Langton Capital – 2020-01-22 – PREMIUM – JD Wetherspoon, New River, delivery, Boeing & other:
JD Wetherspoon, New River, delivery, Boeing & other:
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A DAY IN THE LIFE:
Bit busy with releases this morning. On to the news:
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JD WETHERSPOON Q2 TRADING UPDATE: JD Wetherspoon has this morning updated on trading for the 12wks to 19 January (and for H1). 22 Jan 2020:
• JDW reports that, for the 12wks to 19 January, LfL sales rose by 4.7% and total sales by 4.2% (impacted by closures & disposals).
• LfL sales growth has slowed somewhat as the company reported in November that LfL sales in the first 13wks of the current financial year were up by 5.3%
• At the time of the group’s full year numbers (13 September), Chairman Tim Martin said ‘we currently anticipate a reasonable outcome (pre IFRS16) for the current financial year, subject to our future sales performance.’
• JDW says now that it continues ‘to anticipate a trading outcome for this financial year in line with our previous expectations.’
More on trading, balance sheet, debt etc:
• JDW says that, for the year to date (25wks to 19 Jan), like-for-like sales increased by 5.0% and total sales by 4.9%.
• JDW says ‘since the start of the financial year, the Company has opened 1 new pub and sold 5 and intends to open a further 10 to 15.’
• The group says ‘it is expected that around £80m will be spent this year on new pubs and pub extensions.’
• JDW adds ‘the Company has spent £57m in the year to date buying the freehold reversions of 18 pubs of which it was previously the tenant. Full-year reversion expenditure is expected to be around £85m (2019: £77m).’
• Looking over the longer term, JDW says ‘a total of £320m has been spent on reversions since 2014.’
• It says ‘in addition, the company has spent £516m on buying and cancelling 53% of its own shares since the buyback program started in 2003.’
• This has had a material impact on the number of shares in issue, which has been reduced from 221,512,519 to 104,678,395.
• Regarding its financial position, JDW says ‘the Company remains in a sound financial position.’
• It says ‘net debt (pre IFRS16) at the end of this financial year is currently expected to be between £780m and £820m, slightly higher than previously anticipated, due to higher than anticipated capital expenditure.’
• JDW defends its cash allocation policy, which has seen its dividend held unchanged for a number of years, saying ‘if the company had not bought shares or reversions it would be more or less debt-free, having financed dividends, the repayment of 2003 borrowings of approximately £300m and the opening of a net 239 pubs, from free cash flow.’
Conclusion, current trading etc.:
• Re trading, Chairman Tim Martin says ‘we continue to anticipate a trading outcome for this financial year in line with our previous expectations.’
• Mr Martin then talks at great length about corporate governance and Brexit. He favours a ‘comply or explain’ approach.
• Re Brexit, Mr Martin attacks what he calls ‘project fear’ and criticises the CBI, the Food & Drink Federation and the BBC. He says the ‘elimination of tariffs will obviously reduce prices.’
• He says it is time people took a ‘wise-up pill…and supported the democratic decisions of the UK.’
• JD Wetherspoon reported back in November that sales growth had slowed slightly and this has continued.
• The group’s numbers are still extremely good by industry standards – and forecasts are being maintained.
• As expected, there is no mention of margins in today’s Q2 update. This is a brief trading update dividends are not covered.
• Today’s report is short (c300 words on trading including comments on 2014-2020 capital allocation decisions) but there are c2,200 words on Brexit, corporate governance and the role of non-executive directors.
• JDW is a great company that knows its market. Shareholders, however, may be a little concerned that it is spending their money and directors’ time on issues unrelated to the company’s day job.
• On the trading front, JDW is selling some beer at £1.39 per pint. It has a loyal customer base, and this may secure its market position over time. In the short term, however, though sales may be strong, earnings may be somewhat held back.
• We remain firmly of the view that JDW does what it does extremely well.
• But its shares are not currently cheap and its earnings have been flat-lining. Its low margins could prove to be a point of weakness if sales growth stalls against the background of what the company has called ‘continuing political problems’.
PUBS & RESTAURANTS:
• The FT has a big piece on Deliveroo suggesting that it is ‘facing a funding squeeze at the same time as its biggest British rival in online food apps, Just Eat, has been strengthened by new backing, putting pressure on one of Europe’s most prominent private tech companies.’
• Langton commented on the Amazon position last week. The American giant is reported to have funded Deliveroo via a convertible bond whilst the UK’s CMA looks into the mechanics of a proposed equity investment and its potential impact on competition.
• The FT says ‘investors in Deliveroo have been left confused and anxious by a UK CMA investigation which has put hundreds of millions of dollars of planned investment from Amazon on hold, for months on end.’
• Deliveroo lost £243m in the year to end-December 2018 (the most recent year reported) and had lost an accumulated £592m since incorporation. It will have lost hundreds of millions more in the 13mths since the above accounting period ended. At December 2018, Deliveroo had £184m of shareholders’ funds. Since Dec 18, it has issued equity in both January and July last year.
• The FT says ‘some fear that the very future of Deliveroo, which remains lossmaking, looks uncertain. Even if the CMA does eventually approve Amazon’s investment, in the meantime Deliveroo has already been forced to curtail its growth plans.’ Langton commented on the scale of the increase prices that the consumer (or the restaurant) would have to fund if the industry were to be profitable. True, the ‘start-up’ losses would not continue, but prices in the industry at the moment are not high enough for the whole supply chain to make money.
• The FT quotes ‘one Deliveroo investor’ as saying ‘how they are keeping the lights on is an open question.’
• Chief Executive of the Wine and Spirit Trade Association, Miles Beale has called on the UK chancellor to cut alcohol duty. Beale stated: ‘Duty rises are bad for consumers, bad for business and bad for the Exchequer, as the Government’s own figures clearly show. After wine was singled out for a duty rise wine revenues have fallen on the previous year, in line with a slump in wine sales’.
• The US and French have come to a truce for a year with regards to tariffs, after the US threatened up to 100% tariffs on $2.4bn worth of French goods.
• Heineken’s share price has come under pressure following reports that sales in Vietnam have dropped by around a quarter since the beginning of the year in the wake of a drink-driving crack-down.
• Chick fil A has closed its one store in the UK, in Aviemore, in the Scottish Highlands, in the wake of an outcry following reports that the fast-food chain had been making donations to anti-LGBT rights groups.
• Coal Grills & Bars has fallen into administration. Wilkins Kennedy has been appointed to oversee the administration.
• Market Watch has reported that the co-founder of Pret A Manger, Julian Metcalfe is seeking to fund 1,000 new US stores of his Itsu chain with a stock market listing.
• Julian Metcalfe said: “Forget Pret, this is the next big thing. When you travel in Japan, food is so nutritious it’s glorious. They are so far ahead, I’ve always been inspired with what they eat. We have a 45% profit margin, so it has fast-food margins, which is rare. But 1,000 stores is not going to happen without a partner’.
• Coca Cola’s head of sustainability has told the BBC that the company will not ditch single-use plastic bottles because consumers still want them. Ms Bea Perez said that customers like them because they reseal and are lightweight. The drinks company produces some 3m tonnes of plastic packaging per year. It has pledged to use at least 50% recycled material in its packaging by 2030.
• Sainsbury is cutting hundreds of management jobs in a bid to remove duplication post its takeover of Argos.
• The Coca-Cola Company has announced plans to invest €1 billion in France over the next five years, supporting its sustainable development goals in the country.
• Sales of plant-based foods have risen 40% since 2014 to £816m in 2019, research from Mintel has found. Mintel global food & drink analyst Kate Vlietstra said: ‘The rising popularity of flexitarian diets has helped to drive demand for meat-free products. Many consumers perceive that plant-based foods are a healthier option, and this notion is the key driver behind the reduction in meat consumption in recent years’.
• Subway has announced plans for a new sustainability strategy across the UK and Ireland.
• The six strong, Tomahawk Steakhouse has announced plans to open a new site in Beverley.
• Tesco is launching a new vegan tuna product across its UK stores, sourcing from the US producer Good Catch. Good Catch chief executive Chris Kerr said: ‘Sustainability is, and will continue to be, higher on the consumer agenda than ever before and it’s no secret that this has played a huge part in the rapid growth of plant-based food and drink’.
• Graham Siddle and Lynda Maitland have acquired The Barking Bistro, Whitley Bay’s only dog café, planning to establish the café as a centre for the coast’s canine community.
• Aldi will increase pay for its staff by over 3%, with its minimum hourly pay rates rising from £9.10 an hour to £9.40, with workers inside the M25 getting £10.90 an hour instead of £10.55.
• New River REIT has updated onQ3 trading saying it is ‘well-positioned portfolio delivering a resilient operational performance.’ New River says ‘in the third quarter, we saw continued stability in our operational metrics with an increase in retail occupancy to 96.1%, footfall outperforming the UK benchmark by 60 bps and a healthy demand for our retail space having signed deals across 152,000 sq ft, with long-term deals on terms ahead of previous passing rent and ERVs. Our Hawthorn Leisure pubs business also delivered growth through the acquisition of Bravo Inns and from strong like-for-like EBITDA per pub growth.’
• New River says its pub operation, Hawthorn Leisure, ‘continued like-for-like EBITDA growth per pub, supported by solid Christmas trading.’ It says ‘like-for-like EBITDA growth per pub of +4.9% in FY20 to date, as the portfolio continued to benefit from the scale-based synergies secured in FY19 and a solid Christmas; rate of growth expected to moderate following annualisation of Hawthorn Leisure integration in January 2020.’ New River adds ‘pub occupancy remained high at 97.9% (September 2019: 96.7%) across our 698 community pubs.’
• Sainsbury CEO Mike Coupe to retire from his role at the company and Simon Roberts has been appointed Chief Executive Officer from 1st June 2020
HOLIDAYS & LEISURE TRAVEL:
• Confirmation of a new coronavirus has dragged global markets down. Six people have died from the virus with more than 290 confirmed cases in China, Thailand, Japan and South Korea.
• The FCO has offered travel advice for China after the outbreak of coronavirus. The FCO stated: ‘There is an ongoing outbreak of coronavirus. The virus originated in Wuhan City, Hubei Province but cases have been confirmed in other parts of China. Public Health England has offered advice to travellers, and additional health screening measures may be in place’.
• The US hotel industry has seen occupancy increase 0.6% to 54.4% during December 2019, according to STR. The industry rose average daily rates by 2% to $126.84, with RevPAR up 2.6% to $69.00.
• STR has found that US hotel occupancy levels were flat for 2019 compared to 2018 at 66.1%, with average daily rates up 1% to $131.21 and RevPAR increasing 0.9% to $86.76.
• There is to be a further delay in the reintroduction of the Boeing 737 Max into commercial flights. This will negatively impact carriers in Europe such as TUI, Norwegian Air & Ryanair. Boeing said the return to flying ‘is subject to our ongoing attempts to address known schedule risks and further developments that may arise in connection with the certification process. It also accounts for the rigorous scrutiny that regulatory authorities are rightly applying at every step of their review of the 737 Max’s flight control system and the Joint Operations Evaluation Board process which determines pilot training requirements.’
• Hoseasons reports strong 2020 trading, with the company breaking its previous single day sales record by 11% on January 7. Last year, Hoseasons saw numbers grow 10% last year due to ‘unprecedented demand’ for UK breaks.
• EasyJet reports passenger carryings up 2.8% to 22.2m for the three months to December, with total revenue up nearly 10% to £1.4bn. The budget airline also said that a strong start to 2020 trading was due to ‘robust’ passenger demand, with its relaunched holidays business expected to ‘at least break even’ for the financial year ending September 30, 2020.
• Best Western GB has partnered with Corus Hotels to add seven properties to its portfolio. The hotels will be marketed under the WorldHotels, BW Signature Collection and Sure Hotel Collection brands.
• Apex Hotels reports turnover up 9.5% to £75.4m in the year to 30 April 2019, with pre-tax profit up 51% to £11.7m. The Edinburgh-based group said that these results were due to its ‘comprehensive investment programme’.
• A £300m 120-room hotel is being developed on the site of the Pavilion Road NCP car park in Knightsbridge. The hotel will feature direct access to Harrods via a secret tunnel, and owner of the freehold is City Developments Limited.
• Visit Britain has said that visitors to the UK (who spent a total of around £25bn in the country as a whole) spent £951 million in the country in the last financial year directly as a result of activity by national tourism agency.
• Visit Britain says that inbound tourism visits to the UK grew 33 per cent and spending by 58 per cent in the last ten years.
• The UN World Tourism Organisation says that some 1.5 billion international tourist arrivals were recorded globally last year. The number is up some 4% on 2018. The UNWTO is predicting growth of between 3% and 4% for this year.
• A new Club Med ski resort is to open in the French Alps at La Rosiere next winter.
• The ONS yesterday reported that the number of people in employment in the UK rose by 208k to 32.9m last month. The unemployment rate remained at 3.8%, its lowest level since early 1975.
• The ONS has also reported that national average pay increased by 3.4% before the impact of bonuses in the 3mths to November. This represents the slowest rate of growth since April last year. The NLW goes up by 6.2% this April.
• Netflix yesterday blamed competition for a slowing in its growth rate in the US. It said the emergence of new competitors held it back to growth of just 420,000 subscribers in the US in the most recent quarter. The group finished 2019 with more than 167 million paying customers globally.
FINANCE & ECONOMICS:
• The IoD says ‘businesses have been eager to recruit over recent years, and higher employment levels have in turn supported household incomes. However, many positions remain unfilled, and as it becomes harder to find matches for particular roles, firms will increasingly look to close vacancies and tone down their hiring plans.’
• The NIESR says ‘real wages grew at an annual rate of 1.8 per cent over the same period [to November] excluding bonus payments.’ It says ‘as expected, earnings growth continued to soften a little towards the end of last year but employees should see 2020 start with stronger real pay growth as demand for workers is holding up, inflation eases and upratings in the National Living Wage and minimum wages will benefit those on low incomes.’
• Differentials are likely to be maintained across large sections of the economy meaning that changes in the NLW and NMW will feed through to many more jobs than those they directly impact.
• A poll undertaken by PwC has reported that the UK is becoming increasingly attractive to global businesses searching for growth and investment opportunities.
• The government has been called upon to publish just what it wants to get out of trade talks with the EU and the US.
• Around 55% of the 952 directors surveyed by the IoD said they would only be able to ‘make planning and investment decisions’ with certainty when ‘we understand our future with the EU.’
• Sterling higher at $1.3059 and €1.178. Oil lower at $64.32. UK 10yr gilt yield down 2bps at 0.63%. World markets: UK & US down yesterday but Europe higher. Far East up in Wednesday trade.
START THE DAY WITH A SONG:
RETAIL WITH NICK BUBB:
• Sainsbury: Following the news yesterday that Sainsbury is planning hundreds of management job cuts come the news today that the embattled CEO Mike Coupe has at last paid the price for the failure of last year’s Asda deal and that he will step down on June 1st. And, as had been rumoured, the new CEO will be the leading internal candidate, Simon Roberts, the Retail and Operations Director. Needless to say, there is no mention of Asda in the statement and Mike Coupe gushes that “I am delighted that Simon will be the next Chief Executive and am confident that he is the right choice for our customers, our colleagues and our investors”.
• Ted Baker: The Ted Baker share price has tumbled even further recently, even though there has been no trading update since Christmas and today’s announcement doesn’t move the debate much further forward, via the news that the Deloitte review of the stock valuations has now largely concluded and that Ted Baker expects to report that the value of inventory held on the group’s balance sheet at 26th January 2019 was overstated by £58m (ie materially higher than the £20-25m preliminary assessment announced on 2nd December 2019). As previously stated, however, the overstatement is a non-cash item and related to prior years. And long-suffering shareholders, including the former boss Ray Kelvin, may be relieved to hear that there are no plans for any further update until the time of the preliminary results in March.
• WH Smith: Ahead of today’s AGM, the trading update from WH Smith is reassuring, with LFL revenue up 3% in Travel over the last 20 weeks and down 5% in the High Street, which, given margin and cost control, puts the group on track for the y/e August.
• Retail Sales Watch: The Retail month of January (the 5 weeks to Jan 25th) is nearly over (see the JLP weekly figures below), but we haven’t seen the final word yet on how bad December was on the High Street, despite the calendar shift of Black Friday…The wretched Office of National Statistics (ie the ONS or what we mockingly call the “Planet ONS”) reported on Friday that non-seasonally adjusted total Retail Sales by value were up by 3.4% last month (ex-petrol)…But the BRC-KPMG unadjusted measure of gross sales was only up by 1.9% in gross terms (up 1.7% LFL). So, who was right? The ONS? Or the BRC? Well, the Retailing consultancy group, Retail Economics (RE), which was founded by Richard Lim (who used to run the monthly BRC-KPMG Retail Sales survey) has just come out with its own detailed overview of December and their estimate is that gross Retail sales rose in value by 2.5% last
• John Lewis Trading Watch: Moving on to January sales trends, we flagged a week ago that the John Lewis trading had slumped again and overall gross sales in w/e Jan 18th were down by 2.8% (down c2.5% LFL), according to yesterday morning’s JLP weekly overview…John Lewis blamed Clearance Sale activity for depressing sales in Home, although Computer sales were helped by Windows 7 replacement activity. In terms of sales mix, Electricals were up by 1.4% gross, but Fashion/Beauty sales were down by 2.8% gross last week and Home sales were down by 9.3%. Over the last 51 weeks, overall gross sales are running down 1.6% cumulatively (the H1 LFL sales fall was 2.3%, with gross sales 1.8% down).
• Waitrose Watch: Last week, w/e Jan 18th, saw another painful-looking fall in gross ex-petrol sales at Waitrose, of 2.8%, pulling the last 51 weeks cumulative run-rate down to -0.9%, but JLP revealed after Christmas that store space is running as much as 1.7% down (after the sale of five Waitrose stores in June and more disposals in October), so the LFL sales picture does not look so bad, even though the position is boosted by decent Online Grocery growth, ie LFL sales were only 1.1% down last week (the LFL sales dip was 0.4% in H1, with gross sales down by 0.8%).