Langton Capital – 2020-06-19 – PREMIUM – Confidence, re-openings, New River, Carnival, TUI, EasyHotel etc.:
Confidence, re-openings, New River, Carnival, TUI, EasyHotel etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
I got up onto the flat roof the other day and, when I found a tiny oak tree growing in the mush in the gutter, I couldn’t help but wonder what its longer-term plan was.
It didn’t have one, of course but, having been dropped by a wayward squirrel last year some time, it had apparently seen its chance in the spring and had gone for it.
It’s planted safely in the hedging now (where it will live but be slashed occasionally by a hedge-trimmer, who’d be a tree, eh?) but, I would bet, it didn’t know that was going to happen when it started to put down roots twenty feet up in the air.
And, it needs to be said, there are a lot of businesses out there like that.
They may grow in the wrong places, at the wrong time or in the wrong way. Or they may do all three and they may pivot and pirouette like a dancer on speed and, because of the survivor bias involved in just looking at the winners, we consider that a remarkable sign of their dexterity when, in fact, it usually means that they have got a series of things wrong until they lucked on something that worked.
Like some politicians, perhaps? Minus the winner at present, but who knows, if you try enough tracing aps, school dinners’ approaches, school return strategies, NHS overseas contribution rulings and the like, you might ultimately find something that works.
Follow us on Twitter at @brumbymark. On to the news:
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KEEPING A SENSE OF PERSPECTIVE: Covid-19 is bad for almost everybody. But there are shades of grey. It’s much worse for some than for others:
• If you listen to enough TED talks and the like, the odd interesting idea will stick.
• One, I think by epidemiologist Hans Rosling, was on the nature of poverty.
• He made the good point that, to a cosseted westerner, virtually all the inhabitants of an ‘impoverished’ African country will be poor.
• But, to the inhabitants of that country, some will not have shoes and nothing above their heads at night but the stars.
• Others will have shoes but not a bicycle. The may live in a shanty.
• The bike owners may look enviously at those with a moped and accommodation with running water.
• And others will have houses, perhaps humble by some standards, but they may appear rich to some because, at the end of the day, poverty is a relative measure
• And the same is true about the economic grief emanating from Covid-19. We might briefly consider this under two headings.
Covid-19 drowns out all other noise:
• Unsurprisingly, it’s Covid-this and Covid-that at the moment.
• But, going into the crisis, we had good companies, bad companies and ugly companies. And they will be faring differently.
• Some operators had been collecting comorbidities like they were going out of fashion.
• Thinking in Venn diagram terms and deciding where these comorbidities overlap, we would suggest that the following are red flags of varying sizes.
o Thin balance sheets,
o The need for regular equity infusions due to ongoing losses,
o No access to debt,
o Leaseholds and no tangible assets,
o Unproven tech,
o Undifferentiated or lazy, me-too products (or, ironically, way-out-there products with little traction),
o High but unsustainable pricing,
o Nimble competitors,
o Overrented sites,
o Over-priced acquisitions,
o Stage payments on acquisitions looming etc.
• Everyone might sink but bad companies will sink further and faster than good companies
Some industries are simply in a bad spot:
• This is a leisure email so we’re not seeking to compare our stocks with mask manufacturers or hand sanitiser companies but rather with each other
• So, to stretch Hans Rosling’s analogy, we’re comparing poor people’s shoes with each other rather than comparing any shoes with a Bentley. That said, negative features (some of which will be positively and others negatively correlated with each other) will include:
o ‘Intentionally crowded’ venues,
o Targeting the grey (cautious) market,
o Businesses involving a lot of travel (a lot of moving parts that may go wrong),
o Anything involving a ‘loss of control’ of your own destiny (e.g. planes, cruise ships),
o Products or services asking you to pay up front. The lot of an unsecured creditor will not always be a happy one
o Big ticket rather than low ticket items
Thoughts on ‘winners’ and losers:
• Holidays and especially cruising have several negative features
• Ditto crowd-funded, often loss-making operators in crowded markets operating from leasehold sites with an undifferentiated product will struggle
• They would have struggled anyway. At the moment, they may escape attention but, when the lockdown eases, they could collapse
• Every-day, very familiar products such as pizzas, possibly coffee, burgers etc may be more ‘popular’ than big ticket purchases but the companies involved could suffer from some of the negative features in the ‘drowning out other noise’ section above
PUB & RESTAURANT NEWS:
• GfK has this morning updated on consumer confidence in the UK saying that it rose slightly over the last few weeks. GfK says ‘we have a six-point uptick in the Overall Index Score with all measures up and particularly strong increases in future perceptions of personal finances and the economy.’
• However, GfK says this is ‘still have a story that’s about negative numbers so it’s too early to say that consumers are moving on from the COVID-19 crisis.’ It points out that the minus 34 registered on 6 April was the largest negative number the company had ever recorded. Things have ‘improved’ a little since that point. It says ‘we have to question whether we are seeing early signs of economic recovery or that infamous ‘dead cat bounce’. Most bets will be on the dead cat.’
• GfK says personal confidence for June is at minus 30 (May -34). It says the measure for the’ general economic situation of the country during the last 12 months has improved by one point to minus 59; this is 27 points lower than in June 2019.’
• Westminster council’s attitude towards pavement eating and drinking appears to be in stark contrast with that of the City of London. It is surely unlikely that pandemic conditions will be different in the two boroughs?
• Westminster is said to be lining up 50 projects including pavement widening and temporary road closures whilst the City is writing to operators to remind them that their pavement licenses have been suspended.
• Given that U-turns have been coming thick and fast, it is possible, indeed likely, that changes will have been made before 4 July, the earliest date (as it now stands) that pubs & restaurants can reopen. What on earth operators are meant to do with furniture (let alone staff, food & drink stocks etc.) in such an atmosphere of uncertainty, is unclear.
• A poll conducted by HIM/MCA has found that 42% of operators contacted were not intending to make their Q3 rental payments when they come due next week.
• Ironically, PM Boris Johnson’s review of the two-metre physical distancing guidelines, though welcome, has delayed the publication of hospitality reopening guidance and any confirmation that could have been expected re a definite 4 July reopening date. This has not helped planning.
• UKH has ‘welcomed clarification that hospitality supply chain businesses affected by the COVID-19 crisis are eligible for discretionary grants.’ The supply chain has, to some extent, been out of the limelight in recent weeks. It is less visible but, like other necessities, its absence would soon be noticed if it were no longer there.
• UKH CEO Kate Nicholls says ‘It’s good to see the Government acknowledging that businesses in the supply chain have been hit hard too, and clarification that councils can support them with a grant.’ We have commented previously about the fragile state of the distribution industry, particularly that part of it dealing with hospitality and unable to move into delivery to the food retailer, which is already a competitive market.
• Re suppliers. The FT points out that the UK hop industry is in a bit of a mess as it has fewer people to sell its products to. Consider also tableware, consumables and the like.
• A poll carried out among hospitality leaders has suggested that ‘a second lockdown would sound the death knell for a third of hospitality businesses.’ This may well be true as weakened companies would find survival for a second time considerably more challenging.
• As we have seen in China and in South Korea, the chance of a secondary outbreak is non-negligible. Cambridge University (see premium email) suggests that, at the current stage in the lockdown, the risk of infection is dividing by 10 around every 60-80 days. The risk of infection in mid-June is around 10% that of 23 March. This safety is coming at considerable economic cost.
• A number of operators have said they will either stagger or delay openings. Young & Co will not open until early August.
• UKH has welcomed the Scottish Government’ publication of its reopening guidance, which provides an indicative start date for pubs and restaurants North of the Border of 15 July. UKH says ‘we are pleased to see that social distancing measures will be reviewed…[and] reducing the minimum distance required, if it is safe to do so, would be a huge bonus for businesses as they look to reopen.’
• Living Ventures has put its Blackhouse and Newgate businesses into administration. Four restaurants are impacted. The MD of the business is quoted as saying ‘we have explored every avenue possible to try to save the business, however we have been left with no choice but to take this incredibly difficult decision now.’
• Oakman Inns has said it will open its entire estate on 4 July unless it is clearly ordered not to. Clarity is something that has been sadly lacking.
• Caffe Nero reports that it has given 35,000 free coffees to NHS workers. The company says there will be over 400 Caffè Neros open by the 5th July.
• Coca Cola HBC says that its CFO, Michalis Imellos, is to step down at the end of Q1 next year. The group says it is ‘conducting a search for its next CFO considering internal and external candidates, and an announcement will be made in due course.’
• The Tofoo Co of Malton, in Yorkshire, has said that it is installing new equipment to facilitate an increase in revenues of 30% by the end of next year. Revenues have risen from £600k in 2016 to £14m now with a target of £20m next year.
• Eight strong West-Yorkshire-based restaurant chain Jinnah Group has secured a bounce back loan from Lloyds Bank. The company has around 100 full time staff.
• Meat Liquor Leeds has reopened for delivery via UberEats and for click and collect.
• Camile Thai Kitchen is to open a new location in Barnes South West London.
• The MA reports Hawthorn Leisure’s CEO Mark Davies as saying that the government is ‘dithering’ re its reopening plans. He says 74% of the group’s tenants intend to reopen on 4 July.
• Devizes-based brewer Wadworth is reported to be consulting to make 57 of its staff redundant.
NEW RIVER (OWNER OF HAWTHORN LEISURE):
• Pub (Hawthorn Leisure) and commercial property owner New River yesterday reported full year numbers to end-March saying that revenues rose from £140.2m last year to £144.8m with a normalised profit for the year of £46.3m versus £45.6m last year.
• New River charges some £166.9m of ‘fair value adjustments’ against its profits for March 2020 to produce a net loss of £121.6m before tax. CEO Allan Lockhart says ‘we are reporting these results against an extraordinary market backdrop, as COVID-19 continues to cause significant disruption for occupiers in our key markets. As the Government starts to ease the lockdown restrictions, we are preparing to return to trading in our retail portfolio in June and planning for a return to trading in our pubs from July.’
• New River says it was making progress until March. It says, of the lockdown period, that its estate of ‘essential retail and convenience [stores], and has proved resilient through the last three months as over one third of our tenants continued to trade.’ That still implies that two thirds were closed. New River says ‘we have limited exposure to department stores, mid-market fashion and casual dining. In the coming year we will accelerate changes to our portfolio.’
• For the year, which is very historic given the Covid-19 situation, New River says LfL EBITDA per pub rose 2.3% across its 720 community pubs. The group has suspended capex, cuts costs etc. It is preparing its pubs to trade from early-July. Across its entire portfolio, New River has collected 52% of the rents due for the period 25 March to 1 June. It has deferred 15% and has 21% still outstanding.
• New River says it had ‘anticipated pub closures for some time before the announcement, so were well-prepared for this outcome.’ It says its BDMs ‘have been working closely with our pub partners to ensure they are receiving the support required for their businesses to emerge from the lockdown in a strong position.’ It has helped them access government support schemes.
• It says it was due £3.8m of rent due for the period between lockdown and end-June. It has received £1.4m and says it is ‘confident’ of recovering another £0.3m. It says ‘the remaining rent will either be waived as part of our conditional support grants provided to pub partners, or will be subject to a claim for the business disruption and loss of rent caused by COVID-19. We do not receive any rental income from our operator managed pubs.’ This sounds a bit reluctant, but it is what it is.
• New River says ‘our plans are well-advanced to reopen the pub portfolio…no sooner than 4 July 2020.’ It says ‘we are confident that we will deliver an operational business by this date.’
• New River says ‘93% of our pub tenants and partners have fed back to us in a recent survey that they felt Hawthorn had exceeded or met their expectations of support during the lockdown period.’
• It adds ‘we have had confirmation from 74% of our Leased and Tenanted pubs that they intend to open on 4 July 2020, and 22% are awaiting to see the final Government guidelines.’
• The group concludes ‘for the pub business to have collected over a third of rent due during lockdown and to have generated so much goodwill from its support actions during this period puts the Company in a good place to bounce back following reopening in July and over the summer months.’
• The group implies no change here. it says ‘our disposal programme across the pub estate continues to be active despite the current restrictions on pub operations, reflecting the inherent liquidity of these assets. Since 1 April 2020, we have completed six pub disposals and one c-store disposals, generating total sales proceeds of £2.9 million, demonstrating that even during a lockdown there is still good liquidity in local community pubs.’
HOLIDAYS & LEISURE TRAVEL:
• Carnival has reported Q2 numbers saying that it generated a headline $4.4bn net loss, a loss of 607c per share in the three-month period. The adjusted loss was $2.4bn or 330c per share. Revenues were only $0.7bn, down from $4.8bn last year.
• CCL says ‘the company’s guest cruise operations have been in a pause for a majority of the second quarter. In addition, the company is unable to definitively predict when it will return to normal operations. As a result, the company is currently unable to provide an earnings forecast.’
• CCL says ‘cash burn rate in the second quarter 2020 was generally in line with the previously disclosed expectation.’ It says it had ‘$7.6 billion of available liquidity’ at the end of Q2. Customer balances at end-May were $2.9bn.
• Carnival says it ‘expects to resume guest operations, after collaboration with both government and health authorities, in a phased manner, with specific ships and brands returning to service over time to provide its guests with enjoyable vacation experiences. The company anticipates that initial sailings will be from a select number of easily accessible homeports.’
• CCL is to cut ships saying ‘in connection with its capacity optimization strategy, the company intends to accelerate the removal of ships in fiscal 2020 which were previously expected to be sold over the ensuing years. The company already has preliminary agreements for the disposal of 6 ships which are expected to leave the fleet in the next 90 days and is currently working toward additional agreements.’
• Foreign Secretary Dominic Raab has said that there could be legal challenges if the UK introduces air bridges to allow travel to and from specific countries.
• TUI wants to move to halve the size of its German carrier TUI-fly as it seeks to consolidate its flying capacity across Europe.
• EasyHotel has announced that it has signed a 12-year lease for a 180-room hotel in Aubervilliers near Paris.
• Private equity giant KKR is to buy Dutch holiday parks company Roompot, in a deal that values the company at €1bn.
• PR & marketing firm Travel Consul has said that more than half UK consumers are “longing to travel” post Covid-19 travel restrictions with another 41% waiting to decide on their options.
• Neilson Active Holidays is reported to be cutting up to 28 staff.
• The Global Business Travel Association has said it is seeing an uptick in business travel. It says domestic and essential business travel will likely resume first, not least because travellers won’t be able to meet anybody for 14dys if quarantines remain in place. There is no advantage to be had in having a Zoom conference with somebody fractionally nearer to them than you would have been if you had stayed at home.
• Villa Plus is reported to have agreed to offer refunds.
• Adventure Travel is not likely to be amongst the first sub-sectors to recover, the industry suggests. The serviced apartment sub-sector has seen amongst the least disruption.
• The Spanish government is to put in place a €4.25bn support package for the country’s tourism industry.
• KPMG has been instructed to oversee a review of Transport for London’s finances. Keeping busy, KPMG has also been appointed as administrators to Croydon Park Hotel.
• STR reports that the US hotel industry saw occupancy down 42% with room rates down 34% and REVPAR off by 63% in the week to 13 June. STR says ‘the industry clawed its way above 40% occupancy’ as a result of slightly better demand. STR says this is an ‘obvious improvement from the country’s low point in mid-April.’
FINANCE & ECONOMICS:
• The Bank of England yesterday left Bank Rate at 0.1%.
• The Bank’s MPC voted unanimously to continue with the existing programme of £200 billion of UK government bond and sterling non-financial investment-grade corporate bond purchases.
• The Bank voted 8-1 to increase the target stock of purchased UK government bonds, financed by the issuance of central bank reserves, by an additional £100 billion, to take the total stock of asset purchases to £745 billion.
• US jobless claims jumped by 1.5m this week.
• Nationwide is to triple to 15% the minimum house deposit required from first time buyers. This as a precaution against falls in house prices. It says it is making the move to protect new customers from being trapped in negative equity.
• Top US trade negotiator Robert Lighthizer has said a trade deal between the UK and the US is unlikely before November. The US runs a trade deficit with the UK and is seeking to reduce this by selling more agricultural products once the UK no longer has to follow EU hygiene and safety standards.
• Sterling lower at $1.2429 and €1.1081. Oil up at $41.85. UK 10yr gilt yield up 4bps at 0.23%. World markets mixed. London set to open up around 35pts.
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 figures for May (the 4 weeks to May 30th), underlying Retail Sales held up surprisingly well last month overall, despite the coronavirus lockdown shut down of most non-essential stores, given the boost to Food sales from the fine weather, but “seasonally adjusted” life was less clearcut on the High Street on that bizarre parallel world, the Planet ONS (aka the Office of National Statistics in Newport), via the official Retail Sales figures for May, which were released at 7am this morning…City economists (who still treat the ONS figures as the gospel truth) will be impressed with the better than expected 10% bounce in month-on-month seasonally adjusted sales volume (ex-fuel), but the ONS reports a drop of nearly 10% in sales volume year-on-year and seasonally adjusted value sales were also nearly down by 10% on May last year, with Food
Today’s News: The Boohoo AGM is being held at 2pm this afternoon at their HQ in sunny Manchester and there could be some fun and games in the vote on Directors’ remuneration, notwithstanding the bumper Q1 trading news and the sterling performance of the share price. Otherwise, there was no company news scheduled, but the Studio Retail group (aka Findel) has issued an update, bemoaning the news that the wretched CMA has decided to take a closer look at the sale of its struggling Findel Education business, but flagging that the core home shopping operation is trading strongly, with sales 55% up over the last 11 weeks.
BDO High Street Sales Tracker: The BDO High Street Sales Tracker today for medium-sized Non-Food chains flags that in w/e Sunday June 14th, Total BDO LFL sales (including a handful of Homewares and Lifestyle retailers, as well as Fashion retailers) were down by nearly 20% (down c90% in Store sales, but up by c88% in Online sales). It will be interesting to see how much better this week is, however, given the reports of strong pent-up demand on Monday…
Trade Press: Both Retail Week magazine and Drapers magazine have been published this week, thankfully. Retail Week highlights its annual Retail 100 list of the industry’s most influential leaders (topped again by Dave Lewis of Tesco), but its front cover is a sombre photo of a BLM memorial, to flag the main feature on “Retail and racism” (“Why it’s time to talk shop about racial inequality”). RW also have features on how COVID-19 has changed grocery shopping forever and Rent Day: will retailers pay? In his column, the Editor looks at the re-opening of non-essential shops in England on Monday and thunders that “Reopenings reveal flight to value as recession looms”. Drapers magazine focuses on similar themes and the Editor’s column is headlined “Exposing the ugly truth: fashion retail is racist”. The main News story in Drapers magazine is that fashion retailers reported strong demand from
TIPS Watch: Royal Ascot concludes today (behind closed doors) and “Honest Nick” is tempted to retire wounded, after another pretty blank day of tipping yesterday, but if you want to throw good money after bad, then Imperial Force should be worth an e/w punt in the 2.25pm, with Morando the e/w selection in the 3pm.
News Flow Next Week: The highlight of next week is the Tesco Q1 and AGM on Friday, but the week kicks off with the formal entry of Homeserve and Kingfisher into the FTSE 100 index on Monday. First thing on Tuesday we get the latest GFK Consumer Confidence survey, followed by the Naked Wines finals, the latest monthly Kantar/Nielsen grocery sales figures and the Shoe Zone AGM. After that there is not a lot of news scheduled, although Wednesday is Quarterly Rent Day for retailers and landlords…