.’ The CEO adds ‘this is consistent with what we are targeting over the medium-term. Due to a strong prior year comparable, for the first half we expect organic operating profit growth to be in-line with or slightly behind organic net sales growth. However, we would not be immune from significant changes to global trade policy and continue to monitor this closely.’

• Greene King announced yesterday that the trustees of the Li family trusts have agreed to vote their CKA stock in favour of the acquisition of Greene King. The Li family trusts amount to 31.4% of CKA’s issued share capital.

• Free beer. Young & Co is to celebrate its 188th Birthday by relaunching its beer brand with a ‘new look that also includes the release of two new beers.’ In addition, Young’s are giving away free pints at any Young’s pub to celebrate today. T&Cs apply.

• Costa Coffee, now owned by Coca Cola, recently opened the first of its new, commuter-focused, formats at Lewisham Station in London. The company plans to open eight mini-format stores across London in the next six months.

• Costa says that the layout and ordering system has been specially formatted to deal with customers in the least possible time. The stores will be takeaway only and have contactless payment options. Some will offer self-service ordering screens.

• AB InBev is making a second attempt to spin off its Asian business, Budweiser Brewing Company APAC Ltd, aiming to raise $6.6bn in what could be the world’s second largest IPO this year. Jan Craps, CEO of Budweiser APAC commented: ‘You could say that the conditions are more challenging, but when we listen to potential investors we believe that there is solid excitement about this business and its IPO’.

• Companies across Britain are stockpiling beer, wine and spirits to make sure stocks last over the Christmas period, as concerns grow that Brexit could disrupt supplies.

• Consumers spent more on credit cards with UK retailers last year than they did in cash per the BRC.

• China is to release pork supplies from its central reserves to tackle price rises caused by an outbreak of swine fever.

• The Yorkshire-based Raisthorpe Distillery has boosted its production capabilities with the installation of a new still in the Yorkshire Wolds.

• Fullers has announced the appointment of Iain Rippon as Head of Operations- Tenanted. Iain said: ‘I’m delighted to be joining Fuller’s. It’s a company and a culture I’ve long admired and this is a great opportunity to help shape the division going forwards’.

• The strike at Diageo’s plants across Scotland have been called off after the spirits giant made a new offer to staff at the last minute.

• Coca-Cola HBC has agreed to acquire the Italian mineral water group Acque Minerali, in a deal worth €88m.

• The Indian government has announced a ban on the production, import and sale of electronic cigarettes, due to health concerns.

• The boss of Tesco, Dave Lewis has ruled out the sale of chlorine-washed chicken if the UK strikes a new trade deal with the US after Brexit.

• Big ticket spending, cars. Pendragon: Yesterday’s delayed interims from the embattled Motor dealer Pendragon (which trades as Evans Halshaw and Stratstone etc) were ‘dreadful’ per Mr Bubb, with an “underlying” loss before tax of £32.2m, versus the £28.4m profit a year ago, before exceptional write-offs of over £100m. The co says that ‘the heightened political and Brexit uncertainty, as to both outcome and timing, is adversely affecting customer confidence…during the important trading month of September. As a result of these market conditions, Group underlying loss before tax for FY19 is now expected to be at the bottom of the Board’s expectations’.

HOLIDAYS & LEISURE TRAVEL:

• Saga has reported H1 numbers saying results are in line with expectations. Underlying profits are down 51% at £52.8m with the dividend cut from 3p to 1.7p. Net debt is up 1.7% at £397.9m.

• Saga CEO Lance Batchelor says ‘we have made good progress against our strategic reset. The sales of our 3-year fixed price insurance are encouraging, and a higher proportion of customers are coming to us direct.’ No evidence of a halving of profits in that comment.

• The group’s chairman, Patrick O’Sullivan, Chairman, comments ‘it is early days in our transformation programme and there remains much to do but what we have seen so far gives us confidence that we are pursuing the right strategy.’ The chairman adds ‘the Board believes in the opportunity for and ability of the Group to return to sustainable growth and restore value for all shareholders and is supporting the Executive team as they focus on the profitability of our core Travel and Insurance businesses as well as the capital efficiency of the Group.’

• The Association of Accounting Technicians has recommended that the Scottish government introduce a 2.5% tax on tourist spending rather than impose a flat, per capita tax on those staying overnight.

• The Caterer quotes EasyGroup founder Sir Stelios Haji-Ioannou as saying that EasyHotel, which yesterday announced that 68% of its shares were owned or pledged to ICAMAP, should remain as a public company. Sir Stelios described the move to take the company private as ‘a colossal waste of money’.

• EasyGroup has 28% of EasyHotel and can therefore block both a delisting and any moves to compulsorily purchase independent shareholders. The free float will be extremely limited.

• Sir Stelios says ‘it’s now clear that EasyGroup’s 28% blocking minority stake and ICAMAP’s low ball offer has made it impossible for EasyHotel to be taken private. Therefore, this exercise was an object lesson in pointlessness. By taking their stake from 38% to 68%, ICAMAP have achieved little other than to enrich lawyers and bankers to the tune of £1.5m.’

• Sir Stelios has called for the directors of EasyHotel who approved what he calls a low-ball offer for the company, to be sacked.

• A panel of bankers is due to rule today on whether some investors in Thomas Cook’s debt are due a pay-out under bankruptcy rules. This will have implications for the group’s current proposed refinancing.

• Travel Weekly has reported that a leading expert in Atol has stated the CAA is likely to do ‘whatever it can’ to help Thomas Cook but warned the group is living on ‘borrowed time’.

• Over 26m single use plastics have been removed by Tui Group airlines since last year, as the group aims to abolish 40m items by 2020.

• Accor is looking for hotels to join its new eco budget franchise brand, Greet. The group aims to have 300 properties under its brand in Europe by 2030.

• Per Travel Weekly, river cruise lines such as Uniworld, AmaWaterways and CroisiEurope are now increasing capacity on the Nile. Demand from UK consumers is recovering following terrorist attacks in recent years, with AmaWaterways’ UK managing director, Stuart Perl, saying ‘Egypt is coming back strongly’.

• Ryanair’s UK pilots have called on shareholders to ‘take the airline to task’ at its AGM on Thursday. Members of the British Airline Pilots Association are staging a seven-day walkout from today and on September 19, 21, 22, 23, 27, 28 and 29.

• Munich-based holiday rental search engine Holidu has raised €40 million in Series C funding in a round led by Prime Ventures. Holidu compares the prices of more than 15 million rental properties across 600 different websites.

• According to Atheos consultants in the US, ‘ the importance of high-performing asset management is critical to the success of any hotel owner.’

• The US hotel industry has seen occupancy remain at 71.4%, Average daily rates increase 0.9% to $132.47 and RevPAR up 0.9% to $94.55 during the month of August.

OTHER LEISURE:

• London-based Frame will launch a fitness studio at Angel Central this December. The company plans to offer three studios; one for barre, yoga and dance; one for reformer pilates; and one for HIIT and strength training.

FINANCE & ECONOMICS:

• The ONS has reported that the UK CPI fell from 2.1% in the year to July to 1.7% in the year to August, the lowest rate in nearly three years. Wages are rising at 3.8%, suggesting that real wages are rising at around 2% p.a.

• The NIESR says ‘underlying inflation remains unchanged at 1 per cent in the year to August 2019, as measured by the trimmed mean, which excludes 5 per cent of the highest and lowest price changes .’

• The NIESR says ‘firms are probably waiting to see beyond 31 October before adjusting prices. The slowing of inflation was widespread, falling in 10 of the 12 regions of the United Kingdom with the biggest drops in Northern Ireland and Wales.’

• The ONS has reported that UK house prices rose by 0.7% in the year to July. This is the lowest rate in seven years and below the rate of cost inflation. London house prices are lower, year on year, but they are also down in the North East of England.

• The US Fed cut rates yesterday, lowering its key interest rate by 0.25% to between 1.75% and 2.00%.

• Sterling little-changed at $1.2473 and €1.1301. Oil down a little at $63.67. UK 10yr gilt yield down 4bps at 0.69%. World markets mixed yesterday with Far East also mixed in Thursday trade.

• Brexit & politics:

o Their Lordships are still pondering the legality or otherwise of PM Boris Johnson’s move to prorogue parliament.

o Counsel for ex-PM John Major will address the court today.

o The FT says that, whilst other PMs amongst the 14 that have curtsied to the Queen may have ‘shaded the truth’, Boris Johnson is in a league of his own.

o Jean Claude Juncker has said that the EU needs ‘operational proposals in writing’ from the UK. He says the risk of a no-deal Brexit is ‘palpable’.

o The Guardian suggests that HMG plans to wait until mid-October before presenting plans to the EU.

o The FT suggests that Northern Ireland could be placed in an all-Ireland economic relationship with a border effectively running down the middle of the Irish Sea. It will be difficult to get this through the House of Commons and hence Mr Johnson’s desire to hold a General Election (which would not otherwise be due until mid-2022).

START THE DAY WITH A SONG:

Yesterday’s song was You Only Live Once by the Strokes . Today who sang:

He knows where he’s taking me,

Taking me where I want to be

I’m taking a ride

With my best friend

RETAIL WITH NICK BUBB:

• Next: The much-awaited Next interims today contain the usual lengthy discourses on subjects like warehousing, Online returns and Retail profitability, but they can await the 8.45am results presentation for analysts…Back on July 31st, with the better than expected Q2 trading update, Next edged up their full-year guidance to PBT of £725m, but since then industry trading has not been easy, so the focus today is on what CEO Simon Wolfson says about the second half outlook and “Brexit uncertainty”. And the picture is a bit mixed: Next maintain their £725m full-year PBT guidance, assuming no positive or negative Brexit impact in the short term, but Next concede that autumn trading has been disappointing, if only because of the warm weather, and that Q3 will be weak, which will interest the bears…And the final conclusion is quite sober: “Although we can see a way through the woods, we are not
out the other side yet. Consumer markets remain extremely volatile, the Online world changes rapidly, and the uncomfortable transition away from high retail rents is by no means complete. It would be a huge mistake to underestimate the scale of the challenge facing our business or assume that, from here-on-in, all will progress smoothly”.

• Planet ONS Watch: In “the real world”, as per the overall BRC-KPMG figures for August (the 4 weeks to August 24th), Retail Sales were slightly disappointing last month, despite a sluggish comp and the heatwave at the end of the month, but we will find out at 9.30am this morning what “seasonally adjusted” life was like on the High Street on that bizarre parallel world, the Planet ONS (aka the strange world of the Office of National Statistics in Newport), via their official Retail Sales figures…Now, City economists (who continue, unaccountably, to treat the dubious-looking ONS figures as the gospel truth) generally expect a dip of 0.2% in month-on-month seasonally adjusted sales volumes, but Capital Economics have pencilled in a 0.5% fall in August (to give year-on-year volume growth of 2.4%), for what it’s worth. We will be focusing, as usual, on the year-on-year, non-seasonally
adjusted sales value figures and the level of Online Non-Food sales growth (as the ONS is thought to include the likes of Amazon in its sample), as well as the key split between Large Businesses and Small Businesses (as the ONS still thinks that Small Businesses are outperforming)…

• Marks & Spencer Food: Last night’s Channel 5 documentary “The Fall of Marks & Spencer: Food to the Rescue” was more about the remorseless decline of M&S Clothing than the new focus on M&S Food, but it had some good interviews with the likes of ex-M&S boss Stuart Rose and a great line from the veteran fashion designer Jeff Banks: “In 20 years’ time people will say; M&S used to sell Clothing? Come off it!” However, M&S has been getting some good PR recently for its new-look Food stores, like Hempstead Valley, and the Store Design expert John Ryan wrote approvingly in his daily Newstores blog yesterday about the revamped M&S Food store at Clapham Junction, “where food hall meets supermarket”. The element that has gained the most attention in the coverage of the new-look store so far is the ‘Fresh Herbs’ unit (as they are actually grown on site), but the
whole store is impressive: “this is an environment that those shopping it seemed happy to be in and if this is a signpost of things to come for M&S, it is a striking one”.

• News Flow This Week: Tomorrow brings the interims from Applegreen (the Irish based motorway service station operator that runs Welcome Break).

TRADING STATEMENTS & EVENTS:

Upcoming results are set out below:

• 19 Sep 19 Diageo AGM

• 19 Sep 19 City Pub Group H1 numbers

• 19 Sep 19 Saga H1 numbers

• 19 Sep 19 Bank of England MPC interest rate decision

• 24 Sep 19 TUI Group FY trading update

• 24 Sep 19 DP Poland H1 numbers

• 24 Sep 19 Everyman Media H1 numbers

• 24 Sep 19 Ten Entertainment H1 numbers

• 24 Sep 19 Hotel Chocolat FY numbers