Langton Capital – 2020-04-24 – PREMIUM – Valuations, Whitbread, Dart Group, auditors, Wahaca & other:
Valuations, Whitbread, Dart Group, auditors, Wahaca & other:
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A DAY IN THE LIFE:
We tweeted recently ‘your accounts are due in to the FCA on 24 April. Do you a) schedule 20 working hours, crack the thing, punch the sky & shout yeah! Or b) train for a job in the circus by swinging on your chair for 2hrs watching the bird-feeder action out the window?’
This was not a rhetorical question and, though an awful lot of gazing into the middle distance went on, we got down to it in the end and, just as the FCA announced that it was giving a 2mth extension on the delivery of accounts, we finished the task and delivered the paperwork.
We were then faced with the question did we a) dot all the I’s and cross the T’s in order that next year’s job will be that much easier or b) drop kick a pile of papers under the desk and let the future look after itself?
Well, scrutinising the birdfeeder 24/7 became somewhat more attractive and we chose the latter course of action. It may come back to haunt us, of course but, like the government, we’re living it one day at a time. On to the news:
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• Asset values in a Black Swan environment:
ASSET VALUES: Well, they won’t have gone up, will they:
• A few truisms. The market for assets is, well, a market.
• An asset is worth what a buyer will pay.
• The buyer will pay what he/she thinks it is worth.
• This, in a rational environment, is, arguably, the sum of its future cash flows.
• When cashflows are uncertain, they should be discounted more heavily.
• At present, cash flows are at zero.
• Zero times by an infinite number of years, is still zero.
So, what does this mean:
• There is little wrong with the above train of logic.
• However, although cashflows are zero, we would suggest assets are not worthless
• But they are worth less
• Indeed, administrators, who secure assets and sell them in order to protect creditors, may be finding that it is hard to get rid of sites
• Carluccio’s deadline for offers was last Wednesday and, although we believe a number of operators have pitched for specific sites, we have heard nothing back as of yet
What it means – one:
• Perversely, creditors may see less reason to appoint administrators because, at the end of the day, what will that achieve?
• And will administrators be willing to take on the jobs?
• At least partly because an administrator will look to their own fee first.
• Sorry, but it is what it is. They may sell the wine and non-perishables to ensure this but, in this environment, this may not be possible.
• And getting out of leasehold sites? Difficult, to say the least. We may get cherry-picking from expanding pub companies (with deep-pocketed, Far East owners, perhaps) and low-ball bids from operators, but it will be tough.
What it means – two:
• The auditors of companies not in administration will be a bit twitchy because how are they meant to say that the asset values in the company’s balance sheet give a true and fair view as to its affairs?
• This means that the industry could be faced with some very difficult discussions.
• Indeed, as we write, Whitbread is confirming that it will delay the announcement of its full year numbers to end-Feb. The delay will be 4-6wks.
• It says this will ‘ensure that the Company and its auditors have adequate time to complete their standard procedures given the current working restrictions. A planned date will be confirmed in due course.’
• We would suggest that, in addition to working practices perhaps being more normalised, the delay means that difficult audit decisions re valuations could be made with more knowledge as to how, when or if the lockdown is to come off.
• We rarely ask for sympathy for auditors but, with the comments on Travelodge below in mind, they have a tough task commenting on the valuation of Whitbread’s leasehold (and even its freehold) assets.
What it means – three:
• Looking hard for a silver lining, this does mean that operators could be being presented with a once in a lifetime chance to build an estate.
• This would require a good idea, branding, staff, money, pliable landlords and sites.
• So, there. Having the idea was the main thing. Our invoice will be in the post and over to you for the execution.
PUB & RESTAURANT NEWS:
• UK Hospitality has proposed a six point plan to aid the hospitality industry during and after the current coronavirus crisis. It says:
o The furlough scheme needs to be extended beyond June.
o The sector needs government intervention re rents. See Travelodge proposals re rents under Travel & Holidays below.
o There should be improved access to capital.
o Demand needs to be stimulated post the crisis.
o Business regulation needs to be simplified.
o And the insurance market should be ‘functioning and responsive’
• UKH says ‘with social distancing measures still in place, reopening the hospitality sector without a plan would be catastrophic.’ See our earlier comments on privatising the problem whilst attempting to socialise the solution. UKH suggests that up to a million jobs could be lost.
• UKH is calling for a ‘plan of phased opening for our sector.’
• The government yesterday signalled its willingness to protect commercial tenants in negotiations with their landlords. New measures are to be introduced to prevent aggressive rent collection. UKH says ‘this is a very helpful and pragmatic response from the Secretary of State and will give hospitality businesses some very valuable breathing room.’
• The government said yesterday that temporary measures would be introduced to safeguard retailers and hospitality operators from aggressive debt recovery measures that might be taken by landlords. Statutory demands and winding-up petitions for tenants will be voided and other measures usually taken by landlords may be forced to stand still for 90dys.
• The BRC says ‘rents are a huge burden for retailers that must be paid even where shops are closed.’ She says the measures ‘will give retailers some vital relief and help safeguard millions of jobs all across the country.’
• GfK has reported that ‘consumer Confidence has stayed at the minus -34 points recorded in our first COVID-19 flash of April 6th.’ It says ‘it is impossible to say if this is at the bottom after weeks of adjustment to the reality of lockdown life, or if further falls are to come.’
• GfK says ‘despite households making online purchases of home cooking equipment, freezers, TVs, monitors and other goods, these surges in demand have not compensated for the loss of overall retail sales due to the closure of physical stores.’ It says ‘there is no guarantee that the fall in consumer confidence has ended and we are only five points away from the record -39 low seen in July 2008.’
• The Times and Sky report that Wahaca has appointed PwC to help it assess its financial options. The Times says ‘the search for a new investor or a restructuring are understood to be among the potential options for Wahaca.’ See our comments last week on the company’s losses, the state of its balance sheet and its going concern issues.
• Sky says that ‘contrary to suggestions in the industry, a Company Voluntary Arrangement – a form of insolvency which allows struggling businesses to reduce their debts to creditors – was not being considered.’ It says other alternatives are likely to involve seeking a new investor or another form of restructuring.
• The ONS reports that eight in 10 workers in the UK accommodation and food services sector have been furloughed. This is the highest proportion across the economy.
• The FT reports that Pret A Manger is in talks to raise a €100m urgent loan from global banks. CEO Pano Christou says ‘as a business coming out of this, we might look different, possibly smaller. I wish I could tell you in six months what size of Pret will be. What I can tell you is that Pret will still be there.’
• The FT quotes ‘people with knowledge of the arrangements’ as saying that BNP Paribas, HSBC and Santander are involved in talks to supply the loans. Pret is owned by German finance company and coffee giant JAB.
• The Society of Independent Brewers yesterday said that the government had only 24hrs left to defer this month’s beer duty payments ‘amid concerns that the time to pay arrangements are not working for many brewers.’ SIBA points out that ‘the industry’s call for beer duty payments to be postponed in March was rejected by the Chancellor ‘ meaning that ‘breweries faced payments of thousands of pounds. The average small brewer was landed with a bill of around £5,000 and for larger breweries it was as much as £500,000.’
• The BBPA has commented on the suggestion that social distancing measures could be in place for the rest of the year saying ‘pubs are the original social network, so reopening them with social distancing restrictions is going to be extremely difficult. Both for staff and customers alike.’ The BBPA says ‘the Government are going to need to give pubs special consideration for a restart, as well as specific support just for them.’
• The BBPA calls for the JRS to continue post re-opening. It says ‘pubs will be lost if such measures are not taken and will help the trade whilst it slowly recovers.’ It says ‘trade will not immediately return to the level it was before the COVID-19 crisis hit when pubs reopen. Upon reopening, trade could be down by as much as half what it was before. It will inevitably take time for consumer confidence to build. Social distancing restrictions in pubs will inevitably have a direct effect on footfall in pubs.’
• The CMA has cleared the merger between Just Eat and Takeaway.com.
• Some Nando’s kitchens, around seven in an estate of c400, are to reopen in order to provide meals for front-line workers.
• Alasdair Murdoch, CEO of Burger King UK, has sent an open letter to landlords calling upon them to work constructively with tenants in order to find a way through the current crisis. Burger King has stopped paying rent. Mr Murdoch says ‘as we rebuild our operations, we would like to engage with you in relation to what the recovery will mean for landlords and tenants and how we can work together to ensure that we build for the long term.’
• Honest Burger is set to open a number of its stores for delivery as early as next month.
• Technomic comments on the US industry saying that 94% of operators are reporting significant negative impact on sales and traffic. It says that ‘restaurant/bar revenue losses that total $20+ billion through the first quarter.’ Technomic says ‘convenience stores are mostly still open but have significantly curtailed prepared-food sales and limited dispensed/self-service beverage stations.’
• Domino’s Pizza Inc in the US has reported same-store sales up 7.1% during the first few weeks of the second quarter of 2020. This marks an improvement over the +1.5% seen in Q1 and marks the company out as a financial winner, at least in terms of sales, in the current environment.
• Remarkable Pubs CEO Elton Mouna has said ‘my plans to step down as MD of Remarkable Pubs at the end of our financial are temporarily paused.’ He says ‘to leave mid crisis would show a lack of integrity to the Remarkable team I have worked so closely with for the past five years.’ Mr Mouna says ‘I have agreed to remain in position, beyond our year end of June 30th, and until Remarkable Pubs are back up and running.’
• Fewer dramatic share price movements yesterday though Loungers’ shares did rise by 29% on the news that it had raised new equity at prices substantially above the level at which its shares were currently trading. Gear4Music rose 11%. Fallers included Gym Group, Hostelworld and Young & Co (all down 4%), M&B and Restaurant Group, both down 5% and Ten Entertainment, down 6%.
HOLIDAYS & LEISURE TRAVEL:
o DART Group has updated on trading saying that its underlying profits for the year to end-March will be between £265m – £270m, an increase of approximately 49% on the prior year. However, ales are now suspended and ‘the Board estimates that the Group will record a net exceptional charge of approximately £109m relating to ineffectiveness on a proportion of FY21 fuel and foreign currency hedges in the FY20 results.’
o DART says ‘we continue to actively monitor the financial health of our hotel counterparts in respect of our advance deposits and their potential for recovery.’ See our comments on Cash Hoarding and Our Working Capital Management is Your Bad Debt.
o DART says ‘the impact and duration of Covid-19 remains difficult to determine, and the Board has no clarity as to how this will affect Group profit before foreign exchange revaluation and taxation for the financial year ending 31 March 2021.’ The company is cutting costs and 80% of staff are furloughed. The group has cancelled all of its cancellable summer-only aircraft. Directors have taken a 30% pay cut. The group says ‘positively, and despite the considerable uncertainty, we are seeing customers still making bookings for late summer 20 and winter 20/21, with encouraging numbers choosing to rebook rather than cancel. In addition, and though very early, summer 21 bookings to date are very promising.’
o DART concludes ‘we remain confident that once normality returns, our Customers will be determined to enjoy the wonderful experience of a well-deserved Jet2 holiday and that Jet2.com and Jet2holidays will continue to have a thriving future.’ Much of this depends on how long the disruption lasts.
o Whitbread has updated as to the timing of its full year numbers. See our comments in the Premium Email on discussions with auditors etc. WTB says it ‘confirms that it will delay the announcement of its FY20 full year results, originally planned for the end of April, until the end of May or start of June.’ The company says ‘this will also ensure that the Company and its auditors have adequate time to complete their standard procedures given the current working restrictions. A planned date will be confirmed in due course.’
o Travelodge has written to its landlords suggesting rental cuts of up to 80%. Major landlord Secure Income REIT has rejected the proposal saying it was ‘not in keeping with either the nature or the spirit of the proposals’ made by any of its other tenants.
o Travelodge says ‘these are unprecedented times and some difficult decisions are going to have to be taken by landlords and tenants alike. What is clear is we all want to secure a stable business that can support rent payments for leases that will run for many decades ahead. We are confident that we can find a way through that is in everyone’s interests.’
o Spare a thought? Last year was the Spanish tourism markets best on record. This year could be its worst.
o Expedia has raised $3.2bn in new capital to strengthen its balance sheet amid the current shutdown.
o Delta, which owns 49% of Virgin Atlantic, has told CNBC that it would not put fresh capital into the UK company. It says ‘we need to protect our own business. That’s where our focus is.’
o Ryanair has said it would not resume operations if it had to socially distance passengers on aircraft. CEO Michael O’Leary said the idea was ‘idiotic’.
o CLIA has warned that over 5,000 jobs could be lost in the UK if the cruising industry’s current shutdown persists.
o Eurostar has reported passenger numbers down 20% in the quarter to end-March. They will currently be running considerably lower.
o STR reports the European hotel industry saw REVPAR fall by 64.7% in this March versus the same month a year ago. Occupancy was down by 61.6% with room rates down by 8.1%.
o STR goes on to say that REVPAR in Italy was some 92.8% down with occupancy down 90.8% and room rates running 22.0% lower.
o The travel research company says that US REVPAR was 79.4% down in the week to 18 April. Occupancy is 64.4% lower and prices are down by 42.2%.
o Accor has reported Q1 revenues down 17%. They will be falling at a faster rate currently. The company says ‘the world is facing an unprecedented health crisis that is having massive and unique impacts on the tourism industry.’ It adds ‘nearly two-thirds of our hotels are currently closed, and most of the others are being used to support healthcare workers and all those on the frontlines of the fight against Covid-19.’
o Carnival Cruise brands P&O and Cunard have extended the period of their suspension on cruises for the third time. The companies now say all cruises are cancelled until 31 July.
o IATA says two thirds of a million aviation jobs in the UK could be at risk as a result of Covid-19.
o ABTA, which is struggling with its members reluctance and / or inability to give refunds, has said it must to ‘all we can to preserve customer confidence.’
o Sky reports that the owner of coach holiday company Shearings ‘is racing to avoid becoming the next corporate casualty of the coronavirus pandemic.’ Sky says it ‘has learnt that Specialist Leisure Group (SLG), which also owns the Bay Hotels chain, is in advanced talks with several potential buyers as it tries to avoid falling into administration.’
o Zoom is reported to have seen its user base grow to some 300m.
FINANCE & ECONOMICS:
o The IFS says the UK’s budget deficit will see ‘an absolutely colossal increase to a level not seen in peacetime.’ It believes that the deficit could hit £260bn.
o Bank of England MPC member Jan Vlieghe says that the UK could see ‘an economic contraction that is faster and deeper than anything we have seen in the past century, or possibly several centuries.’
o The Guardian has quoted City University sources as saying that a wealth tax may be able to raise sufficient funds to pay off increased government debt.
o The NIESR has said that the jobs outlook is ‘horrendous’ for British workers.
o Flash PMIs for April came in way below the most pessimistic forecasts at 12.9. Any figure below 50.0 implies contraction. Estimates had been around 31.0.
o An additional 4.4m Americans have signed on for unemployment benefit. That makes26.4m in four weeks.
o Sterling stronger at $1.235 and €1.1464. Oil lower at $22.03. UK 10yr gilt yield down 3bps at 0.29% (despite the announcement that the government is to raise unheard of amounts of debt over the coming months). World markets: UK up yesterday with Europe also stronger. US mixed and Far East down in Friday trade.
START THE DAY WITH A SONG:
The song has been furloughed. See you on the other side.
RETAIL WITH NICK BUBB:
Planet ONS Watch: In the real world, as per the BRC-KPMG figures for March (the 5 weeks to April 4th), underlying Retail Sales were very subdued last month overall, as the coronavirus lockdown shut down non-essential stores in the last 2 weeks of the period, but “seasonally adjusted” life was also very weak on the High Street on that bizarre parallel world, the Planet ONS (aka the Office of National Statistics in Newport), via the belated official Retail Sales figures for March, which were released at 7am this morning…City economists (who still treat the rather dubious ONS figures as the gospel truth) will be disappointed with the 5.1% dip in month-on-month seasonally adjusted sales volume, whilst the reported drop of 5.7% in non-seasonally adjusted sales value year-on-year is surprisingly weak, ie even weaker than the BRC-KPMG report, but these figures are depressed by very weak sales
Today’s News: Talking of petrol…the Manchester-based motor dealer group Lookers has issued a gloomy trading update, noting continuing concerns about possible fraudulent accounting, despite the news that of its servicing and repair facilities have re-opened. There has also been an update from Frasers (aka Sports Direct, of #MadMike fame), but all this says is that the infamous Belgian VAT bill has been settled for an immaterial amount and that the group has not yet been accepted as eligible for the Government CCFF scheme…And Burberry has issued a COVID-19 update, which basically highlights that the Castleford trench coat factory has been given over to PPE production.
News Flow Next Week: There is plenty of important Retail company news scheduled next week, kicking off on Tuesday with the Travis Perkins (Wickes) AGM/Q1 update. Tuesday also brings the latest monthly Kantar/Nielsen grocery sales figures and the Hammerson AGM. Then Wednesday brings the much-awaited Next Q1 update, as well as the Dixons Carphone pre-close update. The monthly GFK Consumer Confidence survey is out first thing on Thursday, followed by the Sainsbury Q1, with the Apple Q2 out in the US in the evening. The Covent Garden landlord, Capital & Counties, has its AGM on Friday, May 1st.