Langton Capital – 2019-10-23 – PREMIUM – WTB, Heineken, EZH, McDonald’s, Just Eat & other:
WTB, Heineken, EZH, McDonald’s, Just Eat & other:
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A DAY IN THE LIFE:
So, it’s now dark in both the mornings and the evenings but do the autumn’s shorter days lead to people working harder or not?
Certainly there’s less point in leaving early to cut the grass and spending hours gazing out at the twilight drizzle isn’t as interesting as might be watching the summer slide by but there’s all that extra effort involved in sourcing, wearing and storing coats, carrying umbrellas, putting your gloves on etc and the darkness hardly lifts the spirits.
But school-day memories die hard and, whilst the summer is associated with the tennis, cricket and lazing on the grass or dodging the bullies (but also unfortunately with exams), the shorter days had a get-back-to-work feel about them and that has lingered.
Anyway, enough of that, three’s work to do. On to the news:
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WHITBREAD – H1 NUMBERS: Following the release of its H1 numbers yesterday, Whitbread hosted a meeting for analysts & our comments are set out below. 23 Oct 2019:
• Numbers are more reliant upon company guidance than might otherwise be the case due to the Costa disposal, start-up losses in Germany etc.
• That said, they were apparently in line with expectations.
• The tone of the update was realistic and not unduly upbeat.
• The shares rose 1% or so in early trading but began to give ground around midday.
• The shares finished the day off around 1.9% (down c80p) at 4123p.
• Whitbread is well-financed and, if anything, under-geared. It is understandably not very keen to gear up too quickly.
• Whitbread reiterated that trading has been challenging. It pointed out that it had added 955 rooms in H1 in the UK alone and turnover went nowhere
• This suggests that either room rate or occupancy had fallen (or both). In either event, REVPAR is down
• The group says ‘the market has weakened’. It first noticed this in Q4 last year. Business is booking later. Visibility is down. Leisure is holding up, but this may change
• Margins are down on the back of cost increases
• Whitbread’s market share will have risen to 12% from 6% between 2010 and 2020
Premier Inn & Restaurants:
• Whilst the UK market is tough (more below), WTB is trying brand extensions (Hub, Zip and now Premier Inn Plus) and it has great hopes for Germany
• Premier Inn Plus is both 1) a good idea and 2) a classic case of facility creep whereby service and prices rise and gaps are created in the market into which competitors (e.g. EZH) can grow
• Whitbread highlights the fact that the provincial market has been noticeably weaker than that in London. WTB is underrepresented in the capital.
• WTB says there is ‘material structural inflation’. Much of this is re wages. The group does not see this abating in the foreseeable future
• Capacity. This is great if it’s your capacity but a major irritant if it is that of a competitor.
• WTB says ‘UK growth [was] held flat due to capacity growth of 5%’. It says London was up at +4.5% but the regions (where most Premier Inns are located) was down 2.0%
• WTB underperformed the market in the UK’s regions. Travelodge has been increasing prices.
• WTB reminded observers that it has high operational leverage – both when revenues rise, but also when they fall. Some 1% in REVPAR is £12m up or down on profits.
• German losses (£5m in H1) are ‘on plan’. Hamburg matured more rapidly than would a comparable UK hotel. Next year should be ‘transformational’. The FY20/21 will still be in loss but the following year should be a profit
• Competitors are still putting capacity on in the UK. Due to the long lead times, this will continue into next year
Balance sheet, cash flow etc.:
• Whitbread says Free Cash Flow (post maintenance capex) remains strong. Conversion is c97% of profits.
• The target for leverage is 3x debt to EBITDA. It is currently 2.3x. That said, the company is not in a rush to spend
• The group has a degree of flexibility as to how, when and whether it spends additional capital
• Sale and leasebacks are somewhat less likely over the near term.
• WTB will sell some, usually smaller, units. There were no targets for either hotel or pub restaurant disposals
Langton Comment – Whitbread:
• The group is slowing its capex. Freeholds are more flexible than are leases. The group has some discretion as to how quickly it builds out its c13,000 room ‘committed pipeline’ and, in the meantime, it has few cashflow or balance sheet problems.
• Trading conditions remain tough. A Brexit deal may change this but, as the rest of the developed world is also slowing, a further reduction in demand is possible.
• The hotel industry has long lead times from the commissioning of a hotel up to the time that it opens its doors. Decisions made by WTB and its competitors five years ago may just be coming to fruition. Hence, it is hardly surprising that capacity will continue to come on into a weakening market.
• Whitbread rightly says that it is taking a decades-long view when it opens a hotel. Shareholders will know this but, as the market does continue to react to shorter term results, WTB’s shares may remain subject to some profit taking.
Langton comment – the cycle:
• We have commented previously re cycles. At the top (a), rate & occupancy is high.
• Occupancy then slips but groups maintain (or even increase) room rates. This holds or even increases REVPAR (b).
• But occupancy continues to slide (c). Some operators then cut rates. Others follow suit (d).
• At the bottom of the cycle, room rates and occupancy are low, REVPAR suffers a double-whammy and capex plans are shelved (e).
• We are currently somewhere between points (b) and (c).
• We accept that the cycle could reverse. But we believe that it is more likely to exhibit a full cycle and go to (d) and (e) before it rallies again.
• This will be influenced but not altogether changed by the outcome of the Brexit process.
• Whitbread seems to agree in that it said at its meeting that confidence in the leisure market, which had held up, was now weaker
GENERAL NEWS – PUBS & RESTAURANTS:
• Just Eat has called on its shareholders to reject a takeover bid from Prosus which valued the company’s shares at a 20% premium to the 594p offered by Takeaway.com. Just Eat responded to the new takeover offer: ‘The board of Just Eat has considered the terms of the Prosus offer and believes that it significantly undervalues Just Eat and its attractive assets and prospects both on a standalone basis and as part of the proposed recommended all-share combination with Takeaway.com’.
• The rival takeover approach by Prosus, that Dutch arm of South Africa’s Naspers, has led some shareholders to suggest that 800p per share could not be unreasonable.
• Chipotle Mexican Grill (the US parent co) reported LfL sales up 11% in Q3 with digital sales up by 87.9% to take 18.3% of total sales. CEO Brian Niccol said ‘we’re pleased with our overall results in the quarter, which reflects further progress on our key strategic initiatives to provide a great guest experience and position Chipotle to deliver above industry growth for many years to come.’
• Chipotle’s Q3 revenue was up 14.6% on the same quarter last year at $1.4 billion. Chipotle has 2,546 outlets. It is pushing into digital, drive-thru restaurants and overseas expansion. Its unit it the UK is currently unprofitable.
• Uber Eats is reported set to move into grocery delivery as it seeks to take further advantage of its delivery network. Uber Eats has struck a deal with Costcutter in a move that will allow 1,700 shops to sell via the delivery company.
• McDonald’s reports Q3 net income down 2% to $1.61bn from $1.64bn a year earlier, facing declining customer traffic in the US. The remodelling of 14,000 stores led to a 2% rise in operating costs to about $3bn.
• McDonald’s CEO, Steve Easterbrook said ‘We’re keenly aware we have to be ahead of these changes, investing, executing and growing with a deep sense of urgency and purpose’.
• Pub is The Hub and Heineken UK have joined forces to launch Last Orders for Loneliness to promote the pub as a natural place for people to meet and interact. David Forde, MD, Heineken UK said ‘pubs are so often the heart of communities and can play a vital role in helping to tackle social isolation.’
• Admiral Taverns has completed the acquisition of 150 tenanted community Star Pubs & Bars sites.
• Heineken Holding N.V. has reported Q3 numbers saying that beer volume rose by +2.3% organically with double digit growth in Asia Pacific. The group says volumes in total grew by +7.4% with double digit growth in Africa, Middle East & Eastern Europe and the Americas.
• Heineken says that its strongest markets in Q3 were Brazil, South Africa, the UK, Nigeria, Romania and Germany. Net profit was €1,667 million for the nine months to date (up 4.4%).
• Several breweries have stated that they are hesitant to expand operations under railway arches despite the introduction of a new tenants’ charter, the Morning Advertiser has reported.
• Stay In A Pub has raised £700k as the group looks to promote pub accommodation. Paul Nunny, founder of the group commented: ‘These are exciting times for the sector with the industry investing heavily in pub accommodation. Gone are the old days of pubs used by the likes of blue collar workers. Pubs today can outshine hotels with their offer of eat, drink and sleep’.
• Pizza Hut USA is testing plant-based sausage toppings.
• Gruppo Montenegro has teamed up with Canadian distributor Mark Anthony Wine and Spirits as the group looks to expand exports.
• Starbucks continues to expand its delivery operation in the US. The entire New York City metro area is now covered including areas in New Jersey, Long Island, and surrounding counties. The program is also expanding to Atlanta, Phoenix, Denver, and Philadelphia. It should be available nationwide by some time next year.
HOLIDAYS & LEISURE TRAVEL:
• Whitbread has drawn attention to the differing trading patterns in London versus the UK’s regions. The former remains strong (where Whitbread is unfortunately underrepresented) but the provinces have seen lower business confidence feed through to reduced business demand and later (or no) bookings.
• The group is adding facilities (facility creep) to extend its brand via Premier Inn Plus. This is to be rolled out to 500 rooms across its estate. At the lower end of the demand curve, PI has developed Hub and now Zip.
• Widening a brand is understandable. The heavy lifting re recognition etc. has been done but facility creep does open up the market to competitors as any business provider will, ultimately, oblige customers to pay for extra services and products.
• WTB continues to believe that the independent market in the UK could shrink by 1pp of the market per annum going forward.
• The group was asked whether it intended to sell its restaurants and replied that there were no plans to do so. Where smaller hotels are disposed, however, any adjacent pub restaurant is also likely to be sold.
• EasyHotel, now 80% plus owned by ICAMAP and EasyGroup, has updated on its pipeline saying that it has now received planning permission for its proposed Paris Charles de Gaulle Airport hotel. The new hotel should open in the 20/21 financial year.
• Tui is adding several new destinations and frequencies from 13 UK airports for next year in its biggest summer programme, as the group looks to capitalise on the collapse of Thomas Cook.
• More evidence of capacity going back on. True, some of TCG’s older aircraft may never make it back into the air (in Europe at least) but the bulk of the capacity that has been ‘removed’ has not in reality been removed at all.
• This could lead operators (so far we have heard from TUI, Jet2 and On the Beach) to put capacity into the market for summer next year. There is very likely to be an overshoot.
• A management letter in 2018 from Thomas Cook auditors EY read ‘The group accounting policy on SDIs [separately disclosed items] also provides, in our view, too much scope for interpretation and potential manipulation.’ Exceptionals at the company amounted to £1.8bn over eight years.
• MPs have gone so far as to suggest that Thomas Cook’s auditors were ‘complicit’ in its collapse.
• According to Sky, Bourne Leisure Group – owner of Butlin’s and Haven Holidays – will be one of the final bidders for Sykes Holiday Cottages. Interest in Sykes has said to have pushed the asking price to over £300m.
• The Foreign and Commonweath Office has lifted its restrictions on flights between the UK and the Egyptian resort of Sharm el-Sheikh.
• HMRC’s inquiry into Airbnb could lead to legal proceedings, according to the company. Last year, Airbnb UK paid tax of £146,059 on profits of £455,076 and a £14.2m turnover. The payments arm had a turnover of $353.7m (£273.2m), but it only made a $1.5m profit and paid tax of $303,823.
• Heathrow Express fares have dropped from £12.50 to £5.50 as the rail link adopts an airline-style yield management system.
• Sports Direct’s Mike Ashley has walked away from a potential deal for Goals Soccer Centres, citing ‘limited and fitful access and co-operation’.
• Snap reports Q3 revenues up 50% yoy to $446m, beating analyst expectations. However the company is forecasting a lower than expected $20m EBITDA for Q4.
• Netflix is offering $2bn in debt to fund its investment in content. Last week’s Netflix Q3 beat expectations with revenues of $5.24bn and EPS of $1.47.
• Television company Banijay wants to acquire Endemol Shine, creator of Masterchef and Peaky Blinders, for £1.7bn. Endemol Shine’s joint owners, Disney and Apollo Global Management, are expected to finalise the deal with Paris-based Banijay in coming days.
FINANCE & ECONOMICS:
• Public sector borrowing in the UK rose last month to £9.4bn, up from £8.8bn in the same month last year. Government borrowing is now up by around 20% in the first half of this financial year on last. Promises made by Sajid Javid and Boris Johnson would add materially to that figure.
• In an economy that is showing negligible growth, ‘turning the page on austerity’ implies either raising taxes for voters or increasing borrowing.
• Sterling down a bit at $1.2867 and €1.1568. Oil up at $59.40. UK 10yr gilt yield down 4bps at 0.71%. World markets mixed.
• Brexit & politics:
o Withdrawal Bill passed for second reading but MPs have rejected the two-day timetable saying that the Commons had longer to scrutinise the Animals in Circuses Bill, which covered a total of 17 animals (total) in the country, including two raccoons.
o Still intent on keeping his fingerprints off any delay, PM Johnson is reported set to push for a general election if the EU proposes a ‘long’ extension.
o Press reports EU President Donald Tusk is to recommend an extension to 31 January. It isn’t clear whether or not no10 would consider that a ‘long’ extension. It is the one that PM Johnson asked for in his letter to the EU on Saturday.
o Closer reading of the Bill is throwing up problems. Brexit Secretary Steve Barclay has admitted that firms in Northern Ireland will have to submit declaration forms for goods heading to the rest of the UK.
o This contradicts earlier suggestions that trade between NI and GB would be ‘unfettered’. The FT suggests ‘there will be more costs, more border checks and more uncertainty for Northern Irish companies trading with England, Scotland and Wales than with Ireland.’
o The favourable treatment for NI has not gone unnoticed by the SNP. The FT suggests that the ‘disintegration of the UK itself’ could be one of the consequences of the ongoing Brexit debacle.
o A YouGov poll in June suggested that the majority of Conservative party members are prepared to let Northern Ireland and Scotland leave the UK to enact Brexit and rescue the Tory Party.
START THE DAY WITH A SONG:
Yesterday’s song was Teen Age Riot by Sonic Youth. Today, who sang:
Will keep us together
We could steal time
Just for one day”
RETAIL WITH NICK BUBB:
• Sports Direct: While the nation tries to work out whether Boris Johnston now wants to have an Election before Brexit, after last night’s defeat in the House of Commons, #MadMike and Sports Direct have issued an extraordinary statement, continuing their unseemly feud with the beleaguered Goals Soccer Centres, insisting that the Board hasn’t given it enough information to pursue its due diligence on a bid: “this leads Sports Direct to conclude that the behaviour of the Goals Board, and its apparent failure to spot and deal with the issues, amounts to incredible incompetence and ignorance, wilful or otherwise, at the very least and potentially far worse…Yet again, the independent shareholders of a UK listed company get wiped out through the skulduggery of others”.
• Retail Sales Watch Part 1: The Retail month of October (the 4 weeks to Oct 26th) is nearly over and the outcome may be boosted by discounting (see the John Lewis figures below) and the more autumnal weather, but we haven’t seen the final word yet on how bad September was on the High Street, given the relatively warm weather and Brexit uncertainty…The wretched Office of National Statistics (ie the ONS or what we mockingly call the “Planet ONS”) reported last Thursday that non-seasonally adjusted total Retail Sales by value were up by 3.6% last month (ex-petrol), helped by unusually good growth from Small Retailers…But the BRC-KPMG measure of gross sales (which focuses on Large Retailers, yet doesn’t capture the likes of Amazon) was down by 1.3% in gross terms (down 1.7% LFL). So, who was right? The ONS? Or the BRC?
• Retail Sales Watch Part 2: Well, the consultancy group, Retail Economics (RE), which was founded by Richard Lim (who used to run the monthly BRC-KPMG Retail Sales survey) has just come out with its own detailed overview of September and their estimate is that gross Retail sales rose in value by only 0.7% last month, year-on-year (non-seasonally adjusted, ex-petrol), which is nearer the BRC-KPMG than the ONS view of things, notwithstanding the differing pictures of Online sales growth in the two rival surveys. RE estimate that Food sales growth was a relatively strong 2.8% last month, but that Non-Food sales were down by 0.9% overall (with DIY and Gardening down by 4.5%, but with Electricals up by 1.2%, at the two extremes). Interestingly, RE highlighted the Brexit split of consumer confidence, with the fact that Leavers are significantly more optimistic in their spending habits than
• Waitrose Watch: After a brief pick-up in the previous week, trading at Waitrose fell back again last week, as yesterday morning’s JLP weekly overview, for w/e Oct 19th, revealed that Waitrose saw a dip of 1.2% in gross ex-petrol sales, on the back of the very wet weather. That left the last 38 weeks still down by 0.7% gross cumulatively, but store space is fractionally down (after the sale of five Waitrose stores in June and more disposals this month), so that the LFL sales picture won’t look as bad (the LFL sales dip was only 0.4% in H1).
• John Lewis Trading Watch: The wet weather helped John Lewis last week, but it was again more discounting that pushed overall gross sales in w/e Oct 19th up by 8.5%, on the back of the “20% off Sale” promotion in Fashion…In terms of sales mix, Home sales were down by 13.8% gross, but Fashion/Beauty sales were up by 32.1% gross and Electricals were up by 3.7% gross. The new Cheltenham store opened last October is now LFL, so there is little new space in the figures, but overall John Lewis LFL sales, however, are down by nearly 1.5% over the last 38 weeks, despite the jump in the last three weeks: gross sales are now running down by 0.7% cumulatively (the H1 LFL sales fall was 2.3%, with Online sales “broadly flat”).
• News Flow This Week: There is not much more Retail company news scheduled for this week, but tomorrow brings the Shoe Zone pre-close update (plus the Amazon Q3 in the US), whilst the CBI Distributive Trades survey for “October” is out on Friday morning.