Langton Capital – 2020-01-30 – PREMIUM – Coronavirus, Fuller’s, Rank, Diageo, McDonald’s & other:
Coronavirus, Fuller’s, Rank, Diageo, McDonald’s & other:
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A DAY IN THE LIFE:
Bit of a rush this morning so just a question for you, which is the better product, Apple’s iPhone or Gregg’s vegan sausage roll?
Perhaps one gives you a warm, inclusive feeling and makes you think you’re saving the planet whilst the other is just a sausage roll. On to the news:
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THE CORONAVIRUS AND UK LEISURE COMPANIES: Travel stocks have been impacted but will the outbreak in China have further reaching consequences? 30 Jan 2020:
The novel coronavirus:
• By now, pretty much everyone will have heard of the novel coronavirus, currently named 2019-nCoV, which emerged in the Chinese city of Wuhan.
• The spread of the virus has worried investors, sending markets down around the world.
• However, some commentators have pointed out that equities were already looking somewhat overstretched and that investors may have been looking for a trigger to reduce exposure.
• This may be looking for a silver lining in a very obvious cloud.
Travel and leisure companies:
• Quarantines have a negative impact on business operations, which in turn is sending ripples through the global economy.
• Travel is the most directly impacted sector
• Flights to and from China are being cancelled by airlines such as British Airways, Cathay Pacific, Finnair, Lion Air, Air Seoul, Air Canada and United.
• Hotel occupancy in east Asia is taking a hit, with anecdotal reports from many hotels in China describe financial and retail districts as ‘Ghost Towns’.
• Best Western Hotels & Resorts President and CEO David Kong said ‘Demand is falling precipitously because of this virus,’ at the company’s hotels in China.
• Hong Kong hotels are reportedly offering steep discounts hence, with both occupancy rates and room rates lower, REVPAR will be badly hit.
• Online booking platform C Trip says more than 300,000 hotels had agreed to refund bookings between 22 January and 8 February.
• Cruise companies are either cancelling or rescheduling cruises
• Travel and Casino companies listed on the Hang Seng Index were amongst the sharpest fallers as traders assess the economic impact of the virus.
• Starbucks has already closed a half of its stores in China
• Less easy to quantify is how flight problems will impact incoming Chinese visitors (to gambling resorts in Asia and to major cities in Europe). Safe to say, however, that it will not be positive
• China’s share of the global luxury market is around 33% and rising. When internal travel is heavily restricted, demand for handbags and the like will fall
• Apple is reported to have delayed the launch of the iPhone SE 2 as production schedules are pushed back by the coronavirus outbreak.
• Lower levels of manufacturing will mean lower demand for the precious metals in the phone, thereby affecting the precious metals mining companies.
• Miners in general are lower as Chinese production across a number of industries has slowed
• Furthermore, the launch of a new iPhone model is a big deal, even for a trillion dollar company.
• Delaying events like this could take the gloss off the company’s share price.
• Competitors who have factories elsewhere might look to steal a march on Apple. For example, Samsung shut down its last remaining smartphone factory in China 2019, with the majority of its phones instead made in Vietnam.
Where this is going:
• Science is putting a lot of resource into containing the spread of the virus. Hopefully these efforts will be successful
• On one hand you have epidemiologists like Gabriel Leung of the University of Hong Kong saying by next week there may be as many as 200,000 cases in China.
• But on the other, quarantine measures could prove effective and scientists are already making breakthroughs towards developing a vaccine.
• China has shown itself to be efficient when it comes to lock-downs
• Ultimately, the next week or 10 days may turn out to be pivotal
• One thing we do know though, is if substantial draconian measures limiting population mobility are enforced, it will put a brake on China’s economy as a whole thereby affecting all businesses that operate in and source from China.
PUBS & RESTAURANTS:
• Fullers has updated on trading for the first 42wks of its current year (the period to 18 Jan) saying that ‘the Company has traded well over the festive period with like for like sales in Managed Pubs and Hotels rising 4.3% for the six weeks encompassing Christmas and New Year, and 2.5% for the 42 weeks to the period end.’
• Fullers says ‘all areas of the business – food, drink and accommodation – have been in like for like growth. Tenanted like for like profits are down 3% for the period.’
• CEO Simon Emeny says ‘it’s been a year of change for Fuller’s and this is a good first Christmas as a focused premium pubs and hotels business.’ He says ‘this is a very busy time for Fuller’s as we complete the integration of Cotswolds Inns & Hotels, undertake a number of major capex projects.’ He says ‘we relish the challenge.’
• Diageo has reported 6mth numbers to end-December saying that net sales rose by 4.2% to £7.2bn ‘driven by organic growth.’
• Diageo says ‘all regions contributed to broad based organic net sales growth…with organic volume up 0.2%.’ Basic EPS of 79.2 pence ‘decreased by 2.1% due to prior year exceptional gains. Pre-exceptional eps grew 4.2% to 80.2 pence, driven by higher operating profit and the capital return programme.’
• CEO Ivan Menezes says ‘Diageo has delivered another good, consistent set of results in the first half, with broad based organic net sales growth across regions and categories. We have continued to increase investment behind marketing and growth initiatives, while expanding organic operating margins./
• Mr Menezes says ‘for the full year, we therefore expect organic net sales growth to be towards the lower end of our 4 to 6% mid-term guidance range. We continue to expect organic operating profit to grow roughly one percentage point ahead of organic net sales.’ He says ‘there is ongoing uncertainty in the global trade environment and we would not be immune from further policy changes.’
• Diageo concludes ‘we remain focused on building the long-term health of our brands, supported by data-led insights and a culture of everyday efficiency. With the consumer at the heart of the business and with greater agility and discipline in the execution of our strategy, we are growing Diageo in a consistent, sustainable way.’
• Everards has announced results for the year ending 30 September 2019, with revenue from their 173 pub estate growing by 3.5% compared to the prior year. The company says ‘group EBITDA of £5.9m was 1% ahead of the prior year reflecting good trading performance and a reduction in overheads.’
• Everards says ‘the sale of the Company’s old Brewery site to The Crown Estate was completed in November 2017 and facilitated the start of construction at the 90 acre Everards Meadows development.’ It adds ‘the Everards development will be open and operating in Autumn this year.’
• MD Stephen Gould says ‘it has been another busy year with the opening of Everards Meadows. Our underlying performance during this has been strong which is a reflection of the effort given by the whole team.’ Mr Gould says ‘we also look forward to our next chapter when our new home opens in Autumn this year.’
• McDonald’s has reported U.S. same-store sales growth of 5.1% for the fourth quarter ended Dec. 31, 2019, up compared to 2.3% growth for the same quarter, previous year. Delivery contributed strongly. For the year as a whole, McDonald’s posted systemwide sales of more than $100 billion. Global same-store sales for the year grew 5.9%, the highest in more than 10 years.
• McDonald’s says ‘through the execution of our Velocity Growth Plan, we once again served more customers the food they crave, marking three consecutive years of global comparable guest count growth.’
• Beyond Meat announces it will supply plant-based ‘fried chicken’ to several KFC stores in North Carolina.
• The Scotch Whisky Association has reported that US tariffs have already had a ‘marked’ effect on exports. The association predicts that if the tariffs remain in place they will cost £100m to the industry this year.
• The BBPA has stated that seven million extra pints of beer will be sold in pubs during the Six Nations.
• The Guardian has claimed that the gig economy is increasingly trapping workers in a precarious position where they are forced to devote ever-more time to the platforms in order to remain financially stable. Research from Doteveryone has led the company to call on the Government to reverse this trend and implement action.
• Greene King has increased its vegan offerings by 45% over the last year. At the close of the last financial year, Greene King reported total sales of vegan dishes were up 265% year-on-year.
• The Japanese spirits company, Suntory has taken a 10% stake in Scottish spirits group, Edrington, for an undisclosed sum.
• The Peach Pub Company has announced the sale of the freeholds of four of its pubs ‘in a property deal that secures further investment in its 19-strong portfolio and paves the way for the next stage of its growth.’
• Peach MD Hamish Stoddart says ‘Peach has grown from an entrepreneurial start-up to a profitable £28 million annual business without any other investor funding, remaining privately owned with growth funded from bank and landlord support throughout our 19 years.’
• Mr Stoddart says ‘in early 2019, working with consultants KPMG and Fleurets, we took the decision to re-finance and embark on a sale and leaseback deal for four properties in our portfolio. This led us to a clearer funding strategy.’
• WooHa Brewing Company based in the North East has raised £600k in 19 days from a crowdfunding campaign.
• The US drinks company, Olipop has secured nearly $10m in Series A funding.
• Over one thousand pubs have signed up to the World’s Biggest Pub Quiz, running from 8-12 March.
• Treasury Wine’s profit expectations will be hit by underperformance in the US, with the Australian wine giant recording EBIT down 17% in the Americas region in H1 to $98.3m.
HOLIDAYS & LEISURE TRAVEL:
• PPHE has reported its plans to develop a new city centre hotel in Zagreb, Croatia. CEO Boris Ivesha says ‘this proposed new hotel in Zagreb adds further growth to our secured £300m pipeline of hotel projects in the UK, Europe and the US. Through our subsidiary Arena, we are continuing to expand our presence in Central Eastern Europe and we have the local expertise, infrastructure and reputation to realise the substantial opportunities in this exciting region.’
• Moody’s has unsurprisingly said that ‘the outbreak and contagion of a new strain of coronavirus that began in the Chinese city of Wuhan is credit negative for the media sector, specifically companies with exposure to China box office revenue.’ It is also negative for travel and hotel stocks.
• UKinbound predicts a ‘record 2020’ despite Brexit fears. The coronavirus has the capacity to take the edge off inbound numbers.
• Ian Taylor reports nothing will change until January 2021 despite Britain leaving the EU at 11pm on Friday. Senior travel industry figures expressed relief at the new certainty around Brexit but fear fresh uncertainty later in the year.
• Royal Caribbean says the cancelling of three sailings from China will ‘impact 2020 financial results by approximately $0.10 per share.’
• HNN’s Terence Baker reports Marriott International is looking to grow in Europe, with Eastern Europe being a particular focus for brand growth.
• STR and Tourism Economics’ first forecast of 2020 projects the US hotel industry to have a non-growth year in RevPAR.
• Lyft announces 90 job cuts as the ride-hailing company seeks to achieve its goal of profitability by the end of 2021. Lyft currently employs 5,500 people and is looking to hire more than 1,000 employees this year.
• As travel companies adhere to the new FCO warning against all but essential travel to mainland China, the prospect of cancellations, refunds and rearranging itineraries looms large.
• Boeing reports a $636m loss for 2019 as the 737 Max crisis continues to hit the firm. The company expects the bill for the grounding of the 737 Max to surpass $18bn.
• Sky News reports train operator Northern will be put into public ownership from 1 March after the chaotic introduction of new timetables in May 2018 saw hundreds of trains a day cancelled. The East Coast Main Line is also operated by the government.
• A number of upgrades costing £5m are planned for Leeds Bradford airport this summer.
• Rank has reported H1 numbers to end-December saying that its ‘transformation [is] delivering revenue and profit growth.’ Underlying net gaming revenue is up by 10% at £377.5m. CEO John O’Reilly comments ‘we are pleased with The Group’s first half performance which demonstrates that the transformation programme is delivering the right results.’
• Mr O’Reilly continues ‘the revenue growth in our digital business and across our Grosvenor and Enracha venues shows that we are moving in the right direction in key areas of our business. We remain on track and are confident in our ability to deliver operational and financial improvements underscored by a relentless commitment to delivering exciting, entertaining and safe gambling environments and experiences for our customers.’
• Facebook shares fell yesterday as it reported better-than-expected user numbers but a sharp increase in costs.
• The BBC announces 450 job cuts to high-profile news programmes as part of an £80m savings drive.
• The CMA has said ticket resale company StubHub could be breaking consumer law by not warning customers buying resale tickets that they could be turned away at some venues.
FINANCE & ECONOMICS:
• SMMT boss Mike Hawes has said that the UK car production slump is a ‘grave concern’.
• Norton Motorcycles has gone into administration.
• The Nationwide yesterday said that UK house prices rose by 1.9% in the year to January, their fastest annual rate for 14 months.
• Sterling lower at $1.3012 and €1.1814. Oil lower at $59.20. UK 10yr gilt yield down 1bp at 0.53%. UK MPC meets today. World markets up in London and Europe, mixed in the US but down in the Far East in Thursday trade
• Brexit & politics:
o Research conducted by Cambridge University researchers has concluded that dissatisfaction with democracy within developed countries is at its highest level in almost 25 years.
o Arkansas senator Tom Cotton has said of the decision to allow Huawei into the UK’s 5G network that Britain had ‘freed itself from Brussels only to cede sovereignty to Beijing.’
o Mike Pompeo has said that US information should only pass through trusted networks.
o Sky says that the UK fishing industry fears that it will be ‘sold down the river’.
o Helmut Schmidt said in the 1970s that the special relationship was ‘so special that only one side knows it exists’.
START THE DAY WITH A SONG:
Yesterday’s song was Let’s Stay Together by Al Green. Today, who sang:
“Hey Satan, paid my dues,
Playing in a rocking band
Hey mama, look at me
I’m on my way to the promised land, whoo!”
RETAIL WITH NICK BUBB:
N Brown: The troubled home shopping and mail order business N Brown chose the unusual time of mid-day yesterday to announce that its CFO, Craig Lovelace was leaving after 5 years in the business “to take up a new position” and that one Rachel Izzard, the CFO of Aer Lingus (of all things), had been appointed to replace him, although leaving/start dates had yet to be agreed.
News Flow This Week: The MPC interest rate meeting announcement will be made at noon today, with some City economists still expecting a panic cut from 0.75% to 0.5%. And the widely followed monthly GFK Consumer Confidence survey is out first thing tomorrow.