Langton Capital – 2019-11-12 – PREMIUM – Debt, Britvic, Pizza Express, Gregg’s, D&D etc.:
Debt, Britvic, Pizza Express, Gregg’s, D&D etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
Having heard somewhere that the link between the ability to delay gratification and intelligence is both strong and positively correlated, we’ve been trying it out on our dog and, perhaps unsurprisingly, it’s confirmed that he is irredeemably thick.
Because, when offered the choice between 5,000 calories (and a very upset stomach) now and say 3,000 calories a day for the next two days, he’ll go for the gut-bursting option every time. And then he’ll sleep, break wind, lick himself unpleasantly and ignore you completely no matter how hard you try to educate him to moderate his behaviour.
Which kind of is, what it is. On to the news:
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FROM THE ARCHIVES: Back in June 2007, Langton began to question valuations. We were pretty much dismissed out of hand by fee-soaked advisers, Mr Tchenguiz’s acolytes, Icelandic raiders etc. Here’s what we said: 12 Nov 2019:
o In 2007, it had been 15yrs since the last whiff of a recession.
o Money was available, balance sheets had to be ‘efficient’ (i.e. stretched) and the devil (or rather a corporate raider) took the hindmost.
o Property values had soared, office values were through the roof and hotels were being described as ‘office blocks with beds’ (no, really)
o Pub companies were property plays and opco/propcos were all the rage.
o You could borrow 3-5x on the opco, perhaps 8-10x on the propco and Bob’s your uncle, free money
o Share buybacks were common, debt was king and cash was for wimps
Faint rumbles of discontent:
• Langton’s eyes were opened by a banker, no less, who stated that ‘risk was being mispriced’. We looked at it and concluded, perhaps, that it wasn’t being priced at all
• HBOS (much too little, much too late) said in mid-2007 that it was going to take a firmer line with its lending
• But actions (as always) spoke louder than words and debt was readily available
Langton comments at the time:
• We said: ‘the allegation that we’ve spotted twenty of the last two recessions is ill-founded.’
• We conceded that it ‘may be different this time, perhaps that wall of money really does exist, the banks have learned their lesson, sheep-like behaviour is a thing of the past but perhaps not…’
• We said ‘private equity does have a lot of money. It is paying high prices for assets but check the business model. They don’t get paid if they don’t drawdown cash and they don’t draw down cash unless they have something to spend it on…’
• We should have mentioned Charlie Munger’s views on incentives.
• We accepted that debt syndication spread risk. But that isn’t always a good thing.
• We said that ‘arguably, the only thing worse than one exposed lender who has no alternative but to work through a problem is the 223 would-be lenders mentioned in connection with one deal…all of whom will be aware that, if the going gets tough, the first one out of them out of the exit is the one most likely to avoid a bad debt.’
• We looked at sellers of assets and buyers of assets. We concluded that the sellers seemed to be more savvy.
• We said ‘the valuation benchmark is continually being raised with…the price tags of class companies…being used as a read-across in valuing any old cobbled-together offering.’
• We said ‘bad deals are funded at 25bps above good deals and that doesn’t sound right.’
• At the time, property yields were rising. We suggested this could be negative for valuations.
• Admittedly a bit pompous but we said ‘financial engineering…is all well and good but it shouldn’t be and can’t be seen as an alternative to true business building and brand development.’
• We said ‘a reality check is in order’.
• we commented that, for asset-backed companies, ‘four, five or six times debt to EBITDA is fine so long as 1) interest rates don’t go up and 2) EBITDA doesn’t go down.’
• In short order, both of these things happened. We suggested that low barriers to entry were a risk to high EBITDA / sales margins.
• We were a bit early and we pointed out that ‘Cassandra was embittered, probably barmy and was ultimately murdered.’
• We said we didn’t want to cry wolf too often so we would ‘leave it at that for the moment.’
What happened in context:
• We were right about risk not being correctly priced but, arguably, the market knew that only too well.
• It was driven, ultimately by the phenomenon that Chuck Prince, former Citi boss knew only too well. Namely that, when the music’s playing, you’ve got to dance.
GENERAL NEWS – PUBS & RESTAURANTS:
• PizzaExpress bondholders speaking for around 70% of the group’s senior secured bonds have said that they would be willing to put more money into the company. The FT quotes credit agency S&P as saying that a ‘distressed exchange or a debt restructuring appears to be inevitable within six months.’ The have recently downgraded Pizza Express’s debt saying there is ‘a material refinancing risk on its capital structure, reflected by unsustainable leverage levels and negligible cash flow generation’.
• Two strong kebab chain BabaBoom is fund-raising on Seedrs. The company, run by former Nando’s staffer Eve Bugler, is valued at around £3m pre-new money and is looking to raise c£400k. The valuation represents 2x run-rate sales or 10x ‘maturity-level’ EBITDA for the two sites that are currently open. The group is targeting £40m of revenue by the end of 2024. Current investors include David Niven, ex-global CEO of Nando’s and Eren Ali, the founder of Las Iguanas alongside Mark Selby of Wahaca and Peter Borg Neal of Oakman Inns.
• The number of pubs and bars filing for insolvency has increased to its highest level in four years, according to data from UHY Hacker Young, with 530 licensed venues closing for business.
• The French bakery and patisserie chain Paul has appointed Mark Hilton as its new Chief Executive Officer.
• The Mexican chain Barburrito has sold two of its London sites as the group focuses on airport expansions.
• Burger King has teamed up with Unilever to supply plant-based burgers across its 2,500 outlets in Europe. David Shear, who heads Burger King in Europe, Middle East and Africa commented: ‘There are a wide variety of players in this space and we looked at all of them before choosing this as the best option in terms of taste and quality. We’re so excited to launch in Europe where demand for plant-based foods has been particularly strong’.
• An outbreak of swine fever in Indonesia caused the death of 4000 pigs on November 6th. Fadjar Sumping Tjatur Rassa, the agriculture ministry’s director of animal health commented: ‘Clinical symptoms and laboratory test results point to African swine fever, but there are also samples that are positive for hog cholera’.
• Greggs faces price rises as a result of African swine flu, despite this pressure the sausage roll maker has seen its share price increase 17% after it upped profit forecasts.
• Alibaba has seen sales on its annual Singles’ Day exceed $30bn, putting the event on track to set a record in its 11th year.
• Panther Partners, which owns D&D London and a number of other restaurants either 100% or as a JV across the world, has reported numbers for the year to end-March 2019 to Companies’ House.
• Panther Partners says the ‘group continued to grow during the financial year despite a challenging macroeconomic environment’. Revenues rose by 14% to £144.7m with EBITDA up 11.7% at £12.8m. After charging £4.9m on its loan notes (the company has a Private Equity ownership structure) and £7.7m for the amortisation of intangible assets and depreciation, the group recorded a statutory loss of £2.2m (2018: loss £5.8m). Panther Partners has accumulated losses now of £25.8m and negative shareholders’ funds of £25.5m.
• Britvic has announced that it has ‘entered into exclusive discussions with Refresco over the potential sale by Britvic of its three juice manufacturing sites in France, its related private label juice business, and the Fruité brand.’
• BVIC says ‘the proposed sale is subject to a consultation process with the relevant employee representatives, which has now been initiated, and also subject to competition clearance by the French Competition Authority. Britvic will retain ownership of the Pressade and Fruit Shoot brands, which would be manufactured by Refresco as part of a long-term partner arrangement.’
• BVIC says ‘the value of the transaction is not material and would result in a modest impact on adjusted EBIT. The transaction would be expected to complete in Spring 2020.’
• Premier Foods has reported H1 numbers saying that it has had a ‘strong first half with growth ahead of the market and increased debt reduction.’
• BigDish has announced the appointment Tom Sumner as its new CEO.
• Thunderbird the premium fried chicken concept by Trispan will appoint Paul Gilchrist as CEO by the end of the year.
• The BBPA has released new guidance for pubs, titled ‘An Open Welcome: Making your pub more accessible for customers’, which will advise tenants on how to make their venues as welcoming as possible.
• The founder of 26 Grains at Neal’s Yard, Alex Hely-Huchinson is set to open a new venture called Stoney Street in the heart of central London at Borough Market.
• Business advisers Alix Partners has commented on the rapid growth of online delivery apps in the UK saying that it has left many restaurants wondering how best to work with them ‘and beat the type of disruption that has decimated other industries.’ Alix Partners warns that both doing nothing and jumping in without a plan can be ‘disastrous to sales, operations and reputation.’
• Alix Partners says that changing technology has allowed delivery apps to place themselves between the customer and restaurants. This is potentially damaging as restaurants run the risk of losing control of – or even contact with – their ultimate customer and they may find themselves disaggregated from the transaction if the delivery company can find a cheaper source of product.
• Tails Cocktails has suggested that customers are unwilling to wait indeterminate periods of time for cocktails saying that they will leave one bar and move to another if they are kept waiting for too long.
• Founder of Tails Cocktails Nick Wall told the MA ‘our research shows pubs and bars in the UK are losing customers due to long queues, driven by the time taken to prepare cocktails. In fact, we’ve found that over a quarter of drinkers have revealed they have left a bar to go to another venue because of the waiting time.’
• Coca Cola in the US is launching a flavoured sparkling water drink called Aha. The drink, which will hit the market in 2020, will come in eight different flavours.
• Keurig Dr Pepper has reported sales up 5.1% to $2.87 billion during its third quarter. Coffee sales grew by 1.1%. Chairman and CEO Bob Gamgort comments ‘KDP’s third quarter results continued to track well with the ambitious long-term targets we established nearly two years ago.’ Mr Gamgort says ‘our underlying net sales growth in the quarter accelerated to 3.1%, with balanced contribution from volume/mix and pricing. Healthy underlying growth in all four segments, combined with margin expansion, enabled strong earnings growth, cash generation and continued debt reduction.’
• Managed pub company Mosaic has completed on its 29th and 30th sites, having acquired the leasehold interests in The Lockside Lounge in Camden last week and The Sterling at St Mary Axe (The Gherkin) yesterday.
• Further closures on the High Street as bankers TSB are reported to be considering closing up to 100 of their 544 branches.
HOLIDAYS & LEISURE TRAVEL:
• Heathrow reported its busiest every October last month helped by the number of Rugby World Cup fans flying to Japan. The airport dealt with some 6.9 million passengers on the month. Heathrow CEO John Holland-Kaye comments ‘Heathrow continues to deliver for the economy, but we are also making progress on tackling the biggest issue of our time – climate change – by decarbonising the global aviation sector.’
• Gear4music has reported H1 numbers saying that revenues rose 16% to £49.4m with EBITDA up from £0.7m to £2.0m. The group is reporting a net loss of £0.1m versus a loss of £0.4m in the same period last year.
• G4M CEO Andrew Wass says ‘this has been an important period of balancing sales growth with our primary objective of improving gross margins and profitability, and I am pleased to report tangible evidence that we are making good progress in achieving that objective.’ Mr Wass says ‘having appropriately reconfigured the business, we now expect gross margins to be higher and revenues to be lower than previous guidance, reflecting our focus this year on building a sustainable platform for growth in all areas.’
• The company concludes ‘we believe that this is the right strategy for the delivery of long-term shareholder value and we remain confident that the business is well-positioned to trade in line with our full year EBITDA expectations.’
FINANCE & ECONOMICS:
• The ONS reports that the UK economy grew by 0.3% in Q3 this year meaning that a technical recession has been averted as, following the decline in activity in Q2, there were not two consecutive quarters of decline.
• Growth for the year to end-September came in at 1.0%, the lowest level since 2010. Sajid Javid said the numbers were ‘solid’.
• The NIESR says that ‘recent surveys suggest that private sector output was flat in October. Nevertheless, we are expecting some growth in public sector output and so are forecasting growth of 0.2 per cent in the fourth quarter.’
• Sterling higher at $1.2864 and €1.1656. Oil up at $62.47. UK 10yr gilt yield up 2bps at 0.81%. World markets lower in Europe yesterday but mixed in North America. Far East higher in Tuesday trade.
• The Resolution Foundation has said that people are working more because they feel poorer.
• Politics & Brexit:
o The Brexit Party’s decision not to field MPs against sitting Tory MPs should help the Tory Party retain seats.
o Nigel Farage says that Brexit is in peril.
o An opinion poll conducted by ICM for Reuters shows Tory support rising to 39% with support for the Labour Party holding steady at 31%. The Lib Dems are at 15% and the Brexit Party at 8%.
o Former US presidential hopeful Hillary Clinton has told the BBC that the decision not to publish a report on alleged Russian interference in UK politics until after the General Election is ‘inexplicable and shameful’.
START THE DAY WITH A SONG:
Yesterday’s song was Lovecats by The Cure, today who sang:
Well you’re built like a car,
You’ve got a hub cap diamond star halo
You’re built like a car, oh yeah
RETAIL WITH NICK BUBB:
B&M: Today’s interims from the discount chain B&M (which, lest we forget, is capitalised at as much as £3.8bn, just ahead of M&S) are pretty mixed, with overall adjusted PBT of £96m down by 3% because of unexpectedly big losses in the German business, Jawoll, but the core UK business is strong, with EBITDA up by c14% on the back of useful 3.7% LFL sales growth. The recent French acquisition seems to be going OK, but the big news, however, is that the German business, which was only bought back in March 2014, has been written-down and put up for “strategic review” and the focus of the 8.30am analysts meeting is likely to be on how quickly B&M can cut their losses in Germany and what lessons have been learnt from this setback.
News Flow This Week: The latest Kantar/Nielsen grocery sales figures (for the 4/12 weeks to Nov 2nd/3rd) are out at 8am today. After the resilient interims from their rival Land Secs today, Tomorrow brings the British Land interims. Then Thursday brings the Burberry interims, the Card Factory trading update, the ONS Retail Sales for October, the DFS AGM and the Walmart/Asda Q3 results.