Langton Capital – 2020-04-07 – PREMIUM – Cineworld, lockdown implications, holidays, repatriation etc.;’
Cineworld, lockdown implications, holidays, repatriation etc.;’
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
Turning our analytical skills, such as they are, to the question as to why dogs always block doorways, we have to conclude that they have learned something from beavers.
Because, as we are finding out to our cost re the economy as a whole, if you block something up, stuff happens.
In the beavers’ case you get a lake and a safe place to build a nest, a lodge, we’re told and, for the dog, you can get stumbling humans who, from time to time, will be carrying a plate of food.
And, if 10% are carrying food and 10% of those people drop some food and 10% of that food happens to be a sausage, then you will end up with more sausages (and, admittedly, more cups of scalding tea) falling towards your mouth than you would have had if you laid in the corner.
And, as a dog can easily turn a deaf ear to curses etc and has honed to perfection his hang, well, hang-dog expression, the upside exceeds the downside, dogs that block doorways get more food, they have more puppies and hey-presto, problem solved.
Anyway, that’s enough of that. See yesterday’s tweets beneath Forthcoming Figures & follow our intra-day comments on @brumbymark. On to the news:
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THE SHAPE OF THE DOWNTURN. Will it be V shaped or U shaped? Or L shaped? 7 April 2020.
• When asked his view on economic recovery back in 2002, Sir Martin Sorrell, at the time CEO of advertising giant WPP, said that he thought it would be ‘bath shaped’.
• This wasn’t very a very attractive prospect at the time but, under the circumstances, it proved to be a pretty accurate description because, with some exceptions, downturns tend to be sharper than the subsequent recoveries
The Covid-19 shutdown:
• It was never going to be like throwing a switch but the current crisis has frozen business and thrown relationships up in the air
• Whether it be worker / employer, company / government or tenant / landlord, things are different now to what they were a month ago
• And all of those changes were legislated (or are being legislated) on the hoof. They are in many cases uncertain
• And, even when there is firm guidance in place (such as with the Job Retention Scheme) this is subject to clarification and change – this change can come after moves (in this case to sack, retain or furlough employees) have actually been made
• The relationship with government is also uncertain. At the moment, needs must and rule one seems to be ‘don’t pay them anything’ whilst rule two is ‘ask them for money’
• This too will be subject to change over time as many ‘windfalls’ may turn out to be loans or delayed payments rather than outright gifts
• The relationship with landlords, who often have their own banks, shareholder or both to deal with, will also need working out
• Thus far there seem to be very few outright gifts in this area. Some landlords have moved to monthly payments, others are offering delayed payment, payment for this quarter at the end of the lease whilst still others are hanging tough
• The request that government step in an pay the rents for shut businesses for up to nine months seems a) aspirational but b) not altogether unreasonable
The physical and non-physical disruption:
• The above relationships will need to be rebuilt. This isn’t instantaneous. Trust can be quickly lost and take a long time to rebuild
• Pubs, restaurants and shops have been physically shut.
• These are often filled to the gunnels with perishable food and in many cases, they are now boarded up
• Food has been given away where possible but opening up a restaurant, restocking it with food & drink (at some cost and from suppliers who may be somewhat suspicious), cleaning it and making it a fit location from which to serve food to the public, will be a time consuming and costly exercise
• We see this from the ‘pre-opening expenses’ that many companies highlight in their income statements
• And the staff have, in many cases, gone
• The JRS was announced after many units had already closed. They had been forced to make snap decisions and many let go at least their hourly paid staff. Where else did the 1m plus applications for Universal Credit come from?
• These people will need finding, re-recruiting, training etc.
• And the consumer may not immediately resume his or her habits of more normal times
• They may be addicted to Bake-Off, they may have bought dozens of cook book, be practising their culinary skills, they may be fearful of infection and, in many cases, they may simply have no money
• Because personal balance sheets will need rebuilding in the same way that corporate ones will
• You can’t just ‘open it and they will come’. You have to ask who and how and when?
• This is all a work in progress and there is no conclusion as such
• However, we can say with some certainty that, having gone through this disruption in order to dampen the spread of infection, the only thing worse than doing it once, would be doing it twice
• Or three or four times or however many times it took until either 1) a vaccine has been found or 2) 60% to 70% of the population has had the illness and the infection rate drops below 1.0
• In reality, the government has the examples of Italy, Spain and France, in that order, to follow
• It would be surprising if we did not learn at least something from the efforts of the above to exit lockdown – but that hasn’t happened yet
PUBS & RESTAURANTS:
• This is set at £10,000 or £25,000 with no smoothing between the two. The grants are based on rateable value. Below £15k and operators receive £10,000. Between £15k and £51k and they receive £25k with nothing at all for those with rateable values of £51k or more.
• there have been calls on behalf of companies that have units falling £1 north of £51k (or £1 short the £15k band) for some sort of smoothing. A grant based as a percentage of rateable value would remove some of the ‘anomalies’.
• A smoothed grant would also leave open the possibility for the government to extend the scheme to operators of larger sites. We have heard from one operator of several dozen sites who tells us that only two sites qualify for anything yet their bills still need paying. Medium sized operators may have a little more fat on the bone, but that is far from universal.
Pub co tenants:
• These operators should, in most instances, be able to claim under the above schemes. Nonetheless, Pubs Code Adjudicator Paul Newby has called on regulated pubcos to consider waiving rents. Alternatively, he challenges them to come up with some other way to support tied tenants through the current pandemic.
• The PCA says ‘the Covid-19 emergency creates a threat to the livelihoods of tied tenants. Those tenants will need the support of their pub companies if they are to survive in their pubs and to return to profitability once the crisis has passed.’
• It adds that it is ‘that five of the six pub companies regulated under the Pubs Code are amongst those who have not yet waived any rent for tenants of their pubs. These are the largest pub companies in England and Wales – each having at least 500 tied pubs.’
• It concludes ‘while recognising that they are all facing their own uniquely difficult challenges during this period, there is an opportunity now for them to demonstrate leadership to the wider industry and to show that they will go as far as anyone to protect each tenant and how they will do that.’
• London Union MD Jonathan Downey is calling for a 9mth government funded rent free period. Mr Downey says ‘it’s naive to think that, in the UK, landlords and tenants will ‘sort it out’ between them and agree rent-free periods. Some will, most won’t. The weekend press was full of examples of when they won’t.’
• CMS Law has written to clients outlining the terms for the Job Retention Scheme as it sees them. Furloughed employees will not be allowed to perform any work for their employer whilst furloughed ‘although they can undertake volunteer work and training.’ It goes on to say ‘the New Guidance specifically states that employees should be encouraged to undertake training. However, any training that the employer requests an employee to undertake must be paid at the relevant rate of National Living Wage/ National Minimum Wage rate (and again the employer will need to pick up any shortfall).’
In the USA:
• Analysts NPD in the US has reported that customer transactions fell by 42% across the restaurant industry in the week to 29 March. NPD says ‘while steep transaction declines are being seen industrywide, some restaurant models are better suited than others to retain existing off-premise business, like drive-thru, carry-out and delivery.’
• NPD says ‘the transaction declines partially reflect the struggle of on-premise restaurants to pivot to off-premise models.’
• Dave & Buster’s Entertainment in the US is reported to be in talks with private equity firms about a potential stake sale.
• NRN in the US reports that the Covid-19 crisis has scuppered plans to take TGI Friday public. It says the deal was set to close in late March, but that timeline has been overtaken by events. NRN says ‘full-service restaurants have been especially hurt as they don’t have drive-thru lanes, which many consumers are choosing to maintain social distancing.’
• The New York Post reports that the city’s ‘restaurant industry faces an existential threat worse than from any previous catastrophe. Eateries will survive the coronavirus nightmare — but salvation will more likely come out of good-faith bargaining between desperate owners and beleaguered landlords than from various government-relief proposals now being urged by restaurant-business advocates.’
The exit route:
• The Atlantic reports that the current crisis may only truly come to an end when either 1) some 60% plus of people have had the disease and its transmission can therefore be stifled and / or 2) a vaccine has been developed.
• A third option is to gently take off the lockdown whilst keeping vulnerable individuals out of circulation until either 1) or 2) above has been achieved.
• Footfall at British retailers is down 85% over the past two months according to Google statistics. Some areas have come to an almost complete halt. Footfall for grocery stores, however, was up around 30% in mid-March.
• More and more unanswerable questions as to when and how the lockdown will end. One would imagine the government is watching Italy, Spain and France with interest as those countries will need to cross that particular bridge before the UK does.
• The Retail Gazette reports Professor Joshua Bamfield at The Centre For Retail Research as saying it would take UK retail about six months or more before it can reach previous levels of sales. Professor Bamfield says ‘it will be slow and shoppers will remain cautious for a long time.’
• Bacardi is to partner with Deliveroo Editions to enable bars to deliver cocktails to local customers in London and Manchester.
• Debenhams has filed notice to appoint FRP as administrators. Debenhams says ‘these are unprecedented circumstances and we have taken this step to protect our business, our employees, and other important stakeholders, so that we are in a position to resume trading from our stores when government restrictions are lifted.’
• That’s Debenhams, Carluccio’s Benito’s Hat, Laura Ashley & Cath Kidson in administration with a whole host of others likely to follow in short order. Chiquito and Food & Fuel have filed their intention to appoint.
• The National Residential Landlords Association has cautioned residential renters that they cannot take the current crisis as a license not to pay their rent. Everyone is looking to their cash balances.
• There is some evidence that the price of global staples such as rice and wheat are beginning to rise reports Bloomberg.
• Goldman Sachs said it will seize and sell Luckin Coffee shares from the chairman of the company after he defaulted on the terms of a $518m margin loan.
• Tesco CEO Dave Lewis has written to customers saying it has been ‘given an initial list of 110,000 clinically vulnerable and isolated people by the Government. From this list, we were able to match 75,000 existing customers – and we’ve already let them know we’re making home delivery slots available to them immediately’. The retail giant says ‘we’ve increased our online delivery slots by 145,000 (+20%) in the last 2 weeks, with thousands more becoming available every day.’
HOLIDAYS & LEISURE TRAVEL:
• The Foreign Office has recommended against overseas travel for an ‘indefinite period’.
• The Foreign Office is reported to have brought over 200,000 UK citizens back to the UK in the last few days at a cost of around £75m.
• A better day for the hospitality and associated industries yesterday, at least in stock market terms. Carnival shares rose 16%, DART Group was up 16% and Intercontinental Hotels rose 12%. Betting companies did well with GVC up 19%, William Hill 16% higher and 888 Holdings up by 12%. Flutter shares were a relative laggard at up 4%.
• That has negative implications for companies whose entire rationale is to transport consumers overseas and / or look after them whilst they are in foreign climes.
• There have been calls for travel companies to take flights beyond 15 April off sale. That would have been around 3wks from the original ‘three weeks’ lockdown (announced on 23 March) which, truth be told, was only ever for an exploratory and minimum period.
• At the moment, EasyJet, Tui and British Airways, are still selling flights for late April and May despite the current travel restrictions likely to be extended for months.
• Saudi Arabia’s sovereign wealth fund has purchased a minority stake in Carnival Corporation as a part of its recent fund-raising exercise. It has around 43.5 million shares.
• Airbnb has raised $1bn in debt and new equity ahead of what is still hoped to be a planned public listing later this year.
• The closure of Bourne Leisure’s Butlin’s, Haven holiday parks and Warner Leisure Hotels has been extended to 14 May. Butlin’s says ‘it is with a heavy heart that we are announcing the closure of Butlin’s until 14th May. Our focus has always been to give our guests a fun and entertaining break, so it’s with much sadness that we do this. We are all facing unprecedented times – every person and every kind of work is affected.’
• Airbnb has said it will pay ‘$250 million USD to help accommodation hosts impacted by COVID-19-related cancellations.’ Airbnb says the accommodation will have to have been booked before March 14 with a check-in between March 14 and May 31 and says ‘guests will be able to cancel for a full refund for COVID-19-related circumstances.’ It adds ‘Airbnb will pay 25% of what you would’ve received for a cancellation based on your cancellation policy. For example, if you would normally receive $400 USD through your cancellation policy, we’ll pay you 25% of that—or $100 USD.’
• EasyJet has secured £600 million via the government’s Covid Corporate Financing Facility.
• Hurtigruten has extended its suspension of its cruise operations until at least 12 May. The company says ‘this is a setback for us, for the local communities we work with and for our guests. But the setback is only temporarily.’
• Cineworld has updated on the impact of Covid-19 saying ‘the Group’s entire estate of 787 cinemas in 10 countries has been closed as a result of COVID-19, a situation impossible to imagine a few months ago.’ It says ‘this has obviously been extremely challenging in many respects’ and adds ‘every effort is being made to mitigate the effect of the closures.’
• CINE says ‘these efforts include discussions with our landlords, the film studios and major suppliers, as well as curtailing all currently unnecessary capital expenditure.’ It says ‘we are also discussing the Group’s ongoing liquidity requirements with our RCF banks.’
• CINE says ‘we welcome the emergency support programmes to protect jobs and business that have been announced in our markets and will access them as appropriate.’ It is suspending payment of the 2019 Q4 dividend payment and says ‘until there is greater clarity on the prevailing circumstances and given the impact of COVID-19 on many of our employees, the executive Directors have voluntarily agreed to defer payment of their full salaries and any bonuses to which they are entitled. Similarly, during this period the non-executive Directors will defer their fees.’
FINANCE & ECONOMICS:
• Knight Frank, which does have a vested interest in the UK housing market, says that the volume of transactions this year will be sharply down but it maintains that prices will fall by only 3% this year and then rebound next.
• Though by no means impossible, that seems rather optimistic.
• Bank of England governor Andrew Bailey has said the Bank will not print money to cover government spending. This should dampen inflationary expectations but it does mean that the government will have to issue gilts to cover its spending.
• New car sales in the UK fell by 44% in March this year compared to the same month last year reports the SMMT.
• The March Construction PMI fell to 39.3 from 52.6 in February.
• Sterling stronger at $1.2278 and €1.1339. Oil price higher at £34.04. UK 10yr gilt yield up 2bps at 0.34%. World markets higher yesterday & Far East up in Tuesday trade.
START THE DAY WITH A SONG:
Yesterday’s song was Walking on Broken Glass by Ms Annie Lennox & her Eurythmics. Today, who sang?
Full speed ahead Mr. Parker, full speed ahead,
Full speed ahead it is, Sergeant
Action station, action station,
Aye, aye, sir, fire, Captain, captain
RETAIL WITH NICK BUBB:
• Today’s News: There is still no sign of an update from AO.com, or from the embattled N Brown, whilst the ASOS interims have been pushed back until tomorrow, but the pre-close from the home repair and services business Homeserve is reassuring and the Inchcape update flags that “global diversification is supporting our performance, with 14 markets still operational (albeit at much reduced levels), including Australia, Ethiopia and Hong Kong”, although Inchcape is not now paying its final dividend. And WH Smith have confirmed the equity placing, after last night’s update (see below).
• WH Smith: Having spent the day consulting institutional shareholders on its refinancing options (little more than 3 months after the badly timed acquisition of Marshalls Retail in the US), WH Smith confirmed after hours yesterday afternoon that it was raising new equity to prop up its balance sheet. However, even though the shares rallied along with the rest of the sector yesterday and management remain confident in the future for its once lucrative airport shops, the City’s appetite for the placing was tested by the accompanying news that the company will not be paying an interim dividend with the results delayed until May 14th and that total revenue was no less than 85% down last week (even though its UK hospital shops and High Street shops with Post Offices remain open). WH Smith are also assuming that revenue for the rest of the financial year (to end August) will be down by
• Weather Watch: It has turned very warm as we move on into April, but memories about “the weather” are always notoriously short-term and often too London-centric…so we turned to the Retail weather consultants Planalytics to check on how last month’s weather “should” have affected trading on the High Street (and Online!) across the country…And their overview for the calendar month of March was headlined “Colder and More Settled: Rain and Gales Let Up”, flagging that we went from one of the wettest Februaries on record to the driest March since 2012. Although temperatures were close to “normal”, all major reporting stations were colder than last year. Overall, across the country, in terms of the sales of key seasonal products, Planalytics estimate that the theoretical impact on “weather driven demand” last month was +7% for Garden Tools, +2% for Soup and +1% for Cough Medicines…It
• News Flow This Week: Ahead of the long Easter weekend, there is not much more company news scheduled this week, but the Tesco finals and ASOS interims tomorrow will provide plenty of talking points.