Langton Capital – 2020-04-28 – PREMIUM – 100% loans, exit strategy, some re-openings, Diageo etc.:
100% loans, exit strategy, some re-openings, Diageo etc.:
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A DAY IN THE LIFE:
Bit busy at the moment. On to the news:
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• The impact of 100% underwritten loans
• Exit strategy conundrum
COULD 100% GUARANTEED LOANS SLOW DOWN DELIVERY OF SAME? Why would banks ink in 80% or 0% guaranteed loans if they can get 100%:
• Industry in general has welcomed the move by government to underwrite up to 100% of loans to some small businesses.
• But, if a bank were most of the way through approving a loan that had been 80% underwritten (or even one that was outside the scheme altogether), why would it now proceed with the original proposition?
• Of course, a 100% underwritten loan, where no interest or capital has to be repaid for a year, is ‘better’ for both borrower and lender but speed is of the essence.
• If a struggling company were offered the chance of £50k now, with some strings, a higher ratee (to reflect the bank’s risk) and some repayments early next year, it might prefer it to a slightly ‘better’ loan at some undefined point in the future.
• Certainly, the government has said that cash could be delivered ‘within 24hrs’. however, it is making promises on someone else’s behalf here and the proof of the pudding will be in the eating.
EXIT STRATEGIES. Death or destruction? Or both?
The stark choices.
• We tweeted four weeks ago or so ‘destroy the economy or let 200k vulnerable people die? It’s a dreadful, dreadful choice and well above our pay grade. But one thing we do know. Don’t, whatever you do, do both.’
• And the above remains the case.
• The UK, though it could hardly be described as ‘fortunate’, is in the position of being able to see what other countries do.
• Because the risk to the economy is real and, over time, if you don’t work, you don’t eat.
Restarting the economy.
• Meaning that it is all well and good to pay benefits from one part of society to the other, all you are doing is moving around parts of the cake.
• But if the cake is not being produced, then there can be no public services, benefit payments, support to industry etc.
• It’s to be hoped that somebody, somewhere in government, understands that.
• It is a given, therefore, in any rational world, that the economy must be restarted. Hence it isn’t a question of ‘if’ but rather ‘when’ and ‘how’.
• We have expressed worries that the temptation may be to privatise the problem whilst socialising, partly for political reasons, the ‘victory’
A rock and a hard place:
• This would effectively mean keeping social distancing rules but opening the economy and removing business subsidies
• This would have very serious and negative consequences for the economy as a whole.
• So, playing for time (a vaccine or sneaking herd immunity) is far from a silly idea. It’s just that it can’t go on forever and, at the end of the day, what if there simply isn’t a vaccine to be had?
IS THE CONSUMER RESILIENT OR FOOLISH (OR NEITHER OR BOTH)?
• Accountant Deloitte’s Consumer Spending Survey (see also below) reports that planned spending on holidays over the next three months has dropped by 35%.
• That seems to be a remarkably small sum.
• Does it really suggest that 65% of money is still being spent on holidays?
• Certainly, holiday companies have been giving vouchers rather than refunds (so the money is still ‘being spent on holidays’) but it is far from clear when or if these holidays will actually be taken.
• Deloitte says 35% of respondents had lost money due to cancelled holidays and events. See Langton’s comments on ‘pass the parcel’, ‘your money is my money now’ and ‘have money, keep money’.
Book early. How did that work out for you?
• Operators have spent years, perhaps decades, trying to persuade customers to book early.
• Fred Pontin advertised in the 70’s with his ‘don’t forget, book early’ catchphrase.
• This has allowed holiday companies to use customer deposits in many instances as their own working capital.
• Now that there is an enforced working capital unwind, this is a problem.
Deloitte’s (and other) conclusions:
• Deloitte says ‘consumers remain cautious about discretionary spending, with many holidaymakers’ pockets already directly hit as a result of travel restrictions.’
• It says ‘whilst summer 2020 may not see the level of travel we’d usually expect, historic trends indicate that consumers value the opportunity to travel.’
• This is likely true but, at the moment, the ‘opportunity to travel’ is simply not there.
• We would go on to say that one of the bigger questions is ‘will this impact the consumer’s confidence in future bookings?’
• And what about cruising? The negative publicity re ‘death ships’ not being allowed to dock and passengers coming off in body bags will take a little while to unwind.
• And Carnival brands P&O and Cunard have delayed their recommencement of cruising three times already.
PUB & RESTAURANT NEWS:
Kicking the can down the road.
• Perhaps understandably, this may be Plan A at the moment.
• PM Boris Johnson has said the government can’t say when the lockdown will come off. He says the government will say something in ‘the coming days’. Chief Medical Officer Professor Chris Whitty has said social distancing measures may have to stay in place beyond the end of this year.
• Mr Johnson says he ‘cannot spell out now how fast, or slow, or when changes will be made’. Although there is little now, he promises ‘maximum possible transparency.’
• Foreign Secretary Dominic Raab has said that operators will have to get used to a ‘new normal’ and Michael Gove has said that hospitality venues could be among the last allowed to open. They ran into strongly negative LfLs before the lockdown (23 March) and before pubs were ordered to close (20 March) as the PM urged customers not to visit pubs or restaurants.
Dead men walking.
• Accountancy firm UHY Hacker Young says that winding up petitions against pubs and bars are up 73% on 2019. The current moratorium on more of the same ends on 30 June. At that point any ‘dead men walking’ could be much more visible. Unless the moratorium can is kicked further down the road, that is.
• UHY Hacker Young says that hundreds of hospitality businesses are surviving at the moment only because of agreements (tacit or implicit) with creditors and the government’s job retention measures. The Caterer quotes the firm as saying ‘the rise in winding up petitions for pubs since the start of the year is noticeable but unfortunately for the pub and bar industry the crisis is far from over. The government has threatened that pubs will be one of the last businesses out of the lockdown.’ It adds ‘if pubs aren’t able to reopen and start generating income soon, there is likely to be a wave of insolvent pubs.’
• UK Hospitality says that more than half of applications for business support loans across hospitality firms have been turned down. UKH says that 48% of hospitality companies polled had applied for loans and, of those, 57% had been rejected.
• UKH says that the job retention scheme has been more successful with 84% of staff across the sector furloughed and redundancies standing at only 2%.
• The British Beer & Pub Association has welcomed the move to underwrite 100% of some loans to smaller businesses but says that many pubs are still not being offered support. The BBPA says ‘the Chancellor’s ‘Bounce Back Loans’ will help some pubs, which is welcome, but sadly only a minority. The reality is that the measures announced today won’t help the vast majority of pubs, who at present are struggling to get access to the Business Interruption Loan Scheme.’ It says ‘for many pubs, taking on debt in the form of a loan isn’t even a viable option. For those that do take out loans, it’s imperative they are given more time to pay them back to boost their chances of remaining open after COVID-19.’
• The BBPA say ‘the Government has forgotten there are still 10,000 pubs [larger units] in the UK who aren’t getting any Government support at all because they aren’t eligible for grants. These pubs almost certainly won’t be eligible for the ‘Bounce Back Loans’ either. They are without help.’
• Diageo has launched and priced three-tranches totalling $2.5 billion of fixed rate USD denominated bonds. It says rates will vary on the three tranches between $750 million 1.375% fixed rate notes due 2025; $1 billion 2.000% fixed rate notes due 2030; and $750 million 2.125% fixed rate notes due 2032.
• A survey of franchisees in the US has suggested that LfL sales are off their lows at McDonald’s outlets. Kalinowski Equity Research suggests that sales fell 20% to 25% in the second week of April. That compares with a projected decline of 25% to 30% in the first week of April.’ McDonald’s reports Q1 results on Thursday. The majority of McDonald’s c14,000 U.S. restaurants remain open.
• Tyson Foods in the US, the largest meat processing company in the country, has said that shortages for consumers may result due to pressures on the food chain. Tyson says ‘as pork, beef and chicken plants are forced to close, even for short periods of time, millions of pounds of meat will disappear from the supply chain.’
• Tesco has said that people have returned to the habit of one large weekly shop. They are no longer ‘just nipping out’ to top up. Tesco also says that it has started laying off the first wave of the 45,000 temporary workers it took on at the beginning of the coronavirus crisis.
• Around ten Krispy Kreme drive-thrus are to reopen.
• Luckin Coffee in China is to be investigated by regulators from the State Administration for Market Regulation. Shares in the company are sharply down.
• Bodega Bay Hard Seltzer has gone live in 230 Morrisons stores. It reports it ‘is seeing a strong rate of sale across both variants.’ It adds ‘unsurprisingly, online sale through their website has been the largest success story by far increasing 100x, shipping 1,250 deliveries last week alone.’
• Surrey operator Hogs Back Brewery is expanding its home delivery service to offer fresh bread and meat as well as its own beers. It says ‘with the sun out and temperatures set to soar, everyone lucky enough to have a garden, terrace or balcony during lockdown will be dining al fresco. Our Barbecue to You service is a great way to source the barbecue essentials of beer, burgers and bread, delivered to your door in one click.’ The weather is taking a bit of a downer this week. Hopefully more sun later.
• Gregg’s is planning to reopen all of its 2,000 plus stores by the beginning of July. Some 20 sites in Newcastle will reopen on 4 May as part of a ‘controlled trial’.
• Independent brewer Jubel reports that its online sales have risen more than tenfold. It lost 75% of its revenues overnight when PM Boris Johnson ordered pubs to shut on 20 March.
• Shake Shack is to reopen its Tottenham Court Road and Canary Wharf sites for takeaway and delivery
• Edinburgh brewery Barney’s Beer is to roll out postal deliveries across the whole of the UK.
• Operators representing around 75,000 restaurants, bars and clubs across Italy have united to protest at social distancing measures in the country. The operators have said that widely spacing tables and introducing plexiglass screens will make their venues uneconomic.
• The government is proposing that loans to small firms should be 100% guaranteed by the taxpayer. As virtually no loans are being made, this is (at the moment) a relatively modest commitment. There is talk of the government paying interest on the loans for the first year.
• Timpson’s boss Sir John Timpson has warned that some High Street shops will not survive the coronavirus lockdown. Timpson’s will reopen 40 of its outlets this week.
• Trade bodies FEA and Ceda have said that the catering equipment industry faces a ‘catastrophic’ collapse in sales as a result of Covid-19. Many shuttered hospitality companies, indeed almost all of them, have cut back or cut out completely capital spending projects.
• The FEA pleads or equal treatment saying support should ‘include equipment manufacturers, distributors and importers, designers, dealers, service and spare parts companies. Only by doing this will there be the infrastructure, skills, and services to support current needs and support the regeneration of the industry when that time comes.’
• See also Deloitte comments on leisure spending below.
HOLIDAYS & LEISURE TRAVEL:
• Accountant Deloitte’s Consumer Spending Survey reports that planned spending on holidays over the next three months has dropped by 35%. Some may suggest that the 65% still booking must know something that the rest of us don’t.
• Deloitte says 35% of respondents had lost money due to cancelled holidays and events. Operators have spent years, perhaps decades, trying to persuade customers to book early. Some may be regretting the fact that they did. Spending on leisure is said to be down 7 percentage points in Q1. It will be down more in April.
• Deloitte says ‘consumers remain cautious about discretionary spending, with many holidaymakers’ pockets already directly hit as a result of travel restrictions.’ It says ‘whilst summer 2020 may not see the level of travel we’d usually expect, historic trends indicate that consumers value the opportunity to travel.’ This is likely true but, at the moment, the ‘opportunity to travel’ is simply not there.
• See also Premium Email.
• A Travel Weekly webcast featuring a number of travel professionals from Celebrity Cruises, Hotelplan and other operators has suggested that ‘operators are actively working on plans for the resumption of travel but future programmes are likely to be scaled back and the rebound uncertain and erratic.’
• This seems very likely as it will be costly, risky and perhaps simply not possible to make plans too early in the summer 2020 season. Hotelplan said it was doubtful that it would have a summer operation this year. Celebrity Cruises says ‘every plan you write, you then rip up and change again, but you constantly plan for that. And things are constantly evolving.’ Carnival Cruise brands P&O and Cunard have extended the period of their suspension on cruises three times already. The companies now say all cruises are cancelled until 31 July.
• Wizz Air is to reopen its London Luton base.
Some hit harder than others:
• The Royal Society of Arts and Manufacturing has said that up to one in three jobs could be lost in UK tourist hotspots such as the Lake District and the Yorkshire Dales. The RSAM says ‘our analysis finds a stark geographical divide in terms of how Covid-19 could impact local labour markets with rural areas and coastal towns most at risk of high job losses.’
• Ministers are discussing putting visitors to the UK into 14-day quarantine. This would effectively kill off the inbound tourism market. Any similar measures in the destination markets of Spain, Greece and Portugal, would risk killing off the outbound tourism market as well.
• Airlines are calling on the chancellor for more help.
• STR reports that hotel occupancy across the UK has ‘stabilized in the mid-teens, percentage-wise.’ It says room rates are down around 25%. Nationally, REVPAR was down 83% in the week to 19 April.
• REVPAR across US hotels was down c62% in March.
• Hotstats reports that hotels across ‘the U.S., Europe, Asia and Middle East [are] all recording year-over-year profit drops greater than 100%.’ That is, they are moving from profit into loss. These are gross operating profit numbers, suggesting that net profits (or rather losses) will be much more severe.
• Hotstats says gross operating profit per available room was down 110.6% in the US and down 115.9% in Europe.
• The largest gambling companies in the country will halt all TV and radio advertising during lockdown. Fears have been mounting re problem gambling.
• Games Workshop has updated on trading saying that, as previously reported, its units were closed on 24 March. It says ‘we will start making trade sales in Europe and North America this week and online orders on games-workshop.com from 1 May 2020.’
• Games Workshop says ‘the majority of our stores remain closed, however, a small number have re-opened in China, the Netherlands and Scandinavia in line with local guidance and subject to their local social distancing measures.’ It adds ‘our stores will continue to re-open across the world as local restrictions are lifted and all required health and safety measures are met.’
• The company says ‘trading for the Group in the nine months to the end of February was in line with expectations. However, since the outbreak of COVID-19 and the subsequent closure of our operations globally, our performance has been impacted. As we are now re-opening our sales channels as discussed above, we estimate our profit before tax for the year ended 31 May 2020 to be no less than £70 million.’ It says ‘we have also agreed in principle with our bank, Santander, to secure an overdraft facility of £25 million for a six month period with a potential six month extension, if required. This will be drawn, as needed, to meet operational cash flow requirements.’
• Apple is delaying the production of its flagship new model iPhones.
• Adidas has said that Q2 sales will be worse than Q1. It says that 60% of its total business and 70% of its stores were currently shut.
• Muso, which tracks illegal download and consumer piracy, says that visits to hooky film piracy sites were up 57% year on year in the last week of March.
FINANCE & ECONOMICS:
• The EY Item Club says the UK economy will not hit last year’s level of output until 2023. Much depends on how long the lockdown lasts and how the consumer behaves when it is taken off.
• Chancellor Rishi Sunak has said there are tough times ahead.
• Michael Gove says the odds were in favour of agreeing a deal with the EU by the end of the year.
• Sterling up vs dollar at $1.2413 but level vs Euro at €1.1468. Oil lower at $19.28. UK 10yr gilt yield up 2bps at 0.31%. World markets higher yesterday. Far East mixed today. UK set to open up a handful of points.
START THE DAY WITH A SONG:
The song has been furloughed. See you on the other side.
RETAIL WITH NICK BUBB:
• Today’s News: There is plenty of Retail company news out this morning. Games Workshop has issued an update, to flag that it is about to re-start both Trade sales and Online sales, but that the recent closures will knock y/e May pre-tax profit from £81m last year to only £70m. Marks & Spencer has issued an update, to flag that it has enough liquidity to get through the crisis, but that it is planning for “materially subdued trading for the balance of 2020 in Clothing & Home” and notes that “Food trading has been adversely affected by lockdown due to the closure of cafes and slowdown in travel and some city centre locations”. Ocado has announced that it will be making a trading update on May 6th. Travis Perkins (Wickes) AGM/Q1 update flags that the Retail business saw decent 4.5% LFL sales growth in Q1, despite the weak end to March, but the group was nearly 4% down LFL overall
• News Flow This Week: The latest monthly Kantar/Nielsen grocery sales figures (for the 4/12 weeks to April 18th/19th) are out at 8am today. Tomorrow brings the much-awaited Next Q1 update, as well as the Dixons Carphone pre-close update, the Shoe Zone AGM and an analyst’s briefing by the John Lewis Partnership. Thursday brings the Sainsbury finals, plus the Apple Q2 and the Amazon Q1 in the US in the evening. Then the Covent Garden landlord, Capital & Counties, has its AGM on Friday, May 1st.