Langton Capital – 2019-11-28 – More on MARS, coffee, Nando’s, Chilango etc.:
More on MARS, coffee, Nando’s, Chilango etc.:
A DAY IN THE LIFE:
I know they say that Facebook (and probably your Google search engine) knows you better than your mother does, but I sometimes wonder what Google thinks of me because, as I was idly looking around to see whether there were any comments as to just how intelligent the queen’s second son was, as I typed in ‘how clever is…’ it auto-filled in ‘is an octopus?’
Now I suppose that, even a couple of days after HRH’s car-crash of an interview, that tells us that more people were interested in the cognitive skills of a boneless Octopoda than they were about the one-time glamorous playboy and number two in line to the throne.
Or maybe there was some sort of crossover between people’s perception of the slippery mollusc on the one hand and an octopus on the other? Anyway, at a time when our would-be leaders seem ever-keener to plumb new depths, that’s something to be thinking about. On to the news:
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MARSTON’S ANALYSTS’ MEETING: Following the release of its full year numbers, Marston’s hosted a meeting for analysts. 28 Nov 2019:
• This is the 6th consecutive year of increased LfL sales. The strategy has evolved such that Marston’s is now targeting debt reduction and delivering more from the assets that it already owns
• Taverns (more wet-led) outperformed Destination & Premium outlets
• Ale sales were good but Lager was a little weaker against hot summer comps from last year
• In common with much of the industry, volumes (and covers) for Marston’s were down but spend per head was up
Focus on trading:
• CEO Ralph Findlay says that the group is determined to drive more earnings from its existing assets
• The group’s community and its premium & destination pubs have outperformed the market – but its family and food pubs have lagged
• The group is reducing business complexity, is focusing on shortening its maintenance capex cycle, is targeting customers digitally and is investing in its staff and in marketing (at some cost to the P&L)
• Focused capex should return 20% on expenditure and in some cases 30% and above. Smaller projects will be undertaken. The maintenance cycle will be cut to 5yrs
• Marston’s intends to attract staff and to increase staff retention. It is drawing more attention to its environmental and sustainability credentials
• MARS’ beer company has performed well. It has 25% of the premium ale market in the UK and supplies 7% of all world beers sold in the country. It offers an attractive ‘one stop shop’ to the free trade
• Beer sales through the off-trade are stabilising and, for Marston’s at least, sales through the free trade are strong. This mix change has a beneficial impact on blended margins
• The group is in a good position to attract further, big-name, overseas brands in addition to Estrella and Shipyard, both of which have performed strongly
Balance Sheet, Cash Flow & Debt:
• There will be no new openings in 2020
• By 2023, debt will be £200m lower and the group will be generating £50m after paying its dividend. Leverage will be down (pre-IFRS16) from 6.3x to under 5.0x
• Capex is lower on the back of the cut new-build programme. Earnings enhancing maintenance & incremental capex will rise. Here there are not expected to be any large, catchup expenditures
• Disposals are ahead of where they need be to hit the £70m target this year (FY20). The group has sold £45m worth, has exchanged on a further £5m and has ‘visibility’ on the remaining £20m. The total could edge up from £70m as the year progresses.
• The market for disposing of single assets is strong.
• Some assets have been written down. The valuation is now ‘appropriate’. NAV is 128p. Most of the 20p reduction is due to lower gilt yields impacting the pension fund and asset values
Conclusion & Outlook:
• It is all to play for as far as Christmas is concerned. MARS repeated that current LfL sales are positive and Xmas bookings are up. It reminded analysts, however, that December is twice as big a month as October and November combined
• Costs this year will rise by 2-3% with labour costs, depending on the outcome of the General Election, due to rise by perhaps 3-4% (or more)
• MARS needs only a 1.5% uplift in LfL sales in order to hold margin. This is a more modest number than that facing some city centre or London operators (where labour and other costs are rising more rapidly)
• There was more corporate activity in the freehold-led pub industry this year than there has been for some time. Assets and yields have proven to be attractive.
• Minimum Unit Pricing comes into force in Wales in the New Year. This should be mildly positive for Marston’s
• Marston’s results are in line with expectations and there will be few changes to forecasts as a result of today’s numbers.
• The group is addressing the market it faces and is now focused on debt reduction and capital spending that will increase the cash-generating power of its existing assets.
• The tough comps presented by the hot weather and the World Cup last year are now behind us but, as always, Christmas remains key. Here early signs look hopeful but the holiday (and particularly the run-up to it) remains a predominantly ‘walk-in’ occasion.
• The group has benefitted from the recovery in wet-sales across the industry and it is a manufacturer as well as a retailer. Its portfolio of brands is strong. Mix changes are helpful and it could pick up more big names.
• Marston’s shares have been buoyed by the Greene King takeover approach and the company’s focus on reducing debt whilst holding its dividend has pleased investors.
• The group’s shares remain inexpensive. The yield is secure at around 6%, debt will come down and the group will target its capital spending carefully.
• As reported earlier, lodges, craft brewing and food (in the longer term) remain growth areas. Marston’s is a major brewer and has a large wet-led element to its estate. The group is well-placed to return to growth and to create further value for its shareholders.
PUBS & RESTAURANTS:
• Allegra’s World Coffee Portal has undertaken the largest analysis of the branded coffee market ever undertaken in Europe & concludes that the international chains are still the ones driving growth across the continent.
• Allegra suggests that the branded segment ‘added 1,235 stores during the last 12 months to reach 37,598 stores, representing 3.4% growth in outlets.’ It says that 26 of the 30 largest coffee markets in Europe grew last year though outlet growth in the UK did slow significantly to 0.9% ‘amid sustained Brexit uncertainty and dampened consumer confidence.’ The UK branded market is reported to have expanded by 8.7% in 2018.
• Allegra reports that ‘Turkey experienced the largest loss of branded coffee shops at -2.9%.. Amongst declining markets, ‘the Hungarian, Belgian and Swedish markets contracted by 1.9%, 1.8%, and 1.3% respectively.’
• Allegra reports that, as far as the coffee market is concerned, property costs are eating into margins ‘but premium and ethical products can boost sales.’ Premiumisation is a continued feature and Allegra concludes that the European branded coffee market is ‘expected to surpass 45,000 outlets over next five years.’ Allegra’s CEO Jeffrey Young comments ‘despite a challenging economic climate and deep consumer uncertainty, branded coffee shops remain in growth across most European markets. Chain concepts are an increasingly popular option for previously traditionally minded consumers. Lifestyle and consistency factors further underpin this trend.’
• The Telegraph reports that Nando’s owner, South African Dick Enthoven, has refinanced £128m of debt in the business. It reports the move is in order to ‘free up Nando’s balance sheet to fuel expansion.’
• Nando’s (along with Wagamama, Franco Manca and JD Wetherspoon) is amongst the winners on the High Street. Tomorrow we’ll have a closer look at the company’s full year numbers to 24 February, which were lodged at Companies’ House earlier this week.
• Chilango, which would appear not to be amongst the winners on the High Street, has postponed a general meeting of its shareholders as it looks to refinance its debts aided by accountants, RSM.
• City AM points out that the company has raised £5.8m from the sale of two mini-bonds (burrito bonds) to c1,500 small investors. The group had staff offering bonds to passers by on London Wall (below Langton’s global HQ) last year.
• Chilango last reported accounts to Companies’ House in August last year (for the year to end March). We have not had sight of numbers since. Anyone wondering where the capital has gone should take note of the fact that, to March 2018, the group had lost an accumulated £14.4m. Auditors Grant Thornton signed the company off at that time as a Going Concern.
• City AM says ‘the financial watchdog today announced a ban on the marketing of some mini-bonds to retail investors, but as funds raised through Chilango’s bonds were used to finance the company directly, they wouldn’t be covered by the ban.’
• Beverage Business World reports on moves to persuade coffee chains to follow the lead of Costa Coffee and cut the surcharge on plant-based milks.
• Bababoom continuing to overfund on Seedrs. The two-strong kebab operator had been looking for £400k and is now up to around £436k.
• Franklin & Sons, purveyors of soft drinks, maintains that flavours influenced by spirits such as gin may widen the appeal of certain soft drinks.
• Global trends. Paper straws are to be introduced to 1,500 Starbucks’ outlets in Japan. Minimum wage hikes (to over $15) are causing issues for restaurateurs in Chicago.
• Discounts getting pretty scary. It’s December at the end of the week.
• Greene King’ Loch Fyne & M&B’s Harvester, Toby, Vintage Inns & Stonehouse Pizza are offering 50% off food on certain days. M&B’s Sizzling Pub Co is offering 40% off midweek prices up to 11 December. ASK is 40% off food.
• YouGov has reported that UK consumers are buying 300% more liqueurs and cocktails than they were 25yrs ago. The pollster’s ‘Family Food’ report says that, elsewhere, beer consumption is some 25% lower.
• The MA reports that BrewDog’s Punk IPA is still top product when it comes to on-trade craft beer. It reports that volumes are up by almost a fifth on a year ago.
• Puttshack has opened its first mini-golf operation in central London at no1 Poultry in the City. It says ‘the Bank site is Puttshack’s second UK opening this year, and follows news last week that the business has secured its first US site, in Atlanta. This follows an equity raise of £30m in June this year with lead investor Promethean Investment, with plans to open more sites in 2020, including at Intu, Watford.’
• Five Guys is to take a story at Baker Street, formerly occupied by YO! Sushi.
• Exmoor Distillery’s head distiller John Smith has said that gin demand will continued to grow as consumers wish to access locally sourced products of a high-quality. Mr Smith says ‘gin is appreciated by men and women, young and old alike – and long may the tradition last.’
• Nielsen has reported that the Thanksgiving holiday in the US is the ‘biggest opportunity’ for wine over the year as a whole. It says ‘Thanksgiving and the days surrounding it represented a great opportunity for suppliers and retailers in the On Premise, particularly in suburban and rural neighbourhoods.’
• Entrepreneur Scott Wilson-Laing has launched a new micro-distillery business with the support of the North East Business and Innovation Centre in Durham.
• Aston Martin, which was earlier this week granted an alcohol trademark, has announced a partnership with Islay’s Bowmore distillery on a range of limited edition whiskies and ‘innovative lifestyle experiences’.
• Venue Group has announced that it is to open a music & food ‘social hub’ at Goods Way, King’s Cross
HOLIDAYS & LEISURE TRAVEL:
• AITO has reported that some operators have reported losing sales after teenagers pressured parents not to fly for their holidays. Pester power usually works to promote rather than restrict the sale of products.
• Certainly, Gen Z is more environmentally-aware than is its parents’ generation. Travel Weekly quotes operators as saying ‘I’ve heard two parents say they will not travel next year because their teenagers won’t let them. Younger people are increasingly engaged and very powerful.’
• Secret Escapes has sold the domain and digital assets of LateRooms to Snaptrip, a last-minute holiday rental marketplace.
• Eurostar is reported to be facing four days of disruption next week due to a strike by French railway workers.
FINANCE & ECONOMICS:
• The SMMT says that the UK motor industry could lose more than £40bn in lost production by 2024 in the event of a no-deal Brexit.
• The latest CBI quarterly survey has suggested that Brexit & General Election uncertainty is ‘holding back UK services firms.’ Sentiment is negative and the firms surveyed are reporting declining order volumes and weaker profitability.
• Sterling up at $1.2937 and €1.1752. Oil lower at $63.81. UK 10yr gilt yield up 4bps at 0.68%. World markets stronger yesterday but Far East lower in Thursday trade.
• Brexit & politics:
o Labour Party waving unredacted documents purported to say that American corporates have been promised access to the NHS post Brexit.
o YouGov poll has Tories cantering to an easy victory with an overall majority of around 68 seats.
o FT opinion piece says Mr Johnson’s career rests on casual mendacity. Still not dead in a ditch, Mr Johnson now says that all you need to do is pop his deal in the microwave and Brexit will be done.
START THE DAY WITH A SONG:
• Taking a break due to exam commitments. Back later in the week.
RETAIL WITH NICK BUBB:
Motorpoint: We noticed the other day that the second-hand car dealer Motorpoint has a bigger market cap than its struggling rivals, Pendragon and Lookers, but that may say more about their problems than Motorpoint, which floated in May 2016 with a market cap of £200m and is now capitalised at £230m. So the last few years have not been that easy for Motorpoint, but its focused business model seems to be a solid one and today’s interims for the 6 months to end Sept show that total revenues were up 1%, in a difficult market. Given cost increases, first half profits were down, but management are maintaining full-year expectations. IN case you’re wondering, the group operates from 12 retail sites: Derby, Burnley, Glasgow, Newport, Peterborough, Chingford, Birmingham, Widnes, Birtley, Castleford, Oldbury and Sheffield. The 13th store, in Swansea, opens early next year: let’s hope motorpont is
Ocado: If you hadn’t caught up with the fact that Ocado is building a big new CFC in Purfleet or aren’t quite sure what a CFC is (it stands for Customer Fulfilment Centre) or what happened to the one in Andover (it burnt down), then you may be bewildered to hear today that CFC 6 is now on the way, in Bristol. Interestingly, it is a relatively small unit, in an existing warehouse and Ocado now call it a “mini-CFC”. Tim Steiner, the feisty Chief Executive of Ocado, says: “The Ocado Smart Platform is constantly evolving as we innovate to adapt to changing customer needs. We can now deliver the best customer experience across a whole range of customer missions, through CFCs, mini-CFCs, and micro fulfilment centres”.
News Flow This Week: Tomorrow brings the widely followed monthly GFK Consumer Confidence survey and…the ghastly annual discount jamboree that is BLACK FRIDAY…
TRADING STATEMENTS & EVENTS:
Upcoming results are set out below:
• 27 Nov 19 Marston’s FY numbers
• 27 Nov 19 Britvic FY numbers
• 27 Nov 19 On the Beach FY numbers
• 28 Nov 19 Greene King H1 numbers
• 3 Dec 19 Gym Group analysts site visits
• 4 Dec 19 Loungers H1 numbers
• 4 Dec 19 Stock Spirits FY numbers
• Est 4 Dec 19 Vianet H1 numbers
• 6 Dec 19 Gfinity AGM
• 6 Dec 19 Whitbread AGM
• Est 6 Dec 19 EasyHotel FY numbers
• Est 7 Dec 19 Games Workshop H1
• 12 Dec 19 General Election
• 12 Dec 19 TUI Group FY numbers
• 12 Dec 19 Fulham Shore H1 numbers
• 12 Dec 19 Fuller’s H1 numbers
• 12 Dec 19 Vianet H1 numbers
• 13 Dec 19 Hollywood Bowl FY numbers
• 19 Dec 19 Bank of England MPC interest rate decision
• Est 20 Dec 19 Carnival Q4
• 23 Jan 20 G4M Q3 update
• 24 Jan 20 Marston’s Q1 trading update
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