Langton Capital – 2020-05-21 – PREMIUM – Whitbread & Dart raising money, new normal, delivery etc.:
Whitbread & Dart raising money, new normal, delivery etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
Bit busy this morning. Sector companies filling their coffers again. DART yesterday and Whitbread this morning. On to the news:
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• Whitbread £1bn Rights Issue. Another biggie fund raise in the leisure sector.
• UK pubs & restaurants are in a tight spot. But it could be worse; they could be operating aircraft or cruise ships.
WHITBREAD TO RAISE £1BN IN NEW EQUITY.
Whitbread has this morning reported full year numbers to end-February and has announced that it intends to raise c£1bn in new equity from shareholders. Our comments are set out below.
Rights issue to raise around £1bn:
• Whitbread has this morning announced that it is to launch a 1 for 2 fully underwritten rights issue to raise gross proceeds of approximately £1,009 million
• The company says ‘the purpose of the Rights Issue is to ensure that Whitbread emerges from the COVID-19 pandemic in the strongest possible position to take advantage of its long-term structural growth opportunities and win market share in both the United Kingdom and Germany.’
• Whitbread says it ‘entered the COVID-19 pandemic with a strong balance sheet and significant liquidity.’
• It has since cut costs and protected cash flow.
• It has furloughed staff and ‘has been confirmed as an eligible issuer under the CCFF, with an issuer limit of £600 million. The Group has also obtained waivers until 2 March 2022 of the existing financial covenants under its financing and pension arrangements, which have temporarily been replaced with debt and liquidity covenants.’
The idea behind the fund raising:
• Whilst this is pretty obvious, the group says it will ‘return its balance sheet to a position of strength that will give it a real competitive advantage.’
• WTB says the money will ‘allow it to invest with confidence and flexibility in its strategy: opening its committed pipeline in the United Kingdom, accessing the significant opportunity in Germany and keeping its offering ahead of the competition.’ It will ‘provide further liquidity headroom in the event of a resurgence of the COVID-19 pandemic.’
• WTB says ‘the Board unanimously believes that the Rights Issue is necessary to, and will, put Whitbread in the best possible position to deliver this strategy and returns to shareholders over the long-term.’
• The group goes on to give estimates as to its cash usage over the coming months.
• It says ‘given the opportunities to invest capital in the United Kingdom and Germany, the priority for Whitbread’s capital structure is to provide financial flexibility.’
• WTB says it ‘retains significant liquidity with cash of approximately £300 million as at 15 May 2020 and access to the £950 million Revolving Credit Facility of which only £50 million is drawn as at the date of this document.’
• No dividends will be paid on its Ordinary Shares until the later of 2 March 2022 and the date the Company is in compliance with the original financial covenants.
• WTB says ‘accordingly, the Board hopes to return to paying dividends again following the normalisation of the Group’s financial position and performance.’
• The company says ‘each Director who is a Shareholder and is who is able to participate in the Rights Issue has confirmed his or her intention to take up in full or in part his or her entitlement to subscribe for New Ordinary Shares under the Rights Issue in respect of his or her respective holding of Existing Ordinary Shares.’
Full year results to end-Feb 2020:
• Whist clearly overtaken by events, Whitbread says ‘FY20 performance was in line with expectations with commercial initiatives driving an improved H2.’
• It says the performance was resilient and was ‘delivered in-line with expectations; improved UK trading in H2.’
• The company adds ‘all restaurants and the vast majority of hotels closed in the last week of March 2020.’
• Cash is being conserved, the dividend passed, government debt accessed, staff furloughed etc. And now the company has decided to tap shareholders for a further £1bn in new equity.
Driving value longer term:
• WTB says ‘in the UK, we will continue to grow and innovate, by leveraging the powerful competitive advantages of our operating model and capitalising on the enhanced structural opportunities that are expected to exist post COVID-19.’
• It adds that, ‘in Germany, our aim is for Premier Inn to be the number one budget hotel operator, replicating our UK success story. We will continue to invest in growing our German pipeline and believe we have a long-term line-of-sight to over 60k rooms through both organic and inorganic investment.’
• It believes there are now opportunities to ‘make value-accretive investment at attractive returns, ensuring Whitbread is well-positioned to resume its long-term growth and value creation when conditions and operations normalise.’
• Until the duration of the current crisis is clear, the earning capacity of Whitbread’s (and all operators’) assets is also uncertain.
• The Rights Issue should, perhaps be seen as 1) precautionary and 2) potentially predatory.
• The company is not in a position to make forecasts – but it clearly believes that there will be a number of opportunities to make acquisitions in the coming months and years.
• It has pulled all the levers available to it in order to preserve cash and wishes to put itself in a better position than its competitors.
• Over the longer term, Whitbread has proved itself an effective builder of estates of largely-freehold based leisure assets
• These are not normal times but we have to make at least the tentative assumption that they will normalise at some point
• With that in mind, WTB will be better positioned with cash in the bank than it would be without
PUBS & RESTAURANTS VS AIRCRAFT & CRUISESHIPS: Pubs and restaurants may not be amongst the first sites to reopen. But demand, though reduced, should still be there. 21 May 2022.
First to close, last to reopen:
• Parents have often told children ‘there’s always somebody worse off than you’
• And, whilst this may be true, it may be of little comfort in the moment
• The subheading above sounds snappy but it may not be completely true.
• And, even if legislation points that way, reopening with customers (as pubs & restaurants will hopefully do) is better than reopening to deadly silence
• The commitment the consumer needs to show to pop to the pub or to grab a pizza is relatively modest
• This is true both financially and with regard to the botheration factor
• The consumer is ‘investing’ only a few pounds, only a few hours
• He or she doesn’t need to seriously raid their savings, they don’t need to pack, to prepare, to take time off work etc
• And the chances of them being stranded at an airport, locked in their hotel for 14dys or entombed on a cruise ship with nowhere to disembark are pretty much nil
• Furthermore, pubs and restaurants are part of our culture than are aircraft, cruise-ships and foreign holidays. They employ hundreds of thousands of people here in the UK and may be more readily supported by politicians etc
• Although the word is overused, these are unprecedented times
• And, though it may be reasonable to expect the consumer to be a little reticent when it comes to making £000 and 14dy decisions versus a commitment of a few pounds, they may surprise us all
• Consumers may be cabin crazy. They may simply demand a holiday. But the risks are there.
• Talk of Portugal and Spain opening their beaches is all well and good.
• It doesn’t cost much to ‘open a beach’ but, when it comes to putting real money at risk, Balearic hoteliers have said that they expect only 40% of hotels to open by the end of the summer and the airlines may simply not fly
Fixed costs, restart costs
• And, whilst it is tough on the domestic hospitality industry, having all those fixed costs with no revenue, the situation is considerably worse for aircraft and cruise ships, the latter of which can cost the thick end of $1bn to build
• Similarly, restart costs and the costs of rescheduled itineraries are much lower for pubs and restaurants than they are for cruise ships
PUB & RESTAURANT NEWS:
Covid-19 & ‘new normal’ news:
• The government has proposed changes to the UK’s insolvency laws in the wake of the Covid-19 crisis. It should give operators some respite if they are being pressured by creditors.
• UK Hospitality CEO Kate Nicholls says ‘this is a very important piece of legislation from the Government and something for which UKH has been pushing. The Bill should provide businesses with some very welcome respite from aggressive landlords and valuable breathing space to restructure their businesses. It is very encouraging to see the Government listening to the concerns of tenants and landlords, and acting decisively on what is a complex issue.’
• The legislation ‘should give some impetus for bringing landlords to the table to understand the pressures that tenants are facing.’
• Landlords have been mixed in their reaction to the crisis. So too have tenants. Some who can afford to pay their rents are not doing so and others, who are in no position to pay, are being pressed by landlords.
• UKH says the ‘extension of the moratorium would allow more time for businesses and Government to get to grips with the scale of the crisis so we can begin to work out long-term solutions to protect local communities. Measures in the bill will provide more breathing space to deliver rent solutions with lower rent liabilities through mandated agreements.’
• See comments in Premium Email.
• Local Government Minister Robert Jenrick has said that the government is considering giving operators blanket permission to use outside areas that would not normally be licensed for trade. This would help some. At least until it started to rain.
• UK Hospitality has launched a campaign to offer guidance as to how the hospitality industry should be reopened. The campaign is organised in four areas, Wellbeing, Workers, Communities and Consumers.
• UKH says ‘hospitality needs the UK and devolved governments to help us deliver for our customers, our employees, local communities and the wellbeing of the nation. We will be ready to restart, in England on 4 July and other parts of the country when allowed, but for the entire country to come together again after lockdown, governments must invest in a fair and timely return for hospitality and all those who rely on it.’
• Commenting on markets in the US, Nielsen says that ‘nearly two months of lockdown orders have had an inordinate impact on the alcohol industry.’ It says that ‘the U.S. alcohol market needs to sustain 22% volume growth across all alcohol categories sold off premise in order to merely level off from the impact of closed bars and restaurants.’ Whilst off-trade sales are up, this is a tough ask.
• Nielsen says that on on-premise sales are 68% down on a year ago. It says that alcohol being offered with takeaway food is at lower prices than would be the case for dine-in. Nielsen says wine sales have held up (taking on and off trades together) but beer sales are below where they need to be if the industry is to stand still.
• Nielsen says that online sales of alcohol in the US are up 234%. From small to a bit bigger. Certain trends are emerging. Consumers are trading up to larger pack sizes, for example.
• Further talk of no drinking at the bar. Table service, restricted numbers, disposable menus and the like are all, similarly, on the cards.
• Caffe Nero is partnering with Uber Eats to offer a delivery service for the first time as it responds to demand from customers for its coffee. The company says ‘the exclusive partnership with Uber Eats means Caffè Nero can continue to be flexible in how it serves its customers, and over 40 stores will offer delivery by the end of May.’
• Nero says ‘since we’ve opened some of our stores for takeaway, we’ve seen strong demand for our coffee. We want to be able to help those unable to visit one of our open stores enjoy our coffee without compromising the premium quality.’
• Some 40 Nero stores are currently open for takeaway only in the UK.
• Lancashire brewer Daniel Thwaites has updated on its position saying that 90% of its staff have been furloughed and that its top executive team have taken pay cuts of up to 30%. The group is ‘assisting pub tenants to claim grants across all the tenanted pub estate which will assist the tenanted pubs to survive and come through this crisis.’ And it is ‘claiming pub grants directly where they are available for the pubs that it operates on a managed basis.’
• The company has put non-essential capex on hold and has decided not to pay a dividend for the year to end-March 2020. The brewer and pub company says ‘the Company was trading very strongly prior to this crisis and we hope to return to that level of trading in the future once our properties are allowed to open by the government. It is working through its reopening plans to prepare for an environment where restrictions will be in place.’
• Thwaites says it ‘benefits from the fact that it owns the freeholds of all of its properties and is therefore not under pressure to pay third party landlords rent, as others in the industry are having to do.’ It says ‘the Company has been through troubled times before and has a strong asset base and an experienced management team to assist in finding a pathway through the challenging times ahead.’
• Facebook and Instagram are to offer products for sale direct from the website.
• Hogs Back Brewery is to feature an online hop-blessing ceremony today, Ascension Day. It says this ‘was traditionally a day when crop blessings were held.’
• London chef Carl Clarke has announced that he is launching a kickstarter campaign to raise money for the creation of a new plant-based noodle product.
• Subway is to lay off 150 staff in the US.
• Moody’s has reported that the JDE Peet’s announcement of its intention to launch an initial public offering and to list on the Amsterdam Stock Exchange would be credit positive for ultimate controlling shareholder JAB Holding Company. Moody’s says the parent ‘will use the proceeds to repay debt at JDE Peet’s.’
• The Chancellor Rishi Sunak has announced his intention to extend the mortgage payment holiday that UK banks have given to 1.7m homeowners suffering financial stress because of the coronavirus pandemic.
HOLIDAYS & LEISURE TRAVEL:
DART Group placing:
• DART Group yesterday became the latest leisure company to tap the equity market for more funds. It announced a placing, not to exceed 20% of the number of shares that it already had in issue. The price was determined via an accelerated bookbuild and this morning the company has announced that it placed a short 30m shares at a price of 576.5 pence per Placing Share…to raise gross proceeds of approximately £172 million.’
• DART says ‘the Placing was significantly oversubscribed.’ It says ‘the Placing Price is equal to the closing mid-market share price of 576.5 pence on 20 May 2020. The Placing Shares being issued represent 20 per cent. of the existing issued ordinary share capital of Dart immediately prior to the Placing.’ The company adds that it ‘consulted with a number of its major shareholders prior to the Placing in order to adhere to the principles of pre-emption as far as possible through the allocation process and is pleased by the strong support it has received from existing shareholders and new investors.’
• Commenting on trading, DART said that revenues for the year to end-March 2020 would be up by 19% y-o-y with profit before tax and FOREX movements of between £265m and £270m. The current year, however, is understandably quite a different story.
• Jet2 has flights and holidays on sale for departure from 17 June but it says ‘the duration of COVID-19 related travel restrictions and thus the financial impact on the Group remains difficult to determine.’ It says that ‘customers are still making bookings for late summer 2020 and winter 2020/2021 and, though still early, customer bookings and their associated pricing for summer 2021 are encouraging.’
• DART says that it has ‘modelled three indicative “no fly” scenarios of increasing durations being: restarting flying on 1 September 2020; restarting flying on 1 January 2021; and restarting flying on 1 April 2021. All three scenarios assume a gradual ramp up of flying operations, initially running at reduced average load factors that are significantly below historic levels.’ It is in the light of this that the group has accessed government debt, entered into discussions with its existing lenders and now is raising more equity.
• DART says ‘the Directors believe that Dart is well positioned strategically to maximise the upturn opportunity once the leisure travel market re-opens. It says it has strong branding, a proven model and has a record of reacting ‘quickly and successfully to market opportunities, for example, following the recent collapses of Monarch and Thomas Cook.’ Board members are buying £370k of stock personally.]
• DART’s chairman Philip Meeson says ‘the Group is grateful to both existing shareholders and new investors for their significant support of this equity issue at no discount to the prevailing share price. The Board believes that the proceeds of the Placing, together with the recently confirmed Bank of England £300m COVID Corporate Financing Facility (currently undrawn) and the Group’s fully drawn Revolving Credit Facility of £100m, will provide the Group with additional headroom to deal with this most challenging of trading environments.’
Other holiday news:
• Which magazine has said that public trust in the travel industry has fallen sharply to an all-time low as airlines and holiday companies have either denied refunds or dragged their feet in paying them.
• The result has swung from positive nine to negative twelve with only 22% of respondents saying that they would trust airlines whilst 34% say that they now distrust them.
• Which has said that most major airlines and holiday companies are openly breaking the law by delaying refunds. See our comments in Premium Email re demand, which is being potentially undermined by actions such as those currently underway.
• Kuoni has told Travel Weekly that uncrowded, distant destinations could see a pickup in demand once the lockdown ends. Kuoni specifically mentions the Indian Ocean, certain exclusive villas and safaris.
• UK operators have told Travel Weekly that the domestic tourism industry bookings for this summer have got off to a ‘slow start’. There are hopes of a spike in bookings at some point.
• Royal Caribbean Cruises has reported Q1 numbers saying that ‘the outbreak of COVID-19 has resulted in an unprecedented global response to contain the spread of the disease.’ The company has suspended its operations.
• CEO Richard Fain says ‘we understand that when our ships return to service, they will be sailing in a changed world. How well we anticipate and solve for this new environment will play a critical role in keeping our guests and crew safe and healthy, as well as position our business and that of our travel agent partners to return to growth.’
• For Q1, the group reports a US GAAP Net Loss of $(1.4) billion or $(6.91) per share. It says ‘the 2020 results include a non-cash asset impairment loss of $1.1 billion.’
• Regarding the rest of 2020, RCL says it has withdrawn guidance and says that it ‘cannot estimate the impact of COVID-19 on its business, financial condition or near or longer-term financial or operational results with reasonable certainty.’ It adds ‘the Company expects to incur a net loss…for its second quarter and the 2020 fiscal year; the extent of which will depend on the timing and extent of our return to service.’
• RCL says ‘booking volumes for the remainder of 2020 are meaningfully lower than the same time last year at prices that are down low-single digits. Although still early in the booking cycle, the booked position for 2021 is within historical ranges when compared to same time last year with 2021 prices up mid-single digits compared to 2020.’
• RCL says ‘we have taken swift and substantial actions to bolster our financial position by significantly reducing our operating and capital spend and leveraging our strong balance sheet to raise additional capital.’ Most things, however, remain uncertain.
• STR reports that the US hotel industry saw occupancy down by almost 64% for the month of April. It says room rates were 44% lower and REVPAR was 80% off. It says ‘the absolute occupancy and RevPAR levels were the lowest for any month on record in the U.S., while the ADR value was the lowest since December 1997.’
• Swissport has accused UK ministers of being ‘asleep at the wheel’ when it came to planning for the current crisis.
• Tourism minister Oliver Dowden has said that a ‘false start’ to tourism in the UK would be worse than no start at all.
FINANCE & ECONOMICS:
• The UK Consumer Price Index rose by only 0.8% in the year to end-April 2020. CPI had been rising by 1.5% in the year to March. Diesel, petrol and other energy prices were lower.
• The ONS says the impact of the Covid-19 crisis on inflation was ‘muted’.
• The NIESR says ‘our analysis of approximately 85,000 goods and services included in the basket indicates that lower prices in clothing and footwear, household services and transport categories contributed meaningfully to the moderation in inflation recorded in April. Our measure of underlying inflation, which excludes extreme price movements, increased to 1 per cent in April thanks to an increase in underlying inflation in 11 of the 12 UK regions. On this basis, we expect CPI inflation to settle around the Bank of England’s target of 2 per cent in the coming year.’
• Sterling lower at $1.2204 and €1.1132. Oil up at $36.54. UK 10yr gilt yield down 1bp at 0.24%. World markets higher yesterday but London set to open down around 40pts (as per 6.30am).
START THE DAY WITH A SONG:
The song has been furloughed. See you on the other side.
RETAIL WITH NICK BUBB:
• Today’s News: The finals from Pets at Home today for y/e March are quite strong, reflecting the stockpiling surge in March, but the current trading update is pretty sombre, with the company warning that “nearly all of the exceptional demand witnessed in the closing weeks of Q4 has unwound during Q1 of the current year” and that first half profits are going to be “materially below” last year’s levels, given the lower sales and higher operating costs (notwithstanding the Business Rates holiday). There have also been bleak trading updates from the Motor dealers, Inchcape and Pendragon, ahead of their AGM’s.
• News Flow This Week: Tomorrow brings the delayed Burberry finals and the ONS Retail Sales figures for April.