Langton Capital – 2019-10-21 – PREMIUM – Selling assets, Just Eat, Pizza Express, Gfinity etc.:
Selling assets, Just Eat, Pizza Express, Gfinity etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
Here’s a question that became very real for Langton over the weekend, have you ever wondered what you would do if you tried to exit a room and the door handle fell off?
Because the best answers, unfortunately, are either climb out of the window or break the doorframe off the wall with a sledgehammer because the alternatives, starving to death in a windowless bathroom or getting eaten by your cats, are much less attractive.
And, as the sledgehammer option involves having access to family members, sledgehammers and the like, the above is really (no, really) worth a little thought if you live alone. On to the news:
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ATTEMPTING TO SELL ASSETS: Sky has reported that entrepreneur Luke Johnson is investigating options regarding selling all or part of Bread Holdings, the owner of the Gail’s bakery shops. 21 Oct 2019:
• Sky has reported that ‘Luke Johnson is reviving plans for a sale of his Gail’s Bakery chain months after his investment in Patisserie Valerie erupted into the biggest crisis of his career.’
• It says ‘Mr Johnson has begun sounding out bankers about an auction of part or all of Bread Holdings, Gail’s parent company.
• The operator now ‘trades from more than 50 sites’ (Gail’s bakery outlets) and owns a wholesale business. Sky says that ‘a sale is expected to take place in 2020.’
• The potential disposal comes on the heels of the sale of Elegant Hotels (in which Risk Capital, Mr Johnson’s investment vehicle, had 11.1m shares) to Marriott at 110p per share but also follows the collapse of Patisserie Holdings, Mr Johnson’s largest investment, after a series of announcements commencing in October last year.
• The collapse has prompted accounting and criminal investigations. Mr Johnson says that his ego ‘has taken quite a battering’.
• Sky reminds readers that CEO Tom Molnar, who is still with the business, set it up with Ran Avidan in 2005. Risk Capital and Mr Johnson invested in 2011.
• There was talk in early 2018, before Patisserie Holdings collapsed amid potential accounting fraud and misrepresentation of its numbers going back many years, of the latter issuing £35m in new equity to buy Bread Holdings (for a considerably larger sum).
• Risk Capital II and RCP Co have around 50.06% of Bread. Bread in turn owns 100% of Gail’s Limited.
• There were stories just prior to Patisserie Holdings failure that Bread could be worth £200m.
• This seemed like a ridiculous figure & the potential sale or IPO was pulled in the face of ‘Brexit difficulties’ and, we would suggest, toxicity that was by that time leaking over from the Patisserie Holdings’ fraud.
What is the company worth? Introduction:
• A year ago, with £78m of revenue and operating profits of c£5m (for the year to Feb 2018), we suggested that the £200m figure was inappropriate.
• We came up with a range of figures between £45m and £80m.
• Bread has since reported (still very dated) Feb 2018 numbers showing that, whilst revenues rose by 9% to £86.4m, PBT fell by 69% to £1.04m.
• EBITDA fell from £9.7m to £8.1m. Bread said ‘the wholesale market is very competitive [and] the retail bakery market also remains very competitive’.
• Quoting high ‘valuations’ of says £200m could be an attempt to ‘anchor’ expectations at or around a certain level. It’s not clear if the £200m (which hasn’t been repeated for some time) is enterprise value or equity value. We believe that it must be the former.
• There is no guidance as to whether 2019 will be better or less good than 2018 was. Certainly, the market as a whole remains tough.
• Net debt has risen from £27.4m to £28.4m. Gross debt is flat at just under £30m.
• Shareholders’ funds at Feb 18 are £10.9m (2017: £10.4m). The bump is due to retained profits & the exercise of some share options.
Company worth, a few numbers:
• These are all subjective measures.
• We do not have an EBITDA split between retail and wholesale. Taking say 8x for retail and 6x for wholesale, a blended EBITDA multiple of 7x does not appear unreasonable.
• This implies a valuation of perhaps £57m. Knocking out the debt gives an equity valuation of perhaps £29m.
• 1.2x retail revenue and 0.8x wholesale revenue (net of intercompany sales) would give a valuation of £84m. Knock out debt & the equity value would be £56m.
• The company has shareholders’ funds of £10.9m. This includes £23.3m of intangible assets. Net tangible assets are therefore negative £12.4m.
• Intangible assets are £0.5m software development, £1.7m brand value, £16.0m premium paid over fair value for acquisitions (including £3.7m for Gail’s and £10.0m for The Bread Factory) and £4.4m ‘customer related’ intangible assets (which is a new one on us).
• If loans were paid off in full, therefore, the tangible asset value of the company is negative £12.4m.
• Beauty is in the eye of the holder here but, we would suggest, some attention should be paid to build cost + goodwill + the get-there-quick value of taking a ready built estate.
• Then add on debt inherited & this should be compared with the asking price.
• Looking at an old-fashioned PE ratio may be inappropriate given the recent lurch downwards in profitability and the fact that the loan notes are high coupon (9% p.a.) and would perhaps be refinanced or repaid on a purchase.
• Profits after tax are a somewhat meaningless £142k.
Balance sheet issues:
• All of Bread’s debt (as at February 2018) was becoming short dated.
• The £14.5m of bank loans ‘are repayable by instalments until 31 March 2020’.
• The £15.2m of 9% coupon loan notes were due to be repaid in March this year. We can only assume that this happened.
• The company (re Feb 2018) reported ‘debt service cover was in technical breach due to investment into 4 new retail outlets, 30% increase in production capacity at the main wholesale facility and the acquisition of The Bertinet Bakery’.
• Bread reported ‘the bank have waved the breach after the year end’. Nonetheless, the lenders may be keen to reduce their exposure if they are able to do so.
• The short-dated nature of Bread’s debt and issues at Patisserie Holdings may impact upon the capital providers’ views.
• KPMG is the auditor (it was Grant Thornton at Patisserie Holdings).
GENERAL NEWS – PUBS & RESTAURANTS:
• The Telegraph has reported that hedge fund CarVal is ‘among those circling debt-laden dining chain Pizza Express.’ The group’s debt is trading at a material discount to its face value. The Telegraph reports ‘Pizza Express is struggling to repay £1.1bn of loans amid spiralling losses. Some £665m of the debt mountain is formed of corporate bonds, which must be repaid starting in 2021.’ See earlier Langton emails for further detail.
• Pizza Express may be fine. But developments to date perhaps suggest that there are major issues. Companies that see their debt trading at large discounts to their issue price sometimes, indeed often, find that the debt ends up in the hands of holders whose interests diverge from its own.
• We have suggested that Pizza Express’s units may not be worth the face value of its debt. Arguably not by a long chalk. That’s akin to negative equity on a house. It’s possible to live with such a situation for some time. However, if the debt needs refinancing (if an individual needed to move house etc.) then that becomes a whole other story.
• At that point who owns your debt and what their agenda is becomes very important. See earlier premium emails.
• Just Eat has reported Q3 numbers saying that group revenue is up by 25% in Q3 and by 28% in the year to date. Nine month sales were £717.8m.
• Just Eat reports group order intake up to 62m (+16%) with UK orders up 8% to 33m. Just Eat says ‘European order growth was good, with ongoing strong performance seen in Italy and Switzerland and new brand partnerships forged in Spain.’
• Regarding the outlook, Just Eat says ‘the Board remains confident in the current performance of the Group and is reconfirming its guidance for full year 2019 revenue in the range of £1.0 billion to £1.1 billion and uEBITDA in the range of £185 million to £205 million (both excluding Brazil and Mexico).’
• Just Eat says ‘as noted at the time of our H1 results, uEBITDA includes the negative impact of recent acquisitions, which is still expected to be £10-12 million.’ The company updates on the proposed merger with Takeaway.com saying ‘it is currently expected that the Company’s shareholder circular will be published by the end of October, with the General Meeting held in December 2019. Subject to satisfaction of conditions, including shareholder approvals, completion of the transaction is expected around year end.’
• Just Eat CEO Peter Duffy says ‘we are seeing strong growth in many of our markets, including Canada, Europe and pleasingly Australia, where we are starting to reap the benefits of our turnaround plan.’ Mr Duffy concludes ‘we remain on track to deliver our full year 2019 revenue and uEBITDA guidance.’
• Time Out reported on Friday that leisure sector investor Richard Caring had taken at 6.59% stake in the business. It is thought that Mr Carin acquired his shares in the group’s recent placing.
• The Food & Drink Federation has said re Brexit & further possible delays that it is ‘vital that we didn’t allow the fact that the nation is exhausted to mean we sleepwalk into mistakes that will haunt the UK economy for a generation.’ The FDF says ‘we welcome the Letwin amendment.’ It adds ‘we welcome more time to scrutinise the new Brexit deal and the legislation designed to enact it.’
• UK Hospitality’s Kate Nichols tweeted ‘debate is positive but can kicking is not – business really needs an end to the uncertainty this weekend to allow for investment, to protect jobs and growth.’
• Tariffs placed on exports to the US could result in Scottish whisky sales declining 20% within a year. Karen Betts, chief executive of the Scotch Whisky Association, said: ‘It means that Scotch whisky is now paying for over 60% of the UK’s tariff bill for the subsidies it provided to Airbus, eight times more than the next most valuable UK product on the tariff list’.
• The US fast-food group Chick-fil-A is set to close its UK store amid a row over donations to anti-LGBT groups.
• Coca-Cola has cautioned on its profits due to the strong dollar, dimming an otherwise bullish outlook after increased demand. John Murphy, chief financial officer commented: ‘Our underlying performance allows us to maintain our full-year comparable [earnings] guidance, even in the face of increasing currency headwinds compared to previous expectations’.
• Chick-fil-A has introduced a dine-in mobile ordering platform that will enable customers to place orders over their app.
• Nando’s is launching its third Nando’s Nin express format in London, designed for takeaway or delivery.
• The soft drinks company, Sipling Beverages Company is to launch non-alcoholic versions of popular cocktails.
• SparePlace, an app that allows restaurants to advertise empty slots in their bookings, claims the industry loses roughly £1bn each year from late-cancellations.
• MCA forecasts the food delivery market to grow at a compound annual growth rate of 6.8% per year between 2018-2021, according to its latest Foodservice Delivery Market Report.
• The Welsh Assembly has proposed a minimum unit price for alcohol of 50p, placing it in line with the Scottish provision.
• Research by Deloitte shows spending in the leisure sector jumped in Q3 despite a Brexit-related slump in consumer confidence. UK consumer confidence fell to minus nine per cent in the last quarter, down two points compared to 2018.
• Unilever claims Generation Z prefers herbal teas and coffees to traditional cups of tea. CFO Graeme Pitkethly says that although young people do drink tea, it tends to be ‘quite high-end, expensive products’.
• EY reports there were more profit warnings from listed companies in the first nine months of 2019 than in any year since 2008. Companies listed in Britain issued 235 warnings with concerns over the economy and delays or cancellations of contracts as the two main causes for companies to miss their forecasts.
• Which? says the ‘death of the high street’ may be overstated as many high streets are beginning to move towards services that cannot be replicated online, with significant growth in cafés, tattoo parlours, hair and beauty services and function rooms.
• Bonmarche enters administration, putting 2,887 jobs at risk, due to a ‘sustained period of challenging trading conditions and cash flow pressure’.
HOLIDAYS & LEISURE TRAVEL:
• Accor’s UK hotel portfolio recorded RevPAR up 0.4% yoy in Q3. London RevPAR was up 1.6% yoy but regional cities saw a 0.9% decline yoy. Revpar worldwide grew by 0.7% with Europe leading the way, up by 1.2%.
• Eurostar reports more than a million passengers travelling on the cross-Channel train service in August, with CEO Mike Cooper saying ‘We have seen positive momentum over the summer, with strong growth in the number of North American passengers choosing to travel by high-speed rail’.
• STR reports US hotel occupancy down 0.9% to 67.4% in September 2019, with ADR up 0.6% to $131.93 but RevPAR down 0.3% to $88.91.
• Shearings Holidays will launch a new set of walking breaks from 2020, ranging from light one-mile ambles to more challenging hikes, such as Ben Nevis in Scotland.
• Gfinity has reported full year numbers to June saying revenues rose by 82% to £7.9m with an operating loss cut from £12.2m to £8.6m. Chairman Garry Cook says ‘Gfinity has delivered a significantly improved financial performance this year and we are on track to reach our target of adjusted EBITDA breakeven by 2021.’
• Moody’s reports that MGM Resorts’ decision to sell the Bellagio and other properties for over $5bn was credit positive. It says these transactions ‘move MGM closer to becoming an asset-light casino company.’
• Tenpin at Cheshire Oaks, Ellesmere Port, has been relaunched as an entertainment centre after a £1m plus refurbishment programme.
FINANCE & ECONOMICS:
• Sterling up over the weekend, lower a little this morning, at $1.2905 and €1.1563. Oil down a little at $59.26. UK 10yr gilt yield up 2bps at 0.71%. World markets mostly lower Friday but Far East up in Monday trade.
• Brexit & politics:
o Letwin amendment passes as 1m voters take to the streets calling for a confirmatory referendum.
o A few hours was arguably not long enough for MPs to scrutinise a deal that was only reached on Thursday and which will impact the country for decades.
o After all, you can always get a deal. Bad deals are easy. You can buy a £10,000 car for twenty grand any day of the week.
o Deal may come back to the Commons tomorrow. Amendments likely to include a bid to attach a confirmatory referendum thereon.
o Bank of England governor Mark Carney says that the planned deal would be better than no deal. Ex-governor Mervyn King says the UK should ‘just get on with it’. The IEA says Mr Johnson’s deal is preferable to that of Mrs May ‘from a free market perspective’ but it does add ‘serious new burdens on trade within the UK.’
START THE DAY WITH A SONG:
Friday’s song was Shuffle by Bombay Bicycle Club. Today, who sang:
“It seems I had to fight my whole life through,
Some gal would giggle and I’d get red
And some guy’d laugh and I’d bust his head”
RETAIL WITH NICK BUBB:
• Saturday’s Press and News (1): As the Brexit drama built up to “Super Saturday” in Parliament, sterling ended the week firm at $1.295, despite talk of an extension/delay, but the front page headline of the FT on Saturday was “Johnson faces fresh hurdle before Brexit high noon in Westminster”. In terms of Retail news, the big story in the Saturday papers was the collapse of the Bonmarche fashion chain into administration, despite its recent takeover by the Philip Day group, although this was only picked up by the Telegraph and the Daily Mail. The Guardian focused instead on the collapse into administration of the privately owned Watts Brothers department store business in Glasgow.
• Saturday’s Press and News (2): The Times noted that the disgraced entrepreneur Luke Johnson, of Patisserie Valerie fame, is thinking of floating his Gail’s bakery chain, whilst the Daily Mail highlighted that WalMart is pressing on with its IPO plans for Asda, after selling off its pension fund liabilities. The “Hero of the Week” in the Daily Mail was Stephen Clarke of WH Smith, after announcing an exciting US acquisition, and various market reports noted that WH Smith got a further boost on Friday from an upgrade from HSBC. The “Director’s Dealing” column in the Daily Mail highlighted the £10m share sale by Simon Wolfson of Next. Finally, the Times had an interesting feature profile of the low-profile boss of Morrisons, Dave Potts (“The “modern Ken Morrisont” who chose the shop-floor over football”), noting that he overcame a troubled childhood in Manchester and that he is looking
• Sunday’s Press and News (1): The confusion over whether the Prime Minister has or hasn’t asked the EU for an extension to Brexit, after the failure of his deal to pass through the House of Commons on Saturday, dominated the front pages of the Sunday papers…In the absence of any clarity over what happens next, there were plenty of Retail stories to distract us, eg the Sunday Times flagged, inter alia, that the food chain Iceland has been hit by the withdrawl of credit insurance to its suppliers, the toy chain The Entertainer has reported strong results for last year and Nigel Oddy is set to take over as the boss of the troubled New Look fashion chain from Alistair McGeorge. The Sunday Times also followed up its story last week that the US sports giant Nike wants to stop supplying small independent stores with a feature article on the UK sports market (“Has Nike become too big for
• Sunday’s Press and News (2): The Mail on Sunday had a plethora of Retail stories, leading with the news that the US fast food chain Wendy’s is planning to open some UK stores next year. The Mail on Sunday also flagged that HMRC is pursuing Online marketplaces like Amazon and eBay for unpaid VAT and that Zara has reported a big slump in its UK profits for last year, whilst it also had a feature interview with the former Sainsbury boss Justin King, in which he railed against the iniquities of “the gig economy” exploited by the likes of Deliveroo and Uber. The Observer had a feature on the growth of Amazon, ahead of its Q3 results in the US on Thursday, and its Business Leader column looked at the decision of Superdry to extend Julian Dunkerton’s tenure as CEO, thundering that “Superdry’s main man has only himself to blame if things don’t improve”. Finally,
• News Flow This Week: While the drama quickens in Westminster, ahead of Oct 31st, the pace of company news slows down this week, but the Travis Perkins Q3 update tomorrow will be interesting, given the warning on Thursday from the Irish-based builder’s merchant Grafton about a recent trading slowdown. And Thursday brings the Shoe Zone pre-close update (plus the Amazon Q3 in the US).