Langton Capital – 2020-02-27 – PREMIUM – AB InBev, Restaurant Group, Marriott, PPHE, Playtec, Covid-19 etc.:
AB InBev, Restaurant Group, Marriott, PPHE, Playtec, Covid-19 etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
God bless ‘em but aren’t there a lot of people out there seeking to put the world to rights by telling other folk what to do.
Because I find myself being instructed to eat less meat, travel less, not heat my home much, not replace my clothes or buy plastic and basically to sit still in a dark room and not breathe too much.
And this mostly by millionaire luvvies just off the plane from a Save the Planet junket in Rio or Cape Town or Singapore, somewhere nice and warm during the Northern Hemisphere winter, and that’s just a bit galling, isn’t it?
Did you travel First Class, how many air miles to you clock up in a year, did you have a private plane laid on, did you have a mid-conference safari into the bush etc seem like reasonable questions to ask.
Perhaps that’s just me being churlish but if someone were to say ‘here’s ten quid, plant a tree’ or ‘use Skype a little bit more’ then I could get on board.
Anyway, only print this email if you want to single-handedly destroy the environment. On to the news:
LANGTON PREMIUM COMPENDIUM, £300 PLUS VAT:
In our 200+ page summary piece, we have curated a large number of those articles in order to logically sequence the major issues that are currently impacting the hospitality subsector or the wider leisure sector. The book will be ready for our one-year anniversary at the end of next week and is available for £300 plus VAT. Please drop us a line.
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RESTAURANT GROUP FY ANALYSTS’ MEETING. Group has a plan. But the devil will be in executing it in a competitive market. 27 Feb 2020.
Full Year Results – 52wks to 29 Dec 2019:
Following the release of its FY numbers to 29 Dec 2019. the Restaurant Group hosted a meeting for analysts and our comments thereon are set out below:
• The good did well, the bad did (a little less) badly and the ugly has been provided for. Directionally, that is correct, but nothing is ever that simple.
• The group intends to:
o `Grow its growth businesses
o Shrink its leisure business and
• Costs are an issue, particularly labour. There is only so much that can be mitigated. The NLW could rise by 6% p.a. until it hits £10.50. Cost inflation, driven by labour, is ‘between 2.5% and 3.0%’
• Wagamama had an ‘exceptional’ year. It grew LfLs by 8.5%. The company says 40% of this was delivery, 40% was increased covers and only 20% was higher pricing
• EBITDA is sharply higher, staff turnover is lower than the group average and the return on capital for conversions is 40% plus
• RTN insists it will not over-expand. It says three is room for perhaps 200 sites in the UK and certainly no more than 220. The chain in the UK comprises 144 sites at present
• Waga does not discount and does not put its prices up by more than inflation
• Growth opportunities here come from:
o Leisure brand conversions and new sites. Conversions to date have seen sales rise 120% with a 40% plus return on capital. There will be 5-6 more conversions this year
o New formats including delivery kitchens & food to go
o The US JV (RTN has 20% and an option to buy in 2026)
Other good stuff:
• There is room for growth in concession (often via new terminals – e.g. Manchester).
• There have been no signs of softness in the airport concession business yet.
• Pubs performed strongly. They require a lot of effort to get right and can’t be expanded via a cookie-cutter roll out – see Langton comments on ‘Small is Beautiful (but hard work)’
• Brunning & Price has beaten the Peach Tracker by 4% p.a. for 5yrs. This is a) brilliant but b) finite. Four were added in 2019 and a similar number should arrive in FY20.
The Leisure Business:
• Sales here contracted by 2.8% on a LfL basis. Though not good, that is better than it has been. Leisure delivery doubled in FY19 to c6% of sales and it could go to c10% this year. RTN says the saved labour compensates for the commission charges
• Delivery ‘did not cannibalise sit down meals’. This should help LfLs.
• RTN wishes to shrink the estate here from 350 now to 260-275 (with CFO Kirk Davis saying a halving from the original number of 360 is still possible)
• Shrinkage will be achieved by 1) conversions to Wagamama (perhaps 7-12 units), 2) by lease expiries or break clauses (around 31), 3) by selling freeholds (c12) or 4) by negotiation / payments to landlords or sub-tenants etc.
• The latter point could be costly. Sites can always be exited, but it’s a question of at what cost. If the landlord or a sub-tenant demands free F&F, an ingoing reverse premium and a rent contribution for the remainder of the lease, this could be expensive
• Not all disposals are loss-making. Some will simply do better as Waga sites
• The company says this division will see sales down and costs up. Margins will only move in one direction, at least in the short term
Other re trading, balance sheet etc.:
• The group aims to delver with a 1.6x debt to EBITDA target for end-2021 versus 2.1x now
• Current trading (6wks to 15 Feb) is +5.3% LfL. This is good but is partly down to changes in the timing of school holidays. Film releases should have helped but Storm Ciara certainly did not. The group is ‘not complacent’
• Currently all divisions are in growth.
• Proposed immigration changes will cause shortages and drive up costs. This is an industry-wide problem. Concessions are particularly dependent on migrant labour
• It is critical that staff be retained. High levels of staff turnover are very damaging.
• The group does not wish to entertain a new concept at this time
• One of the key ‘learnings’ from the Waga deal is that more responsibility should perhaps be devolved to the units. See our ‘Small is Beautiful’ comments.
• A sizeable credit on the sale and leaseback of the group’s head office helped hold exceptional costs in H2 to a small credit
• It’s better to have a plan than to not have a plan.
• But the devil will be in the execution.
• And some plans (e.g. I won’t have a beer until the weekend) are easier to enact than others (e.g. I will walk on the moon before Christmas)
• The comments seemed to make business sense. But there is no yield support now, income funds may cause something of a churn in the share register and asset backing, with all of these provisions flying around, is hard to ascertain.
• So, there has to be a degree of faith here. And RTN is not operating in a vacuum. There are competitors out there who are either 1) better positioned and could cause trouble or 2) worse positioned and could cause trouble
• Capacity will not exit the market rapidly. The second, third and fourth iterations of a failed restaurant are likely to be as another restaurant
• Tautologous, but, if RTN does not go bust, there will be inflection point in its fortunes. And its shares will move ahead of evidence of its operating success. That point could be now but, if it is, then Langton, along with most of the rest of the market, is likely to miss it
CORONOVIRUS OUTBREAK & LEISURE STOCKS:
• The outbreak is good news for nobody within leisure. However, there are degrees of hurt when it comes to the impact with ‘luxury goods’ (including global spirits) and travel heavily impacted.
Luxury goods & spirits:
• Diageo yesterday warned on profits in the wake of the Covid-19 outbreak saying that it expected the range of the adverse impact in fiscal 2020 to be around £275m on sales and £170m on operating profit.
• The damage has been done by the sensible measures taken to restrict infection including a restriction on public gatherings in China, the postponement of events and the closure of many hospitality and retail outlets. Diageo says ‘several countries and many businesses have also imposed restrictions on travel.’
• Diageo points out that ‘bars and restaurants have largely been closed [in China] and there has been a substantial reduction in banqueting. As the majority of consumption is in the on-trade, we have seen significant disruption since the end of January which we expect to last at least into March.’ Diageo says ‘thereafter we expect a gradual improvement with consumption returning to normal levels towards the end of fiscal 2020.’
• Diageo is a June year end. Its comments imply that it does not see much of an impact in the year to June 2021 (which for the company is only 4mths away). Diageo says that three has been ‘a significant reduction in international passenger traffic, especially in Asia.’ The company says ‘we remain confident in the growth opportunities in our Greater China and Asia Pacific business. We will continue to invest behind our brands, ensuring we are strongly positioned for the expected recovery in consumer demand.
• Treasury Wine Estates has cautioned on revenues today. Moody’s has cautioned that Remy and Pernod are materially exposed to the Far East market and a number of other drinks producers have also issued cautionary statements.
• AB InBev (see below) today reports that EBITDA is likely to decline by around 10% in its Q1 as a result of disruption. It has no real visibility beyond that.
Travel companies (and F&B at travel hubs):
• SSP, which operates food and drink outlets at travel hubs, also updated yesterday saying that, whilst the 86% of the group’s business that comprises the UK, continental Europe and North America was performing in line with expectations, the geographies including Asia Pacific, India and the Middle East ‘have seen an impact from the COVID-19 virus.’
• SSP says ‘in terms of the impact at the airports in which we operate across the region, in China we have seen sharp declines in both domestic and international air passenger numbers, which are currently running c. 90% lower YOY.’
• For the month of February, SSP says it believes sales will be some £11m lower and operating profits £4.5m lower than they would have been in the absence of the virus.
• SSP says ‘clearly the duration of the COVID-19 virus and its impact on global travel is uncertain at this stage, as are its consequences for our financial performance for the full year.’ It says ‘we will continue to take all the necessary action as appropriate. Our strategy remains unchanged, and we continue to be well placed to benefit from the significant structural growth opportunities in our markets over the medium term and to create ongoing value for our shareholders.’
• RTN said yesterday it had seen no impact at the airports in which it operates. Its current trading update took it up to 15th Feb. It said that only a small minority of travellers using the terminals in which it operates were flying to the Far East. Should travel volumes to short haul destinations be impacted (such as Italy or Tenerife), then the impact would be more significant.
• The China Grand Prix has been cancelled, the Hong Kong 7s likewise, certain Italian football matches have been postponed, ditto the Ireland / Italy rugby match but the Geneva Car Show will go ahead as planned.
• The Euros are scheduled to commence in mid-June with the Olympics in Tokyo set to follow in late July. No word on either at this stage.
• Nestle has become the latest in a series of large companies to limit staff traveling for business purposes.
• Marriott (see below) said yesterday that the virus is costing it $25m per month in lost fee income. PPHE also comments today on the uncertainty surrounding future earnings.
PUBS & RESTAURANTS:
• AB InBev has reported Q4 and full year numbers saying that revenue grew by 4.3% in FY19 and by 2.5% in 4Q19, with revenue per hl growth of 3.1% in FY19 and 0.9% in 4Q19.’
• AB InBev says ‘healthy volume growth was enhanced by global premiumization and revenue management initiatives, although revenue per hl growth decelerated as result of advances in our smart affordability strategy.’
• Total volumes grew by 1.1% in FY19, with own beer volumes up 0.8% and non-beer volumes up 4.8%. The group adds ‘in 4Q19, total volumes increased by 1.6%, with own beer volumes up 0.8% and non-beer volumes up 8.0%.’
• AB InBev reports normalized profit of $8.086bn in FY19 versus $6.248bn in FY18. The company says it is delivering and has achieved some $3.2bn of synergies since its takeover of SAB.
• Re the coronavirus, the company says ‘the impact of the COVID-19 virus outbreak on our business continues to evolve.’ It says ‘the outbreak has led to a significant decline in demand in China in both on-premise and in-home channels. Additionally, demand during the Chinese New Year was lower than in previous years as it coincided with the beginning of this outbreak. For the first two months of 2020, we estimate that the outbreak has resulted in lost revenue of approximately $285m and lost EBITDA of approximately $170m in China. The group says that it expects an EBITDA decline of around 10% for Q1 and it cannot see beyond that point.
• Restaurant Group’s shares fell 8.5p yesterday, or 7.2%, as a result of its trading update which included a ‘temporary suspension’ of its dividend. The market had been looking for a total pay-out of around £13m for the next full year. RTN maintains that the cash can be used more effectively elsewhere.
• The BBPA welcomes the ‘Unlocking Pubs’ report by the All-Party Parliamentary Beer Group which calls on the Government to recognise pubs’ role in boosting Britain’s economic and social well being.
• On the same subject, the BII COO, Steve Alton, welcomed the All-Party Parliamentary Beer Group’s ‘Unlocking Pubs’ Potential report, saying ‘We hope that Government recognises the importance of our vital industry to the economy, but also to the social fabric of our country.’
• The Society of Independent Brewers (SIBA) also backs the report, saying ‘In the Budget next month the Chancellor should review our high Beer Duty rates and radically reform Business Rates to ensure that pubs and small independent breweries have the support they need’.
• In the US, MOD Pizza reports systemwide sales up 24% yoy to $493m in 2019. Co-founder Scott Svenson said MOD Pizza has big plans for further expansion, noting that its slowing growth rate is a reflection of the company’s size, not its potential.
• Mad Dog Brewing Co will enter voluntary liquidation after a ‘very challenging’ few months.
• The new Amazon Go Grocery store featuring no tills has launched in Seattle. Instead cameras and sensors link to a customer’s online account.
• Treasury Wine cuts full year expectations due to outbreak of COVID-19 causing a slow down in the Chinese market. Last month the company reported growth in its Asian business of around 19% in the first half of the year, to $175.5m.
• NRN in the US reports the ‘private dining and events business is booming’ even though ‘the rise of delivery keeps more consumers at home.’
• Starbucks will start selling a Beyond Meat plant-based breakfast sandwich in its Canadian stores next week.
• Buy now, pay later services such as Klarna and Afterpay are growing at 39% a year, according to a report. The rapid growth has given rise to fears that many young people are ignoring the debt risks.
• Walmart may sell a majority stake in Asda, saying it was talking to a ‘small number of interested parties’. The move comes after the CMA blocked Walmart’s plan to merge Asda with Sainsbury’s last year.
• Apple will open its first store in India in 2021, with Tim Cook saying ‘We needed to get approval from the government to go in there ourselves’.
HOLIDAYS & LEISURE TRAVEL:
• PPHE has reported full year numbers saying that it has seen ‘good growth in revenue and profits and [the] completion of [the] more than £100 million multi-year real estate investment programme.’
• The company reports LfL revenue up 5.2% at £355.8m with normalised profit up 7.9% at £40.7m. The group says that it is to pay a total dividend for the year of 37p, up by 5.7%. CEO Boris Ivesha says ‘our 2019 financial results coupled with our strategic progress once again demonstrate the strength of our unique business model, the appeal of our hospitality real estate portfolio and our rigorous focus on performance.’
• PPHE says ‘whilst we are closely monitoring the current uncertain macro environmental developments related to the Coronavirus outbreak and its impact on travel patterns, trading for the two months in 2020 for our Group has been in line with the Board’s expectations.’
• Tour operators are braced to react to travel restrictions as the impact of coronavirus spreads across Europe, with the current cluster of infections in Italy giving rise to concern.
• The Foreign & Commonwealth Office is urging against all but essential travel to a number of towns in northern Italy, following the COVID-19 outbreak there.
• The WTTC CEO, Gloria Guevara, is calling for a proportionate response to the coronavirus outbreak. Guevara said ‘Governments and those in authority must not seek to choke travel and trade at this time.’
• Flight shaming to become a thing.
• Research from RSM suggests flight shaming will be one of the consumer trends ‘most likely’ to impact the travel industry over the next two years. The ‘flygskam’ [flight shaming] phenomenon started in Scandinavia.
• Marriott has reported Q4 & FY numbers saying that adjusted Q4 EPS rose to 157c versus 144c a year earlier. Full year EPS was 600c versus 621 for 2018. CEO Arne Sorenson reports ‘we are pleased with our performance in 2019. We grew rooms nearly 5 percent, achieved record RevPAR index gains, drove higher guest satisfaction scores, and maintained global hotel profit margins in a low RevPAR growth environment.’
• Marriott says ‘our fee-driven, asset light business model and successful asset recycling continued to generate significant excess cash, allowing us to return a total of $2.9 billion to shareholders during the year.’
• Re Covid-19, the company says ‘given the fluid nature of the situation, we have not reflected the impact from the outbreak in our base case outlook for this year. For full year 2020, our base case outlook assumes comparable systemwide RevPAR on a constant dollar basis will be flat to up 2 percent, with RevPAR growth in North America around the middle of that range. We assume net rooms additions of 5 to 5.25 percent in 2020.’
• Marriott says that, if occupancy remain at current low levels for the rest of the year, it would cost the group $25m per month in lost fee revenue.
• Abta has called for new mobility arrangements and a youth mobility deal to be negotiated in forthcoming EU trade talks to replace the EU Posted Workers Directive in 2021.
• British Airways is targeting to remove 700 tonnes of single-use plastic from its flights this year.
• Tui will provide compensation to holidaymakers after they had to spend the night in Las Palmas airport due to the Saharan sandstorm which grounded flights.
• Heathrow reports passenger numbers up 1% yoy in 2019 to 80.9m, with revenues up 3.4% to £3.1bn. Officials said the income supported an additional £856 million of investment into the airport in 2019.
• Heathrow argues its case for a third runway as being key to the UK’s success after Brexit in the face of legal challenges. The boss of the London hub repeated a warning that rival Paris Charles de Gaulle is poised to overtake Heathrow as Europe’s top airport within two years.
• Playtech has reported full year numbers saying revenue rose 23% to €1.5bn with adjusted profit down 50% at €133.6m. EPS from continuing operations is 4.3c (down 89%) with a full year dividend of 18.1c, down from 24.1c in the prior year.
• Playtech comments on current trading saying ‘core B2B Gambling revenue for the first 55 days of 2020 was up 5% on the same period in 2019 excluding acquisitions and hardware sales.’ Chairman Alan Jackson says ‘our Core B2B Gambling business reported strong growth in 2019.’ He adds the company ‘has taken steps to improve its Corporate Governance.’ Mr Jackson says he will be announcing his successor in due course.
• Moody’s reports that US theme park company Six Flags’ ‘weak fourth-quarter 2019 results and 2020 guidance’ is credit negative. It says ‘the company’s reduced guidance for 2020 risks leading to a negative rating action.’
FINANCE & ECONOMICS:
• The UK 2070 Commission has said that levelling up the country could cost £1,000bn. The Commission says it took £1,500bn and 25yrs to level up East Germany.
• Sterling lower at $1.293 and €1.185. Oil lower at $52.70. UK 10yr gilt yield unchanged at 0.51%. UK market up yesterday but the rest of the world lower and Far East down in Thursday trade.
• The UK is unfortunately slated to open down up to 180pts.
• Brexit & politics:
o PM Boris Johnson is thought likely to drop previous commitments to Brussels later today as he publishes Britain’s goals for a trade deal with the EU, reports the FT.
o EU negotiator Michel Barnier has insisted Britain should honour commitments given by Mr Johnson, despite the fact that these were given in a non-legally binding political declaration.
o Picking cherries without admitting to cherry-picking.
START THE DAY WITH A SONG:
Yesterday’s song was Sowing the Seeds of Love by Tears For Fears. Today, who sang:
“Whatever happened to
Dear old Lenin?
The great Elmyra
And Sancho Panza?”
RETAIL WITH NICK BUBB:
• Topps Tiles: Out of the blue, poor old Topps Tiles has issued a profit warning today, despite the better vibes about the housing market…Trading in the last eight weeks (ie the bulk of their Q2) “has remained challenging against a backdrop of continued weak home improvement spending”, with Retail LFL sales down by 5.5%. Rob Parker, the new CEO, explains that said: “While UK housing market indicators have shown an encouraging improvement in the period since the General Election, these traditionally have a lagged impact on our trading and we would not expect to see any benefit from these until later into our second half”.
• Howden: In contrast, the kitchen joinery business Howden (market cap £4.1bn) has issued a more confident statement with its robust final results today for calendar 2019, although the current trading update is a bit subdued with LFL depot sales only flat over the last 8 weeks (up 1.6% adjusted for the one less trading day at the beginning of January). The company says “Whilst we are aware of the economic uncertainties that we face, we remain confident in our business model for the future”.
• Watches of Switzerland: The luxury retail market has been badly hit by the collapse in Chinese tourist traffic this month, but the Watches of Switzerland business looks to have been more resilient and it has reported strong 6.8% LFL sales growth in its Q3 update today (for the 13 weeks to Jan 26th). The UK jewellery market wasn’t easy at Christmas, but CEO Brian Duffy notes that “Our Christmas trading in the UK was strong despite the competitive and promotional wider market backdrop” and the group is on track for its full-year expectations, “as demand for luxury watch brands in the UK and US continues to exceed supply”.