Langton Capital – 2020-04-15 – PREMIUM – Suspended animation, PPHE, 888, government aid etc.:
Suspended animation, PPHE, 888, government aid etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
So, whilst many workers are busier now than ever (though rarely in a good way), many others find themselves with time on their hands.
Of course, this could be an absolute curse. But it could mean that some have time to brush up on their language skills, to tend to the garden or to do that bit of DIY that’s been on the list for a couple of years though, it has to be said, now would not be a good time to cut your thumb off and clog up an A&E bed for a few hours.
Meaning that we could come out of this poorer but with somewhat tidier houses, with more of those catchup books read (I might give Gustave le Bon’s The Crowd another go) and more knowledgeable in other areas as well.
Als we Nederlandse lezers hebben, laat het me weten als ik probeer het opnieuw! My German and French have pretty much rusted to bits and, as there’s an inexhaustible supply of dog and cat videos on YouTube, maybe that’s my true calling.
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SUSPENDED ANIMATION, A FEW THOUGHTS: We’re in week four. A few more observations. 15 April 2020.
Supply and demand have both gone to zero:
• Shops, pubs, clubs, bars & restaurants have all closed in accordance with government instructions.
• With supply removed, demand is also at zero other than for a bit of delivery, grab and go, click and collect and the rest. This does not amount to much.
Credit where credit is due:
• Whilst talk is cheap and nothing is really working yet, the government (or at least its much-maligned civil service) has put some thought into the question as to how to freeze business without killing it.
• And business has a strong will to live, which means that there is a lot of self-help going on.
• As mentioned yesterday, the biggest costs on the P&L are cost of goods sold (now at zero), labour (furloughed) and property costs (rates at zero, argy-bargy with landlords as to who should take the strain).
• Directors have (mostly) taken hefty pay cuts, other staff likewise & other costs have been cut where possible
The three things that really matter. Cash, cash and cash.
• The government is ‘helping’ with delayed VAT payments (and its business rates holiday)
• The problem here is that cash is simply not changing hands fast enough. Only 9% of the helicopter money (£10k or £25k depending on unit size) has been handed out, only 2% of companies have been able to access government-backed loans and the portal to pay out for furloughed staff is not open yet.
• Elsewhere, debts aren’t being paid. Landlords are unwittingly helping but so are suppliers, whose accounts aren’t being settled. A game of Pass the Parcel, where nobody wants to unwrap the surprise, is taking place.
• Non-contracted capital expenditure has fallen to around zero.
• It’s all in the detail.
• How, how, how?
• Because the proof of the pudding has to be in the eating and there has simply been no pudding yet.
• It may come, of course, but shutting the stable door after the horse has bolted is not very useful.
• In the meantime, the government is leaning on banks (outside the government backed scheme) to be more accommodating and it is letting tenants fight their own battles with their landlords.
• This may be akin to effectively socialising the cause of the problem and attempting to privatise its solution.
• Whilst there has been, on paper at least, a ‘solution’ to a number of the P&L’s largest cost items, this hasn’t been attempted for rent
• This, perhaps, for a number of reasons.
• No1 – bad stuff rolls downhill. If the government can slow the problem on its way, ultimately, to the taxpayer (who has a vote and who doesn’t like to pay more in taxes), then that has to be a ‘good’ thing
• Step forward landlords and banks. They generally don’t have many votes, they wear the black hat and are used to being hissed at by the audience
• No2 – it’s complicated. Just how do you intervene in a market with millions of moving parts?
• Well, you tried with the employment market. Perhaps for obvious social and political reasons, so it could be done but, any battle that can be left in the private sector may be left without government support
• No3 – landlords are people too. Well, sort of. But landlords are often geared, if they don’t receive their rents, they may go bust, the problem will resume its downward progression and the banks will be next (followed by the taxpayer).
• Calls for a 9mth rent moratorium have the virtue of being simple but they would need to be costed and, ultimately, the taxpayer would have to pay the bill for 9mths rent for corporate Britain
• This would be costly, it would disadvantage freehold owners etc
• Securitisations will have covenants and, in many cases, these will be breached if companies do not trade at a sufficiently high level
• So, given that it cannot have been the intention of the lockdown to move a number of companies into the hands of some vulture fund bondholders, what can be done about this?
• At the moment, perhaps, not a lot.
• Securitisations are usually assessed quarterly and, any problem that won’t crystallise until June is maybe being put on the ‘too-difficult’ pile
• Encouragingly, M&B yesterday reported that it had achieved a securitisation covenant waiver on at least one of its covenants (the ‘failure to trade for 30dys’ one). This should have implications elsewhere in the sector
• To be continued
PUB & RESTAURANT NEWS:
• Foodservice markets losing £1bn per week in sales.
• Industry analyst Peter Backman has updated on his thoughts re the food sector saying that he would ‘observe that the foodservice market is currently losing sales to the retail market at the rate of about £1 billion a week. After allowing for the differences in gross profit between foodservice and retail, this translates into a gain for the retail market of about £200 million (perhaps slightly more) in food sales each week. This need to be to added the sales of alcohol and soft drinks that would normally be sold in pubs and which consumers are now buying from the on-trade.’
• Fears that some of the changes may become permanent.
• Backman says ‘this is a huge shift of several hundred millions of £ per week with implications for the supply chain: manufacturers are now producing almost exclusively for the retail market, and as I observed last week, foodservice-focused distributors are having to find business in unusual places. The longer the lockdown persists the more these short-term developments will become baked into the foodservice supply system with implications for what happens when restrictions are finally removed, and consumers start to eat out again.’
• Backman says ‘within the foodservice market itself, there are flickering signs of life in takeaways – with peaks on Mondays but a poor showing over Easter. Delivery is also improving somewhat, and the aggregators are now also attracting business from consumers who are shopping online from convenience stores.’
• The Guardian quotes Vaughn Tan, a professor at UCL, as saying that the current crisis will force the industry to ‘fundamentally rethink what it even means to be a restaurant.’ Restaurants have been around for thousands of years – but I think we know what he means.
• KFC has reopened 11 branches around the UK for takeaways.
• Writing in the Evening Standard, chef Yotam Ottolenghi has warned of ‘tremendous’ damage being done to the restaurant industry unless the Government steps in to allow the deferment of rental payments.
• The CBI has said that it expects the sharpest downturn in the economy for generations. Dame Carolyn Fairbairn, the CBI director-general, said the country needed to ‘to start building the UK’s revival plan.’ She said ‘desperately hard though it is while the human toll on our country is so high, we need to begin to chart a route to economic recovery – the more hidden toll on livelihoods, hope and opportunity demands it. This plan needs to hear from many voices – from business, employees, unions, all political parties, other parts of civil society. Government has much to do and no-one doubts it is at full stretch, but now is the time to start building the UK’s revival plan.’
• Coffee prices are said to be rising as the coronavirus pandemic has led to a spike in demand.
• The BCC reports that only 2% of firms had successfully accessed the government’s loan scheme whilst the portal through which wages will be subsidised is not even open yet. The BCC told Sky ‘if businesses don’t have the money in their accounts they’re going to have to look at all of their costs and make some really difficult decisions. One of those will be if they continue to employ people even if they have the furlough scheme or not.’
• Only 9% of companies entitled to helicopter money grants of £10k or £25k depending on size are reported to have received their cash.
• Burger King has been told by the ASA to withdraw its advert saying that its vegan-friendly Whopper is ‘100% Whopper, no beef.’ The company says ‘we communicated from the outset that the Rebel Whopper is aimed at a flexitarian audience.’
• Over 6,000 people have signed a petition calling on the Government to include tronc and service charge payments in its furlough scheme.
• Global contract catering company Sodexo yesterday warned that revenues will be down by up to £2.4b as a result of the coronavirus pandemic. The company says that financial H1 numbers to end-February were up 5.1% but revenues in the second half will be sharply lower.
• Sodexo, in line with most operators, says that it has furloughed staff, cut costs where it can and reassured investors that it is well-positioned for the future. Sodexo says ‘in the UK and Ireland, we are aiming to redeploy employees where possible to support the NHS and other critical sites as part of the national response to Covid-19.’ Unsurprisingly, CEO Denis Machuel says ‘we have seen a significant number of sites fully or partially closed in Education, Corporate Services and Sports & Leisure, and the Olympics Games have been pushed back a year.’
• Diageo has sold its Dutch liqueur brand Petrus Boonekamp to Italian company Gruppo Caffo 1915.
• Oasis and Warehouse are reported set to appoint administrators. Some 2,300 jobs will be at risk.
• Pub Aid reports that many pubs ‘are continuing to work tirelessly to support their local communities. The help takes many forms, from offering essential supplies to customers, to preparing hot meals for local homeless and other vulnerable people, as well as keeping regulars entertained and connected during isolation with online quizzes, music nights and more.’
HOLIDAYS & LEISURE TRAVEL:
• PPHE has updated on trading saying that ‘trading in January and February was in line with Board expectations.’ This is ancient history, of course. The group adds ‘from mid-March in the UK, the Netherlands, Germany and Hungary, our hotels were either temporarily closed or capacity was significantly reduced.’
• PPHE says ‘the Group’s financial liquidity position is robust’ and it adds that ‘significant actions taken to preserve cash and reduce costs and overheads.’ The group adds ‘as at 14 April 2020, the cash position throughout the Group amounts to £149.9 million. In addition, the Group has an undrawn overdraft facility of £3.8 million.’
• PPHE CEO Boris Ivesha says the ‘review of operational costs has been carefully balanced with the business’ needs for the future to ensure that, as the impact of Covid-19 reduces and a sense of normality resumes, the Group is well-positioned for continued success.’ Looking ahead, the company says it ‘is currently operating at significantly reduced capacity across its portfolio. In the UK, only Park Plaza Westminster Bridge London remains open to accommodate key workers, and in the Netherlands four of our six hotels, which are currently open, are operating at a significantly reduced capacity. Furthermore, operations in Germany and Hungary have been significantly reduced. In Croatia, where our operations are seasonal and typically opened around the Easter holidays, the properties are currently closed.’
• The company concludes ‘given the fast-moving nature of the Covid-19 pandemic and the resulting ongoing uncertainty regarding disruption to the hospitality industry and our markets, it is not possible to provide meaningful earnings guidance for the current financial year. However, having taken the measures detailed above, the Group is well positioned to withstand a continued and significant decrease in business activity across our markets during 2020.’
• Safestay yesterday updated on its financial position yesterday saying that it was ‘pleased to confirm a new £5 million overdraft extension with HSBC.’ It says ‘all of our hostels have been closed since 1 April 2020.’ It says ‘operational costs associated with the running of the individual sites and our head office have been greatly reduced. Capital expenditure and the conversion of hotels into hostels has been suspended. Individual agreements have been reached with landlords involving a mix of suspension of rents or rent reductions for a limited period. As a result, the monthly cost base of the Group has been significantly lowered to approximately £0.6 million of which half relates to payments which can be temporarily deferred.’
• European president Ursula von der Leyen has told German tabloid newspaper Bild that consumers should hold off before making holiday plans for the summer. The UK FCO has advised against all but essential travel.
• Heathrow Airport is hitting record levels of revenue for freight or cargo-only flights. CEO John Holland-Kaye says the airport ‘continues to serve the nation by keeping vital supply lines open, and helping people get home.’ On a less bright note, the airport expects passenger demand this month to be down by more than 90% on the same month a year ago.
• Wizz Air is to cut almost 1,000 jobs.
• Analysis by IATA suggests that international airline passenger revenues will fall by $314 billion in 2020, a 55% decline against 2019. IATA goes further and says ‘the world is heading for recession.’
• Marriott International has announced a new $1.5 Billion 364-Day Revolving Credit Facility. It has also been granted covenant waivers for its existing facility.
• 888 Holdings has reported full year numbers to end-December saying that revenue rose 6% to $560m with casino and sports revenue up and poker revenues lower. The company reports basic EPS of 13.5c and a final dividend of 3.0c per share. Regarding current trading, the company says ‘the Board is monitoring closely the spread of COVID-19. While it is unclear how this fast-moving situation will evolve over the coming weeks and months and it is incredibly difficult to predict how consumers will react throughout this period of unprecedented uncertainty, as a purely online operator with diversified brands across product verticals and a strong balance sheet, the Board is confident in 888’s ability to manage these challenges.’
FINANCE & ECONOMICS:
• Local councils are reported to have paid out around £1bn to small businesses. As we enter the 4th week of lockdown, around 9% of promised monies have been paid out.
• The CEBR is suggesting that UK house prices could fall by around 13% by the end of the year. One in nine mortgage holders is taking a payment holiday. The housing market is currently frozen.
• The CBI has said that, as time slips by, job cuts are likely to be made permanent as business cannot keep labour on its books indefinitely.
• The government’s furlough portal is set to open on 20 April. What is the betting it will crash? Firms have already paid out March ‘wages’ to furloughed staff and April’s payment will be due shortly.
• The IMF says that the global economy could shrink by 3% this year. The fund says a ‘partial recovery is projected for 2021.’ It says the UK will shrink by 6.5%. This is a larger drop than that seen over the financial crisis.
• The OBR in the UK has said that the UK economy could shrink by a somewhat greater 35% in Q2 this year with unemployment rising by 2m people. GDP should bounce back in Q3 – if the lockdown is over by then.
• The OBR is projecting government borrowing of £273bn this year up from earlier estimates of £55bn. The borrowing level will be the largest since WW2.
• The Social Market Foundation is suggesting that the ‘triple-lock’ re pensions in the UK be removed in order to smooth the cost of the current shutdown across the generations.
• Sterling stronger at $1.2605 and €1.1484. Oil lower at $29,82. UK 10yr gilt yield 0.33%. World markets mixed yesterday. UK set to open down around 20pts.
START THE DAY WITH A SONG:
Yesterday’s song was the well-worth-a-listen Can’t Let Go by Caught a Ghost. Today, hopefully not a reference to post-pandemic Britain, who sang?
There’s a crazy old woman smashing bottles on the sidewalk,
Where her house burnt down two years ago
People say that back then, she wasn’t that crazy
RETAIL WITH NICK BUBB:
• Today’s Market: Despite the 2.4% rise on Wall Street yesterday, the FTSE 100 index is expected to dip slightly this morning (according to the Proactive private investor website), after the gloomy outlook report from the IMF and a soft showing from Asian markets overnight (the Nikkei is down 0.4%)…The spread-betting firms expect the FTSE 100 to open c10 points down at around the 5780 mark.
• Today’s News: The struggling fashion chain QUIZ has announced that it is re-starting its Online operation today, following health and safety changes in its warehouse. Today was meant to be the JD Sports finals but they were postponed a while ago because of the pandemic. AO.com remains the only retailer to have said nothing about recent trading…
• News Flow This Week: The BRC-KPMG Retail Sales figures for March (the 5 weeks to April 4th) are out first thing tomorrow and are likely to look reasonably strong overall because of the temporary boost to Food retailers from the stockpiling surge in mid-March. Otherwise, there is no Retail company news scheduled this week, following the long Easter weekend,