Langton Capital – 2020-02-03 – PREMIUM – Fund-raising, Just Eat, wine, discounts, Safestay etc.:
Fund-raising, Just Eat, wine, discounts, Safestay etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
Sometimes our dog regards the world in a deeply knowing and intelligent way.
But that doesn’t last long and, over the weekend, we found him behaving much more ‘to type’ when we was hopping from foot to foot, virtually weeing himself with excitement because one of us had a hat on.
Which rocked his world because he managed to make it seem like the biggest thing that had ever happened to him.
That is until the postman rang the doorbell but, we’re pretty sure, he never did figure out who the person with the strangely enlarged and multicoloured head was even though it was probably just one of his extended family taking the bins out in the rain. On to the news:
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FUNDING LOSS MAKING BUSINESSES: Many businesses, when in their start-up phase, lose money. But for how long are losses acceptable and, ultimately, for how long are they affordable? 3 Feb 2020:
• Few businesses hit the ground running.
• Many if not most require start-up funding. Income, in the early days, weeks or months of the business’s existence may be low or non-existent.
• This funding may be provided by the entrepreneurs themselves, by their families, their friends, business angels or third parties – or by any mixture of the above.
• But if start-up losses persist, questions may begin to be asked.
What may develop:
• It is possible, even likely, that the time period during which a start up business makes losses has been under-estimated.
• This may be due to over-optimism, simple lack of planning or due to competition entering the market at the same time as the company seeks to make its mark.
• There may have been no clearly-laid-out plan or plans and projections may simply have been ‘pushed out to the right’
• Persistent loss-making will require further capital injections.
• Shareholders may ‘follow their money’.
• Or the company may tap new shareholders or access a different type of shareholder (angel, high net worth, crowd fund money or venture capital)
A few practical considerations:
• Companies may find out the hard way the difference between cash and profit
• And, though EBITDA is meant to approximate cash, start-up costs need to be taken into account and unit-EBITDA will exclude the costs of head office
• There are rarely contingency reserves, cash levels may come under pressure more rapidly than hoped and capex, though it remains on the balance sheet as an asset, is not cash
• Entrepreneurs are both 1) only human and 2) tend to be at the optimistic end of the spectrum
• In many cases, they are playing with OPM (other people’s money). This potential ‘heads they win and tails they don’t lose much’ situation can encourage risk taking (witness the banks in the run up to the credit crunch)
• Plan A may be to keep their fingers crossed
• If that doesn’t work and more cash is required, the company in question may tap investors as referred to above.
• Some companies may access the crowd. This, arguably, could be a sign that other potential capital providers have decided to pass on the opportunity.
• If looses persist, capital may dry up. The company may then be obliged, perhaps in this order, to organise a CVA, to sell itself or, if that is not possible, to call in administrators.
The above in practise:
• There has been a sharp increase in the supply of new full service and grab and go restaurants and coffee shops
• Arguably, for some time, the consumer has had as many or more of the above than he needs
• Discounting is a feature
• CVAs have also been a feature. Here Colliers says that, since 2016, some 13 out of 23 large businesses that have launched CVAs have gone on to call in administrators
• Colliers gives Toys R Us and Jamies’ Italian as examples. It says that CVAs are a ‘sticking plaster’ solution and in many cases simply delay failure
• Banks are unlikely to fund loss-making businesses without freehold assets
Langton analysis – a rock and a hard place
• Over recent months, Langton has commented on a number of private companies as they have reported results to Companies’ House
• We have usually mentioned current losses (if any) and accumulated losses (if any). The latter gives an indication of how much shareholder cash has gone into ‘brand building’ or creating the estate
• This loss is a cost in addition to the fixed assets that remain on the balance sheet. These will be ‘fairly valued’ if the company succeeds but could be grossly overstated if the company fails (witness our comments on the tens of millions of pounds worth of subsequently worthless assets at Pat Val)
• We usually mention debt and whether the auditors have signed off the accounts on a Going Concern basis
• We comment on the financing structure. There is a big difference between losses caused by the financing structure (often cumulative debt put in place by the equity provider – usually a venture capitalist) and those caused by unprofitable trading
• The companies in the least good position will be those financed by equity, perhaps with a little bank debt, that are still operationally loss-making and which have tapped shareholders two or three times and might have gone to the crowd for their last one or two fund-raises
• Be it Mexican food, grab and go Asian or coffee, there are quite a lot of them around
PUBS & RESTAURANTS:
• Takeaway.com has announced that it is to rename itself Just Eat Takeaway.com. It says that its offer for Just Eat is now unconditional in all respects and says that it has made an application to the Financial Conduct Authority for the cancellation of the listing of Just Eat shares.
• Takeaway.com says that the suspension will be effective from today.
• Updating on the investigation by the Competition and Markets Authority into the deal, Just Eat says it ‘continues to believe in the benefits that the combination would bring for the business and its shareholders, representing an opportunity to create one of the leading online food delivery companies in the world with scale, strategic vision, industry-leading capabilities, leading positions in attractive markets and a diversified geographic presence.’
• Just Eat says ‘the company also remains confident that the merger would not result in a significant lessening of competition in the UK food delivery market.’ The CMA has issued a ‘hold separate’ notice meaning that Just Eat and Takeaway.com businesses must continue to be run independently until the CMA has ruled. Just Eat says it ‘will fully abide by the CMA’s order and will work with it in the course of the investigation.’
• The company goes on to say that ‘following the issuance of the order, Just Eat Chairman Mike Evans and CFO Paul Harrison, who were due to take up positions as Chairman of the supervisory board and CFO and member of the management board of Takeaway.com respectively, have notified the CMA of their intention not to take up these roles for as long as the IEO [the ‘hold separate’ order] is in force.’
• The company says ‘integration of the two businesses will only occur once the IEO has been lifted by the CMA or amended by way of derogation to allow this to occur.’ It concludes ‘in the meantime, Just Eat remains a strong business with significant opportunities for further growth. Recent contract wins with McDonalds and Greggs prove the strength and success of the hybrid model and demonstrate that Just Eat enters 2020 with considerable momentum.’
• Over a quarter of UK drinkers reduced or gave up drinking in January, research from Drinkaware has found. Drinkaware’s Chief Executive Elaine Hindal said: ‘People who gave up or cut back on alcohol for the month will undoubtedly have seen benefits such as more energy, better quality of sleep and brighter mood. It therefore makes complete sense for them to keep these good habits going beyond January’.
• Some 8.6m people are reported to have claimed sick days last year because they found their jobs ‘too painful’ a survey by Kantar suggests.
• CGA’s Wine Insight Report suggests that ‘operators and suppliers can use recommendations, tastings, menus and other tools to help consumers improve their knowledge of wine and rejuvenate sales.’
• CGA research finds that around 40% of wine drinkers that are likely to purchase the product in pubs & restaurants ‘have an active interest in the category—but just 6% consider themselves very knowledgeable about it.’ CGA says ‘we know that wine can be a daunting drinks category for consumers to navigate, and this report shows how a big knowledge gap is holding back sales. Tools like recommendations, menus and tastings can all help people to feel more comfortable about choosing wine, and greater confidence leads to greater spending. But consumers behave very differently in this complex market, and it is crucial to know which marketing levers to pull for which age groups.’
• CGA reports that English wine sales are up 33% year-on-year.
• Prezzo offering 50% off mains or 40% off food. Pizza Express offering 25% off total food & drink for the remainder of this month.
• Regarding cutting the minimum salary for workers coming into the UK post Brexit, the Food and Drink Federation says ‘reducing the £30,000 minimum salary threshold for skilled workers to £25,600 is a step in the right direction.’ It says ‘we would urge the Government to consider going further still by adopting the ‘going-rate’ system outlined in the previous Home Secretary’s letter…as part of a new system that would also allow our members to recruit the talent they need at all skill levels.’
• The BBPA has announced that Phil Whitehead, Managing Director of Molson Coors Western Europe, has been appointed as Chairman of the trade body following a vote at the trade association’s general meeting. Whitehead will succeed Simon Emeny, CEO of Fuller Smith & Turner, who has been Chairman of the BBPA for the last two years.
• The incoming BBPA chairman says ‘the pub and a pint are a British institution woven into the fabric of communities across the country, but the sector is facing increasing pressures and challenges. The BBPA is a vital partner tackling these issues.’ Mr Whitehead says ‘we will look to champion new ways for our industry to remain a relevant, vibrant and valued part of the UK economy, while safeguarding the legacy of British beer and pubs – a cornerstone of our history and culture.’
• The Wine and Spirit Trade Association has called on the Government to cut wine and spirit duty by 2% at the next budget.
• The global market for non-alcoholic beers is set to increase at 7% per year between 2019-2027, according to data from Fact.MR.
• The wine-focused Holborn restaurant, Gezellig is set to shut after just eight months.
• Ei Group has continued its partnership with The Clink Charity with the launch of a new exclusive cask beer ahead of the six nations.
• Co-op has launched its new vegan range across Nisa stores.
HOLIDAYS & LEISURE TRAVEL:
• Clia cruises have banned passengers and crew who have travelled from or through mainland China over the past 14 days from boarding any ships.
• The US Department of State has issued a ‘do not travel’ statement about China, after the outbreak of coronavirus.
• A Chinese national was taken ill from a StayCity property in York amid concerns of coronavirus. COO of StayCity commented: ‘We are following advice from Public Health England we have been advised that the risk is absolutely minimal and that nothing has been confirmed thus far’.
• Safestay has this morning updated on trading for its full year to end-December saying that it has seen a 25% growth in total revenues to £18.3 million with like for like revenues up 7%.
• Safestay says it achieved an 11% increase in adjusted EBITDA with 77.3% occupancy achieved over the period, up from 75.6%, reflecting good demand. Safestay says that Europe now represents 49% of sales, up from 43% last year.
• Safestay chairman Larry Lipman says ‘in 2019 we near doubled the size of the Safestay network. In doing so, the Safestay brand has become Europe’s leading premium hostel network totalling 21 sites.’ Mr Lipman says ‘trading in 2019 was good, all key indicators were strongly positive, in particular the organic growth performance, and critically we have yet to really benefit from the recent acquisitions agreed towards the end of the year. Safestay is therefore well placed to grow substantially in 2020 and take advantage of the increasing popularity of the modern hostel sector.’
• Safestay says ‘the financial performance and the investment made in 2019 has created real momentum going into 2020. While still very early in the year, performance in the first month of 2020 and forward bookings for Q1 are very encouraging, a positive signal for the coming year, which will also benefit from the acquisitions made last year.’
• Costa Cruises have confirmed that a passenger who fell ill on one of their cruises was indeed suffering from ‘common flu’, as opposed to coronavirus.
• Las Vegas had 42.5m visitors last year, up from 42.1m in 2018. Occupancy levels were at 88.9% with ADR up 2.9%.
• Dnata-owned Travel Republic and Netflights report losses of almost £6m for the 12 months to 31 March 2019.
• The One Bottle at a Time (OBaaT) scheme will see six independent tour operators team up to remove up to one million plastic bottles from being used on their holidays by the end of 2020. The tour operators are Experience Travel, Holiday Architects, Pura Aventura, Selective Asia, Steppes Travel and Wild Frontiers.
• The terminal at Doncaster Sheffield airport will get a £10m redevelopment, with many of the proposed improvements to be completed for summer 2021.
• Per STR, US hotel RevPAR increased by 2.6% in December, with ADR up 2% and occupancy up 0.6%.
• The coronavirus outbreak has emptied out casinos in Macau, hitting gambling companies’ shares and threatening revenues.
• Lawrence Stroll has claimed a £500m cash injection will enable Aston Martin to pull out of a financial spin and turbocharge production.
• Moody’s has suggested that the outbreak of the coronavirus disease in China is credit negative for Apple. It says ‘the outbreak will negatively affect earnings growth over the next couple of quarters.’
FINANCE & ECONOMICS:
• Eurozone GDP rose by just 0.1% in Q4. French GDP fell by 0.1% in the quarter.
• China is reported set to pump around $22bn into its economy today in order to provide a boost to protect it from the coronavirus outbreak.
• Sterling up v dollar at $1.3164 but level v Euro at €1.1876. Oil lower at $56.27. UK 10yr gilt yield down 2bps at 0.52%. World markets broadly lower on Friday with Far East down in Monday trade.
• Brexit & politics:
o The Telegraph says that bankers are about to back a £100bn plus ‘deal-making surge in the City.’ Foreign Secretary Dominic Raab says that the UK will not align with EU rules. He says that to do so would ‘defeat the point of Brexit’.
START THE DAY WITH A SONG:
Last Friday’s song was Last Post on The Bugle by the Libertines. Today who sang:
Oh, I could hide ‘neath the wings,
Of the bluebird as she sings
The six-o’clock alarm would never ring
But six rings and I rise
RETAIL WITH NICK BUBB:
• Saturday’s Press and News: The Saturday papers were a bit thin in terms of Retail stories, with most focus (given the 28% share price slump and the fashion model photo opportunity) on the news that the struggling French Connection has announced that it has ended its protracted formal sale process (the Times headline was “There isn’t going to be a connection with a buyer”). There were also a couple of snippets in the Daily Mail and Telegraph about the news that the Malaysian CEO of Laura Ashley has stepped down. And the FT had a feature on the “Five challenges that face new boss of John Lewis Partnership” (Management structure, Strategy, Partner Bonus, Never knowingly undersold and Stores), flagging that the new JLP Chairman, Sharon White, the former head of OFCOM, “will need to learn quickly if she is to turn round struggling partnership”.
• Sunday’s Press and News: There was more focus on the problems of the John Lewis Partnership and the challenges for the new Chairman, Sharon White, in the Sunday papers. The main Business feature in the Observer flagged that the partnership’s cherished traditions are in doubt and quoted our jest that Sharon White should change the group’s name to the Waitrose Partnership, given the fact that John Lewis hardly makes any money, and highlighted our view that the heady days of chasing top-line sales growth are over and that the focus is now on cost-cutting. In the Sunday Times, the Business Editor, Oliver Shah, thundered in his column that JLP needs to “think the unthinkable” and look at either selling one of the brands or demutualising. And the Prufrock gossip column in the Sunday Times noted that neither the current or the former MD’s of Waitrose and John Lewis attended the official
• News Flow This Week: As we move on into February, company news flow dries up this week, but Inchcape have announced today that their CEO Stefhan Bomhard is off to run Imperial Brands and Next are dragging the hard-working analysts around their super-efficient warehouse in sunny Doncaster on Thursday. And the BRC-KPMG Retail Sales survey for January (the 4 weeks to Jan 25th) and the latest monthly Kantar/Nielsen grocery sales figures (for the 4 weeks to Jan 25th/Jan 26th) are both out tomorrow, with subdued vibes likely.