Langton Capital – 2020-05-13 – PREMIUM – TUI, Young & Co, Stock Spirits, travel in a no-travel world etc.:
TUI, Young & Co, Stock Spirits, travel in a no-travel world etc.:
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A DAY IN THE LIFE:
So, with Spain introducing a 14dy quarantine and a number of UK carriers insisting that they’re going to put back on capacity, a picture of a rock and a hard place springs to mind & it begs the question as to just how that’s going to work?
Taking off shouldn’t be too hard but landing somewhere might be an issue.
Or at least offloading your passengers away from home and it means that the Hale & Pace Yorkshire Airlines sketch from the early-90s was somewhat prescient as they had their aircraft taking off from Leeds Bradford & landing at Leeds Bradford.
These days, of course, if the aircraft crossed into international airspace (let’s say Lancashire), the passengers might have to go into isolation for 14dys in the UK when they get back in any case. Not good for travel. See our comments below. On to the news:
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• Hidden unemployment. How many of the UK’s 7.5m furloughed staff are, in reality, now jobless?
• The travel industry. And we thought we had it bad?
THE DANGER IN GETTING EMPLOYERS TO CONTRIBUTE TO THE FURLOUGH. If asked to put their hands in their pockets, employers may make now-redundant staff, well, redundant. 13 May 2020:
• See general email for Rishi Sunak’s proposals.
• These are broadly in line with our suggestions over the last couple of weeks. That, on the part of Langton, may have been like saying the sun will rise in the east. We were right, but it wasn’t very hard to see the way that things were progressing. Particularly when the ‘no-cliff-edge’ promise was being made.
• But, we would argue, when employers are asked to contribute towards the wages of staff for whom they have no work, they may make them redundant
• Indeed, they would be failing in their fiduciary duty to their shareholders if they did not
Hospitality in particular:
• Some venues may not have been allowed to open by August
• It may be physically impossible for them to contribute to staff costs
• The only option will be to sack worker and, even for venues that have been allowed to open, revenues could be well down
• Here JDW has produced scenarios suggesting down 10% LfL to down 25% LfL with Fuller’s Simon Emeny mentioning down 80% in some venues and other, ‘intentionally crowded’ venues, may still be down 100%
• Hence the choice is with the government. Unemployment in a relatively vocal and visible industry, or ongoing support
• We are hoping for the latter
• The devil will be in the detail and Treasury proposals may become clearer in due course
• In the meantime, the can will be kicked a little further down the road because, at the end of the day, what’s the choice
Various unintended consequences:
• The can kicking is perhaps inevitable. But it has meant that the number of administrations in the UK is actually down on last year (see KPMG below)
• Bad businesses are being kept alive alongside the good
• This will not persist forever. Mr Buffett has said that, when the tide goes out (in this case, state aid), you can see who’s been swimming naked
• Another consequence is perhaps that difficult decisions are being shelved
• Some other unpopular decision, usually involving job losses, are being accelerated and blamed on Covid-19
• But it could be worse. We could be in travel.
HOW WILL TRAVEL SURVIVE IN A NO-TRAVEL WORLD? Travel companies are in a tight spot. 13 May 2020:
• It’s tough to be a travel company if customers aren’t allowed to travel.
• It seems like a lifetime ago that cruise companies were saying it was safe for old people to take cruises, airlines were downplaying the problem etc.
• Now, not so much.
• This has the look of a train wreck in slow motion. Laced with schadenfreude but fascinating and potentially fatal.
The unfolding position:
• Retaliatory 14dy quarantine periods will heavily discourage travel.
• Not socially-distancing on aircraft may antagonise government and put off passengers
• Hence, when seeing the various plans for Jun, July or August, one feels almost like saying ‘who are you kidding?’
Where we are and where we are going (or not going in 2020):
• Even travel agents, a notoriously upbeat crowd, are somewhat downbeat
• Share prices tell a story. See DART yesterday.
• The airlines are laying off staff. The furlough, capped at £2,500 per month, wasn’t helping pilots much
• TUI this morning mentions redundancies
• Matt Hancock has suggested that summer is being cancelled
Whistling in the dark?
• Ryanair says it is planning to start services in July. Empty planes with nowhere to land? Why would you do that?
• Carnival is consulting on redundancies. Cruising looks to be in a tough spot. Plague ship fears, and the like.
• P&O Ferries is sacking staff, smaller tour operators are ceasing trading etc.
• This is taking a while to play out but the direction of travel, no pun intended, is not a very healthy one
PUB & RESTAURANT NEWS:
Extending the CJRS
• The furlough scheme has been extended to end-October. This is a lifesaver for many in hospitality but employers will be asked to pay something towards wages from August.
• At that point, we may find out just how many of the held-open jobs out there are actually real.
• The ONS has said that the CJRS will cost £49bn to the end of June. The extra four months, with some contribution from employers, could cost about the same again.
• At some point it will not be simply down to the government’s wish to pay the above amounts out to laid-off workers, but also down to its ability to do so. The government may have the desire to pay but it won’t always have the means to do so.
• The IFS says extending the JRS unchanged to end-July will take the cost to that date up to around £60bn. It says the cost will be around £100bn by end-October. Around 7.5m workers are currently thought to have been furloughed. See Premium Email for our take on the pitfalls associated with extending the scheme.
• The BBPA has welcomed the extension saying ‘we cautiously welcome the extension and increased flexibility of the Job Retention Scheme.’ The JRS will allow some part-time working from August.
• The BBPA says ‘if pubs and breweries are expected to pay a proportion of furlough costs whilst remaining closed, it could still lead to significant job losses for our sector.’
• UK Hospitality says ‘an extension of the scheme is a sensible, positive and timely move. The scheme has been a crucial lifeline for many businesses and employees. It has helped hospitality overcome the initial crisis, saved businesses and kept jobs open.’
• UKH says ‘the full 80% may need to be extended past July for some businesses in sectors like hospitality that will still operate at much reduced levels of trade, or not yet be able to open.’
• We (Langton) have suggested that a JRS of sorts, perhaps subsidising wages up to 50% and then declining over time, may be necessary even after staff have gone back to work.
Winding down the lockdown.
• Stirling University is undertaking a study into just how the lockdown could be eased. The timing of any feedback will be important as it will be of reduced practical use if the university becomes an expert after the event. The study is set to complete ‘within six months’.
• The new normal? Land Securities says that only 10% of its office sites are currently in use as most workers are working from home. This may become habit forming. Langton is aware of a couple of companies, i.e. 100% of those that expressed a view, that have said they will look more into hot-desking and the like post the lockdown – and perhaps permanently.
• This is perhaps inevitable. It will not be good news for grab and go outlets that serve the lunchtime office market or for early-evening city centre bars and restaurants. In the end, it will not be good for landlords, either.
• French trade association Brasseurs de France has said that French brewers may have to destroy 10m litres of beer that has been left to go off in various shuttered pubs, bars & restaurants.
• Share price movements in the sector yesterday. These were modest overall but were dominated by considerations as to what a 14 day quarantine being imposed by Spain will mean for the holiday market.
• DART Group was down 25% but TUI was relatively little-changed. Carnival was similarly down on 2%. Elsewhere, Naked Wines, Restaurant Group, SSP Group and Whitbread were down 4%. On the Beach was down 5%, Intu & Escape Hunt were down 6%, Revolution Bar Group was down 10% and pub & retail REIT New River was down 11%. No leisure shares were up by more that 2-3%.
• Young & Co has updated on its financing saying that it has issued paper with a nominal value of £30 million and a maturity date of 13 May 2021 under the HM Treasury and the Bank of England’s Covid Corporate Financing Facility.
• YNGA says that it is ‘in the process of finalising a new £50 million syndicated term loan facility and a new £20 million bilateral revolving credit facility.’ It adds that its ‘lending banks have agreed to waive any technical ‘cessation of business’ breach of the Company’s banking facilities as a result of the Group’s pubs being closed due to the coronavirus pandemic.’
• YNGA adds that covenant tests at June, September and December this year and at March next year will likely be changed to liquidity tests. The company says ‘with the Group’s strong balance sheet, supplemented by the actions announced today, the Company’s board of directors is confident that Young’s has sufficient liquidity to handle a prolonged period of closure of its pubs. The board expects the Company to be in a position to return to profitable growth when this unprecedented period is at an end and conditions allow.’
• Stock Spirits has reported H1 numbers saying that revenue rose by 15.1% on an underlying basis to €189.6m. CEO Mirek Stachowicz says ‘these strong results are a testament to the quality of our brand portfolio, the strength of our customer relationships, and the resilience of our business model.’ The company says ‘there remains robust demand for our products, but we are monitoring developments closely and are able to respond quickly if required.’
• Sky News has reported that SSP is ‘in talks with City investors to find a way to cancel its final dividend payment’. The group had declared its final dividend before raising £215m in new equity. Sky reports that only banks, to date, have abandoned previously declared dividend payments.
• Subway is reported to have begun a phased reopening of around 600 sites, a quarter of its UK estate.
• Pod Food Limited is moving from an administration to a creditors’ voluntary liquidation.
• Morrison’s has said that the massive business rates windfall that it is to receive this year along with a spike in demand, means that it will broadly offset the increased costs associated with Covid-19. Sainsbury has said that same thing.
• This isn’t a zero sum game as the taxpayer, who is gifting £500m plus to the bigger supermarkets and around £228m to Morrison’s, will be amongst the losers and there are no obvious winners (though the food manufacturers are doing well).
• Looking for winners, the CEBR says UK consumers are spending more on eating in the home (well they would be, wouldn’t they) and hobbies & crafts. The latter will struggle to power the economy as a whole.
• Kingfisher yesterday said that, though LfL sales were down by 74% in the first week of April, they were running up 2.7% in the first week of May.
• Bloomberg News has reported that Uber is considering buying Grubhub in the US. Bloomberg reports ‘the companies are in talks about a deal and could reach an agreement as soon as this month’.
• McDonald’s is to re-open all of its drive-through outlets in the UK and Ireland by early June. This will take the takeaway trial to 40 stores.
• E-commerce company StarStock, which launched the mypubshop platform, is working on a new initiative from supermarket giant Asda to help vulnerable and shielded customers receive food and essential items.
• Burger King owner Restaurant Brands International is considering making face masks a part of its staff uniform.
• Barclaycard has updated on consumer spending saying that it fell by 36.5% in the UK in April. The card provider says ‘spending on essentials and non-essentials declined 7.5 per cent and 47.7 per cent respectively as social distancing measures took full effect.’
• Barclaycard says ‘specialist food and drink stores, including off licences and greengrocers, saw a strong month as shoppers continued to support local businesses.’ But it adds ‘confidence in the UK economy fell to just 20 per cent, yet Brits remained optimistic about their household finances.’
• Barclaycard reports that off-licenses did well alongside other food and drink shops and spending on subscriptions rose but it says that spending in almost all other areas was down sharply.
• None of this will be a surprise to operators but Barclaycard reports that spending on hospitality & leisure was down by 85.1%, eating and drinking by 79.1% and restaurants by 93.1%. Spend with pubs was down by 96.9%, entertainment by 89.1% and hotels, resorts and accommodation was down by 92.0%. Travel was down by 86.8% but takeaway and fast food spending was down by only 45.0%.
• As mentioned, grocery did well and Barclaycard reports that ‘online spend for eating and drinking – which includes takeaways – also saw growth of 24.6 per as diners treated themselves, while also helping to support local restaurants.’
• KPMG has reported that the number of corporate insolvencies in April 2020 was down by a third on the same month last year. This may be in large part due to support packages put in place by government – and also to the fact that banks, landlords and suppliers, who may have called in the administrators, are fighting fires elsewhere.
HOLIDAYS & LEISURE TRAVEL:
• TUI has reported H1 numbers saying that underlying EBIT for the five months to February delivered a strong result, up €62m1 versus prior year excluding one-offs, driven by Markets & Airlines. Operators always make a net loss in H1. This year, H2 will unfortunately be worse.
• TUI says its operations are suspended but a €1.8bn German State Aid bridge loan was confirmed on 27 March. It says ‘FY20 guidance [was] withdrawn on 15 March 2020 based on the current unpredictable situation.’
• TUI reports a net loss of €740.5m for H1 2020 compared with a net loss of €176.9m in the prior year. It says, however, that it is ‘a resilient business and will be stronger, much leaner and more flexible post COVID-19.’
• TUI says it like it is. It says ‘the tourism industry has weathered a number of macroeconomic shocks throughout the most recent decades, however the COVID-19 pandemic is unquestionably the greatest crisis the industry and TUI has ever faced.’ The group has borrowed heavily from the German government, undertaken its largest ever repatriation campaign and taken action to cut costs.
• The group says ‘with cash and available facilities as well as a number of liquidity enhancing measures, TUI has sufficient funds to cover the coming months. As at 10 May, TUI AG’s total cash and available facilities amounted to €2.1bn.’ It says it ‘has a resilient business model and has shown strong operational performance in recent years.’ It says ‘Future TUI will be leaner, less capital intensive and more digital, creating an even stronger and more agile business.’
• Travel Weekly says ‘thousands of jobs are at risk as the travel giant targets a 30% group-wide cut in costs.’ The group has said that its changes will ‘have an impact on potentially 8,000 roles globally that will either not be recruited or reduced.’
• Travelodge is reported to be considering bankruptcy proceedings in a move designed to put pressure on its landlords.
• UK and now Spain to introduce 14dy quarantines. This tweet from us yesterday – Holidays up the Swanny as Spain introduces 14dy quarantine? Turn a 4dy long weekend in Marbella into 28dys of detention. Fourteen when you get to Spain and another fortnight in the UK when you get back. Try bouncing that excuse for twagging off on your boss.
• This, some may say, is what the slow motion train wreck of an industry looks like. See Premium Email.
• Spain to introduce quarantine requirement as soon as this week. Visitors may need to stay in their hotel or apartment, leave only to buy essential items and wear masks in public places.
• Matt Hancock has said summer may be called off. Ferry firms will be included in 14dy quarantine requirements (except those from France).
• The airline industry is demanding clarity on what a lockdown means. Who is responsible for enforcing it? Will airlines need their passengers to complete forms in flight etc.? And what happens if a passenger lies about his or her quarantine arrangements?
• Carnival has begun a consultation programme with staff about redundancies.
• More than a quarter of the workforce at P&O Ferries is being cut. Some 1,100 jobs are being lost.
• Music & Dance holiday specialist Enjoy Travel has stopped trading.
• Haven and Warner owner Bourne Leisure has said that its parks will be closed until at least 2 July.
• Virgin Atlantic has released a ‘re-shaped’ summer 2021 flight programme.
• STR says that London hotels have suffered more than those elsewhere in the UK. It now says that occupancy may be bottoming out but room rates are continuing to fall. Room rates are down 47% in London but they are ‘only’ down by 30% in the UK’s regions.
• HVS says the European hotel industry ‘faces a huge challenge to rebuild consumer confidence once COVID-19 lockdown restrictions start to lift later this year.’ No kidding?
• Commuters have been told ‘prepare to queue’. The BBC suggests that, even if all public transport services were to run, capacity would drop by around 90% if social distancing were to be observed. For chunks of Langton, which are up in York & unwilling to drive into central London, that’s a bit of an issue.
• Hays Travel has brought 3,000 staff back to work. See our comments on summer 2020 and aspirations for the winter & summer 2021.
• Ten Entertainment has reported full year numbers saying that it had a record 2019 with ‘a strong start to 2020 until Covid-19 closure.’ The group reports sales up 10.2% at £84.1m. The group says it has ‘liquidity headroom into second half of 2021 and [is] ell positioned to reopen.’ Chairman Nick Basing says ‘after a very strong 2019, with the eighth consecutive year of like-for-like growth showing terrific momentum and a great start to 2020, it was disappointing to have to close the doors to customers on 20th March.’
• Ten CEO Duncan Garrood says ‘in response to Covid-19 crisis we have reduced costs to a minimum, utilised Government assistance and secured backing from our lenders, landlords, business partners and shareholders.’ He says the group is ‘in a strong position to withstand the impact of the crisis and to take advantage of opportunities that will arise when restrictions are lifted.’
• The Gambling Commission has issued new guidance for online gambling companies saying, amongst other things, that they should stop offering bonuses or promotions ‘to all customers who are displaying indicators of harm’.
• Twitter has said that its staff will be able to work at home permanently if they wish.
FINANCE & ECONOMICS:
• The Bank of England says the UK economy could shrink by 25% in Q2. It says the economy could be down by 14% over the year as a whole.
• The Bank de France says that the French economy has lost 6 percentage points of growth already due to its 2mth shutdown.
• US consumer prices dropped by 0.8% in April having fallen already by 0.4% in March.
• Sterling lower at $1.2269 and €1.1308. Oil down at $29.46. UK 10yr gilt yield down 2bps at 0.25%. World markets mixed. London set to open around 60pts down.
o The UK’s official Covid-19 death toll rose by 627 yesterday to 32,692. Reuters maintains that the death toll is ‘just over 40,000’ and says this is ‘by far the worst yet reported in Europe’. Excess deaths reported by the ONS point to around 50,000.
START THE DAY WITH A SONG:
The song has been furloughed. See you on the other side.
RETAIL WITH NICK BUBB:
• BRC Retail Sales figures for April (the 4 weeks to May 2nd): We thought that today’s figures, which came out overnight, would show total sales at least 30% down (continuing the 27% slump in the last 2 weeks of March), despite the relative strength of Food and Online sales growth, but the outcome was “only” 19.1% down. Oddly enough, “LFL” sales were well up, by 5.7%, but this calculation excludes all the stores closed because of the lockdown, which were mostly in Non-Food, obviously, but also in Food (eg some M&S Food outlets). Online sales surged, inevitably, but this wasn’t “LFL”, as they clearly wouldn’t have been that strong but for all the Non-Food store closures! Sticking to overall sales…the key Food/Non-Food split is buried within the 3-month moving averages (of +4.5% and -17.5% respectively), but it looks to us as if Food sales were low-single digit down over the month as a
• Today’s News: There is no sign of any update from Greggs ahead of its AGM today, but the service station operator Applegreen has issued an update and the embattled shopping centre business Intu Properties has announced the completion of the sale of its interest in its Spanish centre at Puerto Valencia. The Irish-based Applegreen borrowed heavily to buy the Welcome Break business in Aug 2018 (which has been hard hit in the recent crisis) and then expand in the US, but its banks have been sympathetic, granting the company more liquidity and easing covenants, with Applegreen able to say that “All our sites have remained open and current trading levels are ahead of our baseline assumptions for Q2”.
• News Flow This Week: Tomorrow brings the delayed WH Smith interims, plus the Just Eat AGM and the Next AGM.