Langton Capital – 2020-06-02 – PREMIUM – Vianet, Fuller’s, demand, tourism, staycations and other:
Vianet, Fuller’s, demand, tourism, staycations and other:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
Sometimes I believe you can treat analysis like you would the observation of a black box.
That is, you can see what goes into the box, and you can see what comes out but, as to what goes on inside the thing itself, you’re not too clear and, if you’re at the time in a ‘results-oriented’ frame of mind, it maybe doesn’t matter.
Hence, as dogs, various birds and rabbits can have 8-10 babies perhaps three times a year and yet the world isn’t ankle deep in either dogs, house sparrows or rabbits, there must be a question mark over their survival chances be it because of accident, predation or plain stupidity.
And the latter is always a good bet because why else would small birds fly into windows, puppies get themselves into dangerous situations while their mothers look on with a stupid grin and a question mark hovering about their heads and rabbits sit around like idiots in front of a hungry fox?
Hence, when it comes to relying on the intelligence of a creature that’s only ever a hairs’ breadth from extinction, perhaps better not bother.
Which brings us on, of course, to humans.
And we have no bragging rights in this regard, but that’s a whole other story. Suffice it to say that, as Carlo Cipolla writes in his illuminating pamphlet The Basic Laws of Human Stupidity, the only thing you can rely on a stupid person to do, is to be stupid. Read that one and Gustave le Bon’s The Crowd back to back and you might be forgiven for being tempted to throw yourself off a bridge. On to the news:
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• Pent up demand? Queues outside reopening Ikea sites (who are these people?) has fed hopes that pent up demand will unleash a fury of spending when the lockdown is properly lifted.
PENT UP DEMAND? Is the consumer itching to spend and, if he is, will he have the money to do so? 2 Jun 2020:
• Spending is the balance of supply and demand. Right now, there is very little supply so demand, to some extent, is meaningless as it can’t be executed.
• But supply is slowly returning. Food shops never shut, garden centres have been open for a couple of weeks and now outdoor markets and car showrooms are open.
• On 15 June, non-essential shops can open and, hopefully, many hospitality outlets will be open from early July – although the Prime Minister has said he is hopeful that they will be allowed to open earlier
What are the early signs?
• Yesterday we commented on Cambridge University’s take on spending patterns in Spain and there is very little reason to believe that patterns in the UK have been any different
• Spending on food will have held up. It’s share of wallet will have risen sharply, probably almost doubled, as consumers have had little ability to spend elsewhere
• Primark has said it will open all of its UK shops from 15 June and it has said it will not discount. This could be brave talk – but it may be a genuine sign that the value retailer thinks there will be substantial demand come the 15th
• And Ikea opened some of its stores yesterday. The BBC says ‘thousands of shoppers have queued for hours to get into Ikea stores after the furniture giant reopened 19 shops in England and Northern Ireland on Monday.’
• This may be a little sad. The BBC goes on to say that ‘Ikea was forced to shut car parks at some stores to help ease pressure.’ It adds ‘in Warrington people arrived at 5.40am to start queuing for the Ikea store to reopen at 9am.’ It believes 1,000 or more people were queuing at one stage.
Any read across? Demand.
• Ikea, I’m told, sells a mean meatball. But it’s better known for durable goods, an area where expenditure can be postponed rather than lost
• Spending in pubs and restaurants, on the other hand, really is lost
• Unfortunately, whilst cabin fever should provide something of a boost, when sunny Bank Holidays (or Mothers’ Day or Valentine’s Day, Easter etc.) are lost, they can’t be recovered
• And, whilst it might be possible for a socially-distanced, smaller absolute number of customers to spend an arm and a leg in Ikea, it’s unlikely that a reduced number of customers in a pub or restaurant will spend three times as much per head so as to make up for customers who are left unable to get in
Read across, the fear factor:
• And, whilst shuffling around a shed to buy a shelf might feel ‘safe’, the same may be less true for a pub (or, to a lesser extent, a restaurant)
• Pubs may be popular for their hospitality. Some, think nightclubs, may be ‘intentionally crowded’ to generate atmosphere
• South Korea was recently (11 May) forced to order the closure of bars and nightclubs across Seoul as they had been ground zero for a secondary outbreak
• Customers may intuit this. Some may be driven by bravado but others may stay away ‘just to see what happens’.
Comparing apples with oranges:
• It may be incorrect to pointing at a queue outside Ikea and conclude that customers will flock back to bars
• But, at the same time, pubs in residential areas (or those with lodges and large beer gardens) will not be in the same boat as sweaty nightclubs when the two are allowed to reopen
PUB & RESTAURANT NEWS:
• Journal NRN in the US says that, even when restaurants in the US are allowed to fully reopen, a number of former customers may have changed their habits. That’s likely true. How many, by how much and for how long is what will matter over time.
• NRN points to the acceleration of existing trends such as eating more meals at home, making more use of delivery services etc. NRN quotes analysts as saying that the ability to get meals into consumers’ homes in the future will be more important.’
• Delivery company Seamless says that third party delivery orders increased 204% in April, compared to a year earlier. In addition, orders made on restaurant apps and websites were up 72% in the same period.
• Foodservice analyst Peter Backman has said that ‘the coronavirus pandemic has been a tragedy for many and a trial for most.’ But, Mr Backman says, there have been some financial winners adding ‘some developments that were happening before the lockdown have been given a boost and…development times have been shortened by perhaps as much as two years.’
• Delivery has benefitted with The Times reporting that online food sales now account for 13% of the grocery market – almost double the figure of a year ago. This accords with comments made by Cambridge University in yesterday’s Premium Email. Backman says ‘meal kits from companies such as Hello Fresh, Mindful Chef, Gousto et al are reportedly doing well.’
• Some operators are delivering ingredients and others are pivoting to groceries while still maintaining delivery of their core foodservice range.
• The FCA has taken a number of insurers to task over their failure to pay out on Covid-19 claims. A number are reported to have backed down. The FCA says ‘a number of the relevant insurers decided to accept claims from policyholders with certain policies which included particular wordings which had previously been in dispute.’ A group of nightclub & bar operators is reported to be suing Hiscox over the latter’s refusal to pay out.
• Service Monitor has reported that would-be hospitality industry customers fall into three distinct groups when it came to the question of returning to pubs & restaurants upon re-opening. It says ‘there is a small top tier of people who will go to a venue regardless of what anti-Covid measures have been implemented.’ It says ‘the majority is middle tier who want to see all the social distancing and sanitisation measures overtly put in place – then they will be comfortable to return.’ It adds ‘there is a small bottom tier of people who are not planning to visit regardless of the safety measures introduced; this group mainly includes more at risk individuals and people living with young / older family.’
• The key will be whether consumers enact their current intentions and how many fall into each group. Service Monitor says ‘the main issue for customers is the fear of being too close to other people – no matter how many sanitising stations are deployed.’ Calls to reduce the recommended distance between customers from two metres to one may be pushing against substantial customer as well as health-professional resistance.
• The Met Office has said that May 2020 has become the sunniest calendar month on record in the UK. As mentioned yesterday, the sun has been shining and tills haven’t been ringing. The Premier League recommences games in just over a fortnight.
• The Met Office says that meteorological spring, the calendar months of March, April and May, was the sunniest on record and the eighth warmest since weather records began.
• UHY Hacker Young calculates that losses at the UK’s top 100 restaurant groups increased 94% to £151m last year, up from a loss of £78m in 2018. One would imagine that 2020 will be worse than 2019.
• Casual Dining Group says it has received interest from a number of parties regarding a potential sale of the business. The group has already filed notice of its intention to appoint an administrator. This has been termed a ‘protective measure’, but it does leave up to 6,000 hospitality jobs at risk.
• Vianet has reported full year numbers to end-March saying that revenue increased 3.8% to £16.28 million with adjusted operating profit, pre-exceptional costs, amortisation and share based payments up 4.5% to £4.03 million. Vianet reports EPS of 8.56p (2019: 8.87p) and it is not to pay a dividend.
• Vianet CEO James Dickson says ‘both divisions of the business have performed well. Smart Machines connections grew by c. 12,000 to c. 38,000 in the year, excluding the Vendman estate of c. 200,000 mobile connections.’ He says that ‘despite continued pub disposals in the UK, our Smart Zones division maintained its profit contribution, helped by our Tech Refresh programmes, and we are delighted to note several key contract renewals, including Charles Wells, Greene King, Hawthorn, Hydes, JW Lees, and Punch.’
• Vianet says, re COVID-19. That ‘from the very outset of the pandemic, our goal has been to preserve cash to ensure both business continuity and to enable ongoing investment in the business, with the aim of being strongly positioned for the COVID-19 exit phase. Whilst these are still early days, we are encouraged that April’s trading performance was well ahead of our revised forecasts, and that the measures we have taken to protect the business have been successful, giving us confidence that we are well positioned to exit from the COVID-19 phase with momentum to accelerate our growth plans.’
• Fulham Shore’s Franco Manca now has 31 units open for delivery and collection.
• Fuller, Smith & Turner yesterday updated on its situation saying the company ‘is well financed with a healthy balance sheet and significant liquidity headroom.’ It says, however, that ‘in light of continued uncertainty, pending further clarity from the Government as to when and how pubs will be allowed to reopen, management have taken additional precautionary measures to ensure the Company is in the best possible financial position, with maximum flexibility.’
• FSTA says its ‘Board has formally approved the issue of commercial paper under this facility [the Covid Corporate Financing Facility] for an initial sum of £100 million. This will enable the Company to leave the majority of its £155 million revolving credit facilities undrawn and puts Fuller’s in a strong position with significant liquidity headroom to successfully navigate the months ahead.’
• FSTA says it ‘has an excellent relationship with its lending banks. Constructive discussions have led to appropriate amendments to its banking agreements.’ Its covenants will ‘primarily focus on liquidity headroom metrics’ and the company says this ‘underpins the Board’s confidence that Fuller’s has sufficient liquidity headroom to sustain the Company through this period of continued uncertainty.’ FSTA has also cut costs, placed 96% of its workforce on furlough’ and cut pay on a voluntary basis.
• IKEA has opened 19 of its stores in the UK. Large queues formed. Primark has announced that it will reopen all of its stores in the UK on 15 June. It has said it will not slash prices on summer stock to shift product. See Premium Email.
• US drinks company Constellation Brands has revised the terms of the sale of its low-price wine brands to rival E&J Gallo in the face of competition concerns.
• AB InBev reports that it has completed its previously announced sale of Carlton & United Breweries (CUB), its Australian subsidiary, to Asahi Group Holdings, Ltd. AB InBev says ‘despite the challenging environment, our colleagues working on this transaction showed great dedication and remained focused on delivering to its completion.’ The deal values the business at 16 billion Australian dollars.
HOLIDAYS & LEISURE TRAVEL:
• Spain has said that British holidaymakers cannot return to the country until coronavirus infection rates in the UK have improved further. Greece made a similar statement last week.
• Spain’s tourism minister has said that travellers from Germany and Scandinavia were most likely to be allowed to return to the country’s beaches in the short term. A pilot scheme will require tourists to take a coronavirus test at the airport of their arrival and remain isolated for 6hrs in their hotels to await the results.
• Spain says ‘regarding the United Kingdom, there have been talks with tour operators but British data still have to improve, because it’s important to ensure that the person comes well and then returns well.’ The tourism minister promises that, when British Covid-19 rates improve, tourists will be received ‘with the same hospitality as ever’.
• A group of Conservative MPs are lobbying No10 to consider modifying or dropping its plans for a 14dy quarantine on overseas arrivals.
• The Telegraph quotes Moody’s as saying that Britain’s biggest holiday park operator, Parkdean, could run out of money within weeks unless the lockdown is lifted. Moody’s says that Parkdean is being squeezed as customers demand refunds on cancelled holidays. It says the company ‘may run out of cash this summer if the lockdown is not lifted in the next few weeks and demand is slow to recover.’ Parkdean itself says ‘we are looking forward to opening in July and making the most of the staycation phenomenon.’
• Moody’s says that the operator’s £900m of debt is ‘very high’. On 1 April, Moody’s downgraded Parkdean from B3 to Caa1 with a ‘negative’ outlook.
• On a brighter note, HVS suggests that ‘domestic bookings could prove a silver lining for UK hotels.’ It says, however, that ‘hotels in the capital and other gateway cities, with heavier reliance on international travellers and corporate bookings, are likely to take longer to recover than those in the provinces, which have a more domestic, leisure-based guest profile.’
• HVS says ‘many hotels outside London typically generate over 50% of domestic room nights from holidaymakers. In the Southwest of England, for example, holidays account for 69% of domestic room nights, compared with London, where some 29% of hotel bookings come from domestic leisure bookings.’ In normal years, some 60% of hotel demand in the UK comes from domestic sources.
• HVS spells it out saying ‘one impact of lockdown is that British tourists will be keen to travel, and unable to go abroad are likely to book holidays in the UK once it’s deemed safe to do so. This could prove a silver lining for UK hoteliers, holiday operators and campsites.’ It says ‘we are cautiously optimistic about the UK hotel industry’s ability to recover at a reasonable pace compared with the rest of Europe, and to focus on domestic tourism until international demand returns.’
• Marriott International has reopened all of its hotels in China. It says it has seen a recovery in business travel.
• STR reports that the UK hotel industry is likely to see continued low rates of occupancy if the UK government pushes ahead with its plans for a 14dy quarantine period for international arrivals. STR says that room rates are down around 41% with REVPAR down in the mid-80% range. STR says ‘this has become very much the new normal during this period of lockdown.’
• EasyJet Holidays has added Egypt to its winter 2020 programme.
• Pragma Consulting reports that ‘the Covid-19 pandemic has hit no business sector harder than travel and tourism.’ It goes on to ask ‘are we already seeing some signs of recovery?’ Quarantine measures are being lifted in some jurisdictions but are yet to be imposed in others. The Secretary-General of the UNWTO calls trust the currency of our ‘new normal’.
FINANCE & ECONOMICS:
• May’s manufacturing PMI for the UK was a little less bad than that for April at 40.7. April’s number was an all-time low of 32.6. Markit says the number ‘still signalled a marked deterioration in overall operating conditions.’ Markit says that pockets of growth were linked to the healthcare industry.
• Manufacturing employment fell for the fourth successive month in May reports Markit. It says ‘the glass-half-full perspective is one where the rate of contraction has eased considerably since April, meaning – absent a resurgence of infections – the worst of the production downturn may be behind us.’
• Manufacturing industry group Make UK says ‘UK manufacturing performance is continuing to delve depths unseen outside of the current pandemic with the rates of contraction in orders, output, and exports last month all among the worst in history.’
• The Congressional Budget Office in the US has said that the Covid-19 crisis could drag on the US economy for a decade.
• Sterling up at $1.248 and €1.1215. Oil higher at $38.75. UK 10yr gilt yield up 4bps at 0.23%. World markets broadly higher yesterday. London set to open up around 35 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: Card Factory have announced disappointing finals today for y/e Jan, but the outlook statement is pretty bland (the Q1 update is due on Thursday, unaccountably). Trading was said to have been “encouraging” before the pandemic and recent Online sales have been very strong, obviously, but only about 10% of the shops will open on June 15th. Presumably management will have more to say for themselves in the Strategy update planned by Card Factory for July 28th. More interestingly, mighty Tesco has announced, out of the blue, that the well-respected CFO Alan Stewart is to retire in April next year…It is not clear why he has decided to step down, but he is no doubt mindful of the CEO change coming up (new brooms sweep clean etc) and he has been there since Sept 2014, so he has done a good stint.
Ted Baker: We jumped the gun yesterday in thinking that the beleaguered Ray Kelvin was stumping up over £35m to take part in the £95m rescue funding for the embattled Ted Baker, as although he had said that he would vote to approve the fund-raising at the upcoming EGM on June 16th, last night’s detailed announcement about the placing revealed that he is actually only intending to acquire c4.7m new shares in the business (ie £3.5m worth) and that he is therefore prepared to swallow being diluted from being a c35% shareholder to holding just c16% of the enlarged equity. However, the activist investor Tosca is happy to throw £29m of good money after bad and has elected to increase its stake from c14% to c26%, whilst Threadneedle has decided to edge up its stake in the recapitalised business from just under 11% to 11.5%.
News Flow This Week: Tomorrow evening brings the latest FTSE All-Share index quarterly review (with Homeserve and Kingfisher both candidates for promotion to the FTSE 100 index, depending on tonight’s closing prices). And first thing on Friday we get the latest “flash” GFK Consumer Confidence report (with the record -39 index low seen in July 2008 not tested so far in the crisis, as the latest reading was -34).