Langton Capital – 2020-07-22 – PREMIUM – Britvic, Nichols, increased debt, current trading & other:
Britvic, Nichols, increased debt, current trading & other:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
Pushed for time again this morning.
Yesterday, frustratingly, we produced the email as normal but the ‘send’ button stuck. Or, just perhaps, we forgot to press it. These things happen.
Anyway, we’re away for a fortnight from the end of this week. The Dales and the Deep South. i.e. Lincolnshire, beckon, where we’ll be seeking to do our bit to keep the tills of the nation’s pubs singing. We’ll send the odd tweet. The email will be out as normal tomorrow and Friday. On to the news:
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A ROSE BY ANY OTHER NAME (IN REVERSE): Is the policy to defer problems including creditor payments into next year giving some businesses enough rope to hang themselves? 22 July 2020:
• Bleak comment alert.
• If sacking people is repositioning assets and the unemployed are transitioning human capital, then surely loading up balance sheets with more and more debt should be rebadged as well?
• The HMRC VAT creditor, the begrudging landlord debt, duty payments & other commercial suppliers that you owe money to could become stakeholders or partners rather than creditors?
Some of the detail:
• But enough of the semantics. Some (in fact many) leisure companies have issued more equity, but an even larger number have taken on more debt.
• Some of this debt is from banks but much of it is not interest-bearing in that it represents money owed to suppliers, landlords and the VAT authorities.
• We ran a number of stories earlier in the pandemic entitled ‘Have Money, Keep Money’ suggesting that, wherever the money was when the music stopped, that’s where it stayed.
• This (helped by legal threats, government help and the passage of time) has loosened up a little – but money is still not flowing as normal.
• Witness the reluctance in the holiday industry to give deposits back to disappointed would-be holidaymakers rather than vouchers (which is simply debt – or working capital liabilities – by any other name)
• We consider a few new debt lines below. The furlough payments & rates deferral will not be repayable.
VAT & Duty deferrals:
• One quarter’s VAT can be postponed until the middle of next year. For most operators, this will have been calendar Q1.
• There won’t have been much VAT to defer in Q2.
• If a company has gross margins of c70%, an EBITDA margin of 15% and it reclaims input VAT on all of its costs except labour, rent & rates, then a quarter’s VAT payable deferred should add up to around 3% or so of annual turnover
• There are complications, of course (there is output VAT charged on food but no input VAT to reclaim, there can be VAT on rent etc) but the point is that the VAT deferral could be equivalent to a short term loan of 3% of revenues.
• For companies with a billion in revenues, that’s £30m.
• Duty will only be applicable to the brewers, but its deferral will add up to another not inconsiderable sum
• See below for the sorts of proportions of Q2 (payable March) and Q3 (payable June) rents that have been paid
• Unless they have been forgiven by landlords, these are liabilities rather than gifts.
• Rent may be 10% of revenue for smaller, busy venues but could be double that for large sites where the landlord has been able to use the competition to occupy to focus on the absolute EBITDA that the operator will make from the site, even after a humungous rent bill has been paid
• So, let’s say 16% of revenues or 4% a quarter. Many operators have not paid Q2 or Q3 and they have thus added another 8% of revenue, so far, to their debt pile
• Although much of this is guaranteed by government, it isn’t meant to be a gift.
• Some have suggested that offering more debt to a strapped company, whose revenues have collapsed, and which has taken on more VAT and Landlord debt is 1) not addressing the fundamental problem and, worse, 2) could be akin to offering rope to a person plagued by dark thoughts
• The City UK’s Recapitalisation Group has suggested that there may be unsustainable taxpayer-guaranteed loans of up to £36bn already in the system
• Sky reported recently that it had learnt that a group set up to work out how to recapitalise swathes of UK plc in the wake of the crisis will suggest that emergency schemes launched by the Treasury could result in the vast bad debt burden accruing in 2021.
• The report says that between £97bn and £107bn of bad debt could end up on the balance sheets of British companies.
• That’s perhaps a problem for tomorrow. But there are suggestions that some loans could have to be written off, much as student loans are – although only after they have hung around the neck of the afflicted student for several decade
• ‘If left unresolved, these levels of unsustainable debt could inhibit employment, research and development, investment and ultimately a smooth economic recovery back to growth,” the Recapitalisation Group said in a letter to Andrew Bailey, the Bank of England governor.
• The Group also said the short term measure ‘was absolutely the right thing to do, but it means the job is not yet done.’ It says ‘the economy will need to be reawakened as part of its process of recovery.’ This is now underway.
• The taxpayer, ultimately, could end up footing the bill. Arguably the purpose of the loans was to keep wheels turning and, for a while at least, they have succeeded in that aim.
PUB & RESTAURANT NEWS:
Covid – the new (ab)normal:
• The NPD Group maintains that there is ‘clear evidence of a slow but encouraging recovery in the British out-of-home foodservice market.’ It says ‘weekly spend to the end of week 28 (Sunday July 12th) recovered to 50% of the levels seen before the COVID-19 lockdown. That represents an improvement of 30 percentage points since lockdown in late March.’
• Dinner is showing the strongest recovery with weekly spend now at almost two-thirds (64%) of pre-lockdown levels. The low point in late March was 29%. Delivery is still 60% higher in spend terms than it was before the lockdown.
• NPD says ‘while this data on spending shows evidence of some recovery in British foodservice, it is not clear if this reflects the start of a sustainable improvement or the short-term satisfaction of pent-up demand following relaxation measures.’ NPD goes on to say that ‘activity is on the increase at weekends as people grasp the opportunity to socialize. In the three weeks since the end of June, weekend spend has doubled from 29% of pre-lockdown to 57%.’ Younger consumers are returning to ‘normal’ more quickly than their older peers.
• NPD still says, however, that ‘the gap between eating out in a foodservice venue and buying prepared food to eat at home is still wide, indicating reluctance among some consumers to eat or drink inside foodservice establishments.’ There is plenty of work still to be done. Treats are on the up. NPD says ‘treating could be an indication that consumers have grown impatient with lockdown and the restrictions associated with it. Operators can tap into this desire for a personal or family treat by offering choice or value to encourage repeat visits.’
• Staycations should provide a boost as it means there will be more customers for the foodservice industry remaining in the UK. NPD says ‘the ‘Eat Out to Help Out’ scheme might boost visits, but its short-term validity won’t allow it to have a big impact. However, the VAT tax cut from 20% to 5% that applies to hospitality and tourism until January 2021 means that with prices already falling it’s likely to provide much-needed stimulus as operators pass on lower prices to consumers.’ Our feedback has suggested that most of the VAT cut will remain in tills for the short term at least.
• The Hospitality Professionals’ Association reports that almost a third of hospitality businesses that reopened on 4th July have reported ‘better than expected’ revenue. However, expectations must have been rather low as HOSPA says 67% of operators still said that revenues were running at less than a half of last year’s level.
• HOSPA CEO Jane Pendlebury says ‘looking at the results of our survey, whilst revenues are down considerably, a big plus is that such a large proportion seemed to fare better than initially expected.’ She continues ‘we really can’t understate the impact of the pandemic on the hospitality industry. Revenues have been decimated in the past few months, but we’re keen to look for any positives. And whilst we’re set for ongoing difficulties for some time to come, the fact that some have seen better than anticipated trade is certainly good to hear. With safety measures (so far) seeming to work, and guests (so far) seeming to abide by them, we’re hoping that, as an industry, we can build on this initial positivity to try and bounce back – with recent government initiatives also helping us in this.’
• Small Brewer relief
• The government has said that it remains committed to Small Business Brewer Relief. It has recommitted to review Alcohol Duty and it will review business rates. The above measures have been broadly welcomed by hospitality operators.
• Small Brewer Relief – The BBPA has welcomed the extension saying that ‘the purpose of SBR, which is now worth £75 million to small brewers, is to compensate for diseconomies of scale and it also ensures a huge choice of great beers for Britain’s beer drinkers.’
• SIBA, on the other hand, whose members are arguably disadvantaged by smaller brewers snapping at their heels having to pass on less in duty to customers under proposed changes, says ‘we are hugely disappointed that the Government has today decided to reduce the threshold at which Small Brewers Duty Relief starts to taper from 5000hl of annual production to 2,100hl. SIBA has consistently argued that no brewery should lose any relief as the result of any reform.’
• The Treasury has said that ‘a technical consultation will be brought forward in the Autumn’
• Alcohol duty review: The BBPA says it will respond to the Alcohol Duty Review announcement. It adds ‘confirmation that the wider Alcohol Duty Review is expected in September is welcome. The BBPA will be responding to the review to highlight the case for further support for brewing and pubs for what is a world-renowned British industry supporting 900,000 jobs, contributing £23 billion to the economy and playing a key role in communities throughout the UK.’
• Here UKH says ‘the acknowledgement that the current alcohol duty system needs reforming in order to support the sector is also a positive development.’ SIBA comments ‘the forthcoming alcohol review presents a long awaited opportunity to fully assess and address the inconsistencies within the duty system, such as why global companies can pay a lower rate of duty on cider than the smallest independent brewer does on equivalent strength beer.’
• Business rates review:
• There is virtual unanimity here with the BBPA saying it ‘welcomed the announcement of a Business Rates Review’ adding ‘pubs pay 2.8% of the entire business rates bill, despite accounting for just 0.5% of business turnover and pay more rates as a percentage of sales than any other sector, meaning reform for business rates has long been needed to support Britain’s pubs. Clarity that the next revaluation will now take place in 2023 is also welcome.’
• UK Hospitality has welcomed the Government’s call for evidence for business rates reform. CEO Kate Nicholls says ‘securing a full review of the business rates system has been a priority for UK Hospitality and its predecessor trade bodies for years. We identified it as the largest barrier to growth in our sector years ago. We have pushed extremely hard to convince the Government to act on this, so it is great to finally see positive action.’
• It says ‘with rateable values therefore staying high for longer, the need for an extension of the business rates holiday is more acute. The holiday has been a hugely valuable lifeline for hospitality businesses, and we need the Government to extend it for another year to give the sector the extra degree of flexibility it needs to get back on its feet.’
• SIBA comments ‘we welcome the Government’s fundamental review of business rates which we hope will lead to a radical and wholesale change in the way pubs and breweries pay.’ The BII adds ‘a continuation of the Business Rates holiday to April 2022, is essential to ensure their businesses survive for long enough to achieve their full potential across all of these areas’ and CAMRA says ‘we hope the Government will act to change the Business Rates system in England, which penalises pubs and fails to recognise their valuable role as community hubs which are vital in tackling loneliness and social isolation.’
• The latest Customer Sentiment Tracker from Feed It Back and KAM Media suggests that scores are rising, this being ‘mainly driven by the casual dining and casual premium segments. Both segments saw a 10-point increase compared with last week. Pubs are also delivering strong scores.’
• KAM says ‘overall the KPIs are going in the right direction suggesting that operators are really listening to customers and offering them a great and safe experience. However, operators need to work with staff to ensure they don’t become complacent over the next few weeks. New and nervous customers are slowly returning to venues and they need to be 100% re-assured at every point in the experience.’
• Wine America has said that sales in the off trade are ‘more than making up for the loss of restaurant sales’.
• Footfall levelling off too soon?
• Wireless Social reports that its ‘footfall tracker has seen a slight growth in the amount of people on the streets, however there has been a smaller increase compared to the previous few weeks.’ It says ‘English city centres grew by on average a couple of percent, with footfall on Sundays for the majority increasing faster than the Saturdays. Liverpool on Sunday was the closest we have seen compared to the February average with it being 41% behind the benchmark date.’
• If the growth in footfall is going to level off anywhere near here, then there will be more High Street closures to come. Hopefully, this just represents an anomaly or just a slight change in the gradient of the recovery.
• Wireless Social says ‘with Scottish hospitality starting to reopen, we have seen a bigger jump in Glasgow and Edinburgh, with Glasgow’s footfall on Saturday increasing by a huge 16% and Edinburgh by 9%. Cardiff’s footfall grew but at a slower rate.’ Oxford Street in London is reportedly showing little change over the week before. Wireless Social says ‘the West End’s usual footfall drivers of tourism and theatres and entertainment are still waiting for a return.’
• Capital & Counties, which owns a large number of assets in the Covent Garden area, has reported a £400m reduction in the estimated value of its estate over the last six months. Only 44 per cent of rent for the second quarter has been collected (due end-March) and 27 per cent for the third quarter (due at the end of June).
• Capital & Counties has agreed to some rent holidays and deferrals for certain tenants. It has allowed some rents to be linked to turnover.
• Meanwhile, property owner Shaftesbury has said that it is to pedestrianise the Seven Dials junction in the West End in partnership with Camden Council in order to help drive trade. From August 3, the roads in Seven Dials will be closed to traffic from 10am to 6pm.
• Britvic has updated on Q3 trading saying that it is reporting ‘year-to-date revenue of £1,027.7m, a decline of 5.1% on last year, while Q3 revenue declined 16.3% to £328.9m.’
• Britvic says ‘as anticipated, and previously communicated in our interim results, Covid-19 has impacted performance. Significant declines in Out-of-Home consumption were partly offset by strong growth in At-Home consumption, resulting in market value share gains across our business units.’
• Britvic says ‘in March we estimated the impact of full Covid-19 restrictions on adjusted EBIT in 2020 at between £12m to £18m per month, net of mitigating actions. As we entered the crucial summer trading period lockdown restrictions started to ease and the hospitality industry has gradually begun to re-open. It is however too early to judge the impact this will have on the business; we therefore maintain our previously estimated monthly impact of full Covid-19 restrictions on adjusted EBIT.’
• CEO Simon Litherland says ‘as expected, Q3 demonstrates the full market impact of the Covid-19 lockdown.’ He says ‘I am confident that the strong momentum we built up going into the pandemic will return, and that our long-term strategy will continue to create value for all our stakeholders.’
• Nichols has reported H1 numbers saying that it has seen ‘strong Vimto brand growth and resilient cash performance through an unprecedented period.’ Revenue is £59.2m, down 17.3% and PBT is £2.9m against £13.3m in the prior year. EPS is 4.6p vs 29.6p and the interim dividend is 280 against 12.4p last year as the dividend has been reinstated. The company has said that there is ‘continued uncertainty for H2’ and it is still not giving guidance. The company says Andrew Milne (current COO) will succeed Marnie Millard OBE as CEO from 1 January 2021.
• Chairman John Nichols says ‘in light of the ongoing impact to the financial results of the Group due to the global pandemic, the Board remains pleased with the Group’s performance. Although the immediate future remains uncertain, we are confident in Nichols’ ability to emerge from this period well-placed to continue to deliver the Group’s long-term strategic plan.’
• Nichols says that, since it withdrew its final dividend of 28p, it has decided to reinstate it. It says ‘any final dividend proposal (February 2021) will be in line with our dividend policy and be based on the two years financial performance adjusted for payments already made.’ It concludes ‘despite the short-term impact to the financial performance of the Group as a result of the global pandemic, we remain confident in Nichols’ ability to emerge from this period well-placed to continue to deliver the Group’s long-term strategic plans.’
• Wagamama is to permanently close two sites in London. Overall, CEO Emma Woods says ‘we are committed to preserving our restaurant estate and protecting jobs and are having constructive discussions with all of our landlords to ensure the rental structure over the next 18 months reflects the unique situation we are all in as we begin reopening and rebuilding the business.’
• Stonegate is also replicating Chancellor Rishi Sunak’s Eat Out to Help Out scheme ahead of its official introduction next month. The company is offering customers half price on food, up to a maximum discount of £10 per head, Mondays to Wednesdays this month.
• Papa John’s is opening three new stores to take its total in the UK to more than 450 units.
• Morrison’s has launched meal kits comprising £30 recipe boxes.
• Snack brand Boundless has raised £1m to fund international growth
• LinkedIn is to cut 960 jobs, some in the UK, on the back of a slump in recruitment volumes.
• Kantar reports that demand for tea, coffee, biscuit and reading materials has risen during lockdown.
• The British Chambers of Commerce says that UK firms are only operating at around half of their pre-virus levels. It says they are at 53% of capacity. The BCC called for tax cuts to help businesses recover. Director General Adam Marshall says ‘our findings demonstrate that the UK’s economic restart is still very much in first gear.’ This will impact employment levels over time.
• Property agency Shelley Sandzer and advisory firm Gerald Edelman have announced the creation of a new business, Shelley Sandzer Corporate Finance (SSCF). The parties say ‘the venture will bring together the companies’ respective expertise in property and finance to provide F&B operators with a full spectrum of services to help maximise their growth.’
HOLIDAYS & LEISURE TRAVEL:
• Travelodge points to a domestic holiday boom saying that 55% of the people it surveyed intend to take a UK break. Some 70% of would-be holidaymakers are not keen to travel abroad in current conditions.
• Demand is apparent for short breaks, traditional holiday locations and city breaks. Some 44% intend to stay at a seaside resort, 32% will holiday in the countryside and 23% are planning a city break. Travelodge says the results show ‘a glimmer of green shoots for our tourism industry with Britons planning to holiday across the length and breadth of the UK this summer.’
• Abercrombie & Kent is consulting with staff over redundancies.
• Hotel.com offering 8% off booking prices.
• The US hotel industry saw occupancy down 43% in June compared with the same month a year ago. Rates are down 32% and REVPAR is some 61% lower.
• Virus not read the script (it’s like a miracle, it will disappear’ – per guess who) as US air travel volumes fell last week after 12 consecutive weeks of growth, reports CNN.
• GVC’s shares closed down 12% yesterday on the back of the company’s announcement that HMRC was to investigate its Turkish-facing business (which was disposed of in December 2017).
• Escape Hunt has announced the release of a downloadable game, Doctor Who: The Hollow Planet.
• Snap has reported that ad sales have begun to bounce back in July.
FINANCE & ECONOMICS:
• UK government borrowing totalled a record £127.9bn in Q3 this year. That is more than double the amount borrowed in the whole of financial 2019/20.
• June borrowing was down on May – but it was still the third highest monthly total recorded.
• Data from HMRC shows property transaction volumes down 31.5% in June versus a year ago (but up by 50% on May’s even lower total).
• US Secretary of State Mike Pompeo has congratulated the UK on dropping Huawei & says he hopes a trade deal can be agreed between the UK & the US in a timely fashion.
• Russia report (unlike a similar investigation in the US) did not look into electoral interference.
• Former cabinet minister Amber Rudd has said that PM Boris Johnson is ‘more comfortable with men’ and says that this has resulted in ‘poor decision making’. Full interview in the FT.
• Sterling stronger at $1.2718 but down vs Euro at €1.1023. Oil up at $43.97. UK 10yr gilt yield down 1bp at 0.14%. World markets broadly higher yesterday but Far East lower in Wednesday trade & London set to open down around 20pts as at 7am.
START THE DAY WITH A SONG:
The song has been furloughed. See you on the other side.
RETAIL WITH NICK BUBB:
Today’s News: It is only a month or so since Kingfisher put out a detailed and bullish trading update, but it has elected to make another one today, confirming that store and Online sales have remained very strong. With 2 weeks to go of Q2, LFL sales are still running over 20% up (with Online sales c200% up) and the company has said that it now expects H1 profits to be ahead of last year, despite the lockdown in March/April. Amazingly, Kingfisher has backed this up with detailed country-by-country weekly sales figures for June and July and trading is strong across the board, with, for example, LFL sales up 20% in the UK last week and up 27% in France!
Grocery Market Share Watch: The latest monthly Kantar grocery market share figures (for the 4/12 weeks to July 11th/12th) came out at c8am yesterday morning and the Kantar overview was headlined “Grocery sales reach new high as shoppers remain cautious”, flagging, inter alia, that take-home Grocery sales increased by 14.6% in the last 4 weeks (down from 18.9% in the previous 4 weeks, food price inflation rate has dipped from 4.0% to 3.6%. Kantar also highlighted that Online sales have remained strong, up by 92% in the last 4 weeks, but consumers have become slightly less reliant on convenience stores.
News Flow This Week: The Howden interims are out tomorrow, whilst the Kingfisher AGM and the trading update from Hotel Chocolat are on Friday, along with the widely followed monthly GFK Consumer Confidence index and the ONS Retail Sales figures for June. And it’s worth noting that the hapless Frasers Group (aka Sports Direct) is due to announce its finals soon and that we are still waiting for the delayed McColl’s interims.