Langton Capital – 2019-10-24 – PREMIUM – Hawksmoor, C&C, Pat Val, Thomas Cook etc.:
Hawksmoor, C&C, Pat Val, Thomas Cook etc.:
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A DAY IN THE LIFE:
Bit rushed this morning but just a note on 21st century Pavlov’s dogs reactions; how do you feel when the battery light on your laptop starts flashing and you’ve left your charger at home?
Yes, I know.
Had better rush. On to the news:
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PRIVATE COMPANY RESULTS: Underdog, which trades as the Hawksmoor chain of steak restaurants, has reported numbers to December to Companies’ House. 24 Oct 2019:
• Hawksmoor has a good rep. It was founded in 2006. But though they stayed on with the company, founders Huw Gott and Will Beckett sold a chunk of the business to Graphite Capital. Under Graphite, the capital structure of the business has changed (to that of a PE model) and expansion (for good or ill) has been accelerated.
• As mentioned, Hawksmoor is perceived well. It was one of the first ‘better steak’ companies that entered to compete with the rather tired Gaucho Grill. Started 2006. Second site 2010. This is slow but steady going.
• Things have accelerated since but there have been some false steps. In addition, the company targets a high-spending customer and trade may at some point be sensitive to economic conditions.
• Hawksmoor (Underdog Group no.08542386) produces quite full accounts. Latest are to Dec 18. Tone is positive. It refers to higher revenues, EBITDA and branch numbers. It is opening in New York as its first overseas venture. Slight red flag there. There is ‘no ultimate controlling party’.
• The latter comment is a bit odd as Graphite ‘own’ it. There should be no mystery here as the eight (yes eight) classes of equity are all laid bare on the Companies House website. We just didn’t have time to loo.
• A glance at note 14 to the accounts shows that the 8 classes of ordinary shares are equal in terms of capital but have different voting rights. This is not unusual in a PE situation.
A look at the numbers:
• Whilst EBITDA is positive & rising for Hawksmoor, there are PAT losses (of £7.8m in FY17 declining to a loss of £5.1m in FY18. A closer look suggests this is partly down to interest charges (£2.2m) and goodwill amortisation (£3.9m). Both warrant a closer look. Goodwill charges will cease as it has now been completely written off. See comment on the liquidated subsidiaries below.
• Interest is due to the charge on £42.4m of outstanding fixed rate loan notes, presumably to shareholders.
• again, this is not unusual in this situation. Trading profits could be a better measure of success and they rose from £2.3m to £2.6m. Not brilliant margin, however, on £47m of turnover.
The balance sheet:
• There are accumulated losses of £39m. Shareholders’ funds are a negative £38m.
• Under ‘normal’ circumstances, this would imply Going Concern issues unless the bond holders are very supportive (see below).
• There is cash of £5.3m, bank loans of £7.9m and Loan Notes of £42.4m to give net debt of £45.0m (2017: £44.7m).
• We can’t see who the Loan Notes are owed to – but it is very likely to be Graphite, other shareholders and the directors. The auditors should and would be very twitchy if it were otherwise.
• We can see that the bank debt is due within 2-5yrs. It was rescheduled during the year. The Loan Notes are ‘redeemable on 26 November 2019’. That’s an obvious issue.
Going concern issues, refinancing etc.:
• The directors have signed off saying they ‘have every expectation that the other loans due for repayment on 29th November 2019 will either be refinanced or an extension made to the maturity date following early discussions with the loan note holders.’
• They have therefore used the Going Concern basis.
• The directors’ report was signed on 30 September. One would have thought they would have had a better idea on the Loan Note by then? You could probably fit all the board and its bond and shareholders in a telephone box.
• The auditors have signed off on this. This is important and they should not have done it lightly. The auditor is Deloitte.
• The directors add ‘all planned capital expenditure is uncommitted, which allows the Group to adapt accordingly to short-term liquidity demands.’
• There have been no changes to directors or auditors during the year.
• Deloitte is sound, there has been no change to directors in the year.
• The company may have gone too far (see liquidations) too fast and New York may be an issue but there is not a sea of red flags.
• At the year end, the company had a loan out to ‘directors’ of £146k. This is accruing interest at 4%. This doesn’t look like a big deal.
Post balance sheet events:
• The company says Foxlow Restaurants (no.08552600) and Dinish Restaurants (no.05383868) were put into CVAs in Sept 2019 as they ‘ceased to be economically viable’.
• The former closed 2 restaurants & the latter had no income. The two companies lost £3m between them in 2018. Both companies are now in liquidation.
• Re the above, the losses will disappear in FY19 but there are likely to be exceptional costs.
• Interestingly, Foxlow’s accounts show that the directors had made the decision to shut the business and had prepared the accounts ‘other than on a going concern basis’.
• We could investigate this further but it’s a question of ‘where do you stop?’
• T&C’s apply meaning that this was a 2hr desktop analysis rather than a 2wk deep delve.
• We would suggest that, whilst the trading comments are upbeat but there are losses, the balance sheet isn’t brilliant.
• There is a (probably internal) refinancing coming and the group has had to liquidate two loss-making subsidiaries. The halo has slipped a bit. There will be exceptional charges in FY19.
• The product, people & sites are good, but prices necessarily charged are high. New York is a bit of a leap.
• Please do not forward this analysis.
GENERAL NEWS – PUBS & RESTAURANTS:
• C&C reports H1 numbers to end-August saying revenues rose 13.5% to €874.9m with adjusted EBITDA up 8% at €71.5m.
• C&C reports adjusted diluted EPS up by 5.8% at 16.3c with a H1 dividend per share of 5.5c announced. The group has reduced net debt from €344m to €255m.
• C&C CEO Stephen Glancey reports ‘we are pleased with the progress of the business over the first half of the financial year with revenue growth of +13.5% and operating profits ahead by +9.2%.’
• Mr Glancey continues ‘last year was exceptional with a World Cup and a hot summer boosting demand. Despite challenging year-on-year comparatives we have delivered a resilient revenue performance in our core brands.’ He says ‘despite the economic uncertainties linked to macro and political issues, current trading is in line with expectations.’
• C&C concludes ‘we remain on track to deliver double digit EPS growth in FY2020 and on our steady state forward earnings targets. We have significant balance sheet strength to support our targeted growth range.’
• KPMG has shown that there are at least some winners coming out of the Pat Val fraud, dishonesty and incompetence debacle as the accountants have netted some £2.3m for work carried out on winding down the company after shareholders lost all their money and many employees lost their jobs.
• Partners at KPMG charge themselves out at £875 per hour. KPMG has said that it should not be involved in any moves to sue Pat Val or its former directors due to a ‘conflict of interest’.
• Patisserie Valerie is now to be liquidated. The FT reports that ‘creditors to the failed chain, which include its former chairman Luke Johnson and HM Revenue & Customs, have so far received none of the money they are owed.’ Mr Johnson, who has resumed his business advice column in the Sunday Times, is to benefit from the sale of Elegant Hotels to Marriott. There is also a suggestion that the sale of Bread Holdings (the owner of Gail’s bakery shops) is to be revived. See our comments in earlier Premium Email as to the potential valuation.
• From the ashes. KPMG is to be paid, which leaves the largest ‘asset’ left in the company the nascent legal action against Grant Thornton. The FT reports that FRP, which has been hired by creditors to pursue claims will ‘consider whether to launch legal action against Patisserie Valerie’s former directors, officers and advisers.’ Former chairman Luke Johnson is amongst the creditors. The advisors will have to keep an eye on potential conflicts of interest there. The company has suggested that the misrepresentation of its figures went back prior to the group’s IPO, at which a number of shareholders and directors took tens of millions of pounds from incoming shareholders. The SFO and accountancy bodies are still investigating the situation.
• Rosa’s Thai Café is due to open in open Spinningfields, Manchester. It is taking a site vacated by Handmade Burger Company.
• Shares in Beyond Meat have recently been targeted by short sellers in the US.
• The BRC has said that 85,000 jobs have been lost on the High Street over the last year. It is calling upon the government to overhaul the system of business rates and the apprenticeship levy.
• Fuller, Smith & Turner has acquired the seven site strong Cotswolds Inns & Hotels Ltd in a deal valued at £40m. Fuller’s Chief Executive Simon Emeny commented: ‘The inns and hotels being acquired are all iconic, character properties in sought-after locations in the Cotswolds. They will further enhance our existing portfolio of premium hotel accommodation, adding 201 stylish bedrooms’.
• Sky’s ‘state of the nation’ poll has found that ‘more than a third of voters are deeply pessimistic about the economy and their own finances.’ This may be influenced by their view of Brexit but it is worth noting that only 11% of respondents thought their financial position would actually improve in the next 12mths.
• Whitbread Tuesday said that business confidence had impacted business bookings fairly rapidly. It said that consumer confidence had held up better but added that there were signs of it coming under downward pressure.
• Sky says 59% of respondents believe that the general economic situation in the UK has changed for the worse in the last 12 months, against just 13% who say it has got better.
• Wet sales have recently been outperforming food sales. This may continue for some time, particularly if consumers retrench somewhat. Wet sales also generate higher margins (less labour involved), thus providing operators with something of a hedge against rising wage costs.
• Yo! Sushi is trialing an express format restaurant that will target customers on the go.
• William Grant & Sons has released its UK market report finding that 64% of UK consumers agree it is ‘extremely important’ to seek trust and transparency from brands.
• Lidl is launching a two-day wine pop-up blind tasting in London, Manchester and Glasgow next month. The test will comprise of eight bottles and will and aims to ‘put snobbery aside’ as consumers judge wines.
• John Colley, the new boss at Majestic has told Drinks Business that the group aims to get back to what it does best by backing classic wines. The group’s new range will feature many household favourites, with Mr. Colley stating: ‘“These are things our customers like and our colleagues like, so I think we’ll be well positioned going forward’.
• Browning West has built up a 5.33% stake in Domino’s Pizza, worth £70m. The move could lead to demands for a major change of direction at Domino’s and will be another major blow for boss David Wild.
• Oakman Inns launches Ashmore Inns, a new trading division responsible for managing pubs which are part of family estates.
• Impossible Foods has filed an application with the European Food Safety Authority to bring its plant-based burgers to Europe.
• Project Cafe USA 2020, Allegra World Coffee Portal’s market report on US coffee shop segment has found that the market grew by 3.3% to $47.5bn, reaching a total of 37274 outlets.
• The Project Cafe USA 2020 report commented that Starbucks remains the largest coffee chain in the US, with a 40% share of the total coffee shop market with 14,875 outlets and adding 585 net new stores over the last 12 months.
• In the US, Amazon Counter’s will expand to reach thousands more locations after a launching in 100 Rite Aid locations this summer. Amazon Counter is the online retailer’s in-store pickup option.
HOLIDAYS & LEISURE TRAVEL:
• TUI shares yesterday recovered a little of the ground that they lost on Tuesday when the market reacted to broker suggestions that the company would struggle to make estimates. Analysts suggested that the fall out from the grounding of the Boeing 737 Max would continue to weigh on earnings.
• This is likely the case but, in the short term, the impact could be outweighed by first the benefit to margin seen after the demise of Thomas Cook but secondly also perhaps the impact of the substantial capacity that is being put onto the market for next year in the anticipation of higher demand.
• When tour operators put on capacity, they will shift it. Even if it means discounting.
• EasyHotel yesterday said that it had signed a 20-year exclusive franchise agreement to develop three hotels in Tel Aviv with a total of 667 rooms to open by late 2022.’ CEO Guy Parsons said he was ‘pleased to report further progress against our strategy as we continue to expand our network of super budget hotels in city-centre locations, both in the UK and across international markets.’
• Following the collapse of Thomas Cook, Virgin Atlantic plans to make Manchester airport a network hub for the airline. More and more and more capacity going back on.
• Diana Holland, assistant general secretary of Unite, told the Business, Energy and Industrial Strategy select committee that Thomas Cook’s failure ‘ensured’ the loss of 4,000 jobs.
• STR reports European hotel occupancy up 0.6% yoy to 79.1% in Q3, with ADR up 1.1% to €121.36 and RevPAR up 1.7% to €95.95.
• Hilton Worldwide has reported Q3 numbers saying that it earned an adjusted 113c in Q3, up 13% on the same quarter last year. Hilton reports that system-wide REVPAR rose by 0.4% with the development pipeline rising to 379k rooms.
• Hilton CEO Christopher Nassetta reports ‘despite the overall slowing macro environment, we are pleased to deliver strong bottom-line results for the third quarter. Adjusted EBITDA was towards the high end of guidance and diluted EPS, adjusted for special items, exceeded our expectations, driven by strong net unit growth. Additionally, we continue to achieve market share gains across all brands and regions year to date.’
• The Epicurean Club has commissioned a survey by YouGov that suggests that UK tourism industry will receive a boost from holidaying Brits as a result of Brexit travel concerns.
• The poll suggests some 41% of people will be more likely to consider a holiday in the UK post-Brexit. Only 19% say that Brexit will not affect their thoughts on travel.
• Eurostar broke monthly and quarterly records in the quarter to end-September with a 4% increase in traffic numbers to 3.1m passengers. More than 8.4m passengers have travelled through the Channel Tunnel in the first 9mths of this year.
• Jet2.com and Jet2CityBreaks’ winter 2020 programme will feature 22% more direct flights to New York, offering 6,000 seats to the American city. More evidence that capacity is coming back into the market.
• Jet2holidays data suggests an increasing proportion of UK consumers are opting for more flexible package holidays outside the traditional seven to 14-night duration. The number of bookings for between 8-13 nights has risen to 24% compared to just 15% a decade ago.
• HMRC will probe Airbnb over its tax payments, which may lead to legal proceedings.
• Manny Fontenla-Novoa, a former boss of Thomas Cook between 2003 to 2011, has denied saddling the firm with a debt pile that ultimately killed the business. Mr Fontenla-Novoa said the cost of servicing the Thomas Cook debt pile was ‘manageable’ during his time in charge but the company’s position was complicated by events, including the 2008 financial crisis.
• Hays Travel purchased Thomas Cook’s 555 shops for just over £6m, according to the latest hearing of the Business, Energy and Industrial Strategy Committee today.
• The London Electric Vehicle Company’s (LEVC) 2,450 licensed hybrid-electric cabs in the capital are set to be joined by ‘The Dynamo’ – a fully-electric taxi converted from a Nissan electric van in a Coventry factory. The mayor has hailed Dynamo’s launch for helping clean up the capital’s polluted air.
• Tesla shares bounced sharply yesterday to rise to their highest levels since February as the group told investors that it made a profit of $143m for the three months to 30 September.
FINANCE & ECONOMICS:
• Sterling higher at $1.2916 and €1.1597. Oil up at $60.90. UK 10yr gilt yield down 3bps at 0.68%. World markets higher yesterday, Far East up today.
• Brexit & politics:
o PM Boris Johnson met with Labour leader Jeremy Corbyn yesterday in the wake of the Commons’ rejection of Mr Johnson’s proposed Brexit timetable.
o No10 is said to be still considering its response after its latest defeat. Noises from Europe suggest that the offer of a delay will be forthcoming.
o Ireland’s foreign minister has said that a flexible extension may be the most appropriate next step.
o Richard Branson has again backed a second Brexit referendum saying that such a poll would lead to the UK staying in the European Union.
o PM Johnson may go for an election via a one-line General Election Bill, which would only need majority (rather than the two thirds majority needed under the Fixed Term Parliament Act.
o However, his Bill could be amended, for example to give the vote to 16-18 year olds.
START THE DAY WITH A SONG:
Yesterday’s song was Heroes by David Bowie. Today, who sang:
“Can I take you to a restaurant
That’s got glass tables
You can watch yourself
While you are eating.”
RETAIL WITH NICK BUBB:
• Shoe Zone: The discount footwear retailer Shoe Zone warned at the end of August that the second half of its financial year (the 53 weeks to Oct 5th) had been challenging, but today’s pre-close update flags that the overall outcome has been no worse than it expected and that its new so-called “Big Box” stores are trading well. There is no mention of “the weather”, but the autumnal conditions of late must have been good for business: Anthony Smith, the new Chief Executive, says “Shoe Zone has ended this difficult year in line with our revised expectations. It is early days in the new financial year but we have been encouraged by the performance so far”.
• Sports Direct: The extraordinary statement from Sports Direct at 7am yesterday morning about its silly feud with the beleaguered Goals Soccer Centres wasn’t the only announcement the company made during the day, as it put out a one-line statement at 3pm to say that it had at last appointed new auditors, in the form of RSM (the mid-tier accountants best known as co-sponsors of the monthly Peach Tracker survey of pub and restaurant sales). Given the fuss there’s been about the fact that none of the big accountants wanted to touch the company with a bargepole, as the saying goes, you’d have thought that #MadMike would have wanted to say a few words about how he looked forward to working with the new auditors on improving corporate governance and shareholder value etc etc, but, unaccountably, he declined the opportunity…
• Next: We flagged yesterday that John Lewis and others have driven better sales in October through a big step-up in discounting, but Next don’t play that game, so it’s possible that Next may have missed out a bit, notwithstanding the help from more autumnal weather. Fortunately, ahead of the Q3 update next Wednesday, Next softened the market up for weak sales in this period, when it reported the interims on Sept 19th. And we spotted in the latest monthly review of fashion retailer’s marketing and merchandising by the pricing experts Retailmap that Next has not been sitting on its hands in the meantime, as it is now selling Adidas branded sportswear in its stores and is also actively promoting instore its “click and collect” service for Amazon.
• News Flow This Week: The Amazon Q3 is out in the US tonight, whilst the CBI Distributive Trades survey for “October” is published tomorrow morning.