Langton Capital – 2020-02-12 – PREMIUM – Heineken, food costs, Intu, discounts, TUI, capex etc.:
Heineken, food costs, Intu, discounts, TUI, capex etc.:
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A DAY IN THE LIFE:
I don’t want to show my age, but do you remember when the BBC news used to be on at 5.40pm and 9pm?
Weird times, I know, but it meant that kids programmes ended definitively at 5.40pm and a programme that you could moan to stay up to watch, such as Colditz, came on at 9.25pm.
Ah, those were the days. Nothing to worry about except strikes, food shortages and fuel crises. On to the news:
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CAPITAL SPENDING: Could you, should you (do you) ignore it in your cash flow projections? 12 Feb 2020:
• EBITDA ignores D. It suggests, implicitly, that assets do not wear out.
• If that is untrue for diamond-tipped oil rig drills, which ‘should’ never wear out as they don’t go out of fashion and will never meet anything tougher than themselves, then it is certainly untrue in a consumer-facing hospitality business
• Capital spending is the monkey on your back. It can’t be safely ignored.
• And nor should it be but, in the very short term, like marketing spending, staff-training and the like, it can be shelved.
• however, in an industry where competitors innovate and where they are very visible to your customers, it can’t be ignored for long.
• And that’s where the bean-counters, not often heavily represented in the ranks of alpha-males (and females) that run businesses, should put their feet down
• Because if there’s too much focus on EBITDA (and expansion, growth etc.), there won’t be any cash left for maintenance capex and that will only end badly
How this works in practise:
• In a 200yr old company with little to prove, many assets will be freehold and the culture of maintaining them may be ingrained
• In a 2yr-old crowd-funded coffee shop chain, perhaps not so much
• And the 200yr old company may decide that it has no alternative but to join in a race to add leasehold assets and then fail to maintain them in order to jack up EBITDA
• This can be accompanied by a change in management, a desire to exit the company via a disposal and the rest. People, after all, are only people.
• Sticking to they knitting is boring but often necessary
• Airtours’ (admittedly not a 200yr old, freehold based company) 50-something year old directors decided to present their accounts during the dotcom boom wearing black polo shirts and, within a year or two, they were effectively bust
• Airtours was rescued by Thomas Cook which, itself, went bust
Maintenance capex at the micro level:
• At the company level, maintenance capex means that EBITDA is not a good measure of cash flow
• If you ignore it (maintenance capex), then EBITDA is a much better approximation but, in an industry where competitors are raising funds via IPO’s, the crowd or from cash-stuffed PE houses, uninvested units can soon look drab at best and awful at worst
• And then the PE funded company ignores capex and the cycle continues
• And getting ahead of capex, especially after four, five, six or more years of ignoring it can be very challenging
• Organic cashflows may be insufficient (partly because the tired assets are declining) and going to one’s shareholders with the story that ‘I need your capital to stay broadly where I am’ isn’t a compelling pitch.
• We hear a lot of companies saying that they want to get their refurb cycle down from seven, eight or nine years (or never) to perhaps five years – and this is good
• At least as an aspiration – but it may difficult to enact in practise
Confusing the capital account with the income account:
• Some start ups (and indeed some mature companies) confuse your capital with their income
• And then they may go on to treat every pound of income as a prisoner as, to spend any of it on maintenance, would belie the suggestion that EBITDA is the measure that they should be judged on
• Some companies, particularly private companies or those that behave in some ways as though they are (like JD Wetherspoon), have the conviction to plough ahead with maintenance spending, repairs and even an ‘investment in staff’ – but many do not.
• Catchup capital spending can then become a potentially existential threat
PUBS & RESTAURANTS:
• Heineken has reported full year numbers to end-December saying that net revenue grew by 5.6% with consolidated beer volumes some 3.1% higher. The group’s Heineken brand grew volumes by 8.3%, its best performance in over ten years.
• Heineken reports operating profit up 3.9% with margins down 12bps at 16.8%. The group grew net profits by 4.3% to €2.5bn with diluted EPS of 438c vs 418c last year. CEO Jean-François van Boxmeer comments ‘in 2019, we delivered another year of superior top-line growth, with continued strong performance in the second half. Growth was well balanced with beer volume up 3.1% and revenue per hectolitre up 3.3%, driven by robust pricing and focus on premiumisation. The Heineken brand growth accelerated to 8.3%, with more than 40 countries delivering double digit growth. The successful roll-out of Heineken 0.0 continued and it is now available in 57 markets.’
• Mr van Boxmeer says ‘our strategy continues to be growth oriented with an ever-increasing emphasis on the sustainability of this growth, both socially and environmentally.’ He says ‘we closed the year with an operating profit organic growth of 3.9%. In a context of increased input costs, we have continued to work on the efficiency of our operations whilst steadily investing behind our brands, our sustainability agenda and our digital transformation.’
• Re the future, the company says ‘we expect our operating profit to grow by mid-single digit on an organic basis, barring major negative macro economic and political developments.’
• Heineken has also announced that Mr van Boxmeer is to retire after 15yrs as CEO. He will be succeeded by Dolf van den Brink on 1 June. Mr van den Brink is currently President Asia Pacific region and an Executive Team member.
• Events company Camm & Hooper has announced via Companies House that MD Debra Ward ceased to be a director of the company on 23 January. Ms Ward took over as MD in autumn last year.
• The latest CGA Prestige Foodservice Price Index has suggested that there are ‘opportunities for operators to capitalise on month-on-month price reductions.’ It says that ‘year-on-year inflation fell to half the 12-month average in December 2019.’
• CGA & Prestige says ‘the strong downward trend saw unseasonal month-on-month drops in inflation in seven of the ten categories in the Index.’ The report says that inflation across the basket of food that it tracks has fallen for six months in a row. Certain seasonal products have risen in price (salmon and festive meats like pork and turkey) but the prices of vegetables and dairy products declined. CGA and Prestige say this ‘is extremely rare for the time of year’.
• Prestige says ‘now is an excellent time for operators to be looking at their pricing, and taking steps to ensure that it reflects the wider market. It is very possible that this a temporary respite and we will see the index begin to rise again in the second quarter.’ CGA adds ‘Christmas demand usually delivers an increase in food and drink price inflation, so the easing of pressures across the Price Index is good news. Foodservice businesses have been battling many inflationary pressures since the Brexit Referendum in 2016, but will now be hopeful that prices are settling.’
• Intu Properties’ shares fell by around a third yesterday after a potential backer declined to support the property company’s bid to raise new funds. The shares are down by more than 95% over the last 5yrs on the back of declining demand for its units. The shares, which were over £9 at one stage, are now changing hands for 12p. Intu had previously suggested that it was holding constructive talks with shareholders.
• Discounts, some extending over Valentine’s Day as though it didn’t exist. Prezzo 2-4-1 on mains, Restaurant Group brands Coast-to-Coast 40% off mains till the end of the month, Frankie & Benny’s 25% off mains, Chiquito 20% off. Pizza Express 25% off food & drink (what else is there?) till 27th.
• CDG brands Bella Italia and Café Rouge 40% off mains but ends today. ASK offering 25% off food to and including Valentine’s Day.
• Starbucks has teamed up with Paradies Lagardère and OTG for further airport expansion following the end of exclusivity with HMSHost.
• Research from IWSR and Wine Intelligence has found that premiumisation is still a key trend for spirits. The groups reported that premium and super-premium spirit sales are expected to grow at 4.7% CAGR between 2018 and 2023.
• Plant-based food delivery company allplants has succeeded in raising £2.4m on Seedrs against a £2.0m target. The raise is for convertible stock and the company does not give a pre-new money valuation.
• Innis & Gunn launched a ‘Beer Money’ campaign on Seedrs on 11 November, raising a total of £3m. The group will use the funds to build Edinburgh’s first major brewery in more than a century.
• Fourth has teamed up with sustainability platform, Footprint, in order to highlight how the hospitality industry could reduce food waste, which costs each site more than £10,000 a year.
• The Yorkshire chef, Matt Healy has launched a new Grön cafe in York, his vegetarian and vegan-friendly concept. Matt said: ‘Grön has been such a big hit and the vegan and vegetarian scene is going from strength to strength with more people than ever making changes to their food choices’.
• Humpit, the hummus and pita concept, has announced its plan to open a further 30 sites across the UK and beyond in the next five years.
• Thunderbird Fried Chicken has shut its original Brixton site after just one year of trading.
• The US Wine Trade Alliance and the National Association of Wine Retailers (NAWR) have warned that wine previously exported to the US is now ending up in China and other markets, blaming tariffs imposed on European wine. Wine exports from France to the US fell by 48% during the first month (November 2019) of 25% tariffs.
• Research commissioned by technology firm Epson has found that 75% of respondents would change their shopping behaviour if more shops on the high street had an experiential element.
• Ocado CEO Tim Steiner received a £54m bonus in 2019, despite the company making a loss of £214.5m.
• Google’s appeal against a €2.4bn fine imposed by the European commission will be heard over the next three days. The fine levied regarding alleged abuse of power in promoting its own shopping comparison service.
HOLIDAYS & LEISURE TRAVEL:
• TUI shares rose by 13% yesterday on the back of what the market concluded was an upbeat statement. TUI was able to say that, ex the bad stuff (coronavirus & Boeing 737 Max), trading had improved.
• Norwegian Cruise Line has cancelled Norwegian Spirit’s planned Asian sailings over growing concerns about coronavirus.
• Charles de Gaulle is set to overtake Heathrow as Europe’s biggest airport hub as Britain leaves the EU. According to an update from the airport, the Paris hub is growing at twice the size of Heathrow.
• Princess Cruises ship Caribbean Princess was refused entry to Trinidad & Tobago, with at least 299 passengers and 22 crew members believed to be suffering from suspected norovirus.
• Royal Caribbean has lifted its ban on passport holders from China, Hong Kong and Macau after adopting the controversial policy last week.
• Jet2 has expanded its Christmas market breaks, adding more than 100 services from 7 UK airports to destinations such as Berlin, Budapest, Cologne, Krakow, Nuremberg, Copenhagen, Strasbourg and Vienna.
• Village Hotel Basingstoke has opened following a £25m development programme, marking the group’s 31st property.
• Airbnb reported a loss for the first 9mths of last year (to September) on the back of increased costs. The group reported a net loss of $322m compared with a profit of $200m in the same period a year earlier. Speculation has it that the company, which is thought to be considering an IPO, has been valued at as much as $31bn. The Wall St Journal suggests the number may be much lower than that.
• BoE governor Mark Carney claims the economic impact of China’s coronavirus outbreak is already bigger than that caused by the spread of SARS in 2003.
• Hilton reports net income of $886m in 2019, with $176m in Q4. Adjusted EBITDA was $586 million for the fourth quarter and $2,308 million for the full year. The company approved 33,700 new rooms for development during Q4, growing Hilton’s development pipeline to 387,000 rooms as of December 31, 2019.
• PM Boris Johnson gives go-ahead to HS2. It will be completed in 2040.
FINANCE & ECONOMICS:
• The Michael Gove has said that frictionless trade with the EU will end at the end of this year. The BRC has gone on to warn the F&B industry there could be ‘significant disruption’ in the supply of fresh fruit and vegetables.
• The UK economy flatlined in Q4 with GDP growth of 0.0% per the ONS. More recent surveys have suggested that there may have been a pickup in January.
• The IoD says ‘it’s likely that political uncertainty and unwinding stockpiles caused the economy to flag at the end of last year. However, firms entered 2020 with more of a spring in their step. Confidence has shot up, while hiring plans and investment intentions have also risen a notch, but the post-election bounce may tail off.’
• The ONS has revised up the growth figure for Q3 last year from 0.4% to 0.5%.
• The NIESR says that ‘the UK is benefitting from a post-election boost to business and consumer confidence.’ It says ‘there is no guarantee that this will be sustained’ and adds that ‘the potential complexity of trade negotiations with the EU means a high degree of uncertainty could resurface, which would weigh heavily on economic growth.’
• Sterling up at $1.2964 and €1.1879. Oil higher at $54.87. UK 10yr gilt yield up 1bp at 0.57%. World markets mixed.
• Brexit & politics:
o Minor cabinet reshuffle expected tomorrow. The new Cabinet will meet on Friday.
o Mr Gove says frictionless trade will end in December. He says ‘you have to accept we will need some friction…I don’t underestimate the fact that this is a significant change.’
o Chancellor Sajid Javid has said UK trade will thrive despite the reintroduction of UK border checks after December this year.
o Michel Barnier has said that the UK will not by granted a permanent deal allowing City of London access to European markets. A document photographed being carried into Downing Street had Sajid Javid saying that he aimed for ‘permanent equivalence’ for UK businesses for ‘decades to come’.
START THE DAY WITH A SONG:
Yesterday’s song was Paranoid by Black Sabbath. Today, who sang:
“When will I know that I really can’t go,
To the well once more time to decide on?
When it’s killing me
When will I really see
All that I need to look inside”
RETAIL WITH NICK BUBB:
Dunelm: Today’s strong interims (for the 26 weeks to Dec 28th) from the homewares chain Dunelm have been well flagged, with underlying PBT 21% up at c£85m and, although no formal trading update was expected, the main interest was in what the company said about the outlook. And Dunelm has not disappointed on that front, flagging that Q3 has started well, with a successful Winter Sale, and that it expects full-year PBT to be “slightly ahead of the top of the latest range of analyst’s expectations” (defined as £135m-137m, on a post IFRS 16 basis).
BRC Retail Sales for January (the 5 weeks to Feb 1st): Despite the bullish noises from Dunelm and the upbeat noises from the BDO High Street Tracker and the Springboard footfall figures for January, the BRC survey for January, which came out first thing yesterday, was subdued, with overall LFL sales only flat. The key Food/Non-Food split is buried in the 3-month moving averages, but it looks to us as if both sectors were broadly flat on a LFL basis last month.