Langton Capital – 2020-10-07 – PREMIUM – 10pm closing, more on RTN, Deliveroo, discounts & other:
10pm closing, more on RTN, Deliveroo, discounts & other:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
One of the less attractive things about being an adult is that you don’t laugh out loud as much as you did when you were a child.
You might find things amusing or even smirk nastily every now and again, but full-on guffaws are fairly rare meaning that, when I had occasion to laugh heartily a couple of times earlier this week, I remembered it.
Once was as a result of a direct mail on Linked In asking if Langton Capital had any need for private jet travel in the near future and the second was when I got a cold call from an Indian gentleman on an unknown number asking me if I had any debts and saying that he represented the International Debt Conciliatory Society.
Or some such but, as he didn’t know my name or which individual he wanted to talk to and then came up with a generic name that sounded more suitable to resolving the debt problems of a Brazil than a Brumby, I had to laugh out loud.
That threw the gentleman momentarily but, professional that he was, he was still wittering on about debt and bank codes and probably passwords and CVC numbers for credit cards and logon details as I put the phone down on him.
Sad really that resources should be put into at the least pestering and quite possibly trying to rob individuals 5,000 miles away.
But such is life and it’s time to move on to the news. Follow us for real time developments on Twitter at @brumbymark:
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FAMILIARITY BIAS: We’ve all heard that, to a hammer, everything’s a nail. But the rest of the world may disagree. Here we consider why that might be important. 6 Oct 2020:
• If you work in the world of cinemas, you might not be able to conceive of a world without them.
• The problem is that, sometimes, the rest of us can. Certainly, for a year or two.
• The same may go for cruise ships, events companies, festival organisers and the like.
• Some companies and industries have a tightrope to navigate. And alternative providers, such as Netflix, will be actively shaking the rope
• We would suggest that, whilst nearly every business model is being severely challenged by the Covid-19 pandemic, some are under much more pressure than others
• Bond has been postponed again and Cineworld has said that it is shutting its cinemas ‘temporarily’.
• Its shares fell by 36% on the news. Sky reports that a consortium of lenders have ‘parachuted in advisers for urgent talks on the company’s $8bn (£6.2bn) debt mountain.’
• It is likely that landlords are similarly concerned regarding the properties that they have leased to Cineworld
• Brutal though it is, staff will not be needed if films are not to be screened to paying customers and 45,000 employees will lose their jobs globally. Some 6,000 jobs will be lost in the UK
• Rival Odeon has said that it will open some of its units on weekends only but, given that major films were being postponed and customers were being asked to sit in darkened rooms, masked in order to protect themselves and others, how much of a surprise is this?
• There are alternatives out there.
• Certainly, it would be tough to replicate the ‘big screen atmosphere’ but, masked up and in the dark with a bunch of coughing strangers, one might ask ‘would you currently really want to?’
• Netflix has ‘broken’ some big films such as The Irishman and such a debut must be being considered by many of the studios
• For people who live and breathe cinemas (and who might be employed in senior positions therein), it may be hard to conceive of a couple of years without the product. For the rest of us, it’s not so hard
Cruise ships, major events, festivals and, to a lesser extent, airlines, tour operators, nightclubs and casinos:
• Pubs, restaurants, cafes, coffee shops, zoos, staycations, hotels and many other hospitality destinations are open
• But some aren’t.
• We won’t run through each product repetitively but, if there are rival products out there (staycations vs cruises, online gambling vs casinos etc.) it is perfectly possible that some business models will be challenged for quite some time
• What is inconceivable for the senior employee (at an airline, casino, events company etc.) could be perfectly conceivable for virtually everybody else
• If sites, aircraft, nightclubs or whatever are dependent on large numbers of tightly packed or locked in customers, this might not be their year
• There must, one might fondly hope, have been some prioritisation when sites have been kept open or obliged to remain closed
• Sites should be a) less dangerous and b) more socially useful. Perhaps think bingo vs casinos.
• Perhaps some industries, which may have lived by the sword but aren’t keen to die by the sword, should be and will be supported
• But money is finite and, if Mr Sunak is to be believed when he says a Tory government will always balance the books, there may be a reluctance to spend more taxpayers’ money on industrial support
• All of which suggests that the risk premium in some industries was perhaps underestimated over recent decades – but that’s an academic argument and of little comfort to struggling operators in the short term
RESTAURANT GROUP H1 CONFERENCE CALL & PRESENTATION:
Following the announcement of its H1 results, the Restaurant Group hosted an online meeting for analysts and our comments thereon are set out below:
The lockdown & reopening:
• The group shut down its businesses & cut costs. This led to a working capital outflow.
• The group has been materially re-shaped. Airport location numbers will be around halved. The co says these sites should contribute perhaps 80% of division sales & EBITDA
• 100% of pubs are open. Wagamama and Leisure are 90% open but Concessions are only 40% open. LfLs are +14%, +11%, +4% and minus 58% respectively.
• The Leisure Division CVA came in H2.
• Net debt rose by £25m to £311m at H1 end. The group has raised equity, increased debt, extended the Wagamama bond and has accrued payments re VAT
• There are £172.2m of exceptional costs. Cash costs were only £6.5m. There will be an exceptional credit of £117.5m in H2 due to the removal of lease liabilities on exited sites
• Key points. The business has been re-shaped. It is now ‘well-positioned’. And short term trading is ‘extremely encouraging’.
• This has been a ‘brutal period’.
Recent trading & outlook:
• Around half of sites now have some form of turnover rent. Some of these agreements run to June 2022. Concessions sites are permanently revenue-based. Supply has been reduced and further cuts are likely. More labour is available.
• Delivery has grown materially at +66% at Wagamama and +162% in the Leisure Division. This should grow further. There are no targets being set ‘as this could influence behaviour’. In the case of a second lockdown, the co would keep a larger proportion of its estate open
• Regionally, London is very poor. LfL sales are down 24% for Wagamama, down 68% for Leisure sites and down 38% for Brunning & Price
• Re concessions, passenger numbers are down by 70%. The group does not see a recovery until H2 last year ‘at the earliest’. Some 16 sites are open & LfL sales are down 58%.
• The outlook is still ‘hugely challenging’. Capacity is down. The estate is higher quality. Recent trading has been ‘very encouraging’.
• Xmas will be ‘different’. There will be no big groups. But the company is hopeful.
• The recent rule of six, 10pm and regional restrictions have moved the dial to the left. Restaurants are running at minus 10% to minus 15% across the industry as a whole
• Cash burn in the case of a 2wk lockdown? Around £4m. If the lockdown were longer, it may be £3m per month.
• Group now has four pillars and is ‘well-positioned to deliver…’ The group is now ‘well-balanced’. The group should be capable of contributing between £110m and £125m of EBITDA. This is not a forecast, rather illustrative.
o Is this taking into account a resumption of business rates? Yes, in Q2 next year.
• Delivery will grow further (‘significant further penetration…’), supply is reduced and costs are reduced (labour, site costs)
• What level of LfL do you need to remain cash flow positive? Won’t give a figure but say this has been achieved since reopening.
• What margin are you targeting? Higher ex the tail.
• Net of all cost delivery margin is similar to dine-in. Less labour, more delivery costs.
• Working capital inflow in H2? Some of the £46m outflow in H1 should come back in (but not all of it as this is a smaller business).
• Cash exceptional costs should be around £20m (redundancy and reopening costs). In 2021 there will be some business rates liability re closed sites
• The 10pm curfew does not have a material impact. But there has been a change in confidence. There has been a ‘general softening’.
• Discounting? The market ‘has been quite disciplined’. There is less discounting overall.
• Exposure to cinemas? Around 20% of leisure estate overlaps with a Cineworld site. Cinema takings were already ‘down 90%’. Maybe a missed opportunity rather than a direct hit. Around 150 sites are co-located with cinemas.
• Cost inflation? Labour costs should moderate.
• Impact of social distancing? Leisure coped ‘relatively easily’. Pubs have used their outdoor space. This will be less easy. Wagamama is coping as its previously very busy sites, Central London, are less busy. Concessions are not busy.
• RTN has squeezed several years’ worth of evolution crammed into a few months.
• The outlook remains extremely challenging.
• But, with reduced capacity, potentially lower costs and assuming a slow return of consumer confidence, the company is, as it says, relatively well-positioned.
• There are hurdles. VAT should rise from 5% to 20% at the end of Q1 next year and business rates are scheduled to return. Accrued VAT will need to be paid (along with other delayed costs) and unemployment could impact demand.
• An investment in this space is not without risk. These, however, are industry-wide issues.
PUBS & RESTAURANTS:
The 10pm curfew:
• UK Hospitality has told MPs that more than half a million pub, bar and restaurant workers will lose their jobs by the end of the year, largely due to the 10pm curfew, local lockdowns and declining consumer confidence.
• UKH CEO Kate Nicholls says 900,000 hospitality workers remain on furlough. It believes that 560k workers in general, both those currently furloughed and some that are working, will lose their jobs.
• Ms Nicholls told the Commons Treasury Committee yesterday ‘we are doing that data again but we anticipate it will be far higher due to local restrictions, the national constraints on events, working from home and the curfew.’ The furlough scheme ends this month.
• UKH maintains ‘we fear that unless there are amendments for those areas which are particularly hit, you won’t avoid the cliff edge in October and we have got large numbers of redundancies that are forecast in October because of how the jobs support scheme is set up.’ It says that some city centre bars are running at 20% or 30% of normal revenues.
• Ms Nicholls says ’there is a very real danger that we will lose large chunks of the economy – in hospitality we will have insolvent businesses, businesses going into administration and therefore that engine of growth for re-employing people will be lost for good.’
• The Labour Party, some backbench Tories, trade bodies and a large number of operators are demanding that the 10pm curfew be reviewed. It means that last orders will need to be called around 9.30pm and buses, tubes and taxi ranks are unnecessarily busy.
• MPs will debate the 10pm curfew tonight with hospitality sector bodies questioning the scientific logic behind the rule and its effectiveness. Trade bodies and operators are almost uniformly opposed to the 10pm closure rule. Tim Martin, chairman of JD Wetherspoon, has called it ‘utterly stupid’. He says ‘other jargon-filled government initiatives such as the rule of six, circuit-breakers, curfews and lockdowns are doomed to fail.’
• Marston’s CEO Ralph Findlay says ‘it’s easy for government and academics to point the finger at hospitality and to be seen to be doing something, even if what that something is has got questionable benefit.’ Chancellor Rishi Sunak has asked, if the EOTHO scheme was a super-spreader, why are there higher rates of Covid-19 in the north than the south.
• The Telegraph quotes supporters such as Aberdeen University’s Professor Hugh Pennington as saying in a rather lukewarm fashion ‘if you limit the amount of trade that a pub is doing rather than closing them all together, you would hope that will help to reduce transmission. Of course, I suppose you could say, the more drunk somebody gets the less likely they are to do social distancing.’
• The problem is that the 10pm closure does not necessarily limit drunkenness. It may simply push it out onto the street and off-licenses at 10pm and thereafter into people’s private houses.
• Hawksmoor says ‘the choice is clear; is the preference for people to socialise in regulated, Covid-secure spaces where abiding by the rules is a condition of entry, or in private unregulated spaces where checks on adherence are impossible?’ JDW boss Tim Martin says ‘let’s hope MPs consign Boris Johnson’s surreal moonshots and vain attempts to defeat the virus to the dustbin.’ Tory MP Steve Baker is a little more restrained when he calls the 10pm curfew ‘poorly evidenced’.
• Sky reports that a number of small restaurants are accusing Deliveroo of unfairness and claim the delivery app is charging some large chain restaurants significantly lower commission rates than many small independent partners. Deliveroo is looking to float its shares next year.
• M&B brands Sizzling Pub, Vintage, Ember Inns, Harvester and others are reminding would-be customers via Vouchercodes.co.uk that they offering 50% off mains today.
• New West End has reported that West End footfall was down 6% week-on-week on Monday. Single days will be impacted by the weather. Footfall compared to the same day last year was down 55%.
• LfL Restaurant Group numbers, very good at the headline level, will have benefited from a) keeping much of the reduction in VAT from 20% to 5% and putting the difference through as sales, b) opening much of the estate in August rather than July & hence taking much of the EOTHO comps and not those in July and c) from a very material rise in delivery (up 162% in Leisure and up 66% at Wagamama). We would still concur with the group’s view that these were encouraging numbers.
• Social Entertainment Ventures, which operates ping pong and darts operations including Flight Club in London and Chicago, has reported numbers to end-September 2019, all pre-Covid-19, to Companies’ House.
• The company says that it generated revenues of £19.1m in the year (up 27.1%) and produced adjusted EBITDA of £1.8m (2018: £1.3m). The company produced an operating loss of £6k (2018: loss £1.5m) and an after tax loss of £1.3m (2018: loss £1.5m). The company has shareholders’ funds of £4.1m and an accumulated profit of £869k since incorporation.
• Stonegate Pub Company has announced a drink give away through its We Love Sport app to celebrate the new football season.
• Chocolate drinks specialist Knoops has announced the opening of its second London site later this month.
HOTELS & LEISURE TRAVEL:
• Jet2holidays has extended the suspension of holidays to the Canary Islands until October 31.
• IATA has warned that the airline industry could ‘burn through’ around £66bn in losses next year.
• Odeon cinema group is cutting opening hours and opening some only at weekends due to low demand. PM Boris Johnson has said he would ‘encourage people to go out to the cinema, enjoy themselves and support.’ He said much the same about Eat Out to Help Out only to say, a month later, that it had contributed to the spread of Covid-19, a statement denied by his chancellor, Rishi Sunak.
• The Gym Group has announced that it has signed a 15-year lease for a new gym in York which will open in Q1 2021. The company says ‘York is a City where we have wanted to operate in for a long time, but until now we have not been able to find the right site in the right location with the appropriate deal. In agreeing this lease, we have benefited from the rapidly changing dynamics of the retail property market.’ It says ‘as we continue to expand we look forward to extending our high quality, affordable experience to thousands of new members at a time when fitness has become ever more important in all our lives.’
FINANCE & MARKETS:
• PM Boris Johnson has spoken to the virtual Tory Party Conference and said that Covid-19 has not ‘robbed me of my mojo’. He told Andrew Marr on Sunday that he was as fit as several butchers’ dogs.
• The IMF has said that the global economy is in ‘less dire’ shape than it was earlier this year. It now faces a ‘long, uneven and uncertain’ road to recovery.
• Sterling weaker at $1.2885 and €1.0984. Oil up at $42.15. UK 10yr gilt yield unchanged at 0.29%. World markets mixed yesterday with London set to open around flat on yesterday’s close.
RETAIL WITH NICK BUBB:
Tesco: Today’s interims (for the 26 weeks to Aug 29th) are the first to be presided over by the new Tesco CEO Ken Murphy and, ahead of the 9am analysts webcast, he makes the ritual comment that “Tesco is a great business with many strategic advantages. I’m excited by the range of opportunities we have to use those advantages to create further value for our customers and, in doing so, create value for all of our other stakeholders”. The overall results are marred by losses in Tesco Bank, but Retail operating profit was up c4% and Tesco has said that the full year Retail profit will be at least flat, although there is not a lot of comment about current trading or the outlook. The big news is that Tesco has announced that its new CFO will be Imran Nawaz (aka Imran who?), an experienced CFO in the Food manufacturing world, via Tate & Lyle and Mondelez, but unknown to the retail
Today’s Other News: Today also brings the Frasers Group AGM (at 11am at HQ in Shirebrook, rather than in the London offices of the company), together with the Just Eat EGM to approve its acquisition of Grubhub in the US. And ahead of the Frasers AGM, the company has chosen to issue an announcement urging shareholders to vote in favour of a staff bonus scheme that could be worth in excess of £100m if the share price stays above £10 for a 30 day period during the next 4 years. It is unclear why the hapless Frasers has not provided details of this scheme before or whether the result of the vote is in doubt, assuming most big shareholders will have already voted by proxy…