Langton Capital – 2019-12-02 – PREMIUM – IPOs, Loungers, balance sheets, Just Eat, low & no etc.:
IPOs, Loungers, balance sheets, Just Eat, low & no etc.:
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A DAY IN THE LIFE:
People naturally think that, when things are in balance, they are as they should be.
But that’s not true as any student of economics will tell you, rather glibly, that there can be more than one equilibrium, fragile or otherwise, and it may be a political, social or moral call as to which is deemed to be preferable.
And don’t get me started on the implication that ‘balance’ is necessarily a good thing, I mean take the touts on Brick Lane.
The restaurant owners probably don’t want to pay an extra member of staff to pester pedestrians. The touts themselves don’t enjoy their job and would-be customers don’t like being chased down the street and harangued by proponents of two for twenty-quid curries with a free pint thrown in, most of which promises, you can rest assured will have been forgotten by the time the bill arrives.
But, whilst the market is in equilibrium when nobody touts, this isn’t stable as you only need one restaurant to commence operations and all the others have to follow suit. It’s not ideal but there it is. Onto the news:
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THE MARKET FOR INITIAL PUBLIC OFFERINGS: With the stock market near to all-time highs, it’s perhaps interesting to note that there are relatively few IPOs out there. 2 Dec 2019:
• Loungers listed in April this year but, since then, the leisure sector has lost Merlin, EI Group, Greene King and Thomas Cook, all markedly larger companies. The first three succumbed to bids whilst Thomas Cook went bust.
• It’s interesting to note that, with the stock market close to all-time highs, there are few IPOs about but quite a few bids.
Is it because IPOs so often disappoint?
• Given that entire companies are being bid for, there would appear to be money about; but is it the wrong sort of money?
• EI Group, Greene King and, to a lesser extent Merlin are freehold asset plays whilst Loungers, whilst saw its shares listed on the market rather than change hands via a secondary or tertiary Private Equity deal.
• Is the stock market well dry? Probably not but, as we commented back in March, it does seem to be the case that ‘many, many IPOs disappoint.’ We suggested that advisors, who are paid to get deals away, may be overoptimistic.
• The vendors, who know the business well, want to sell – and yet they are asking the public to buy those same shares.
• It is an adversarial relationship and, as many IPOs go to a discount, the vendors often get the better side of the deal.
Selling the dream…
• Brokers both present the facts and sell the story.
• As we said in March, ‘to be really successful, an IPO depends upon the would-be buyers selling the story to themselves.’
• They see what the company has done and build a mental ladder to the moon. They extrapolate using what they know (which is limited), but are unable to model what they don’t (which is infinite).
The triumph of hope over experience:
• The timing of IPOs is determined by the vendor of the shares.
• They may be incentivised to sell when growth is slowing or when valuations are peaking or, preferably, both events are occurring.
• Buyers know this, and there is often push-back.
• Loungers has a fine, well-run estate of outlets. The issue is not quality. It is regarding share pricing and growth prospects.
• Between the timing of our comments above and the pricing of Loungers’ IPO in April, the IPO price was cut, and the number of shares being sold was reduced.
• Loungers’ shares went to a premium, then slid to a discount and, last week, they rose by 5% or so to take them back to their IPO price.
• The company reports H1 numbers on Wednesday. At that point, we will see a balance sheet.
• The final results, which were announced in August, were for the year to 21 April, that is prior to the IPO.
• At that time, Loungers had negative tangible assets of £128.6m. Subsequently, the group listed its shares on AIM and paid off all but £32m of its £172m (of pre-IPO) debt (including its preference shares and around half of its bank debt).
Is the balance sheet important:
• Build and sell strategies are often based on the idea of building units for cash or debt (a balance sheet transaction) and selling the company for a multiple of earnings (a P&L transaction).
• This is what it is. It is, in itself, neither right nor wrong.
• Indeed, proponents of the multiple of EBITDA method of valuation may say that that is all that matters.
• But that’s not the case as the numbers for tangible assets in the balance sheet show observers what, in an industry with very low barriers to entry, the company could be replicated for.
• Of course fantastic management is worth a premium but valuation should still bear some relation to the cost of construction of the business, especially in a lightly-branded estate with few or no freeholds.
• The below numbers were correct at March this year but directionally they remain relevant
Written in March 2019 – A somewhat inglorious track record…
• Langton has been reviewing some of the leisure & retail sectors’ recent IPOs.
• In Leisure, 5 of 16 IPOs we reviewed have lost 50% or more of their value in the years since listing. The worst performers being Pat Val (down 100%), Comptoir (down 82%) and Revolution Bars (down 63%).
• The best performers in our list were SSP Group +230%, Just Eat (+190%), Fulham Shore +67% (which was an introduction rather than a placing) & Hollywood Bowl +38%.
• Retail fares worse with 10 out of 15 companies being currently below their listing price. The worst performers here were QUIZ (down 89%), Game Digital (down 87%) & Bonmarche (down 79%).
• The best performers on our list were Boohoo +269% & Joules +74%. But the arithmetic average of the population is minus 5%. Strip out Boohoo and it is minus 24%
• The arithmetic average of all 31 companies looked at is plus 7%. Strip out CAKE and QUIZ at the bottom and BOO and SSP at the top and the average is minus 3%
• Finding an IPO that performs as well as SSP or Boohoo is rare. The macro argument is ‘don’t invest’ whilst the micro comment is ‘it’s different this time’
• IPOs may be overpriced, especially if incentivised by exiting shareholders. They are selling their ‘baby’ and, let’s be honest, they’re greedy
PUBS & RESTAURANTS:
• The contested bid for Just Eat may be leading for a rare auction later this month. The Telegraph suggests that the company and the Takeover Panel are in discussions to run an auction with best & final offers invited by 27 December.
• Dutch company Takeover.com and Prosus have been engaged in a war of words for some time. They will be invited to allow their chequebooks to do the talking. The Telegraph quotes a source as saying that Prosus is happy with the proposed auction.
• Still some pretty chunky discounts out there now running into December. ASK 40% off food, Prezzo 50% off mains with cheap Prosecco on top.
• CGA has been looking at the move towards low and no-alcohol drinks in its report ‘Understanding Moderation in the On-Trade’. CGA says that 32% of adults have now tried a no or low alcohol beer, wine or spirit in the last six months. This equates to around 15.5 million consumers.
• CGA says that sales in the no and low alcohol category have increased by 48% in the last 12 months to more than £60m a year. Growth for completely alcohol-free options was nearly 80%. As only a small percentage, around 9%, of those referred to above identify themselves as completely teetotal, the move appears to be towards moderation rather than a complete rejection of alcohol.
• Health appears to be the main reason behind the move. CGA says ‘our report shows there is huge potential for operators and suppliers to capitalise on the growing number of moderators. With even more people likely to cut back on booze after the Christmas excesses, producers, operators and suppliers are queuing up to jump on the opportunity with an ever-increasing range of no and low alcohol alternatives. With many consumers eager to trial them out of curiosity, along with the evident health drivers associated, the challenge will be to build loyalty and repeat trial in a market where it is increasingly hard to stand out.’
• KAM Media has highlighted the ongoing problem with regard to staff churn in the hospitality industry. It says ‘3-in-10 employees in hospitality leave in the first 12 months and average tenure is just 7.5 months.’ KAM says that staff turnover is around twice the average across industries in the UK as a whole.
• KAM says that pay & conditions are critical but it says that a ‘reputation as a good employer’ is critical to 1-in-2 employees. This may play out badly for companies undergoing CVAs or other collapses such as those at Patisserie Valerie where a number of units continue to trade.
• UK Hospitality has said that the proposed tourist tax in Scotland (known as a Transient Visitor Levy) will cost jobs. UKH says it will cost the Scottish economy £200m and nearly 6,000 jobs. UKH says ‘this ill-thought through proposal will damage Scotland’s reputation as a world-class tourism destination, increase costs for Scottish people and lead to a loss of jobs and investment at a critical time for the sector.’
• Britvic has agreed a deal with Esterform Packaging for the supply of recycled plastic as a part of its sustainability programme.
• LVMH has taken a 55% stake in Provence rosé producer Château d’Esclans for an undisclosed sum.
• Speaking at an MA event, CGA’s Jonny Jones has said that drink producers must innovate with new drinks to ensure they retain their place in the on-trade. CGA says there were around 70 new brands launched per week in the past 12 months – 3,675 in total.
• Amazon distribution staff at six centres in Germany staged a Black Friday walkout in a dispute over pay and conditions.
• He does it his way. Sam Smith’s pubs in York have banned the use of plastic.
• The somewhat bemused York Press says this is ‘despite millions of people in the UK hardly ever using cash anymore.’ The Press says the brewer & pub operator ‘has repeatedly hit the headlines nationwide for its bans on swearing, texting, emailing etc.’ It says ‘its bar on card payments is less well known, even though one former Sam Smith’s pub manager has claimed that it had more impact on their ability to run their pub profitably than any of the other bans.’
• Notice in The Blue Bell, a Sam Smith’s pub in Hull: ‘Mobile phones, iPads, laptops, tablets & other transmission/reception devices are not allowed to be used inside this pub. The ban includes receiving or sending texts, taking or viewing photographs, emailing, using games, apps, Google, Facebook, Messenger etc. etc.’
• Not a lot of Instagramming going on in Sam Smith’s pubs. The company says ‘we want our traditional pub to be a haven for social conversation’. Newspapers are still allowed.
• Sam Smith’s York Arms on High Petergate in the City shut suddenly in July. The company has not responded to requests as to why. The York Arms is 50yds or so from the Minster. The group shut two other pubs in the city earlier, one for several months, and the reasons were never made public.
• Oakman Inns is to embark on a new round of fund-raising, with a target of between £10m to £12m, reports Propel. Peter Borg-Neal led Oakman currently has 24 outlets.
HOLIDAYS & LEISURE TRAVEL:
• Rail fares are to rise by an average of 2.7% from 2 January. The above-inflation rise will take money out of would-be spenders’ pockets.
• South Western Railway staff look set to launch a series of strikes this month after talks with employers broke down.
• Labour has said that it intends to cut rail fares by a third if it wins the election next week.
FINANCE & ECONOMICS:
• Factory activity in China returned to growth in November for the first time in seven months.
• The FT has suggested that a decade of cheap money and QE has damaged retirement prospects for millions because annuity rates are currently so low.
• Sterling little changed at $1.2917 and €1.1721. Oil lower at $61.32. UK 10yr gilt yield up 3bps at 0.70%. World markets weaker on Friday but Far East higher in Monday trade.
• Brexit & politics:
o Tory poll lead still relatively comfortable but narrowing as Labour seeks to squeeze the Lib Dems as the party best-placed to stop a Hard Brexit. Lead down to around 9%. A lead of 7% or less indicates another hung parliament.
o The Lib Dems have said that they would not support Labour’s renationalisation plans in the event of a hung parliament.
o The BBC has suggested that, should the UK’s withdrawal proposals pass parliament next month, the country could face a new cliff-edge at the end of 2020 as ‘trade negotiations tend to take several years to complete.’ PM Johnson has said that he would complete these negotiations in a few months.
o Former deputy PM Michael Heseltine has said that Boris Johnson’s comment that he will ‘get Brexit done’ is a ‘great delusion’.
START THE DAY WITH A SONG:
• Taking a break due to exam commitments. Back middle of next week.
RETAIL WITH NICK BUBB:
• Saturday’s Press and News (1): The main Retail story in the Saturday papers was the news that Ocado has signed a big new Overseas licensing deal, this time in Japan with the giant Aeon supermarket chain and the Times quoted our view that, given that Japan must have plenty of rival automated robotic warehouse providers, this is quite a coup for the business (“Ocado sells automated technology to Japan, the world leaders in robots”). In first dealings on Friday morning, the Ocado share price was over 12% up, but it closed just under 10% up. In terms of Editorial coverage, the Business editorial in the Times mocked the reliability of Ocado’s “pyromaniac robots” and joked that “the Japanese may yet get cold feet about food delivery, when they discover that making any money from it takes aeons”, but Lex column in the FT said that although there are plenty of sceptics about Ocado and profits
• Saturday’s Press and News (2): The outcome of Black Friday was the other big topic, mostly on the News pages and although the Guardian focused on the untimely collapse of NatWest’s Online banking systems, it had a photo of the busy-looking Bullring shopping centre in Birmingham on Friday and quoted the beleaguered Intu shopping centre group as saying that their footfall was 13% up on Black Friday a year ago. The Telegraph had a photo of shoppers in Sao Paulo in Brazil fighting over giant TV sets… whilst the Times highlighted the big growth in Online traffic and Barclaycard transactions on Friday, but the Daily Mail flagged that “Black Friday Sales to last until Xmas” and quoted Nitin Passi of the struggling Online fashion business Missguided as saying that discounting is rife and “it is a bit of a bloodbath out there”.
• Saturday’s Press and News (3): In other news, the Times noted that the private equity owned Dobbies Garden Centres chain is thinking of floating on the stockmarket again and the Times also flagged that Carphone Warehouse is being sued for £20m by a small digital payments group called Thinksmart. The Times also had a feature interview with the Irish boss of Aldi UK, Giles Hurley (“Aldi targets affluent middle classes for Christmas as tinned goods are canned”), noting that Aldi is determined to add a reputation for high-quality produce to its low prices. In a similar vein, the “Hero of the Week” in the Daily Mail was the Scottish boss of the upmarket grocer Fortnum & Mason, Ewan Venters, whilst the FT had a big feature on the luxury shopping spree by the French group LVMH and its boss Bernard Arnault. The Telegraph had a striking photo of the “Refill Station” being trialled in 4
• Sunday’s Press and News (1): The Sunday papers were slightly thin in terms of Retail news and one of the most interesting stories was the Sunday Telegraph story that a trading slump at the once highly profitable Holland & Barrett chain is forcing its Russian owner to inject cash into the business to reassure nervous bondholders. The Sunday Times flagged that the private equity owned footwear brand Dr Martens is looking to be sold for over £1bn, the private equity owned Online bike retailer Wiggle has reported heavy losses and Card Factory is poised to drop out of the FTSE 250 in the upcoming index review. The Sunday Times also had a big feature on Ocado and the threat from new “micro-fulfilment” rivals like Takeoff in the US (“Ocado the disruptor is being disrupted”), although it was written before the Aeon deal was announced on Friday and it ended up quoting the former
• Sunday’s Press and News (2): The Mail on Sunday had a feature profile and interview with the boss of Dixons Carphone, Alex Baldock, ahead of the upcoming interims, noting that he is bullish about prospects despite the cost of discounting: “I won’t whinge about Black Friday- our customers LOVE a deal”. The Mail on Sunday also flagged that Mike Ashley has settled the Sports Direct US legal row out of court. In other news, the Business Editor of the Sunday Times, Oliver Shah, devoted his column to the subject of “Is the London property market turning?” Finally, the Sunday Times had photos of all the businessmen who turned up to its annual party at Claridge’s last week, including Marc Bolland, Archie Norman, Alex Baldock and Julian Dunkerton.
Ocado: The hyper-active Ocado has issued an announcement for the third day running….and this time it is funding news, via the launch of a £500m Convertible Bond offering: “to fund capital expenditure in relation to Ocado Solutions’ commitments and general corporate purposes. The offering enables Ocado Group to diversify its funding sources and capitalise on attractive issuance conditions”. The terms are not overly attractive to investors (a coupon of only 0.75% to 1.25% and a conversion premium of 40-45%), but no doubt it will be lapped up by the markets. Along with the news, there is a brief trading update, ahead of the formal Q4 outcome planned for Dec 12th, with sales expected to be 10%-11% up. As usual, we find it hard to escape the feeling that Ocado ought to be doing a bit better than that, given all the extra CFC capacity it has laid down (net of the loss of Andover), but
News Flow This Week: Today is the much-hyped CYBER MONDAY…but, as we move inexorably on into December, there is less going on in the Retail sector this week, in terms of company and industry news, to distract us from all the General Election campaigning…The BRC-KPMG Retail Sales survey for November is out first thing on morning (with a very weak outcome likely because of the shift of Black Friday), but more interesting will be the key John Lewis sales figures for last week, which are published mid-morning tomorrow. The fashion chain QUIZ has interims on Wednesday morning and the latest quarterly FTSE Index review is out on Wednesday evening. The Joules pre-close is on Thursday and the jeweller Signet also has its Q3 in the US that day. Friday then brings us the ABF (Primark) AGM update.