Langton Capital – 2020-01-21 – Pat Val anniversary, SSP, Fevertree, discounts, bricks & mortar etc.:
Pat Val anniversary, SSP, Fevertree, discounts, bricks & mortar etc.:
A DAY IN THE LIFE:
I quite like the ‘posh bonkers’ type that haunt bookshops and the like.
Not that I really know any personally but, compared with some of the people that you might meet shambling towards the bus stop home from town after last orders, they’re a breath of fresh air. Albeit smelling vaguely of mothballs with their bemused, other-worldly half-grins, their spectacles held together with Elastoplast and with the pockets of their Harris Tweeds stuffed with restaurant receipts, Jelly Babies and pipe tobacco.
Still, despite the fact that I’ve shambled towards my fair share of bus-stops in my time, I’ve been told that if you can’t spot the ‘bookshop crazy’ in the room (and particularly if you find yourself muttering about Thomas Mann’s repressed urges or Candide’s subtle anti-Catholicism), it might be you. On to the news:
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PAT VAL ADMINISTRATION, ONE YEAR OLD TOMORROW: Administrators were called in to Patisserie Holdings one year ago tomorrow. Where are we now and what have we learned? 21 Jan 2020:
Premium Text included today below
• On the 10th October 2018 Patisserie Valerie announced it faced a winding-up order from HMRC.
• Its shares were suspended and the firm subsequently uncovered ‘significant, and potentially fraudulent, accounting irregularities’ leading to the arrest of its finance director, Chris Marsh.
• An attempt was made to rescue the company (with cash from major shareholder and chairman Luke Johnson and from shareholders) but the scale of the problem had been underestimated
• On the 22nd of January 2019, Pat Val entered administration after failing to secure a financial lifeline from its banks (or further cash from other sources)
• An abyss had clearly opened up. The directors and advisors were unable to quantify the scale of the problem and nobody was prepared to thrown more good money after bad
• KPMG were then appointed as administrators.
The administration. Wham, bam, thank-you ma’am:
• In March KPMG discovered the £40m blackhole was actually £94m.
• The cash didn’t exist, unregistered debts did and the assets were worth less than they were in the books at and, in many cases, they were simply worthless
• Understandably, the administrators didn’t want to hang about.
• Attractive parts of the business were sold off, Baker & Spice was sold to the Department of Coffee and Social Affairs.
• Causeway Capital bought 96 Pat Val stores.
• A.F. Blakemore & Son acquired all 21 Philpotts stores across the UK.
• These disposals totalled £15.5m, leaving the administrators with Stonebeach – the trading company behind Pat Val.
• In the company’s books, Stonebeach’s kitchen equipment was worth £8.3m, its leases £5.7m, its furniture £3.3m and its shop fittings £12.3m. That totals £29.6m. The Administrators valued all of the above at zero.
• The Going Concern principle had, with hindsight, been misapplied in this case.
• Through a mixture of fraud, ineptitude, overconfidence and a simple desire to believe what they wanted to believe, the directors & advisors had overseen what had become one of the most spectacular collapses in the sector in recent years
• The potential legal claim against Grant Thornton is now believed to be the company’s biggest asset in administration.
Where to from here?
• KPMG, though they were paid £2.3m in administration fees, said they will not pursue Grant Thornton due to conflict of interest
• This conflict would have been apparent when KPMG took the job
• Creditors removed KPMG as administrators in July, and appointed FRP Advisory.
• FRP will also consider whether to launch legal action against Patisserie Valerie’s former directors, officers and advisers.
• FRP will be eyeing who has the biggest ‘pot of cash’ in deciding who to bring legal action against. There is no point bringing an action against ‘straw men’
• This might give Pat Val’s former directors, non-execs and the insurers to its auditors pause for thought, as it is possible they could be named as co-respondents.
• On the criminal front, the Serious Fraud Office has been investigating Patisserie Valerie and has so far made six arrests, including the re-arrest of former finance director Chris Marsh.
• No names have been released (other than Mr Marsh) but stories abound as to how the books ended up in the shape that they did. Simply the labour involved in so much plate-spinning suggests that it may have been a cottage industry
What (if anything) have we learned?
• When a pride of lions pulls down and dismembers a wildebeest, the rest of the herd pays attention.
• But only for about ten minutes because, with all that tasty grass around, there are other things to be getting on with
• Unless various bodies are on the guard against it, the collapse of Pat Val might have a similarly transient impact
• We would suggest that auditors may have to hike their fees & do more work.
• Non-execs will be twitchy. They are as liable as the executives in the case of a collapse. Likely they will demand bank confirmation letters, periodic asset valuations and the like. This will cost money
• Shareholders could also demand similar confirmatory statements – but, in the real world, they probably will not
Nearer term considerations:
• The collapse inevitably led to criticism of the auditing industry, with other failures such as Carillion and Thomas Cook adding fuel to the fire.
• Critics questioned how auditors could sign off on these companies on a Going Concern basis.
• In defence of Grant Thornton, fraud is harder to spot than an outdated business model.
• And, though it is hard to say elegantly, if an auditing firm is utterly hammered on its fees, then it may have to tailor the work that it does, within the law, accordingly
• However, an auditor’s objective is to obtain reasonable assurance about whether the financial statements of a company are free from material misstatement, whether due to fraud or error.
• Investors have been warned for years that auditor’s reports are not ‘guarantees’. Occasionally the lesson is expensively hammered home
• Additionally, the SFO investigation continues. So far, there has been very little information as to the progress of the investigation, with the SFO being tight-lipped
• What we do know is that the investigation was announced on the 12 October 2018 and has been ongoing for 15 months now. One would expect a lot of evidence will have been collected over that time.
• As far as civil recovery is concerned, FRP Advisory has not been releasing information on a day-to-day basis
• However, there are enough deep pockets out there to suggest that somebody will be in receipt of a writ at some point in the future
PUBS & RESTAURANTS:
• SSP Group has updated on first quarter trading saying it ‘has had a good start to the new financial year with further encouraging progress on its strategic initiatives and unchanged profit expectations for the full year.’
• SSP says ‘total group revenue in the first quarter increased by 7.5% on a constant currency basis, comprising like-for-like sales growth of 1.2% and net contract gains of 6.3%. Total group revenue growth at actual exchange rates was 6.1%.’ The group says ‘overall like-for-like sales growth was in line with our expectations, with the external headwinds noted in the second half of last year continuing, as anticipated, into the first quarter of this year.’
• The group concludes ‘looking forward to the full year, our expectation for like-for-like sales growth for the Group remains unchanged, at just below 2%.’ It says ‘we remain confident of delivering another year of strong growth, in line with our expectations. Whilst a degree of uncertainty always exists around passenger numbers in the short term, we continue to benefit from the structural growth opportunities in our markets and to create further shareholder value.’
• Wetherspoon has announced that it will welcome Brexit by cutting the price of several European drinks on the day the UK leaves the EU.
• Brasserie Bar Co has reported full year numbers to end-June last to Companies’ House saying that it has turned in ‘strong’ results with turnover up 6.7% at £57.8m with unit EBITDA up by 15% at £8.5m.
• Brasserie Bar Co reports PLC EBITDA up by 15.2% at £4.0m and says ‘2019 will best be remembered as the year in which the company achieved its transformation into the market-leading food-led Pub Company.’ The company says ‘this is proving to be a highly attractive market.’
• Brasserie Bar Co says that its model has been ‘trebling the existing trade’ where it has taken over units. It says its Brasserie Blanc restaurants ‘continue to grow sales and market share in their local markets, increasingly so as many of our competitors continue to retrench.’ The group opened two new pubs in the year under review.
• Market comment – Brasserie Bar Co says ‘the eating and drinking out of home market have persisted in being extremely difficult. Casual dining in particular is under more and more pressure. Closures of high street restaurants are reported as exceeding 1400 outlets.’ The company says the local pub market is ‘less exposed and consequently more robust.’
• Intu is reported to be looking for a cash injection from its shareholders. It will be interesting to see just how enthused shareholders are by that idea. Will they see themselves as supporting a turnaround or simply throwing good money after bad? Beales yesterday appointed administrators.
• Major discounts still available with 50% off mains at Prezzo and 40% off mains at Café Rouge (Casual Dining Group) and at Frankie & Benny’s (Restaurant Group). Beefeater (owned by Whitbread) is offering 33% off mains and Pizza Express is offering 30% off all food and drink.
• Data from the customer feedback specialists, Feed It Back, has found that the mentioning of ‘vegan’ during the first three weeks of Veganuary in 2020 is more than double 2019’s numbers. The firm also found that the average score given in a review mentioning vegan has reduced to 4.3 from 4.5 out of 5, suggesting that consumer expectations of vegan dishes have risen.
• Commenting on the report CEO of Feed It, Carlo Platia stated: ‘Veganism was the stand out trend of 2019, gathering significant momentum throughout the year and attracting the attention of new product development across the hospitality and retail industries’.
• The investment firm of Portugeuse retail tycoon Luis Amaral, Western Gate has urged shareholders in stock spirits to support a vote for a special dividend, as he believes the profits are not being fairly shared.
• Food Service Equipment Journal reports that ‘pub chain Marston’s continues to leave no stone unturned in trying to make its kitchens as energy efficient as possible’. It says the chain is investigating ‘a heat recovery system that ticks all the right boxes.’
• Food Service Equipment Journal has pointed out that some equipment manufacturers, such as Synergy Grill, offer labour-saving grills without fat trays that use less gas than existing products. Synergy Grill has ‘increased factory production to keep pace with casual dining demand’ reports the Journal.
• This trend, if continued, will run against that towards branding that has been a major source of growth for the major global accommodation chains. Pragma says that the larger operators, such as Hilton, Marriott and Radisson ‘have to adapt’. It says ‘the brands and the hotels they operate are actively changing their offering’ but adds that ‘over the past few years these brands have increasingly looked to acquisition to grow revenues.’
• Fevertree shares suffered their worst day ever yesterday, dropping 27% as the company warned that it would miss estimates due to a poor Christmas. The group’s claims that a poor Xmas meant that comps would be soft later this year would appear to have fallen on deaf ears.
• Fevertree said that 2019 earnings should be around 5% down on the prior year, implying perhaps 51p per share. This implies that the group, even after its sharp fall yesterday, is trading at an eye-watering 28x earnings. The shares yield around 0.5% in dividends.
• Partizan Brewing has reported July 2019 numbers to Companies’ House. Whilst no P&L needs to be presented, retained losses have increased by around £22k in the year. The company gives no details on trading.
• The UK drinks industry has embraced the low-alcohol trend beyond Dry January. The BBPA has estimated that nearly 5m pints of no to low alcohol beers will be bought this month, as 4.2m Brits stick to Dry January.
• The craft beer company, Big Drop has launched a new crowdfunding campaign to help it continue to expand internationally.
• Beales has appointed KPMG as administrators after failing to find a buyer or new investment for the business, putting more than 1,000 jobs at risk. The department store has 23 shops and there will be no immediate closures as the business continues to trade.
HOLIDAYS & LEISURE TRAVEL:
• The SARS-like virus that is spreading in China has led to concerns over travel and tourism in the area and to a wider drop in share prices. Similar concerns have led to sharp drops in travel in the area in the past.
• Pragma Consulting suggests that ‘the growth of online booking platforms such as Airbnb and Expedia have fuelled the growth of boutique hotels and apartment sharing, opening the travel accommodation market to a host of new players and providing a greater choice to prospective travellers.’
• The billionaire Barclay brothers are reported to be in talks to sell the Ritz Hotel in London to a consortium of wealthy Saudi Arabian families as the Channel Isles residents cut back on their investments in the UK. The process is said to have been under way for several weeks.
• Uber has agreed to sell its food delivery business in India to Zomato, which is backed by Alibaba of China.
• It is understood that Fosun has recruited a number of former Thomas Cook senior executives as it prepares to relaunch the travel group as an online travel agent. Former group strategy and technology director Alan French is believed to have been appointed as chief executive.
• Final offers for German airline Condor are thought to be being submitted, with Apollo, Greybull and Polish carrier LOT expected to put forward bids
• Accor Hotels has announced a €300m share buyback programme. Accor narrowed its full-year profit guidance in October, due to uncertainty caused by the Hong Kong protests.
• Tourism spending in the UK is expected to reach £26.6bn in 2020, an increase of 6.6% on 2019. It is anticipated that 39.7m overseas visitors will come to the UK in 2020, up 2.9% on last year.
• Japan National Tourism Organisation has announced that over 31m overseas visitors arrived in Japan during 2019.
• The Chief Executive of Uber Technologies has entered into talks with London’s transport supremo amid the recent legal battle.
• Fleurets has reported that Signet Hotel group has bought the Mitre Hotel at Hampton Court.
• Facebook has announced that it will create 1,000 new jobs in London by the end of the year.
FINANCE & ECONOMICS:
• Oxfam has said that the richest 2,000 people in the world are wealthier than the poorest 4.6bn combined.
• Sterling higher at $1.3014 and €1.1727. Oil lower at $64.65. UK 10yr gilt yield up 1bp at 0.65%. World markets: UK lower yesterday with Europe up. US markets higher but Far East down on concerns re the outbreak of a SARS-like virus in the area.
• Brexit & politics:
o Big Ben bonging & Prince Harry hogging the headlines.
o Meanwhile, the EU has said in Brussels that it may not be ready to begin trade negotiations with the UK until March. Spokesman Eric Mamer says ‘the commission can adopt its proposal for the negotiation directives only once the UK has actually withdrawn from the EU. But then there is still an institutional process for these to be adopted by the Council.’
o Chancellor Sajid Javid has said that the UK will diverge from EU rules. Such a move could make trade negotiations that bit trickier. The EU doesn’t want protected products (e.g. tomatoes, oranges) coming into the EU via the UK.
START THE DAY WITH A SONG:
Yesterday’s song was The Supremes with you can’t hurry love, today who sang:
There isn’t much (isn’t much),
That I feel I need (that I feel I need)
A solid soul (a solid soul)
And the blood I bleed
RETAIL WITH NICK BUBB:
• Dixons Carphone: The trading update today for the 10 weeks to 4 January is headlined “Strong performance in sales, market share and customer satisfaction”, which doesn’t mention margins or profits, but there is no profit warning, with the company going on to say that it is on track to meet its targets and there is no change to the financial guidance given at Interim results. UK mobile sales were down 9% LFL, but UK Electricals was up 2% LFL and International was up 3%. Alex Baldock, the Chief Executive, says “We’ve had a good Peak in a weak UK market and we’re on track to deliver what we promised for this year, and with our longer-term transformation”.
• Joules: The struggling Joules only issued its profit warning on Jan 10th, so it doesn’t have much new to say with its interims (for the 26 weeks to Nov 24th) today, apart from a reference to ongoing supply chain cost pressures. The new CEO Nick Jones says “Since joining Joules in September, I have been impressed by the strength of the brand, the flexibility of our multiple routes to market and our fantastic teams. I am confident in the opportunities for long-term sustainable growth of the Joules brand across multiple territories and I am excited to lead Joules through this next chapter of growth”.
• News Flow This Week: Tomorrow 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.
TRADING STATEMENTS & EVENTS:
Upcoming results are set out below:
• Early Jan 20 Xmas statements (in the order presented last year) – Stonegate, Morrison’s, Sainsbury, Constellation Brands, C&C, Brighton Pier, Everyman, M&S, Tesco.
• 20 Jan 20 Fevertree full year update
• 20 Jan 20 Hostelworld trading update
• 21 Jan 20 SSP trading update
• Mid Jan 20 Xmas statements (in the order presented last year) – Cineworld, Saga, DP Eurasia, EasyHotel.
• Late Jan 20 Xmas statements (in the order presented last year) – Hotel Chocolat, Restaurant Group, Starbucks, AG Barr, Fullers, DPP, Domino’s, Hollywood Bowl, Britvic, Rank, Diageo.
• 22 Jan 20 JD Wetherspoon H1 update
• 23 Jan 20 G4M Q3 update
• 24 Jan 20 Marston’s Q1 trading update
• 28 Jan 20 AG Barr trading update
• 29-31 Jan 20 – Springboard charity Snow White pantomime at Leicester Sq. Theatre
• 30 Jan 20 Diageo H1 update
• 30 Jan 20 Rank Group H1 numbers
• 30 Jan 20 Bank of England MPC meeting
• 31 Jan 20 Britvic trading update
• 20 Feb 20 Texas Roadhouse Q4 & FY numbers
• 26 Feb 20 Revolution Bar Group H1 numbers
• 26 Feb 20 Wm Hill FY numbers
• 26 Feb 20 SSP Group AGM (no trading statement expected)
• 4 Mar 20 Hostelworld FY numbers
• 11 Mar 20 Sajid Javid Budget
• 26 Mar 20 Bank of England MPC meeting
• 9 Apr 20 Hollywood Bowl H1 trading update
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