Langton Capital – 2020-06-25 – PREMIUM – Young & Co, Hostelworld, Easyjet, re-openings, landlords etc.
Young & Co, Hostelworld, Easyjet, re-openings, landlords etc.
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
Yesterday was a big day for the fund-raisers with Young & Co, EasyJet and Hostelworld all tapping investors for fresh capital.
And, at this stage in the cycle, it is what it is. Companies can smell both desperate need and opportunity and, as the share prices of many leisure companies are much, much higher than they were in the dark days of late March, securing debt if possible, hanging fire and raising funds about now via the issue of shares at these sorts of prices will lead to less dilution.
Anyway, that’s a bit heavy. And it’s Thursday or, as it’s known in lockdown, The Weekend. And in nearly is but the ‘evergreen weekend’ mind-set will take a bit of shifting.
Worth noting that I’ve managed to irritate people for years by greeting them with ‘never mind, it’s nearly the weekend’ from about Monday afternoon but, until this last few weeks, I’ve never really meant it.
JD Wetherspoon said a couple of days ago that it had contacted its staff with a view to getting them back to work from 4 July. A small number resigned on the spot and sadly two had died with Covid-19 but scrubbing the rust off will be no small job.
Follow us on Twitter at @brumbymark. On to the news:
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PAYING THE RENT: Q3 rents were due yesterday. Many operators, keen to share the Covid-19 love with their landlords, will not have paid them. 25 June 2020:
• In the same way that victors write the history books, property owners tend to write property law
• When this bumps up against cheap money in the hands of over-optimistic operators, it can mean that leases, perfectly legal and enforceable documents, can be signed even when there is no financial wiggle-room for the tenant should things not go according to plan
• At the end of the day, however, needs must. If a site is not viable, the rent will not get paid – unless the tenant who is on the hook has assets elsewhere or cross-guarantees of some sort
• Some units, in this case, can remain over-rented for many years, often to the detriment of the tenant and their neighbours
• Taken as read that we know leases tend to be for 15yrs or 25yrs, they have 5yr, upward only rent reviews and they may or may not have a one-way or a two-way break clause
• There may be cross-guarantees from other company subsidiaries or even personal guarantees on the part of directors
• There may be a rent free period or a contribution to capital spend. This will be a function of negotiation
• Rent deposits may be 3mths or 6mths. Ongoing rent is payable three monthly in advance. Service charges ditto. This may any number but is often 20% to 50% of rent. Business rates, when they existed, will be around 30% to 50% of rent
• All of the above, particularly from the point of view of the tenant and even more particularly if things go wrong, stink
Reality setting in:
• Even ex-Covid, things change
• Properties change more slowly than many other things but areas may go in and out of fashion, building types may become a bit passé, pedestrian flows may change, rival shopping centres may be built etc.
• Hence, maybe, rents should be capable of falling but they’re often not and, as rents are used to set the rents of new leases in the same vicinity, landlords will often suffer voids rather than set a precedent such that rents should be lower
• If the landlord becomes liable for business rates on an empty property, then this may encourage movement in the opposite direction
• This is partly why Xmas card shops and tacky gift shops with temporary signs spring up on High Streets around November. Rents may be very low but no leases are being signed to set a precedent and the business rates fall on somebody else
• Covid is a lot of big changes all come at once. Landlords must surely know that this time, some of the fallout will land on them.
• With this in mind, some operators are calling for their landlords to be given easier access to government support (perhaps in order that they can pass more of the burden of non-existent sales on to them)
Some other points:
• Some operators may be thinking that the beer tie, after all, was not altogether a bad thing
• Because the property owner, often a brewer, has a vested interest in protecting the tenant’s trade and, patronising though it may be, this has stood the test of time
• Worth noting that there will be some ‘signalling’ going on. Companies that are trading relatively well via delivery may signal that they need rent cuts, landlords may make empty threats etc
PUB & RESTAURANT NEWS:
How many units will be open on 4 July, 31 July, 31 August?
• Please drop us a line & let us know your plans. Will publish anonymised details tomorrow.
• What’s clear already is that 4 July will not be flicking a switch from ‘all-closed’ to ‘all-open’. Various comments that a significant proportion of the country’s chain restaurants will not reopen at all. CGA says that a third of operators will cut some of their sites and another third are considering doing so.
• Merlin says all of its units will open 4 July, Franco Manca in FT says will open 6 units on 4 July and a stream thereafter. Shepherd Neame to have 200 open by the end of July. Hoseasons & other domestic holiday companies intend to sell as much stock as possible from the earliest possible date.
Bookings coming in. City may allow pavement dining.
• The government has given more guidance on how it expects pubs & restaurants to behave after they are allowed to reopen on 4 July.
• Plenty of comment out there that venues have been ‘flooded with bookings’. It will take a little while to assess underlying demand.
• The City of London Corporation is reported to be considering backtracking on its pavement license ban. It is said to be looking into reallocating some street space to accommodate al fresco dining. It had previously said that tables on the pavement would push pedestrians into closer proximity of each other.
• The City’s Alastair Moss says ‘we know the resumption of outdoor dining will be a welcome shift, but it is vital that the return of social spaces continues to be safe for all workers, residents and visitors to the City.’
• Big Hospitality quotes Risk Capital’s Luke Johnson as saying that this is a bleak time for UK pubs, restaurants and hotels, which ‘have been shut for more than three months and have amassed significant debts in that period.’
• Johnson says ‘it’s unlikely there’ll be a sudden, dramatic bounce back. The one, slight hope on the immediate horizon is that, because this Government in its madness has introduced two-week quarantines on everyone flying into the UK, people may look to holiday at home this year. They’ll have some more money in their pockets, and they’ll want to go out. So, takings in July and August may theoretically be better than we expect.’
• Scottish outlets are to be allowed to reopen on 15 July. Wales has yet to commit. Northern Ireland has inked in 3 July.
• Bloomberg points out that ‘British shopkeepers [and publicans, restaurateurs] slowly emerging from three months of forced closure have a new problem on their hands: the rent is due.’ It says some £2.5bn was due yesterday if Q3 is to be paid fully in advance.
• Long Live the Local has relaunched its campaign to encourage people to visit their local pub. It says it ‘will remind pub goers of the great beer, food, atmosphere and community spirit they have missed during lockdown and highlight what pubs are doing to ensure the safety of their customers.’
• Campaign director David Cunningham says ‘we know that some people won’t need much encouragement [to visit the pub], but others may feel nervous about returning. We will reassure them by highlighting what pubs are doing to ensure their safety is paramount. We will let them know that although a few things may be a little different, many of the things that they’ve missed so much about their local-the delicious food, a pint of fresh draught beer and the atmosphere will be exactly the same.’
• CEO of Greene King Nick Mackenzie says ‘we can’t wait to welcome our customers back to our pubs and we know people are eager to return to their local. The safety of our customers and team members is always our number one priority and against the backdrop of a slow recovery from COVID-19, we are investing to put in place all the necessary arrangements. Of course, customers will notice some differences when they return but it’s important that alongside implementing the changes, we maintain the very essence of the great British pub.’
No sport, singing, standing at the bar etc. All understandable.
• UKH says the guidance notes produced by the government late Tuesday are pragmatic. CEO Kate Nicholls says ‘it is reassuring that the Government has understood the need for flexibility, demonstrating that they have listened to businesses. The guidance is pragmatic and should a provide venues with enough versatility to suit their own unique circumstances. This is exactly what was needed to avoid restricting venues and making the job of reopening even harder.’
• The emphasis seems to be on guidance rather than proscription.
• UKH says ‘the emphasis is now going to be on businesses and customers to exercise some responsibility and ensuring that the guidance works optimally.’
• Covid-19 has been and remains a big deal. As impediments, such as the legal inability to open, are stripped away, operators will have more insight as to just what level of demand they can expect in the ‘new normal’.
Industry & other reaction:
Many of the details still unclear. Some valid concerns.
• Police are said to be concerned that queueing outside pubs during hot weather on a pub crawl could lead to an upsurge in drunkenness and disorder
• Sky reports that government is preparing a ‘bonfire of red tape’ in order to allow more eating and drinking outdoors. The City of London is considering its position, Westminster looks to be a go, other councils at various stages in the decision making process. Some firming up of intentions would certainly help operators.
• NRN in the US says that the coronavirus pandemic ‘has evoked the most widespread changes in state alcohol beverage laws since Prohibition was repealed.’ Some states are allowing ‘to-go’ sales, others are ‘considering measures to extend or make permanent the temporary easing of alcohol beverage restrictions.’
• The Telegraph reports ‘businesses have been warned by ministers not to hike their prices to make up for customers lost through social distancing.’ Many things the government has said over recent weeks has been couched as advice. The words ‘were possible’ feature heavily in advice.
Young & Co raises money, CMA backtracks on Deliveroo / Amazon.
• Young & Co has announced that it is raising new shares up to 19.9% of its existing ‘share capitalisation…through a placing to provide Young’s with the financial flexibility to drive its continued success and faster growth.’
• The company says the placing is taking place via an accelerated book build with a chance for retail investors to participate via a retail offer. The company announces this morning that it has raised £85.5m gross via the issue of 4.26m A shares and 4.9m non-voting shares at £11.60 and £7.35 respectively. The retail offer raised a further £2.7m.
• Young & Co says the placing ‘will provide Young’s with the financial flexibility to continue to invest to drive its future success and faster growth.’ It will use the money to ‘restart investments in Young’s estate’ and the new money will additionally strengthen the balance sheet and allow the company, if appropriate, to ‘pursue opportunistic acquisitions.’ It says that ‘selective opportunistic acquisitions are part of Young’s achieving its growth strategy.’ The group adds ‘acquisitions are focused on the locations of the pubs as well attractive economics, with investment criteria targeting at least a 10% return on acquisitions.’
• The Competition & Markets Authority has apparently changed tack and said that the proposed Amazon investment in Deliveroo does pose a threat to potential competition. Amazon will take a 16% stake in the UK-based food delivery company. The CMA says ‘this decision reflects the 16% shareholding that Amazon is acquiring at the present time. Were Amazon to acquire a greater level of control over Deliveroo, in particular by making a full acquisition of the company, this could trigger a further investigation by the CMA.’
• Moody’s reports that Burger King France’s access to an €80 million term loan provided by a pool of French banks and partly guaranteed by the Government of France’ is a ‘credit positive’ move.
• Premier Foods’ shares rose sharply yesterday. They have more than trebled since mid-March. The company is much-changed. We’ve circulated info very selectively due to Mifid II. Drop us a line for details.
Spare a thought for industry suppliers.
• Sector analyst Peter Backman has conducted work alongside IGD saying that the Covid-19 outbreak, apart from everything else, has seen the ‘boundaries between eating at home and out-of-home, once blurred, have now broken down, resulting in unprecedented changes to supply and demand of food and drink in the UK.’
• The split of end-consumer spend on food last year was 36% in foodservice and 64% in retail shops – but that has shifted dramatically during Q2 this year. Going forward, Backman ponders four possible outcomes – a quick return to trend, a ‘decade of drift’, a big swing to technological solutions and / or a reversal of some trends such as the move to increased globalisation.
• IGD cautions that suppliers to the foodservice sector ‘must keep the lines of communication open with customers to stay well aligned and have the ability to respond quickly when changes happen. Think about re-purposing assets like equipment, stock and vehicles to develop new solutions for customers and the wider community.’
• Backman concludes that ‘COVID-19 has been, and will continue to be, a great accelerator for the shifts between in and out of home consumption that have been emerging over the past 15 years. Current consumer behaviour is a catalyst for change, which is happening far faster than anything I predicted, just six months ago. As we move forward, every part of the supply chain will have to be able to adapt rapidly to this changing landscape.’
• Scottish beer gardens can open on 6 July. Customers to be allowed inside on 15 July.
HOLIDAYS & LEISURE TRAVEL:
Fund raisings by overseas operators & positive signs for staycations.
• EasyJet has announced that it is to raise in the region of £450m of new equity via a share placing.
• Hostelworld yesterday announced that it was to raise new equity up to 19.9% of its current shares in issue. The accelerated bookbuild was available to qualifying new and existing investors. The group confirms this morning that at total of 17,664,155 new ordinary shares were placed at 72p. In addition, 1,450,000 new Ordinary Shares have been conditionally subscribed for outside the Placing by an existing shareholder at the Placing Price. The company has therefore raised gross proceeds of £13.8m.
• Hostelworld has also updated on trading and its financing position saying that Q1 2020 EBITDA decreased by c. €4.8 million when compared to the same period for 2019 and that ‘COVID-19 has driven a sharp reduction in trading volumes in H1 2020.’ The company says it ‘has taken swift and decisive action to reduce costs and minimise cash burn. As a result of the Group’s programme of cost reductions and cash conservation initiatives, and anticipating minimal booking volumes to the end of Q2 2020, the Group expects an H1 2020 EBITDA loss in the range of €8 million to €9 million (H1 2019 EBITDA: €8.9 million).’
• Re financing, Hostelworld says it has c. €15.2 million ‘of immediately available cash on hand as at 31 May 2020’ and it is conserving cash. It says its monthly cash costs in H2 2020 are expected to reduce to c. €1.9 million. The group had no debt pre-Covid but says it ‘has now agreed terms for a three-year revolving credit facility to provide up to €7 million of additional liquidity.’
• Re its share placing, Hostelworld says the move will ‘materially strengthen the Group’s position, in an uncertain environment’ and provide essential liquidity through FY20 and FY21 in both of the Group’s projected demand recovery scenarios, including the “Pessimistic Case”.’
• CEO Gary Morrison says ‘while the short term outlook for the travel industry remains extremely challenging, I remain confident that Hostelworld will emerge from the COVID-19 crisis stronger than before and be able to seize market opportunities when normal travel patterns resume.’
• Hoseasons is reported to have had its best day ever for sales on Tuesday. The company says ‘over the last few weeks we have seen volumes of enquires and bookings increase on a daily basis, as people begin to become more confident about booking a UK holiday.’
• Hoseasons was up 236% on the same day last year. Sykes Holiday Cottages also reports record levels of business.
• STR reports that the European hotel industry saw occupancy fall by 82% in May vs May last year with room rates down 34% and REVPAR some 88% lower.
• IATA has reiterated its view that quarantines will ‘keep many people unemployed.’
• Ground handler Swissport is to cut almost half its UK workforce. It will put around 4,500 people out of work. The Airport Operators Association has said that 20,000 airport jobs as a whole could be at risk.
• Moody’s reports that Travelodge’s CVA developments are ‘credit positive because they will strengthen the hotel chain’s balance sheet and reduce its cash burn rate.’ The landlords may be less keen.
• There has been an upsurge in Covid-19 cases in some US states. New York has announced a quarantine on visitors from some US hotspots. Europe is said to be considering a ban on US visitors.
Gyms complain that they are being treated unfairly, Beckham into eSports.
• Gym industry operators have said they are ‘extremely disappointed’ that they are not to be allowed to reopen on 4 July.
• The Times reports nonetheless that swimming pools and gyms could still be allowed to reopen later in July
• David Beckham is reported to be backing a new esports business, Guild Esports, that is aiming to raise £25m to expand into the market.
FINANCE & ECONOMICS:
• The International Monetary Fund has cut its estimate for global growth this year to minus 5%. It expects the UK economy to contract more than 10% this year.
• Sterling weaker at $1.2411 and €1.1032. Oil lower at $40.03. UK 10yr gilt yield down 1bp at 0.20%. World markets lower yesterday. London set to open around 20pts lower.
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 delayed N Brown Wines finals (for y/e Feb) have been released today and although every other Online retailer has been thriving during the lockdown, this home shopping company (which claims to be 90% digital) came close to going bust. The statement is headlined “Refreshed strategy to return N Brown to sustainable growth”, but last year’s results were poor, with revenue 6% down and adjusted PBT 29% down, and Q1 saw revenue 22% down, even though “trading has continued to improve from the sudden and significant decline experienced in March”. The CEO Steve Johnson says, nevertheless, that “we are confident we are taking the right actions to create a sustainable, profitable business for the long term which has the potential to generate significant value”.
Today’s Press: According to the Guardian press preview, the front pages of the papers today are a mixture of the growing pressure on the corrupt Housing Minister, Robert Jenrick, and the continuing summer heatwave. The Guardian itself splashes with “Jenrick under pressure to quit as Tory donor documents released”, whilst the Times runs with “Pressure mounts on minister” and the Daily Mail goes with “Cosy texts that damn minister”. The Telegraph carries a big picture of thousands thronging to the beach (as do the Mail and the FT), but their main headline is “Schools to scrap social distancing”. The FT’s main headline is “Brussels willing to compromise on ‘level playing field’ trade talks”, saying the EU is seeking a framework for the Brexit deal. In terms of Retail news, the main focus is on the bumper Naked Wines trading update, as well as the news that John Lewis has appointed Pippa
News Flow This Week: The highlight of this week for UK investors in the sector is the Tesco Q1 and AGM tomorrow, but in the US many investors will be following the Nike Q4 results after the close tonight (the consensus Q4 revenue estimate is $7.3bn, -c28% on last year).