Langton Capital – 2019-11-19 – EI Group, CVAs, restaurant losses, TCG & other:
EI Group, CVAs, restaurant losses, TCG & other:
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A DAY IN THE LIFE:
Trying to ‘help’ our daughter with her maths homework reminded me that I never was very good with all of that ‘two negatives make a positive’ but ‘adding a negative to a negative makes it bigger’ sort of stuff.
I mean, I can get it when I really try but it’s rather an effort.
Still, relating it to the real world, where one negative apple can spoil the whole barrel, can make it easier to understand because, for example a ‘well-spoken, highly-educated, lying charmer’ is made into a negative by the presence of just that one word and a ‘dedicated, relentless, iconic sociopath’ ditto.
And surely it’s better to have a bunch of moronic criminals than several ‘criminal geniuses’ isn’t it? Unfortunately, having been the victim of an ID theft and a few episodes of credit-card cloning recently, Langton can confirm that they don’t all come wearing masks, hooped jumpers and carrying bags marked ‘swag’ these days. On to the news:
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CAN’T SEE THE WOOD FOR THE TREES? It’s tough to retain perspective when companies are reporting left and right but the number of restructurings, CVAs, branch closures etc seems to be trending upwards. 19 Nov 2019:
• We’ve recently seen numbers from GBK, the collapse of Ceviche, further Pizza Express refinancing rumours and the news that Chilango has appointed advisors to help it to restructure its debts.
• Before that, the collapses of Jamie’s Italian and Patisserie Valerie, alongside countless CVAs, reminded us that trading on the High Street is somewhat challenged.
• But often hard news isn’t as timely as you would like it to be.
• Companies do not need to report numbers to Companies’ House until 9mths after their year ends. Hence some data announced will relate to events that took place 21mths earlier.
• Confusing matters a little, larger private companies may announce sales and perhaps EBITDA numbers months before they lodge their accounts, and these may give a more positive impression than is sometimes justified.
• Against this background, it is not as easy as it might be to judge just what is the current mood of the market although (see above) UHY Hacker Young does say that the UK’s 100 largest restaurants are currently in loss
It doesn’t feel very good out there:
• Putting the lack of immediacy to one side, there are some worrying creaking & groaning noises coming from a few business models
• Debt is a problem for some, sluggish sales are an issue for many
• And debt, as many operators are finding out, isn’t like equity in that 1) it really, really does demand a return and 2) it isn’t forever
• Hence some players may be able to run for a while with the equivalent of a home-owner’s negative equity but, when they want to move house or refinance their debt, they may be in all kinds of trouble.
• Finance providers will have more access to information than does the wider market. Hence it is telling when a company’s debt is trading at 25p or 20p in the pound yet it is still making halfway positive comments about trading
• Hence statements re sales should perhaps be treated with caution. We would they may not tell the whole story.
Sales are vanity, profit is sanity:
• Nothing’s every quite that straightforward but, in a market where delivery and discounting are allowing some companies to increase sales – but at a material cost to margins and at a risk to their business models – sales can’t be looked at in isolation.
• Charlie Munger said that, no matter how important you think incentives are, they are more important than that.
• If LfL sales are used as the basis to reward managers, said managers may push discounting, increase marketing spend and utilise delivery companies in order to maintain or increase sales
• If branch costs are examined when arriving at managers’ rewards, they may try to push costs up to head office to focus on branch sales or, if they have to, on unit EBITDA
• Such behaviour need not, necessarily, be in the company’s longer term best interests
• Because the road back from discounting is difficult and allowing delivery companies to handle the relationship with one’s customers is surely akin to letting the fox into the henhouse
There are some winners out there:
• Companies such as JD Wetherspoon, Nando’s, Fulham Shore (Franco Manca) and perhaps Wagamama should maybe be held up as successes
• In the short term, the CVAs undergone by rivals could give them (the rival companies) an advantage but it’s quite hard to imagine an operator that has undergone a CVA (because of incompetence re product, site selection, rental agreements or whatever) coming back as a roaring success
• Of course, this assumption could be short-sighted on our part as management and shareholders may have changed, the product may have evolved etc
• However, when the High Street saw major wet-led bar new build around the Millennium (remember the era of alcopops?), it was the ‘winners’ (i.e. JD Wetherspoon) that performed well over time following the crunch
• other operators such as Old Monk, Surrey Free Inns, Barracuda, Regent Inns, Luminar, Jamie’s (bars not Italian), Premium Bars, Urbium, Po Na Nah or whomever
• Rightly or wrongly it has proven difficult for such companies to turn the page
EI GROUP FULL YEAR NUMBERS:
The numbers in context:
• EI Group recommended a bid by Stonegate for the company at 285p per share in July. The bid was approved by shareholders on 12 September.
• The CMA is undertaking its phase 1 review of the transaction. EI Group says ‘subject to the outcome of the CMA review our expectation remains that the transaction will complete in the first quarter of 2020.’
• EI Group, the largest owner & operator of pubs in the UK, has reported full year numbers to 30 September 2019
• It reports that underlying EBITDA fell slightly to £276 million (2018: £287 million). It says this is ‘in line with expectations, reflecting the completion of the disposal of 354 commercial property assets for net proceeds of £340.6 million.’
• Adjusting for the above, ‘underlying EBITDA from our retained business increased to £263 million (2018: £261 million).’
• Underlying PBT was £118 million (2018: £122 million).
• After non-underlying costs and a goodwill write-down, the statutory loss after tax was £209 million (2018: profit of £72 million).
• Underlying EPS ws 21.6p (2018: 21.2p)
• EI Group reports that net debt has been reduced to £1.7 billion (2018: £2.0 billion), giving a loan-to-value ratio of 52%
• EI Group reports that LfL net income rose 1.2% with average income per pub, allowing for disposals, up 2.2%
• The group’s managed pubs showed LfL sales growth of 5.0% (after growth on the same basis of 7.1% last year)
• The group now has 70 managed investment pubs across 11 partners
• EI Group has 125 commercial properties after the sale of 354 assets in the year
• CEO Simon Townsend says ‘we are pleased to have maintained the strong trading performance for the year, particularly given the challenging trading comparatives from the summer last year.’
• Mr Townsend continues ‘we continue to deliver sustained like-for-like net income growth within our core Publican Partnerships business and are generating strong returns as we expand our Managed Operations and Managed Investments businesses.’
• The company adds ‘the approach by Stonegate to acquire the business is recognition of the strength of our strategy and the value of our high quality pub estate.’
• The company concludes ‘as a board and management team, we remain focussed on leading the organisation through to the expected completion of the transaction. Our objectives are unchanged; it is business-as-usual. We continue to identify operational improvements to drive growth in like-for-like performance and to seek the optimum use for each of our properties.’
PUBS & RESTAURANTS:
• Accountants UHY Hacker Young has suggested that the UK’s top 100 restaurants made a combined loss this year of around £93m, down from a profit of £37m the prior year.
• UHY Hacker Young says: ‘the restaurant sector in the UK is still suffering from the sharp chop (drop?) in profitability earlier this year.’ Costs are rising and sales are reported to be falling. The accountant says ‘the average household now spends £967.20 per year on dining out, down from £988 the previous year.’
• It adds that the ‘growing popularity of home delivery services has come as a mixed blessing for restaurants. While these services provide an additional channel for sales, for some restaurants they have come at the cost of a fall in more profitable in-person visits. This has cut sales of alcohol, which is often a restaurant’s highest-margin product.’
• Over time, the use of delivery companies could weaken the link between the restaurants and their customers. It could allow delivery companies to push into ‘dark kitchens’ in an attempt to cut the restaurants out completely.
• UHY says ‘there are now few restaurant chains that aren’t either considering a strategic restructuring or a reduction of their branch networks. Restaurants are also taking action at a micro level such as simplifying their menus to reduce waste, cut costs and focus on their most popular dishes.’ Whilst true, there are still winners out there although CVAs and the like tend to disadvantage the better operators (who do not undergo them) as rivals may be paying a lower rent.
• JD Wetherspoons has confirmed that a diner has choked to death eating at its Palladium Electric in Midsomer Norton, Somerset.
• The BBPA has welcomed the Conservative Party’s pledge to help businesses. Emma McClarkin, Chief Executive of the BBPA commented: ‘We have been calling for the reform of the broken business rates system for many years. Pubs pay 2.8% of the business rates bill, despite accounting for just 0.5% of turnover. Reducing their rates is a very welcome move, helping pubs to keep their doors open until the fundamentally unfair system is overhauled’.
• UKHospitality has also commented on the Conservative’s pledge to overhaul business rates, with CEO Kate Nicholls stating: ‘We very much welcome the pro-business sentiment and particularly the focus on employment and property taxes – the two biggest hurdles holding back hospitality growth and investment. We are particularly pleased to see reform of business rates being made a priority’.
• UKHospitality has remarked on the Labour Party’s announcement on apprenticeship reform, with Chief Executive Kate Nicholls saying: ‘Reforms to the apprenticeship regime are needed to give businesses greater control over their training needs. Measures to reform the system and provide more flexibility for businesses are certainly a positive step. Upskilling the workforce is a priority for hospitality, so any measures that free businesses up to invest in their teams more efficiently are welcome’.
• Bacardi has acquired the remaining stake in the US whiskey and vodka producer Stillhouse Spirits after the Stillhouse’s founder dismissed a $100m lawsuit levied against Bacardi earlier this year.
• Jamie Oliver is opening a new chain of restaurants, called Jamie Oliver Kitchen, focusing on world food. This new chain launch comes six months after his UK empire collapsed.
• Ei Group launches ‘Pub Energy’, an initiative to reduce their utility costs at the end of their current agreements with market-leading prices on gas and electricity. Paul Harbottle, Group Commercial Director at Ei Group, said ‘we are saving our publicans from two things: hidden high costs and the time spent speaking to several different suppliers, both of which take the focus away from running a great pub.’
• The Centre for Retail Research reports major high street chains have been forced to close almost 6,000 stores so far this year, up 77% on last year.
• The Food and Drink Federation (FDF) CEO, Ian Wright, has written a letter to ministers warning that consumers face having to pay more for popular brands because of the soaring cost of a government-led recycling scheme.
• Jollibee, a Filipino fast food chain, is set to open its third UK site in Leicester in the city’s Haymarket Shopping Centre.
• Pernod Ricard and Wuliangye International (HK) announce an agreement to capitalise on shared resources, jointly strengthening infrastructure, developing regional sales channel systems starting from Southeast Asia, with potential expansion to other markets in Asia outside of China.
• Durham Distillery is set to open a site in Durham city centre after acquiring a 10-year lease at the former RBS branch on High Street.
• The British Industry Egg Council has accused the government of hypocrisy with regard to animal welfare standards, claiming that a Brexit free-trade deal could open the floodgates to cheap and risky imports from Ukraine, India, Argentina and the US.
HOLIDAYS & LEISURE TRAVEL:
• Tui CEO Friedrich Joussen says Thomas Cook failed due to ‘too little differentiation’. Joussen told the FT ‘When you have no differentiation, you are head to head competing with the internet.’
• Airbnb signs a $500m deal to sponsor the Olympic Games until 2028, joining Coca-Cola, Alibaba and Toyota as part of the ‘worldwide sponsorship programme’ for the IOC. The deal will cover the summer and winter games in Tokyo, Beijing, Paris, Milan and Los Angeles.
• STR reports US hotel RevPAR growth projections have been downgraded to less than 1.0% for 2019 and 2020. Amanda Hite, STR’s president, said ‘U.S. hotels have posted nine straight years with RevPAR increases of basically 3% or higher, so growth levels below 1% will clearly represent the industry’s worst years since the recession’.
• Staycity’s Heathrow property now has its own Indian restaurant, part of the growing
• Moody’s has reported that the high level of demand for The Walt Disney Company’s new Disney+ streaming service is credit positive. Moody’s says the launch is ‘the most significant product launch in the company’s recent history.’ Whilst it is early days, the signs look promising.
FINANCE & ECONOMICS:
• The ICAEW has reported that its Business Confidence Index ‘has been trending downwards over the past five years and is now at its lowest level for a decade.’ The 5yr period predates (only just) the Brexit referendum.
• The ICAEW’s Business Confidence Index stands at minus 20.6 for Q4 this year. The lowest it touched during the financial crisis was minus 45.3 in the first quarter of 2009.
• Rightmove has said that the number of properties coming onto the market is falling at its fastest rate in 10yrs. It said the average price of the properties it sees fell by 1% month-on-month in November with the number of listings down by nearly 15%.
• Sterling higher at $1.2956 and €1.1696. Oil down at $62.28. UK 10yr gilt yield up 2bps at 0.72%. World markets mixed.
• Brexit & politics:
o Tory lead over Labour has widened.
o Speaking at the CBI’s national conference, PM Boris Johnson says he will postpone cuts to corporation tax in order to boost spending elsewhere in the economy.
START THE DAY WITH A SONG:
Yesterday’s song was Hanging on the Telephone by Blondie. Today, who sang:
“When the men on the chessboard get up and tell you where to go
And you’ve just had some kind of mushroom, and your mind is moving low
Go ask Alice, I think she’ll know”
RETAIL WITH NICK BUBB:
• AO World: Ahead of today’s interims from AO World (aka AO.com), the share price has taken another beating, as if the company was (like B&M) suffering in Germany. And, after a review, AO has decided to close down its loss-making operation in the Netherlands (at a cost of £3m), but it says it has “increased confidence in establishing a growing profitable German business through more efficient customer traffic acquisition and the centralisation into the UK of core disciplines including ecommerce and marketing”. Just in case, Germany doesn’t recover, however, AO has said that “if we are wrong in our conviction it will be clear to us by at the very latest by summer 2020 and in a worst case scenario we believe the cost of closure is c£20m”. It is hard to know what the City will think of all this, ahead of the analysts meeting at 9am, but, despite the problems in Europe, CEO John Roberts
• News Flow This Week: The Dunelm AGM is being held at 11.30am today at their HQ in sunny Syston (near Leicester), but no update is expected. Tomorrow brings the Kingfisher Q3 update and then Thursday brings the Naked Wines interims and the Hotel Chocolat AGM.