Langton Capital – 2020-01-20 – PREMIUM – Fevertree, irrational exuberance, Hostelworld, input costs etc.:
Fevertree, irrational exuberance, Hostelworld, input costs etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
One of the advantages of being self-employed (and of starting work at stupid o’clock in the morning) is that, if you’re coming into work on a Friday and the heavens open and soak you to the skin, you can hang your trousers on the radiator and paddle around in your socks for a while.
However, if the building manager choses that moment to return some keys to you that had been borrowed to give the electricians access to a fuse board overnight, you can find yourself with some explaining to do.
All theoretical, of course but, if your trousers had half a kilo of pilau rice dumped on them earlier in the week, as mine allegedly had, then wetting them and steaming them over a radiator can have some interesting olfactory consequences.
All theoretical, of course and, as the sun’s due to shine again today, who can believe that it was ever rainy. On to the news:
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BOOK REVIEW: IRRATIONAL EXUBERANCE PART II. More from Robert Shiller on why investors have in the past, do now and always will, allow themselves to get carried away. 20 Jan 2020:
The role of confidence:
• Confidence is non-tangible and it can change rapidly.
• Shiller maintains that arguments, during a period of exuberance, become detached from analysis.
• Doing well in a boom gives a sense of moral superiority to those that have benefitted. This engenders a feeling of envy, almost panic, in those that have not participated
• Trends can be maintained. The best weather forecast for tomorrow is often to look out of the window today, and say it will be like this
• Effectively loops, these can last for years. Commonly, people can forget how they started – but they are nonetheless powerful for that.
• Furthermore, investors may not be scientific. They don’t need evidence in order to believe something. In fact evidence may get in the way of prejudice – and the latter may be the stronger force
• Regret may provide motivation. We may be envious of others success. You feel you need to get in. Also, there is more focus on the markets. Froth in the Press. More investment clubs.
Bubbles in practise:
• Shiller says prices may go higher than anyone imagined. Bursting of the bubble may not be sudden.
• Alan Greenspan’s warning came four years or so before the market topped out
• Investors arguably saw it coming in 1999. They often do – but they don’t do anything about it.
• Ponzi schemes prosper because of feedback loops & bubbles. Perpetrators may think that they will be able to save the day (somehow).
• Investors may be sceptical, but they still get sucked in. seeing others make money can be key.
• There are more swindlers in booms per Charles Kindleberger. They are like magicians, they are simply good at it. Some are fraudsters & others are disingenuous.
• Housing markets often peak say 2yrs after stock markets.
• The news media can set the stage for market bubbles. The market outlook can be vacuous. Moves are sound-bite driven.
• News can cause ‘attention cascades’ (as well as ‘information cascades’). Things cumulate. This can lead to inaction, more inaction and then major moves as pressure builds up
• Shiller says the stock market struggles, even ex-post, to explain share price moves.
• There may be talk of ‘new era’ thinking. But this doesn’t last forever. It is not sufficient, on its own, to sustain bubbles.
• Participants have quantitative and moral anchors. They (and we) have a gambling instinct. They will be overconfident. They will only listen to the evidence that supports their opinion etc. etc.
• Peoples views are often clouded by emotion & a lack of clear objectives. We discover things about ourselves after the event.
• The herd instinct is real. There can be epidemic-like qualities to a bubble. Action is often stimulated by interpersonal communication. This will be speeded up by TV, the internet, email, chat rooms etc.
• People are looking for ‘tellable stories.’. E.g. Y2K will ‘bring the house down’.
• There will be ‘obvious errors’ during a bubble – but they won’t be evident ex-ante or, even if they were, there will be rational arguments as to why ‘it’s different this time’.
• Investors either 1) learn very little from previous bubbles or 2) we are dealing with a different group of individuals
• Shiller does not conclude, as such. He is observing behaviour and, if anything, he seems to suggest that we are stuck in a loop.
PUBS & RESTAURANTS:
• Fevertree reports ‘subdued’ Xmas trading in the UK.
• Fevertree reports its earnings will fall in 2019.
• Fevertree has updated on full year trading saying that revenues rose by 9.7% in the year. It says this is ‘reflecting the significant progress made during 2019 across many of our regions. However, this performance is below the Board’s expectations, primarily reflecting subdued Christmas trading in the UK.’
• Fevertree says ‘while the UK has performed below expectations, it has been a year when we have lapped exceptional comparators and despite that we have retained our clear category leadership position and are very well placed to return to growth as we proceed through 2020.’
• The group says ‘as reported, the wider retail environment in the UK experienced a challenging Christmas with the mixer category not immune from the weak consumer confidence and corresponding slowdown in spending.’
• Fevertree says ‘we expect conditions for the category to remain challenging in the first half of 2020 reflecting the current level of consumer confidence.’ It says softer comps in H2 ‘provide us with confidence in returning to growth during the year.’
• Fevertree says ‘despite the softer trading than expected in the final months of the year, we have continued to invest behind the brand for the longer term, most notably in our growth regions. As a result, margins have ended the year behind our expectations and we expect earnings to decline by c.5% when compared to 2018.’
• The group says ‘as outlined above we plan to continue to invest in our growth regions in the year ahead and resulting in gross and EBITDA margins adjusting to c.49% and c.28% for 2020 respectively. The Group’s balance sheet remains strong with the year-end cash position anticipated to be £128m.’
• Fevertree’s shares have halved from their highs but, as a growth stock, it may find itself out of favour as a result of today’s announcement.
• The BBPA has predicted that during the month of Dry January 4.8m pints of low and no alcohol beer will be sold in the UK. Commenting on the growing range of non-alcoholic beer, Emma McClarkin, Chief Executive of the British Beer & Pub Association, commented: ‘Those taking part in Dry January or reducing their drinking have plenty of alternatives from brewers and pubs to see them through the month. The range and quality of non-alcoholic beers in the UK has never been better. Some are even available on tap in pubs, making them the perfect option for those doing Dry January who are thirsty for a pint’.
• The UKHospitality/CGA Future Shock Report has commented that the UK’s hospitality sector needs to promote sustainability further if it wishes to continue to lead the way. UKHospitality Chief Executive Kate Nicholls said ‘Sustainability is arguably the key issue of our time. It will become more important and hospitality needs to lead efforts to promote sustainability yet further’.
• Potential good news on prices.
• The latest CGA Prestige Foodservice Price Index says that there has been ‘a continued easing of inflation in key categories and [there is] a chance to grow sales and margins this year.’
• CGA & Prestige say ‘prices across the foodservice sector dropped to their lowest point for seven months in November 2019.’ The Index ‘has fallen by four points since August, pushing overall prices to their lowest since April 2019. The new report forecasts more falls in the next few months, providing operators with a welcome opportunity to reduce their costs and improve margins or cut menu prices to incentivise trade.’
• The Index suggests ‘a greater level of certainty around Brexit should further help businesses to focus more closely on footfall and sales during a traditionally challenging period for the sector.’
• Pulling the market in the opposite direction, Sajid Javid has told the FT that the UK will diverge in terms of rules from the EU after it leaves the body this month. He says that businesses should ‘adjust’ to this new reality. The Food and Drink Federation said the proposals were likely to cause food prices to rise towards the end of this year.
• Mr Javid did not say which EU rules he wanted to drop but said ‘there will not be alignment, we will not be a rule-taker, we will not be in the single market and we will not be in the customs union – and we will do this by the end of the year.’ The FDF has said this would be the ‘death knell’ for frictionless trade with the EU.
• Prestige COO Phil McGuinness comments ‘the slowing of inflation should provide some reassurance to purchasers for the year ahead. With 2020 looking likely to bring falls in multiple categories, along with certainty around Brexit bringing 12 months of stability, we are likely to see further reductions within the Index, which can be used to maximise margin or drive sales.’
• Prime Minister Boris Johnson’s government is set to clamp down on immigration more rapidly than previously believed per press reports. Government officials said on Sunday that cabinet should discuss issues this week. Any shortage of staff opportunities in the hospitality industry could put further upward pressure on wages.
• The FT says ‘business leaders on Sunday said that they were concerned over the potential change in implementation of the new immigration rules, which had already been a worry given the importance of lower skilled workers to many parts of industry and services in the UK.’ The BCC says ‘at a time of critical skills shortages and substantial change, these proposals would add further barriers to firms accessing the staff they need.’
• Restaurant management software company Tenzo has said that vegetarian and vegan meals have seen a sales increase of 2.1% in the first week of January across fast casual and quick service restaurants in the UK as compared to the first week of December.
• Tenzo goes on to say that some individual chains have seen an increase of up to 6% on their vegan offerings. It says ‘this appears to occur when the restaurant has a larger variety of vegan dishes, showing that people like to have a choice of meals when dining out instead of just one or two options.’
• Further thoughts on the Coffer Peach Tracker for the 6wk Xmas & December period.
• Does 2.5% sales growth imply any volume growth at all? Quite possibly not. And, given that delivery will have taken a larger share of sales this year than it did last, there are likely to have been fewer covers served in December 2019 than there were a year earlier. Analyst Peter Backman recently estimated that delivery is growing at around 15% compound. Margins are likely to be lower as this channel to market continues to grow.
• It’s worth remembering as always that the Tracker does not include numbers from outperforming groups such as Nando’s, JD Wetherspoon, McDonald’s and Greggs. JD Wetherspoon updates this week on Wednesday with Marston’s updating on Friday.
• Licensing solicitors Poppleston Allen comment that ‘it has been reported that last night [Thursday last] the London Borough of Redbridge’s Full Council deferred the decision to adopt a Late Night Levy due to an administrative which resulted in an incorrect recommendation being contained within the report provided prior to the meeting.’
• Responding to the introduction of the Agriculture Bill, the Food & Drink Federation’s CEO Ian Wright said ‘as the Government embarks upon trade negotiations with the EU and partners around the world, it is vital that we prioritise the quality and choice of UK food and drink, and safeguard the confidence of our consumers and shoppers in our world-class industry.’ Mr Wright says ‘we welcome the commitment from government to keep our food security under review. It must assess both domestic production as well as vital ingredients and goods from overseas. We are committed too to reducing our own environmental impacts and to working with others to increase resource efficiency and help protect natural capital across the supply chain.’
• The 24 strong, Oakman Inns & Restaurants has partially refinanced their secured debt on two of its properties through £11m loan from Cynergy Bank.
• The plant-based meat alternative startup, THIS has raised £4.7m in funding from Backed, Five Seasons Ventures, Inivest Partners, Seedcamp and Manta Ray Ventures.
• Greene King has reported vegan dish sales up 265% year-on-year.
• TRG has seen its share fall 7.5% after a broker expressed concern over menu price inflation.
• BDO has found that LfL sales for highstreet retailers declined 0.9% during 2019, the fifth consecutive year contraction.
• The Cantonese themed Yauatcha has opened its first Middle East outlet in Saudi Arabia. Grant MacPherson, senior vice president of restaurants for Hakkasan Group, said: ‘Yauatcha isn’t just another Chinese restaurant – it’s blazing a trail on exemplary cuisine. We recognise that Saudi Arabia is a well-travelled nation with high expectations for unique experiences’.
• Boparan Restaurant Group has confirmed the launch of its seventh Slim Chicken site in Kent next month.
• The ONS reports retail sales volume down 0.6% in December, falling for the fifth month in a row.
• In the US, Starbucks will expand to 100 community stores by 2025. The stores are meant to serve as an economic boost for low-income neighborhoods.
HOLIDAYS & LEISURE TRAVEL:
• Hostelworld has updated on full year numbers saying ‘we are pleased with the continued progress on the Growth Roadmap and can confirm the results for the full year to 31 December 2019 are in line with the Board’s expectations.’ The company will discuss its Strategy Update alongside its FY numbers on 4 March 2020.’
• The government of the Balearic Islands has approved new laws to clamp down on tourist drinking, with fines of up to €600,000 will be issued for serious offences which fall foul of the new rules.
• CVC Capital Partners acquires D-Marin’s Greek, Croatian and UAE yacht marina operating businesses.
• Estonian start-up Bolt has secured €50m from the European Investment Bank to continue developing its technology and safety features in its ride-hailing, scooter and food delivery business across Europe and Africa.
• Construction of the high-speed rail link HS2 could cost the government £106bn, a new review has found. The report went on to find that there is ‘considerable risk’ that costs could rise a further 20%.
• Moody’s reports that the UK Gambling Commission’s ban on the use of credit cards to gamble in Great Britain, effective from 14 April, is credit negative for four companies that it rates, namely William Hill, GVC, Gamesys Group and Playtech.
• Moody’s says ‘we expect the ban to reduce revenues in 2020. It also illustrates increasing regulatory scrutiny and taxation on the industry as the government tries to curb problem gambling. The credit card ban will apply to all revenue streams with the exception of lottery products purchased in stores (non-remote lotteries).’
• Moody’s says, however, that ‘we do not expect any material erosion of the gambling companies’ financial ratios in the next year as a result of this new ban.’
• Per Guardian, Betfred’s owners, Fred and Peter Done, are making millions from a business that treats public sector staff for health problems including gambling addiction. The Dones have taken £5.2m in dividends from the business in the past three years.
FINANCE & ECONOMICS:
• Chancellor Sajid Javid has said that he would like to double Britain’s underlying rate of economic growth after it leaves the EU. In an interview with the FT he gave no details. His first budget will be announced on 11 March.
• Sterling lower at $1.2994 and €1.1705. Oil higher at $65.63. UK 10yr gilt yield unchanged at 0.64%. World markets higher Friday, Far East mixed in Monday trade.
• Brexit & politics:
o Big Ben chimes fiasco rolls on as Downing St seeks to distance itself from the fund-raising.
o Press still fixated on a 35yr old man’s decision to move out of his nan’s house.
START THE DAY WITH A SONG:
Last Friday’s song was The Less I Know the Better by Tame Impala, today who sang:
No you just have to wait,
She said love don’t come easy
It’s a game of give and take
RETAIL WITH NICK BUBB:
• Saturday’s Press and News: The surprisingly subdued ONS Retail Sales figures for December got plenty of uncritical coverage in the Saturday papers, with lots of headlines speculating that the Bank of England may respond by cutting interest rates…On the back of that, the Daily Mail had a feature on “Where to invest for some Retail therapy”, highlighting the stockmarket success of Boohoo in particular (as well as Greggs and Games Workshop) relative to Marks & Spencer. Talking of Boohoo, the Guardian had an interesting feature on the growth of the Online fast fashion business I Saw It First that was started in 2017 by Mahmud Kamani’s brother, Jalal, and is now a sponsor of the cult TV reality show “Love Island” (although it quoted our view that Jalal would not have been allowed to start a rival business if it was seen as a threat to Boohoo). The Guardian also had a feature on the
• Sunday’s Press and News (1): There were plenty of features in the Sunday papers, but the main News story was the Sunday Times revelation that the embattled shopping centre business Intu Properties is working on a £1bn rights issue to cut its debt mountain, with the Business Editor, Oliver Shah, highlighting in his column that this is “High noon on the High Street” and that “if investor’s decide Intu’s woes are more to do with its balance sheet than its tenants, it may yet spring a surprise”. The Sunday Times also flagged that Intu’s rival, Hammerson, is trying to dump its remaining 7 retail parks ahead of its finals next month, the struggling gifts chain Hawkin’s Bazaar is on the brink of collapse (again), City analysts are nervous about ASOS’s ability to rebuild its profit margins and the former New Look boss Tom Singh has invested in a new Online clothing marketplace called
• Sunday’s Press and News (2): In terms of features, the Sunday Times flagged that Dixons Carphone boss Alex Baldock is still struggling, two years on from trashing his predecessor’s legacy, and that he may try and prop things up by merging with German electricals rival Ceconomy (“Trouble on the line for Carphone Warehouse”). The “Inside the City” investment column in the Sunday Times looked at Greggs and said that the shares are a Hold. The Questor investment column in the Sunday Telegraph looked at the outlook for the builder’s merchant giant Travis Perkins and said the shares are a Buy. Ahead of the Burberry Q3 results on Wednesday, the Sunday Telegraph also had a feature on the turnaround of Burberry (“Burberry stitches together a shift upmarket”) and its focus on China and “must-have handbags”. And ahead of the Joules interims on Tuesday, the Sunday Telegraph also
• Intu Properties: Following the Sunday Times story that the embattled shopping centre business Intu Properties (which owns Trafford, Lakeside, Metrocentre etc) is working on a £1bn rights issue to cut its debt mountain the company has confirmed that it is indeed planning an equity raise with its finals at the end of next month and that it is “currently engaged in constructive discussions with both shareholders and potential new investors on the proposed equity raise”. Matthew Roberts, the CEO, also highlights that “We have delivered a robust operational performance for 2019 finishing with a busy Christmas trading period. Total footfall in 2019 was flat in the UK, which significantly outperformed the Springboard footfall monitor for shopping centres”.
• Sosandar: The AIM-listed Online women’s fashion brand, Sosandar, is still pretty small, with a market cap of only £45m, but it has today reported steady progress in Q4 performance month-on-month, with October revenues up 108%, November up 138% and December up 153% year on year and it has flagged that full-year revenues will be ahead of expectations.
• News Flow This Week: There are still quite a few retailers still to report on Christmas trading, kicking off with the Dixons Carphone update tomorrow, whilst the struggling Joules also have their interims tomorrow. Wednesday brings the WH Smith AGM update, the Burberry Q3 update and the Pets at Home Q3 update (and the Topps Tiles AGM). The ASOS trading update and the Hotel Chocolat update are on Thursday.