Langton Capital – 2020-04-09 – PREMIUM – Restaurant Group, Diageo, money-raising, lockdown etc.;
Restaurant Group, Diageo, money-raising, lockdown etc.;
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A DAY IN THE LIFE:
We’re having to remind ourselves here that this is a short week, Thursday is the new Friday and there won’t be any Monday Blues next week.
That said, we’re busy for the moment and, with Restaurant Group tapping the market for cash, let’s move on to the news:
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RAISING MONEY: With little or no income and still some costs to fund, companies are having to raise liquidity levels. How is this being done? 9 April 2020.
Cost cutting, suppliers, debt, equity:
• Funds are often raised, roughly in the order given above.
• Companies should not, of course, be carrying too much surplus cost
• It is a tenet of capitalism that companies should be efficient
• That is a good thing. At least it is almost all of the time.
• But it does mean that, in situations such as this one, there may be very little surplus cost to cut.
• The government has stepped in with the CJRS and some helicopter money – but very little of this has arrived yet.
• Directors and retained workers have, in many cases at least, taken pay cuts
• And costs will be being cut elsewhere – but this will be finite and, at the end of the day, it is hard to cost-cut your way to prosperity
Suppliers – working capital:
• Hospitality often works on a negative working capital model.
• This means that the companies, say a pub, sell their goods before they pay for them. The sell for cash and they take their stock (and their labour) on credit.
• That is what it is. In normal circumstances, it is extremely welcome as 1) suppliers don’t tend to charge interest and 2) it means that you don’t need to have as much equity in the business.
• However, it does mean that balance sheets, if they are not replete with fixed assets, can be a bit thin.
• And in a situation where units are being closed, of course, the above works in reverse.
• There is an outflow of capital as creditors are paid for stock, staff are paid for the work they have already done etc.
• Of course if the company in question has no cash (as it is shut and it didn’t have money squirrelled away), then creditors may not be paid, the group may be insolvent and somebody may procure a winding up order
Debt – banks, bondholders:
• Drawing down existing facilities. Many companies have done this as a ‘precautionary measure.’
• Waiving covenants. This will be necessary as there may be no EBITDA. So having an EBITDA covenant is somewhat meaningless.
• Extending facilities. It may be possible to roll over facilities, extend them, expand them etc.
• Take out new loans. These may be guaranteed by the government – via CILS – or not. This would be helpful, but will it be quick enough to stave off collapse?
• Turn to bondholders. The paperwork could be too lengthy to allow a securitisation to be started from scratch.
• Hidden dangers. Bondholders are ruthless and vulture funds (aka distressed debt funds) may pick up bonds in a company in order to bust it and sift through the wreckage
• This would not be Plan A in the government’s view – but what can it do to stop it?
• This is often a last resort.
• Existing shareholders do not like dilution – though it may allow managers to continue without interruption.
• And equity is expensive compared to debt – but it is irredeemable and equity holders will not bust the company if they do not get paid whilst banks might
• Cutting dividends and suspending share buybacks. This is effectively a tax on equity and both actions should help to secure cash – or at least stop cash balances from falling further
• Raise new equity. This may be a final resort – especially if share prices are depressed.
• Placings are much easier to achieve than rights issues.
• The corporate lawyers and advisors will be busily trying to find ways around this but some companies are limited as to how much equity they can place without giving existing shareholders rights to participate – and the latter takes a lot of time
• Solving the problem. There is a (positive) wrinkle in that a share issue may solve the problem that meant that the shares were depressed in the first place
• In a form of virtuous circle, the fund-raise secures the future for the company and its shares may rise – see Restaurant Group
• Time is our enemy. We could go on here but that will have to do.
RESTAURANT GROUP – Trading update and equity placing (most of this article was penned last night. The placing has now concluded. RTN has raised £57m).
• The fund raise was announced at 5.15pm last night.
• It was finalised and done by 7.00am this morning.
• Shareholders, many of whom are presumably working from home, must have either a) been working all night or b) have been in the know already.
• Restaurant Group’s shares rose by 41% yesterday, ahead of the announcement.
Restaurant Group’s assumptions:
• Restaurant Group updated on trading yesterday evening.
• The group says ‘in light of the rapidly changing developments regarding Covid-19, we have modelled a pessimistic scenario for the current financial year. This takes account of management actions taken to conserve cash, the benefit from the government announced initiatives and updated financing arrangements with the Group’s lending group.’
• The group says it ‘assumes that all our restaurants and pubs will remain closed until the end of June. Furthermore, with the Government indicating that social distancing measures will remain in force post lockdown, we believe that there will be a slow recovery in footfall during the rest of this financial year.’
• RTN says ‘we therefore assume that we would be extremely disciplined in the phased reopening of our restaurants through July to December 2020 and would expect to reopen around 400 of our 600 restaurants and pubs across that period, potentially with some restrictions on operations immediately following lockdown.’
• This seems like a realistic if, as the company says, a slightly pessimistic outlook. We have the situations in Italy, Spain and France, in that order, to follow and none of those countries have yet taken their lockdowns off.
• Austria is making certain suggestions. But they are not out of line with RTN’s comments above.
The impact on finances:
• The above leads to a H1 decline in LfL sales of 60% with a 30% drop in H2 and a 45% decline over FY2020 as a whole.
• H2 will be critical. The group is modelling down 45% in Q3 and down 10% in Q4. One would assume that Wagamama would be the best of the bunch with leisure brands and travel hubs markedly worse.
• The group is expecting total sales to half in the year (down 60% in H1 and down 45% in H2 (on fewer units).
• Total sales should be down 60% in Q3 and 30% in Q4. There are a lot of disposals factored into this model.
• RTN has reduced capex to ‘no more than £30m for FY2020.’
• It has cut costs, furloughed staff and it will not pay a dividend.
• Food and Fuel and Chiquito ‘statutory entities have been placed into administration.’
• The group is negotiating with its landlords to remove minimum rents at concession (where possible)
• The group models EBITDA for this year of ‘between £45m and £55m with net debt in the region of £310m to £320m.
• Virtually all of this will accrue either in the first half of Q1 or in Q4. What happens in Q4, of course, is uncertain.
• The group says it has headroom with a forecast of ‘a minimum of £60m of cash liquidity throughout the remainder of the 2020 financial year.’
• It the closure is extended, the ‘adverse impact on cash would be no more than £5m for each further month of complete closure plus the cost of furloughing employees.’
Cash and debt:
• The group has previously announced it has secured an additional £15m increase in Santander’s super senior revolving credit facility to Wagamama
• And it is now saying that ‘after consultation with a number of major shareholders’ it is moving ahead with a Placing of up to c19.9% of the Company’s existing ordinary share capital.
• This should ‘provide sufficient liquidity to deal with the current challenging environments and enable the Group to continue to operate, where possible, through this extraordinary period whilst ensuring that it is well positioned for the eventual normalisation.’
• The Board says it ‘has concluded the Placing is in the best interests of shareholders and wider stakeholders and will promote the success of the Company.’
• It says ‘the Board remains confident in the strategy over the longer term and believes the Group will be well positioned to benefit from the normalisation in trade with its diversified set of brands.’
• RTN this morning announced that it had successfully placed 98.2m shares at 58p, just a 3% discount to the then-price of 59.9p, which was itself 41% up on the day. The raise thus brings in around £57m gross
• The group currently has c491m shares in issue. A 19.9% placing at, say, a 20% discount to the current price of c60p, would raise around £47m before expenses. This is now superseded by our comment above – the company raised around £57m. The discount was very tight.
• These prices could move. The group’s shares, already depressed, were c160p before the coronavirus crisis struck, and they fell to around 23p three weeks ago.
• The placing is via an accelerated bookbuild.
• RTN says it has consulted with a number of shareholders already.
• It would be reasonable to conclude, therefore, that the placing will be supported.
• The group’s shares rose by 41% yesterday. That is hardly likely to be coincidental.
• Insiders may have concluded, with some justification, that the placing should secure the group’s future, albeit at the cost of some dilution at a price that would have been unthinkable only a month ago.
PUBS & RESTAURANTS:
• Diageo has updated on the impact of COVID-19 saying that ‘widespread containment actions put in place by governments across the globe in March, including the closure of bars and restaurants, are having a significant impact on the performance of our business.’
• DGE says ‘social distancing measures, including the closure of the on-trade channels, have been introduced in most of our markets. We are tracking changes in consumer behaviour during this time and adjusting our plans and resources in response.’
• It says ‘in mainland China, we are beginning to see a very slow return of on-trade consumption, as restaurants and bars have started to gradually re-open.’ It adds ‘in North America, where the on-trade channel accounts for approximately 20% of US Spirits’ net sales, most States closed bars and restaurants in March. In Europe, there have been significant closures of on-trade premises in most countries. This channel accounts for approximately 50% of Europe net sales, although the size of the on-trade channel varies significantly between individual countries. In both of these regions, we have seen some pick-up in the off-trade channel (retail stores) in recent weeks, although it is unclear whether this will be sustained.’
• DGE says it is cutting costs where possible and adds ‘we have a strong balance sheet and at 31 December 2019, our adjusted net debt to EBITDA ratio was 2.8 times. There are no financial covenants attached to our outstanding short or long-term debt.’ CEO Ivan Menezes says ‘I am confident in Diageo’s long-term strategy and our ability to move quickly in this difficult environment. We will continue to execute with discipline and invest prudently to ensure we are strongly positioned for a recovery in consumer demand. I am proud of the resilience and commitment of our people as they work hard to support our partners, customers and communities.’
• Online operator Naked Wines has updated saying it has seen ‘strong demand provides good momentum into FY21.’ The company says ‘since restrictions on social gathering began, we have seen higher levels of demand from both new and repeat customers in all of our markets, particularly in the US, and as a result we are finishing the year with good momentum and expect revenue for FY20 to be in excess of £200m, which is slightly ahead of current consensus.’
• Naked Wines’ CEO Nick Devlin says ‘in the short term, the introduction of social distancing has accelerated the shift in consumer buying behaviour towards online, leading to increased demand from both new and existing customers across all our markets.’ He concludes ‘Naked, with its advantaged consumer proposition and strong balance sheet is well placed to meet the challenges of a changing consumer environment.’
• McDonald’s has reported that LfL sales fell by only 3.4% in Q1 despite closures due to lockdown measures recently imposed. March will have been a lot worse than January and February. McDonald’s still had 99% of its units open in the US.
• Total Jobs has said that a record number of people in the UK were now looking for farming jobs.
• Constellation Brands has updated on its trading and production saying ‘over the past several weeks, we’ve shifted resources to accelerate production of high-volume products and we’ve built substantial product supply across our warehouse and distribution network in the U.S.’ The group adds ‘we remain confident in our ability to continue meeting the needs of U.S. consumers and do not expect any near-term service disruptions to retailers or consumers.’
• The German government is allowing breweries to defer their annual beer tax payments in order to help them shore up their balance sheets. Germany’s breweries had been expected to pay around €650 million in beer tax from production in 2019.
• The BCC has concluded that 57% of businesses in the UK do not have enough liquid resources to survive for more than three months.
• Only 8% of businesses had successfully tapped into the government’s Business Interruption Loan scheme. The BCC says ‘we’ve seen a big jump in the number of firms furloughing staff, and many are now starting to apply for access to government loan and grant schemes to keep themselves afloat.’
• The BCC has reiterated the need for cash sooner rather than later if businesses are to be supported over the coronavirus crisis. This has variously been described to Langton as ‘useless’ and ‘hopeless’. That might be a little harsh. But telling a drowning man that there is plenty of oxygen six feet above his head is no help at all.
• The BBPA has produced protocol and guidance helping pubs to destroy beer in their cellars without having an Authorised Company Representative from a brewery or supplier present. This will then allow duty on unsold beer to be recovered. The BBPA says ‘HMRC’s decision to provide additional flexibility in these extraordinary times – as the BBPA called for – has been extremely welcome. This guidance the BBPA has produced, approved by HMRC, gives clear guidance to pubs on how they should destroy their beer and how they need to record it, ensuring the destruction is safe for staff and done in an environmentally responsible manner. Following the guidance will help ensure excise for unsold beer gets back to brewers and credit gets back to pubs, so I urge all licensees and operators to use it.’
• UKH has urged the government to rethink its decision to exclude tronc payments from its Job Retention Scheme arrangements. Employers save NIC on tronc payments and, in some situations, these are used to bolster wages. This works fine nearly all of the time but, in the current environment, it means that staff who may have earned above the £2500 per month limit when tips are taken into account, will be capped at 80% of the lower figure.
• The MA reports that some 10,000 pubs will not benefit from the £10k or £25k of helicopter money promised to business because they have rateable values of more than £51k. Large pubs, bars, nightclubs and many restaurants will be excluded.
• UKH CEO Kate Nichols has told The Caterer that cash flow, or rather the lack of it, is the major issue for many businesses in the hospitality industry.
• The South African wine industry has reportedly been given permission to export wines again after having been shut down for a period.
• Nielsen has reported that consumer packaged goods demand (tinned food etc) in the US has risen sharply as a result of ‘behavioural changes’. This will also be the case in the UK and in other developed markets.
• UK Hospitality has welcomed the Government’s recommendation of additional flexibility for licensees. A letter written by the Home Office to local authorities is recommending flexibility and says a ‘considered and pragmatic approach should be taken to breaches of licence conditions and procedural defects caused by the COVID-19 pandemic, particularly where these breaches or defects do not have a significant adverse impact on the licensing objectives’.
• UKHospitality Chief Executive Kate Nicholls comments ‘this additional flexibility for licensees is some welcome positive news at a moment when any good news is needed. The Government has shown a great deal of common sense in advising local authorities to act more pragmatically and flexibly during the outbreak.’
• Supermarkets have denied profiteering. Tesco yesterday warned that the coronavirus outbreak could cost it up to £925m in increased payroll, distribution and store expenses.
HOLIDAYS & LEISURE TRAVEL:
• The government has reported that the number of rail journeys being taken in the UK has fallen by 95%. London is 88% down on a year ago with around half of all trains running.
• TUI has extended the suspension on all of its holiday and cruise programmes globally to at least 14 May for beach holidays and 31 May for cruises. The company says ‘at this point in time, nobody can accurately predict when that will be, so for the time being we will keep a close eye on our programme and continue to amend and adapt timings in line with the latest global travel advice.’
• The Wall St Journal reports that hotel bookings have continued to strengthen. Railway usage on 4 April was at its highest level since January.
• STR reports that London hotel occupancy fell by 57.8% to 34.5% in the month of March. Room rate was down 10.4% and ADR was down by 62.1%.
• Travel Weekly has reported that the FCO’s advice that UK residents should avoid travelling abroad indefinitely would lead to an increase in claims for refunds. UK travel companies are awaiting a government decision on whether the right to cash refunds could be temporarily suspended.
• The FCO reports that around 1.3m Britons have returned back to this country since last November.
• One of the long-stay carparks at Gatwick airport is being used to accommodate a drive-through Covid-19 testing centre.
• The Telegraph reports the Music Venue Trust as saying that hundreds of small music venues could shut down forever within weeks.
• Disney’s video streaming service, Disney Plus, has achieved more than 50 million subscribers since its launch only five months ago. Disney says ‘we’re truly humbled that Disney Plus is resonating with millions around the globe.’
FINANCE & ECONOMICS:
• The World Trade Organization suggests that world trade could contract by between 13% and 32% this year. That is clearly quite a wide range.
• France has entered recession with GDP reportedly down 6% in Q1. The economy there shrank by 0.1% in Q4 last year.
• The UN has suggested that the economic fallout from the coronavirus outbreak could push up to half a billion people into poverty.
• The RICS in the UK has suggested that the UK housing market could come to a sudden halt. The March index of properties for sale fell to minus 72, while indices for demand and sales fell to minus 74 and minus 69 respectively.
• Sterling stronger at $1.2383 and €1.1393. Oil higher at $33.17, UK 10yr gilt yield down 3bps at 0.38%. World markets lower in the UK & Europe yesterday but up in the US and mixed in the Far East in Thursday trade.
o Partners at accountancy firm KPMG are to take a 25% pay cut.
o Donald Trump’s wealth is said by Forbes Magazine to have fallen by over $1bn due to the coronavirus outbreak.
o King’s College London scientists have suggested that the number of people with Covid-19 in the UK could currently be around 1.4 million. This is down from their estimate of 1.9 million on 1 April.
o The largest number of people to die in hospitals in a 24hr period in the UK was recorded yesterday. Some 938 people lost their lives. The figures do not capture deaths in care homes or in the community.
START THE DAY WITH A SONG:
Yesterday’s song was Daylight by Matt and Kim. Today, who sang?
To need a woman,
You’ve got to know,
How the strong get weak,
And the rich get poor
RETAIL WITH NICK BUBB:
• Naked Wines: The Online wine business Naked Wines has been a good performer on the stockmarket of late (the market cap is up to c£200m), given the recent boom in demand for home delivery and the company has confirmed today that y/e March ended with good momentum (particularly in the US) and that sales for the year will top £200m, slightly ahead of consensus. CEO Nick Devlin says: “To the extent it’s safe to do so we are working hard to continue to connect wine drinkers with world class independent winemakers and bring a moment of normality and enjoyment into their homes without necessitating a visit to a store”.
• News Flow Next Week: For Retail sales purposes, March was the 5 weeks to April 4th, but because of the Easter break we won’t find out until the BRC-KPMG Retail Sales figures on Thursday how the key Food/Non-Food sales split turned out. Otherwise, there is no Retail company news scheduled, following the Bank Holiday on Monday, although we are still puzzled why AO.com has said nothing about recent trading. Note that Easter is earlier this year (Easter Day is April 12th, compared to April 21st last year).
• Life after the Pandemic (Part 1): As part of an occasional series on what life may be like after the pandemic is over, we were struck by this comment yesterday morning by the French-based market research company Ipsos (which has a current market cap of Eur 840m), in its COVID-19 update: “Ipsos is confident in its ability to get through the period that has just opened and that will last longer than the time of confinement. For a long time, this pandemic will be a game-changer. It is massive, brutal and universal. It is also lived by all, in real time, the first time for a viral attack that is so contagious. As such, it will permeate the functioning of society, the structure of markets and the behaviours, hopes and fears of people. It will force institutions and businesses to work differently. It will also reinforce Ipsos’ conviction that information (as long as it is properly produced,