Langton Capital – 2020-04-20 – PREMIUM – Marston’s, EasyHotel, Hollywood Bowl, Rank, lockdown extension etc.:
Marston’s, EasyHotel, Hollywood Bowl, Rank, lockdown extension etc.:
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A DAY IN THE LIFE:
Quite a lot going on at the moment, so let’s move straight on to the news:
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• Private company accounts. Wasabi.
• Comment on the Going Concern principle.
• More on Deliveroo & delivery demand
• Negative working capital (tour operators, pubs etc.)
PRIVATE COMPANY ACCOUNTS. Wasabi. 20 April 2020:
Private company Wasabi has reported full year numbers to 29 December 2017 to Companies’ House late last month. Parent company Wasabi Sushi Bento also reported accounts.
Introductory comments & headline numbers:
• Just how Wasabi was able to report numbers some 15mths after the end of the financial period to which they refer is unclear to us.
• The main operating company, Wasabi Limited, which finished the year under review with 51 restaurants (2017: 51), reports turnover of £96.0m (2017: £91.6m) with an operating loss of £3.3m (2017: loss £1.1m) and EBITDA of £784k (2017: £2.2m).
• Parent Company Wasabi Sushi Bento reports turnover of £115.1m (2017: £106.1m) with an operating loss of £4.9m (2017: loss 4.9m) and EBITDA of £569k (2017: loss £1.2m). The parent company had 61 restaurants.
• Wasabi Sushi Bento says the Korean food takeaway business ‘continued to grow from a turnover perspective in 2018 while remaining constant at branch level with two new branches opening in Wasabi Co. (Russell Square and Oxford Street) coinciding with two sites closing in London.’
• It says ‘by the end of the period, the Group had 61 branches in total, including 51 UK Wasabi branches, five US Wasabi branches, two “Kimchee to go” outlets, two kimchee restaurants and one Soboro bakery.’
• The company adds ‘the Group continued its partnership with M&S with five kiosks and three sushi offerings being present in M&S stores.’
• The Company adds ‘turnover growth was driven by a full year of operation for all the subsidiaries with positive EBITDA performance within the Group being driven mainly by its Wasabi brand in the UK and USA.’
• It says ‘the Group still experienced rising operational costs in the UK with higher payroll costs being driven by the National Living Wage and pension contribution increases whilst property costs such as rent and business rates had continued to rise.’
• It adds ‘the overall operating loss in the Group did increase of 1.1% in comparison to the prior year (2017: loss £4,853,262).’
• The company has entered into an exclusivity agreement with J Sainsbury Plc to supply Wasabi’s hot food range as part of Sainsburys ready meal offering.
• A new chief executive officer, Henry Birts, has been appointed. He ‘brings a wealth of knowledge in the hospitality industry with previous leadership roles at Pizza Hut and Yum! Brands.’
• The company says ‘following investment from Cap Desia in May 2019, the Company has committed to expand by opening one new Wasabi store in central London for late 2019 and developing a plan to embark on a refurbishment programme of existing sites.’
• The group says ‘in 2019, six sites were refurbished which are currently outperforming the rest of the estate in like for like performance.’
• It says it should be in a position to improve [before the Covid-19 outbreak] its operating profits.
• The group says ‘in May 2019, a minority shareholder invested into the Wasabi Group through its vehicle being Wasabi Participations Limited from Cap Desia so that the business could accelerate future growth in both the UK and US.’
• It says ‘the Group’s financing structure now comprises three main components which ensures it will continue as a going concern:’
• This has become more than just a nebulous concept.
• The directors say ‘given the unprecedented nature and effect of the COVID-19 pandemic in 2020 the full impact on the business and economy cannot be ascertained.’
• They add ‘this could result in a material adverse impact to the recoverability of the Company’s assets due to market fluctuations and other economic conditions outside of the control of the Board. This is a non-adjusting subsequent event and therefore no adjustments have been made to these financial statements.’
• The directors say ‘the Group and Company are currently meeting their day to day working capital requirements through their bank facilities and cash holdings.’
• They add ‘before the effects of the current economic trading environment, in conjunction with the funding injection from CapDesia Group Limited in May 2019 and given strong operational performance, the director had reviewed cash flow forecasts under a number of different scenarios which indicated that the Group and Company would have been able to meet all liabilities as they fell due for the foreseeable future.’
• They add ‘the current change in economic conditions due to the coronavirus has created significant uncertainty over the level of demand for the Group’s products particularly in urban areas and in New York.’
• They say ‘the Group’s forecasts and projections have therefore been updated to take into account the latest changes in trading performance and these show that the Group and Company may not be able to operate within the level of their current facilities without further interventions thus creating a material uncertainty in respect of the ability of the Group and Company to continue as a going concern.’
• The company will not be alone in this conclusion.
• The company says it ‘is reviewing all the options available including landlord negotiations, additional bank financing and capital investment from our investors to make sure that the Group and Company have sufficiently funded working capital and cash available.’
• The company says ‘based on the above factors the director believes that it remains appropriate to prepare the financial statements on a going concern basis.’
• Auditor Price Waterhouse Coopers say ‘the current change in the economic conditions due to the coronavirus has created significant uncertainty over the level of demand for the Group’s products particularly in urban areas and New York.’
• It adds ‘these conditions…indicate the existence of a material uncertainty which may cast significant doubt about the group and company’s ability to continue as a going concern.’
• It says ‘the group financial statements do not include the adjustments that would result if the group and company were unable to continue as a going concern.’
What this means:
• It may be worth saying that Wasabi is far from alone in finding itself in an unprecedented situation.
• However, there is material uncertainty as to whether the company (or indeed a number of similar companies) will be able to survive.
• If assets etc had to be restated, other than on a going concern basis, there would be a material write down of value.
• As at end-December 2018, the company had accumulated losses of £12.0m and a negative net worth of £8.5m.
• It had bank debts of £28.4m and cash of £3.4m. It issued shares, as mentioned above, in 2019.
NEGATIVE WORKING CAPITAL:
• We note that TUI is offering 20% bonuses to customers who re-book holidays rather than take cash refunds.
• This will be in order to ensure loyalty but it is also an attempt to keep cash in the business.
• Negative working capital is a good think, often until it is not. Time is our enemy. More tomorrow.
DELIVEROO & AMAZON:
• The two companies have edged the proposed investment under the wire.
• But, arguably, only after Deliveroo implied that it was a life-saver after saying that the Covid-19 outbreak had had a material negative impact on its business.
• The regulator has said that it will OK the investment in order to allow Deliveroo to stay in business.
• This is a preliminary approval and there will be a final decision in June. It would be rather messy if the final decision went against Friday’s positive conclusion.
PUB & RESTAURANT NEWS:
• Marston’s has updated this morning saying that the company continues ‘to take an extremely prudent approach in our management of the business during this period of unprecedented uncertainty.’
• MARS says ‘in addition to the actions which have been taken to reduce the Group’s overall cost base, outlined in our previous update on 18 March, Marston’s Issuer PLC has also taken the precautionary measure of securing a waiver of a breach that might arise under the 30 day suspension of business and operations provision under the terms of the Group’s secured funding platform.’ This is similar to the comments made by M&B, which also has securitised debt, last week.
• MARS says ‘the waiver has been granted until 29 May 2020 with an automatic extension to 15 June 2020 in certain circumstances.’ It adds ‘the Group is also reviewing whether there is a need to consult with bondholders about further possible covenant waivers under the secured funding platform in light of the impact of the UK Government’s measures on the business.’
• The BBPA has said that pubs would need at least three weeks’ notice as regards reopening because they would need to replenish supplies. Bottled beers, wines and spirits could be available quickly but the time-delay re real ales is inescapable. BBPA CEO Emma McClarkin says ‘it is extremely important the beer and pub industry is closely consulted on the lifting of the lockdown restrictions when the Covid-19 crisis is over. The reopening process for the pub trade will be enormously hard and it’s imperative the Government work with the trade to get it right, else the situation would see even more pubs close.’
Government help and comment:
• The Covid Jobs Retention Scheme has been extended to end-June. UK Hospitality has welcomed the news saying ‘this extension itself is good news and will give us more breathing-room to help ensure employers are in a stronger position once they are in a position to reopen. The decision to keep the scheme under review could be absolutely critical for hospitality.’ Commenting on the news CEO of the BBPA Emma McClarkin said ‘we greatly welcome the extension of the Job Retention Scheme into the summer as announced today. The extension will ensure the continued safeguarding of thousands of livelihoods in the beer and pub trade, whilst also continuing to help closed pubs with their cash flow through this difficult period.’
• Sky has reported that the government is considering additional measures to help provide loans to companies in certain sectors such as aviation, retail and hospitality.
• Michael Gove confirmed yesterday on the BBC’s Andrew Marr Show that the hospitality industry will be amongst the last to exit the current lockdown. This will come as a surprise to few. A ‘three-phase’ plan to exit the lockdown may be considered but the government will currently give no details. The Mail Online quotes ‘a source close to the government’ as saying the exit strategy currently on the table will see Britain’s lockdown lifted in stages – with people likely to be allowed back in outdoor spaces first – and pubs last.
Other pub & restaurant news:
• In our Thursday 16 April email we commented on the broker suggestion that JD Wetherspoon may need to raise up to £250m in new capital, some perhaps via equity. We reported on chairman Tim Martin’s opposition to the pub shutdown and his comments thereon.
• We added ‘post the shutdown, the company said it would not pay suppliers or staff. It later agreed to pay staff for the work that they had already undertaken.’ These statements are untrue. Langton accepts that Wetherspoon stated, immediately after the shutdown, that it would pay staff for work done. Therefore, it did not “later” agree to pay them for this work, as Langton incorrectly said. Langton apologises to Wetherspoon for this error.
• JD Wetherspoon addressed staff on 23 March. It reports that ‘all staff have been paid from the outset of furlough without interruption notwithstanding that payments to employers under the Government’s scheme will not commence until next week.’ It says that suppliers are being paid.
• CGA suggests that Britain’s appetite for hot food delivery may have peaked. It says ‘while a third of consumers said they had ordered delivered restaurant or takeaway food during lockdown, with another 11% planning to, the results suggest there has been no change in demand since pubs and restaurants were closed down.’
• The CGA research, which was carried out between April 11 and 16, concludes ‘what will be disappointing for those setting up new delivery services, is that the latest research shows that the proportion of adults planning to use delivery services, but yet to do so, has actually dropped since last month, down from 19% to 11%, while the number that have used delivery has remained static.’
• Deliveroo told the CMA that the Covid-19 outbreak had had ‘a significant negative impact’ on its business. CGA says ‘the apparent stalling of delivery demand may in part be down to the fact that a number of high-profile high street brands that had significant delivery businesses pre-lockdown have since closed their delivery operations on safety grounds.’
• The Telegraph reports the concerns of hospitality bosses that ‘hundreds of restaurants will be at risk of bankruptcy within days unless landlords are banned from calling in debts’. See our earlier comments on Dead Men Walking.
• The BBC reports Sir Philip Green’s Arcadia group is serving notice on landlords that could see it walk away from more than 100 stores by the end of the summer.
• Debenhams is reported to have agreed a deal with its landlords to keep around 120 of its 142 stores trading once Covid-19 restrictions are lifted.
• A better day for the sector on Friday with all of the major movements on the upside. 888, Dart, Fevertree and SSP all up 8%, Hostelworld up 9%, Intercon +11%, Hollywood Bowl & Restaurant Group up 12%, M&B up 14%, Flutter up 16% and Cineworld, which has been notably volatile of late, up 21%.
• The FCA has called for measures to oblige payday loans, car finance and pawn shops to offer payment holidays to borrowers.
• Greene King has written to a number of its tied tenants to let them know that some will be able to apply for help from the Greene King Pub Partners Support fund.
• SIBA reports that beer sales for its members are down more than they are for the larger, global brewers.
• CO2 is reported to be running short in the US. Brewers and soft drinks companies are large users in the manufacture of their drinks.
• Big Hospitality reports that Pizza Pilgrims has reopened its flagship restaurant on Victoria’s Buckingham Palace Road in London for delivery.
• The Telegraph reports that Chinese money could be instrumental in providing capital for some sectors. It says ‘with so many companies now fighting for survival, Fosun [the private equity major investor in Thomas Cook amongst other companies] is determined to use the coronavirus crisis to its advantage.’ It quotes one of the investment firm’s founders as saying ‘we believe that we are able to capture this new momentum in this downward cycle.’
• Pret a Manger is reported to be set to launch a coffee range in supermarkets this month.
• Amazon’s investment in Deliveroo has been cleared by the CMA. Deliveroo warned that the Covid-19 outbreak was having a ‘a significant negative impact’ on its business. Fears that Deliveroo may go out of business seems to have been a part of the CMA’s thinking. It says the ‘imminent exit of Deliveroo [from the market] would be worse for competition than allowing the Amazon investment to proceed’.
ALL IN IT TOGETHER. JUST SOME DEEPER THAN OTHERS:
• Accountant KPMG has commented on the impact of the coronavirus outbreak on the UK economy and on our sector. KPMG suggests that GDP will fall by 8% this year but this drop will not be equally shared across sectors.
• KPMG says that hotels and restaurants, pubs & cafes will see a drop in output of 30% and 29% respectively whilst utilities will lose only 12% and transport and logistics will be down by 3% (with a surge in deliveries offsetting a drop in demand for travel), IT by 2% and healthcare and the public sector will grow by 5%.
• KPMG says ‘the hospitality industry will also find it harder to recover lost output next year; cancelled travel plans and restaurant bookings will mostly be gone for good, unlike manufacturing and construction, where there should be a stronger rebound already this year thanks to back orders that can be filled once the lockdown is over, even if the initial fall in output during the lockdown will also be very large.’
• KPMG sees ‘recreational & cultural service’ income down by around 70% in Q2 with a bounce to a running rate of around minus 5% by Q1 next year. KPMG reports re pubs, restaurants etc that ‘we expect the recovery to be more gradual than the recovery of the overall economy, as the threat of reinfection may keep people away beyond the lockdown period until a vaccine becomes available.’
• KPMG says ‘the current slowdown is unprecedented on a number of levels. One of them is the scale of contraction in output that is expected, due to the lockdown and continued social distancing measures anticipated until a vaccine is found, which will also cause fluctuations in output to be sharper than in previous recessions.’
HOLIDAYS & LEISURE TRAVEL:
• EasyHotel is proposing the delisting of it shares from AIM. The group’s two largest shareholders, Citrus Holdco and easyGroup, are in favour of the delisting and the company says ‘the Board believes that the Cancellation is in the best interests of the Company and Shareholders as a whole.’
• EZH reports it will buy shares in the market at a price of up to 70p per share if small shareholders wish to exit. The cancellation should take effect on 19 May.
• Travelodge has appointed advisers to oversee negotiations with its landlords as ‘it scrambles to retain enough cash to survive the coronavirus lockdown’ reports The Financial Times. It reports ‘Travelodge did not pay its quarterly rent bill at the end of March’.
• Travel Weekly reports marketing experts as suggesting that travel companies will have to ‘coax people back’ when it comes to selling holidays.
• Carnival Corporation CEO Arnold Donald has refuted suggestions that his industry was slow to react to Covid-19. Mr Donald says ‘the cruise industry put a pause on cruise before anybody else did. Before hotels or restaurants and other places of social gathering. Cruise ships are not the cause. Neither are they the reason for the spread.’
• Silversea Cruises UK & EMEA boss Peter Shanks has told Travel Weekly that some media coverage of the cruise sector recently has been ‘appalling, objectionable, not fair and unreasonable.’
• Reuters reports that Norwegian Cruise Lines has appointed Goldman Sachs to explore options to ‘bolster is finances’. It says ‘among the options Norwegian Cruise is considering is a stake sale known as private investment in public equity.’
• Manchester airport passenger numbers fell 54% year on year in March. April numbers will be worse.
• Uber has withdrawn 2020 earnings guidance.
• Saga has suspended cruise and holiday operations until the start of June.
• Airlines globally are reported to be paying out more in refunds globally than they are taking in in ticket sales.
• Sunvil’s financial controller, Ismet Emin, is reported to have died with coronavirus.
• Booking.com has warned staff to expect layoffs. Bookings in April are down 85% year on year. Booking.com has secured $4bn from investors this month.
• TUI is offering a 20% bonus to customers who re-book their holidays rather than ask for a cash refund. Comments on negative working capital – see Premium Email.
• The UN World Tourism Organisation has said ‘words alone will not save jobs’.
• Hilton has warned revenues will fall in Q2. It says ‘we consider results for the next several quarters to be less consequential for the stock’s trajectory than any prospective indications for 2021.’
• In a sign that destination countries are concerned that travellers may be slow to return, Jamaica’s minister of tourism, Edmund Bartlett, has announced that the country will offer a 6mth moratorium on licences and fees that would otherwise be paid by tourism entities.
• Australian police are investigating how Princess Cruises handled the outbreak of Covid-19 on its ship, The Ruby Princess. There have been more than 20 deaths linked to the ship.
• The Rank Group has updated on trading saying that ‘we have continued to make progress on our plan to ensure that we withstand this crisis and re-emerge as a strong business.’ It says ‘we are preparing for difficult trading conditions when we reopen our venues businesses.’
• Rank says it has furloughed around 7,000 of its 7,600 staff. It says it will benefit to the tune of £1m per month from the business rates holiday. It is talking to landlords and suppliers. CEO John O’Reilly says ‘with the tremendous support we have received from HM Treasury and HMRC, together with our own mitigations, we have established a robust financial position to address and withstand an extended period of economic turmoil.’ He adds ‘given the uncertainty we face and continued social distancing measures likely to be in place for some time to come, we continue to work to protect cash and to prepare for the reopening of our venues in as safe a way as possible.’
• Walt Disney is to stop paying around half its workforce, some 100,000 employees, this month, in a move that should save it up to $500m a month.
• Hollywood Bowl Group on Friday announced that it had successfully placed 7.5m shares at 145p per share to raise £10.9m gross. CEO Stephen Burns says ‘the funds raised today will further strengthen our balance sheet which we believe will enable us to emerge from this period of significant disruption in a robust financial position.’
• The newspaper industry is facing what some have called the ‘biggest existential crisis in its history’.
• Wynn Resorts Chief Executive Officer Matt Maddox has called on the Nevada governor to reopen the Las Vegas Strip in mid- to late May and retain some safety measures in place
FINANCE & ECONOMICS:
• Bank of England governor andrew Bailey has said that a 35% drop in GDP in Q2 is not implausible’. The OBR has come up with the figure of 35% and the Bank is to provide its own forecasts shortly.
• Roger Bootle of Capital Economics has said that a V-shaped recovery is unlikely. He says ‘the best we can hope is that we get back to where we were.’ Bootle says ‘I’m more optimistic about leisure travel than business travel.’
• Sterling slightly lower at $1.2477 and €1.1474. Oil lower at $27.63. UK 10yr gilt yield unchanged at 0.30%. World markets broadly better on Friday with Far East mixed in Monday trade. UK market set to open up around 30pts.
START THE DAY WITH A SONG:
The song has been furloughed. See you on the other side.
RETAIL WITH NICK BUBB:
• Saturday’s Press and News (1): The front page headlines in the Saturday papers were pretty mixed in tone, with the Guardian highlighting the shortage of protective gowns in the NHS, the Telegraph flagging the high number of care home deaths from the coronavirus, the Times running with the anger over the lack of a Government plan to end the lockdown (“Public being “treated like children” over lockdown”) and the Daily Mail swallowing the Government line about hopes for a vaccine, whilst the FT’s main headline was “BoE warns forecast 35% drop in economy will leave deep “scars””.
• Saturday’s Press and News (2): In terms of Retail news, most papers noted the news that the hitherto incompetent CMA had made the sensible decision that the planned Amazon investment in Deliveroo is now likely to be given the go-ahead, because of the financial problems of Deliveroo with so many of its host restaurants closed. The Telegraph looks to have been the only paper to highlight the undisclosed rental deals that the beleaguered Debenhams has reached with landlords to enable it to re-open all but 7 stores after the lockdown (although it failed to flag that one of these closures will be the flagship Debenhams in Westfield White City). The Times highlighted the gloomy view of one City broker that the embattled shopping centre landlord Intu Properties had reached “the end of the road” and that its equity value was zero. The Times also had an interview with the boss of the Online
• Saturday’s Press and News (3): The FT had an interesting feature on the problems that many clothing retailers will face after the lockdown finishes and Government support is wound down (“Retailers fear pain will last beyond the end of lockdown”), quoting one anonymous fashion chain CEO as saying that his P&L looked worse in the 6 months after the lockdown than it does during the 3 months of it, as well as the Head of Retail at KPMG, Paul Martin, saying that “2021 is likely to be worse than 2020”. And Lex column in the FT looked at the dire situation of the US department store JC Penney, thundering that “putting zombie retailers to rest will give the wider sector a chance to breathe easier”. Finally, the Business editorial in the Times looked at the big profits made by Directors in recent emergency share placings (“Instant paper profits leave sour taste”), highlighting that the
• Sunday’s Press and News (1): The front page headlines of the Sunday papers were obviously dominated by the pandemic crisis and the Sunday Telegraph went with “Johnson starts to take back control”, whilst the Mail on Sunday ran with “Get Britain moving again” (noting that DIY stores and garden centres are set to re-open in mid-May), the Sunday Times flagged that “Ministers plan for schools to reopen in three weeks’ time” and the Observer highlighted warnings that the world can’t rely on a vaccine to protect it from the virus threat. On its front page, the Sunday Times gave less prominence to a devastating double-page “Insight” report on “how the Government sleepwalked into pandemic catastrophe”. The front-page headline in the Sunday Times Business section was about the cash flow problems of many small businesses: “Crunch time for companies as Sunak is pushed for 100% loans”.
• Sunday’s Press and News (2): In terms of Retail news, the Sunday Times and the Sunday Telegraph both flagged that Asda has been getting tough with its clothing suppliers, but the most noteworthy story was probably the Mail on Sunday scoop that DFS is the latest retailer expected to tap investors with a share placing. The Mail on Sunday also highlighted that Waitrose has seen an astonishing 50% rise in Online Grocery deliveries over the last 4 weeks, setting it up well for “a titanic clash” with M&S Food this autumn when the Ocado contract changes hands. The Sunday Telegraph highlighted that, ahead of its final results next week, the City darling Boohoo is in good shape to weather the storm, given its cash-rich balance sheet and working capital strengths. The Observer flagged that Amazon’s recent success will be in the spotlight on Thursday when it announces its Q1 results in the US
• Sunday’s Press and News (3): 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 (“How to avoid the scars from a deep and nasty recession”), as well as the column by the veteran City commentator Jeremy Warner in the Sunday Telegraph (“Ease now, before the economy turns to rubble”) and the Observer’s Business Leader column (“Even after restrictions are lifted, will air passengers be ready to fly?”).
• Today’s Market: After the 3.0% rally on Wall Street on Friday, the FTSE 100 index is expected to open usefully up this morning (according to the Proactive private investor website), despite a mixed showing from Asian markets overnight (the Nikkei is down by 1.3%) and weakness in the oil price…The spread-betting firms expect the FTSE 100 to open c60 points up at around the 5850 mark.
• Today’s News: DFS has confirmed the Mail on Sunday scoop that it is having to tap investors for new equity to help it through the downturn. The statement flags up the negative working capital issue caused by the reliance on customer deposits, given DFS’s inability to offer safe two-man delivery. DFS’s banks have allowed it an extra £60m-70m of funding but presumably the price for this was an equity raise of c£55m (ie up to 20% of the current share capital). The statement also flags a 20% rise in Online sales over the last 3 weeks, a rise in the total order book from £185m to £192m and further cost mitigation measures, so it will be interesting to see what the DFS share price does this morning in response: in normal times the share price would go down, but, mindful of the way the ASOS share price doubled after its recent funding news, these are not normal times…
• News Flow This Week: There is not much Retail company news scheduled this week, but the ABF (Primark) interims tomorrow and the Boohoo finals on Wednesday will generate plenty of interest, whilst Thursday brings the ONS Retail Sales figures for March. Note that the Amazon Q1 in the US is on April 30th, not April 23rd as flagged by the Observer yesterday.