Langton Capital – 2020-03-30 – PREMIUM – Administrations, fund raises, DPP, cruising, hotels & other:
Administrations, fund raises, DPP, cruising, hotels & other:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
So, with sitting at home and gazing into space now mandatory in line with our anti-Covid-19 efforts we were wondering why there’s an ‘n’ in hymn but not in gym.
Indeed, my MS spellchecker was so outraged that I tried to slip an ‘n’ into the latter that it blew a fuse and wouldn’t talk to me for a couple of days but why’s it there, it’s not even as though it was pronounced in the dim and distant past as I believe the ‘k’ was in knife or even the ‘h’ was in where.
Anyway, that’s not going to progress the cause of mankind much but, after a weekend during which we plunged the septic tank, celebrated with a couple of beers around a roaring open radiator and then saw snow fall on Sunday, it’s back to work.
Follow our Covid-19 thoughts on #brumbymark and see also beneath Forthcoming Results today. On to the news:
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ACUTE DISTRESS – CARLUCCIO, CHIQUITO, FOOD & FUEL & BYRON: There are likely to be administrations announced this week, possibly today. But how do corporates prioritise their restructurings? 30 Mar 2020.
• Covid-19 and the reaction thereto has hit the industry like a brick. Rescue measures are largely indiscriminate and may save some of the bad alongside the good but, overall, it is likely that the crisis will drive a number of weaker players out of business.
• We have said on a number of occasions that ‘co-morbidity’ factors will include too much debt, onerous leases, a mediocre product (or simply one that has been overtaken by competitors) and poor management teams (to be fair these are often the teams before last or even the team before that).
• Going into this crisis limping already was never an ideal proposition.
• The Telegraph reports that The Restaurant Group has been ‘forced to shelve a £500m debt restructuring’ and suggests that the company is ‘exploring options to raise money including an emergency rights issue.’ It is probably fair to say that many, if not most, hospitality companies will be examining their funding options. The group is to put its Chiquito and Food & Fuel subsidiary brands into administration.
• For many companies, the options, more or less in the order of desirability, will be to:
o Don’t need to do anything (rare in this environment)
o Stiff your creditors. JDW says it will not pay creditors, even when it has received and sold on the products in question, until its pubs re-open. Also delay other bills, rent, tax etc.
o Ask for a temporary covenant waiver (because earnings will collapse) & make do with current debt.
o Draw down previously agreed facilities.
o Negotiate new facilities – this is almost certain to be accompanied by a passing of the dividend.
o Organise a sale and leaseback (may be difficult given the need for speed)
o Issue equity via a placing or a rights issue.
o Organise a debt for equity swap and risk handing the company to its bondholders or banks.
o Undertake a CVA – tough given time constraints.
o Call in administrators.
• Carluccio is reportedly set to call in administrators this week, possibly today. FRP Advisory is likely to be appointed. The administration comes after ‘emergency merger talks’ with Byron came to nothing. Around 2,000 jobs are at risk.
• Under different circumstances, Carluccio and Byron could have worked well but, in this situation and given the balance sheet structures of the two companies, it is not surprising that the creditors were not willing to go along for another ride.
• Byron appointed advisors on Thursday. The company is thought unable to access the government’s £330bn loan scheme because of its loss-making nature (it lost £47m in the year to June 2018 and £55m in the prior year. It hasn’t produced 2019 accounts yet), its lack of a triple or double-A rating and the reduced potential for it to survive the current crisis.
• Both Carluccio and Byron undertook CVAs in 2018. Colliers International has said that CVAs are ‘delaying’ failure. We would liken it to climbing up the funnel in a sinking ship. If there isn’t enough being done to stop the ship from sinking further, then the CVA won’t change the end-game.
• Colliers International claims that since 2016, 13 out of 23 large businesses to have launched CVAs have gone on to file for administration. Colliers International co-head of retail agency, David Fox, says ‘CVAs were designed to help struggling businesses, but they do nothing to address high debt levels, which often require restructuring, refinancing or a debt write-off’
• A number of companies that have grown by rolling-up competitors have struggled in recent years.
• Chiquito is reported to have filed a notice of intention to appoint administrators. RSM is to handle the process. Food and Fuel is also to go into administration. Some 1,500 jobs are at risk. Restaurant Group told Big Hospitality ‘we have conducted a review of the performance of our business divisions, with a particular focus on the expected future cash generation profile of each of our business units. The Group believes that both Food and Fuel Limited and Chiquito Limited will achieve negative EBITDA in the financial year ending 27 December 2020. As a result, the Group has taken the very difficult decision to appoint administrators for Food and Fuel Limited and filed a notice of intention to appoint an administrator for Chiquito Limited.’
• Around 20 Chiquito’s are not traded within Chiquito Ltd and these units will be unaffected.
• As before, much of what we would normally include as Premium Email content will be included below in order to reach a wider audience and promote feedback.
COVID-19 PROMPTED ADMINISTRATIONS:
• We could have five, six administrations this week. Indeed, we could have two or more today.
• Rather than speculate further about the who and when, here we look at what might be the implications – particularly if administrations could or should be used like Chapter 11 protection from creditor legislation that is used in the US.
• Keeping a failed company in the same hands could be seen as a reward for failure – but these are hardly normal times.
• Staff protection – and the protection of the fabric of industry – could come to the fore.
• Tacitus said ‘they made a desert and called it peace’ and one of the risks re Covid-19 is that we come out of the other side ‘successfully’ but with no companies left to trade.
• Re staff. It is believed that, if an administrator takes over a company, it can immediately furlough the staff and recoup 80% of the laid-off staff’s wages from the government via its Coronavirus Job Retention Scheme.
• It is likely that other operators will explore this route. Equity would lose its value but the staff could be protected and directors (or even existing equity holders) might be in a position to buy the company back after its period administration.
• Under more normal circumstances, this might be difficult. The company might be seen as playing fast and loose. It might lose its credibility and its staff but, as all operators are currently in the same boat, this might not be the case.
• A fortnight seems like a lifetime. It’s worth considering that it was just two weeks ago that PM Boris Johnson first ventured to say that the public should not visit pubs & restaurants.
o Mon 16 March – Advice to stay away from pubs & restaurants.
o Thereafter. Sequential worsening in LfL footfall.
o Fri 20 March – Order that pubs & restaurants must shut.
o Thereafter. Stuttering closures of many delivery and takeaway operations.
o Mon 23 March – Lockdown for individuals
o Fri 27 March – PM Boris Johnson positive for Covid-19
o Sun 29 March – Mention of 3mth or even 6mth shutdown
• As highlighted in our Forthcoming Results section, there have been around 45 RNS updates (from around 40 leisure companies) to the Stock Exchange since 17 March (the day after the government advised customers to stay away from leisure businesses).
• We could go into much more detail, but time is our enemy at stupid o’clock in the morning.
• Suffice it to say nobody (with the possible exception of DPP today (see below) has had a good word to say about Covid-19.
• Nobody has even said it will have a neutral impact.
• All operators recognise that it is bad but most, understandably, are unable to quantify this. Restaurant Group has made certain assumptions. Whilst these are reasonable, they may or may not turn out to be correct – see our comments on 18 March.
• Reuters reports that 100 British companies have cancelled, skipped or announced that they will not propose, dividends. At least 15 leisure companies have done this. They include Flutter, Gregg’s, Domino’s, SSP, Young & Co, Shepherd Neame, JD Wetherspoon, Gym Group, Playtech, PPHE, Intercontinental Hotels, Whitbread, New River and Britvic. Morrison’s has said that it will postpone further special dividends.
• Companies that have not updated on dividends fall into two camps 1) those that commented early (before the 20 March closure notice), 2) those that don’t pay a dividend in any case (at least 15 of the 40 that have reported) and 3) companies that are keeping their options open.
• One company, Coca Cola HBC, has said it intends to continue with its dividend policy unchanged (at least for the moment)
• Four companies have raised money. SSP, City Pub Group, Ten Entertainment and Hotel Chocolat. These were all done via placings, mostly accelerated book-builds. There are stories that companies fully-listed on the LSE could be considering Rights Issues.
• These take time but, in many cases, fully-listed companies will lack the authority to raise more than perhaps 5% of their equity via placings.
• Several companies have postponed their results announcements. All had gone to conference calls or webcasts, even before the lockdown.
• Pay reductions have been announced in a number of cases. Marston’s and JD Wetherspoon’s CEO and Chairmen are taking a 50% cut, the CEO at Greene King is 50% down, the Young’s board is all taking a 20% pay cut etc. In the unquoted arena, BrewDog’s James Watt and Martin Dickie are taking a 100% pay cut and Mark Jones at Carluccio is not to be paid this month.
• Industry action groups remain active in their negotiations with landlords and banks and in keeping the plight of leasehold businesses in the public eye. Landlord Criterion Capital is being singled out by some sections of the Press as being particularly uncompromising in its rejection of approaches by beleaguered tenants. Blackstone also gets a mention.
• Groups continue to lobby for a debt enforcement moratorium, along the lines of that proposed re property evictions. They welcome the news that insolvency rules are to be softened such that directors will not be pursued personally for debts they may run up in the next few weeks.
OTHER COVID-19 NEWS:
• See Friday’s Covid-19 tweets at the foot of Forthcoming Results.
• The UK’s deputy chief medical officer, Dr Jenny Harries, has said that it could be six months before the UK can go back to ‘normal’. She adds ‘this is not to say we would be in complete lockdown for six months.’ However, any moves to reduce social distancing measures would have to be gradual.
• The government has confirmed that there will be a retrospective but temporary suspension of the wrongful trading provisions of the Insolvency Act. This holds, under normal circumstances, that directors can by held personally liable for debts run up if a company trades when it is knowingly insolvent (as many companies no doubt currently are).
• Young & Co updated on trading on Friday saying that it is ‘accessing the Government’s Coronavirus Job Retention Scheme’ saying a large number of workers ‘will be kept on the Group’s payroll but will stop working.’ It will pay 80% of the wages of those earning above the government’s £30k limit.
• YNGA says it will not pay a final dividend. It adds that it is cutting costs and will benefit from the VAT deferral and business rates holiday. It says this gives it ‘further headroom to put it in a strong position to weather this crisis.’ YNGA ‘remains in ongoing discussions with its banks, which are collectively very supportive, and is seeking to ensure additional covenant headroom. The Board is also in the process of understanding whether it can access the Bank of England’s Covid-19 Corporate Financing Facility.’ If Young’s can’t, then who can? The board is taking a 20% pay cut.
• The City Pub Group updated on Friday on its placing saying that it raised £15m prior to expenses via an accelerated book-build at 50p per share. The company says ‘together with our existing funding arrangements, this significantly strengthens our balance sheet providing a further cushion in the event the suspended environment is extended.’ The company also ‘intends to raise up to approximately £7 million through the issue of 14,015,634 new Ordinary Shares’ via an open offer.
• Glasgow’s G1 Group has announced that it is to retain all of its staff. The group has committed ‘to pay 80% of their basic wage to each and every employee, for a period of 3 months, as laid out by the government.’
• Castle Rock has launched a hardship fund to support the company’s most vulnerable staff through the Covid-19 pandemic.
• Cabinet Office minister Michael Gove has said that the current lockdown, or a variant thereof, is likely to continue for a ‘significant period’.
• The Scotch Whisky Association is launching an online portal to help with the supply of hand sanitiser to frontline health and social services.
• The UK’s poultry industry is reported to be struggling with higher levels of demand as it has coincided, unsurprisingly, with a reduction in staffing levels due to Covid-19.
• Sky says that a third of the UK’s food harvest this year could rot in the fields. Migrant labour won’t be coming in and domestic workers may either not want to do the jobs, have trouble travelling or be ill.
• Dairy farmers are warning they may go out of business because the price they are paid for milk has fallen, despite shortages in some supermarkets.
• Bright House looks set to go under this week. Some 2,400 jobs will be at risk.
• Greene King CEO Nick Mackenzie is to take a 50% pay cut during the coronavirus crisis. Other board members will take a 30% reduction.
• Campari has withdrawn earlier profit guidance.
• Deliveroo has said it will deliver 500,000 free meals to NHS workers across the country. Pizza Hut has said it will donate 300,000 meals as a part of the Deliveroo campaign
• Friday a down day. Losses include Carnival, down 21% at 981p (was £36 in January), Flutter down 12%, Saga down 10%, TUI 9% lower and William Hill down 8%.
DOMINO’S PIZZA POLAND – ‘WELL PLACED TO TRADE RELATIVELY WELL’.
• Delays results.
• DP Poland has updated on trading and announced that it is to delay its full year results in line with the FCA moratorium on reporting. DPP had been due to report tomorrow. It says ‘we will commit to a new date as soon as the regulatory background becomes clearer.’
• DPP says ‘in line with our announcement on 7 February 2020, the Board expects to report full year results for the year ended 31 December 2019 in line with management expectations: System Sales up 13% to approximately PLN 81m and 3% like-for-like growth in System Sales 2019 over 2018. Cash at bank as at 31 December 2019 was £3.6m; control of cash and costs remain key areas of focus for the Group.’
• DPP says ‘trading in 2020 started broadly in line with management’s expectations for the full year, with only minimal impact from COVID-19 in the first two months of 2020.’ From 14 March, the lockdown in Poland intensified and DPP says ‘we are following the advice of government and health authorities to ensure that our stores can continue to operate safely and deliver delicious pizzas to our customers.’
• Continues to trade all units.
• DPP says it ‘continues to trade, making deliveries from all of its 69 stores. The Group’s high level of online ordering of delivery sales (82% in 2019), which supports online payment for food orders, is proving attractive to customers in the prevailing environment. In addition we have introduced a Contactless Delivery and Contactless Carry-out process for customers, which have been well received. Eat In dining has stopped altogether for the present.’
• The company says ‘we are currently seeing reductions in the cost of ingredients, particularly in cheese – a key component of most pizzas. In addition, in recent weeks the recruitment market has improved markedly for us.’
• The company says ‘there is little visibility on the potential full year outcome for our 2020 Financial Year at this time. However, for so long as we are permitted to continue to sell and deliver great pizzas to our customers we believe that we are well placed to trade relatively well during the lock down. Nevertheless, we cannot anticipate how our customers might react to circumstances, which change almost daily.’
• Relatively well-positioned.
• CEO Iwona Olbrys comments ‘the Coronavirus presents our industry – and business in general in Poland and around the world – with some major obstacles. Nevertheless, I believe that the Domino’s brand, and its reputation for quality of product and service, put us in a good position: much of our competition would love to have such a reputation. We continue to deliver to our customers delicious, hot pizzas, typically within 30 minutes from order.’
• The company says ‘we now offer contact free delivery and carry out. We continue to create new initiatives and seek to adapt to the ‘new world’.’ It concludes ‘whilst the outlook for the world at present is uncertain, in this new world I believe that DPP occupies an important position in the Polish Food & Beverage industry.’
HOLIDAYS & LEISURE TRAVEL:
• As mentioned above, a fortnight is a long time in terms of sentiment. With people dying on cruise ships drifting around near the Panama Canal, it was only a fortnight ago that the Cruise Line Industries Association said that regulatory moves to discourage cruising is ‘unwarranted.’ We said at the time perhaps they have a vested interest. See our ‘Doing the Wrong Thing for the Obvious Reason’. VP Mike Pence in the US had said that old people should use ‘common sense and caution’ when deciding whether to take a cruise or not.
• TUI has received a commitment from the German government for a €1.8bn loan. TUI will have to waive its dividend for the term of the loan.
• Deloitte’s survey of sentiment in the hotel industry has addressed just how quickly the industry believes it can get back to ‘normal’. Once the outbreak is contained, 31% of the respondents believe the industry will take another 12-24 months to recover. 27% predict recovery will be another 6-12 months whilst 22% believe the bounce back will be much quicker at 3-6 months
• China is temporarily banning all foreign visitors. This was inevitable as the risk of reinfection remains high.
• A Carnival Cruise ship carrying more than 1,800 people off Panama is seeking to transfer healthy passengers to another ship after four people died on board. The Zaandam has had more than 130 people on board report ‘flu-like symptoms’.
• Bloomberg has said Carnival is looking to raise $7 billion in order to improve liquidity.
• The Ritz hotel has reportedly been sold to Middle East interests.
• OTAs have seen their shares suffer huge losses in the US. Expedia is down some 53% with Booking Holdings down by 37%.
• Smith Travel Research repeats its observation that the 69.5% drop in US REVPAR seen last week ‘is the steepest weekly RevPAR decline we’ve ever recorded in our 30-year history.’ It adds ‘unfortunately, we fully expect that this data could get even worse next week as travel into the U.S. and North America overall dwindles even further.’
• S&P has lowered its credit rating for Heathrow. S&P says ‘the airport sector in Europe is facing an unprecedented decline in air traffic as Europe has become the epicentre of the Covid-19 pandemic and the governments have introduced travel restrictions and quarantine orders.’ It adds it ‘now expects a eurozone and global recession in 2020, which will likely slow the recovery in passenger traffic.’
• Gatwick is to close one of its two terminals this week.
• Cirium reports that around one third of all commercial aircraft worldwide have now been grounded.
• The United Nations World Tourism Organisation says international tourist arrivals will drop by 20% to 30% year-on-year in 2020. It would be very interesting to see just when they are factoring in a recovery as levels will currently be far below that suggested for the full year.
• Some 38 MPs have written to the chancellor calling for support of the aviation industry in the UK.
• Some now-workless Virgin Atlantic and easyJet staff are to be asked by their employers to help man the new NHS Nightingale Hospitals. Some cabin staff are trained in first aid, CPR etc.
• Tokyo Disneyland and DisneySea will remain closed at least until April 19.
• WhatsApp has seen a 40% spike in usage during the current pandemic.
• Ipsos Mori has suggested that exposure to advertising could make gambling a part of everyday life for children. It says ‘regular exposure to gambling promotions can change perceptions and associations of gambling over time and impact the likelihood they will gamble in the future.’
FINANCE & ECONOMICS:
• The ONS reports that house price growth in the UK slowed to 1.3% in the year to January from 1.7% in the year to December.
• Fitch has cut the UK’s credit rating saying that the rise in government debt increases risk. It says ‘the downgrade reflects a significant weakening of the UK’s public finances caused by the impact of the COVID-19 outbreak and a fiscal loosening stance that was instigated before the scale of the crisis became apparent.’
• UK car production looks set to fall by around 18% this year per forecasts by the SMMT.
• Reuters reports that more than 100 British companies have postponed or removed dividend payments this year so far in an attempt to preserve cash.
• Oil hitting 18yr lows at $23.50.
• Sterling stronger at $1.2393 and €1.1182. UK 10yr gilt yield down 3bps at 0.35%. World markets weaker Friday with Far East lower in Monday trade. UK set to open perhaps 10pts better.
START THE DAY WITH A SONG:
Friday’s song was Mott the Hoople with All the Young Dudes. Written by David Bowie, it’s stood the test of time. Today, who sang?
In the dock of Tiger Bay,
On the road to Mandalay,
From Bombay to Santa Fe,
Over hills and far away
RETAIL WITH NICK BUBB:
• Saturday’s Press and News (1): The front page headlines in the Saturday papers were dominated by the news that the Prime Minister and Health Minister had both tested positive for the coronavirus and had gone into self-isolation, eg the Telegraph went with “Leaders laid low as coronavirus strikes at heart of Government”, but the FT took a different tack and ran with “Ministers under fire for ignoring offers of more ventilators for NHS”. In terms of the impact of the crisis, the FT also had articles about the slump in orders for takeaway food services like Deliveroo and the collapse in housing market transactions and it also flagged that H&M is pressing its UK landlords for the right to exit leases early if sales do not recover after the crisis is over…whilst the Telegraph highlighted the expected 70% slump in mortgage approvals in Q2 and the fact that 2m self-employed people will
• Saturday’s Press and News (2): In terms of Retail news, most papers highlighted the collapse of the restaurant chain Carluccio’s and the household goods rental chain Brighthouse, but the big story was the public apology on Friday morning from #MadMike (aka Mike Ashley) for his ill-judged efforts to keep Sports Direct stores open. This unusually contrite stance got some grudging praise from the Editorial columns, eg the City Editor of the Daily Mail said “it took a big man to make a public apology after his bonkers efforts to keep his stores open”, whilst Lex column in the FT was sympathetic (“Business bosses are under huge pressure. They will sometimes say dumb things”) and the Business editorial in the Times said that his offer to provide lorries to the NHS was “a decent gesture” and that “for now, he deserves the benefit of the doubt”. But the Business editorial in the Telegraph
• Saturday’s Press and News (3): Interestingly, the Business editorial in the Telegraph about Mike Ashley lashed out at Simon Wolfson of Next for not making an apology for initially assuming that Online warehouse staff would continue to work (“this was a moment of considerable misjudgment”). The Business editorial in the Times took a different approach on Next’s decision to now stop Online orders, noting that it can survive even on zero sales for 3 months, but “if one of Britain’s best-run companies can go down with coronavirus this quick, what about the rest of them?”, concluding that “the sooner non-essential Next is back in business the better”. In happier news, the Daily Mail highlighted the boom in DIY sales reported by Kingfisher and in its market report the Daily Mail noted that although there was a renewed sell-off of Retail stocks on Friday, the Morrisons share price held
• Sunday’s Press and News (1): The Sunday papers were again full of gloom and doom about the crisis and the Sunday Telegraph front page headline, for example, was “Crisis will get worse before it gets better, says PM”, whilst the Observer went with “Johnson warns UK: tougher lockdown may be necessary”, but the Mail on Sunday highlighted the “blame game” going on inside Government with the bizarre headline “No 10 fury at China’s lies”. In terms of all the Editorial and other comment, we would, as usual, highlight the thoughtful column by the Sunday Times Economics correspondent David Smith (“there are other things we should think about post-crisis, beyond the sustainability of the public finances”), whilst the veteran City commentator Hamish McRae in the Mail on Sunday said in his column that although the Government and Bank of England are doing the right thing “they can’t
• Sunday’s Press and News (2): The sombre front-page headline of the Sunday Times Business section was “Unemployment to double as coronavirus ravages economy” and the paper was full of articles about the problems facing many companies and industries. In terms of Retail news, the Sunday Telegraph flagged that the embattled Arcadia fashion chain is suspending payments into its pension fund in an effort to preserve cash and it had an interesting interview with the boss of British Land, Chris Grigg, highlighting that it can’t afford to suspend rents indefinitely and that shopping centres like Westfield White City and Stratford are just too big and will be impossible to fully let in the future…On the back of that, the Sunday Telegraph flagged that some shops will never re-open after the crisis, a theme also taken up in a feature on the News pages of the Observer. The main Business story in
• Sunday’s Press and News (3): The Mail on Sunday highlighted the pressure on Marks & Spencer, after Goldman Sachs forecast that its Q2 clothing sales will fall by 60% and S&P downgraded its credit rating. The Mail on Sunday also flagged that hedge funds have been shorting retailers like B&M and Ted Baker, as well as targeting retail landlords like Hammerson. Finally, the Mail on Sunday had an interview with the hard-working boss of the Co-op, Steve Murrells, noting that it has begun a trial in one area in Wales to deliver food to the old and vulnerable, but that it may have to close more stores and funeral homes because of staff shortages.
• Today’s Market: After the big dip on Friday, the FTSE 100 index is expected to have a quiet start this morning (according to the Proactive private investor website), even though Asian markets moved lower overnight (the Nikkei is down by 1.9%). The spread-betting firms expect the FTSE 100 to open c5 points up at around the 5515 mark, but there are more gloomy company updates out this morning…
• Today’s News: Amidst the continuing welter of COVID-19 updates, our eye was caught by the news that EasyJet is grounding its entire fleet and the Online estate agent Purplebricks has suspended all its advertising…plus the news from the embattled shopping centre landlord Hammerson that it has only been able to collect 37% of its Q2 rents so far (57% adjusted for tenant agreements) and it too has suspended its final dividend and its previous guidance on 2020. In terms of Retail news. Mothercare has announced an update, warning of disruption to its Overseas franchising operation and flagging that it has given up trying to raise more equity.
• News Flow This Week: After the flurry of unscheduled trading updates last week, we are not expecting much UK Retail company news this week, apart from AO.com, but, with the end of the month coming up quickly now, the monthly GFK Consumer Confidence survey first thing tomorrow morning will get a lot of attention (although the polling will have been done in the first half of the month, before the pandemic began to get a grip). And tomorrow morning also brings the much-watched Kantar and Nielsen grocery market share figures (for the 4 weeks to March 21st/22nd). Out in the US, it will be interesting to hear on Thursday what Walgreen Boots say about the outlook with their Q2 results (for the period ending Feb 29th).