Langton Capital – 2021-01-07 – PREMIUM – M&B Q1 and potential fund raise, UK services, cruise ships etc.:
M&B Q1 and potential fund raise, UK services, cruise ships etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
Having studied economics at an august university to degree level, I continue to stun myself (and all those within hearing distance of my conversations) by how little I know.
However, I would argue in my defence that complete knowledge is an illusion.
And anyone who thinks that they ‘know’ economics is simply on the path to knowing that they don’t know it. Meaning that, as I already know that I don’t know anything, I know more than those who don’t even know how much they don’t know.
Here’s a worked example that might illustrate just how tricky some problems are.
• I might offer to pay you £1bn to hop on one leg for thirty seconds.
• But only if you agree to pay me £1bn for frantically blinking my eyes for the same length of time.
• We both honour our obligations. GDP rises by £2bn, we both have mild repetitive strain injuries and, though we are waving our GDP around like a happy flag, there is no cash to be seen anywhere.
• The government then tries to force its nose into the trough and demands some tax.
• However, as both parties here have effectively broken even, there’s no tax to pay and, even if there was, there’s no money to pay it with.
We could even jigger around with payment dates and demand a tax rebate on the £1bn loss whilst deferring the £1bn on income and it’s at this point you begin to realise that, alongside lawyers, the accountants out there will never be short of work.
More thoughts along those and similar lines in the short book what we wrote. Spoiler – it’s a thriller not a textbook. Available HERE and Kindle on Amazon. On to the news:
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MITCHELLS & BUTLERS Q1 TRADING UPDATE:
Mitchells & Butlers has this morning updated on trading for its Q1. It also reports that it is considering an equity raise and our comments are set out below:
Potential equity raise:
• M&B reports that it ‘has cash balances on hand of £125m, with all facilities drawn.’
• It says ‘with no sites trading, ongoing monthly cash burn has returned to the level previously disclosed in relation to the last shutdown, at approximately £35m to £40m before payment of debt service (representing interest and amortisation) of £50m per quarter.’
• It adds that ‘the next quarter payment date for debt service is 15 March 2021’ – this implies that things are getting very tight
• M&B adds that ‘it is not possible to estimate with any confidence what restrictions on our ability to trade lie ahead of us and for how long. As a result, the directors believe it is prudent to explore an equity capital raise, to give the group increased financial and operational flexibility.’
• The company says ‘no decision has yet been made with regards to the timing, size, or terms of any such equity capital raise.’ It adds ‘the Board, which includes representatives of the major shareholders, is unanimous in its support for these actions being taken.’
• The read-across for the rest of the industry is limited. At M&B, clearly things are tight and, with an open-ended lockdown, M&B is right to explore all options.
• Many companies in the sector have either raised equity (JD Wetherspoon, Luminar, Restaurant Group, Revolution Bars & others) or made material capital transactions for cash (such as Marston’s cash-creative establishment of the Carlsberg Marston’s Beer Company)
• M&B was an outlier here. It might have been able to trade through the pandemic without access to equity but Lockdown II and III have made this more challenging
• Given the nature of its share register (large holdings held by Joe Lewis and two Irish investors), a raise was both easier to communicate but perhaps harder to enact than it would have been at other companies
• There aren’t many headline numbers to talk about. M&B reports that tighter and tighter restrictions have been imposed over the last couple of months.
• The company says ‘over the period, progressively tighter restrictions were imposed through December both across the UK and in Germany resulting in an ever smaller number of sites open and significantly reduced sales activity being possible through the important festive trading season.’
• It adds ‘since the UK government announcement reallocating regions in England between tiers, on 30th December 2020, we have had no sites open.’
• M&B says ‘across the whole of the first quarter total sales were 67.1% below prior year. On a like-for-like basis (for sites when open, excluding periods of closure) trading has been 30.1% down on prior year across this period.’
• The company says ‘throughout, we have again reduced discretionary capital expenditure and operating costs to a minimum.’
Other comment & Outlook:
• Mitchells & Butlers’ CEO Phil Urban says ‘we are now in a third national lockdown’ and adds ‘the Job Retention Scheme is temporarily protecting some employment but there is a real and pressing need for support for businesses themselves if we are to return to being the vibrant sector and important employers that we were.’
• He says ‘Mitchells & Butlers was a high performing business going into the pandemic and with the support of our main stakeholders I have every confidence that we can emerge in a strong competitive position once the current restrictions on us are lifted.’
• There has been some speculation as to whether M&B would require additional equity. The company has now confirmed that a fund raise is being considered.
• This is unsurprising and the read across for the rest of the sector (see above) is somewhat limited as most listed companies have taken action of some sort already.
• M&B’s shares rose sharply on the news that vaccines were to become available and that there were realistic hopes that the most vulnerable in society would be inoculated during the first few months of this year.
• The company has since seen most of its pubs slide into Tier Three (if not already there) and then Tier Four and now into Lockdown 3.0. This is a sector-wide issue.
• The potential fund raise, which is more likely than not in our opinion given the cash requirements over the coming months, could unsettle the shares. There will be some concern as to whether or not the major shareholders will be able to ‘stand their corner’ or whether the share raise will need to be supported by outside investors.
• As we have commented earlier, the group’s share register and its dividend policy arguably require a bit of work. We commented at the time of the final results that ‘there are some observers who say that it will require capital’. There was no mention of this at that time but further lockdowns have brought the issue to the fore.
• There can be no meaningful guidance as to future trading at this time.
• The group has strong asset-backing and, though it has been impacted by Covid-19 along with the rest of the industry, it is better-positioned than many to recover – although it does need to address its cash position.
REQUEST FOR FEEDBACK – THE OUTLOOK FOR 2021:
Please drop us a line & let us know your views. Thanks to contributors to date. This week has seen a staggered return to work. We’ll put something out to contributors and to the premium list tomorrow.
PUBS & RESTAURANTS:
Covid, lockdown & financial support issues:
• The MA has reported that pubs offering takeaway services can claim the grants of up to £9k, announced by the government.
• The MA has further printed that the Department of Business, Energy and Industrial Strategy has confirmed that deliveries of food and alcohol from pubs should only be to fixed addresses.
Top down, the view of the economists:
• IHS Markit has reported a UK services sector PMI of 49.4 where any number below 50.0 implies contraction. The result is higher than the 47.6 registered in November but, as tiering got tougher as the month progressed, the exit rate for the month will have been well below the average.
• Markit says ‘margins were under pressure from sharply rising input costs and ongoing price discounting across the service economy.’ Operators remain optimistic with Markit saying ‘business expectations for the next 12 months strengthened in December and were the most optimistic for almost six years. Around 59% of the survey panel forecast a rise in activity over the course of 2021, while only 13% predict a decline.’
• Skewed performance.
• Markit says ‘companies reporting a decline in business activity in December almost exclusively cited shrinking client demand and restrictions on trade due to the COVID-19 pandemic.’ It says ‘where growth was reported, this was mostly confined to residential property, business-to-business services (especially e-commerce), and providers of digital consumer services.’
• Markit says ‘export sales remained a weak spot, with new business from abroad decreasing sharply in December.’ It adds ‘input price inflation accelerated sharply since November and reached a ten-month high. This was linked to rising charges by suppliers amid higher freight costs and transport shortages.’
• Markit’s Economics Director Tim Moore comments ‘December data confirm that the UK service sector has swung back into decline after the partial rebound seen during the third quarter of 2020, largely reflecting tighter restrictions on consumer services amid the worsening trajectory of the pandemic.’
• Mr Moore says ‘shrinking demand resulted in additional price discounting to stimulate sales at the end of the year. Margins were also hit by a sharp and accelerated rise in operating expenses, which were linked to transport shortages and the pass through of higher freight costs by suppliers.’
• He concludes ‘with a third national lockdown underway, service providers will be braced for a sustained period of subdued UK economic conditions and deferred client spending in the first quarter of this year. However, business optimism on a 12-month horizon was relatively upbeat in December and reached its highest level for almost six years, underpinned by hopes that a successful vaccine roll-out will help to deliver a strong economic rebound in the second half of 2021.’
Company & industry comment:
• CAMRA tweets that ‘nearly 6,000 emails have been sent to MPs in the last 24 hours – that’s fantastic!’ It has produced a template to make it simple for members and supporters to email their MP.
• CAMRA says ‘ask your MP to back our campaign to treat pubs in England fairly and let them sell beer & cider to take-away & drink at home during this new lockdown – just like supermarkets and off-licences can.’
• December 2019 accounts, referring to an accounting period that now seems a lifetime ago, were due to be lodged with Companies’ House by end-December 2020. These are more than usually out of date. If anyone would like details on submissions by Mabel Topco (Wagamama), Welcome Break, Dishoom or Boost Juice Bars, then we can forward them.
• The Californian wine company, O’Neill Vintners & Distillers has acquired the Rabble wine brand from Paso Robles-based vineyard manager Rob Murray for an undisclosed sum.
• Tofoo Co, the vegetarian food manufacturer has seen its revenue increase 89% in the last year to £14.7m. David Knibbs, founder of the group commented: ‘Through consistent innovation and a strong brand presence, we’ve built a very loyal consumer base that enjoys making delicious and wonderfully unexpected meals using The Tofoo Co. products’.
• LIVEKINDLEY Collective has purchased Iceland Foods’ No Meat brand. Iceland will begin to sell LIVEKINDLEY Collective’s brands in stores from April.
• Shepherd Neame has announced it will cancel rent for all its licensee pubs, and has offered its pubs as vaccination centres.
• UKHospitality Cymru has asked the Welsh Government to use new funding provided by the Treasury to support the sector. UKHospitality Cymru executive director David Chapman commented: ‘[The] Treasury’s announcement recognises that our beleaguered businesses are once again forced to close for a precarious third lockdown period’.
• Nearly 1 in 4 of those who have attempted ‘Dry January’ have given up on the challenge, according to research from KAM Media. Katy Moses, MD at KAM Media commented: ‘30% of UK adults intended to take part in ‘Dry January’ according to research we did in December. By January 1st that figure had dropped by 17%. Our most recent poll, conducted on 5th Jan shows that only 25% of those who actually attempted ‘Dry January’ are still going strong’.
• Supermarkets reassure customers that there is no need to bulk-buy products due to the new national lockdown. Stores have said they have good availability and have increased delivery slots in response to a surge of demand in the immediate aftermath of the lockdown announcement.
HOTELS & LEISURE TRAVEL:
• Carnival Cruise Line’s suspension of US operations has been extended to 31 March, with the company also cancelling selected cruises on later dates in 2021. Carnival said guests and travel agents are being notified of the cancellations and options for a future cruise credits or a full refund. Princess Cruises has also extended the suspension of sailings.
• Commenting on the US hotel market, STR says that ‘group business was nearly non-existent in 2020, but hoteliers are preparing for its likely return in the latter part of 2021 and continued growth in 2022.’
• Re conventions business, STR reports commentators as saying ‘state restrictions have forced changes in how companies organize and host events, which has made the segment risky.’ Large venues will have to be socially distanced. It also believes that client companies will be sending fewer guests for corporate jollies and / or conventions etc.
• Grand Central and Hull Trains will cease operations to London from 9 January to 1 March. Neither operator receives a government subsidy and instead rely on ticket revenue.
• Nintendo has acquired Canada-based Next Level Games, the developers of Luigi’s Mansion 3, marking its first studio acquisition since 2007.
• The parent group to Odeon Cinemas, AMC Entertainment is considering increasing its debt facility by offering the cinema chain as collateral.
FINANCE & MARKETS:
• IHS Markit has reported its composite output index for the UK in December at 50.4, up from 49.0 in November. It is ‘slightly above the 50.0 no-change threshold.’ The number represents a strong contribution from manufacturing and a weaker service sector performance (see Pubs & Restaurants above).
• Markit says ‘business optimism across the UK private sector as a whole was little-changed from November’s 68-month peak. Both manufacturers and service providers anticipate a sustained expansion of business activity amid hopes of a swift improvement in UK economic conditions as the pandemic is brought under control in 2021.’
• The Daily Telegraph suggests that the latest lockdown could increase the government’s spending deficit to £450bn, up from the £394bn previously estimated by the OBR. Growth and tax receipt estimates are being ‘slashed’ at the same time as spending is rising. The deficit is ‘ballooning’ says one of the newspaper’s contacts.
• The EY Item Club says a £450bn deficit was a “rising and genuine possibility”.
• Sterling down at $1.3584 and €1.1031. Oil up at $54.73. UK 10yr gilt yield up 4bps at 0.25%. World markets better yesterday and London set to open up around 69pts.
RETAIL WITH NICK BUBB:
• Today’s News: On top of the expected/strong B&M Q3 update today, Sainsbury’s has brought forward its Q3 update from next week, to flag a useful profit upgrade and Joules has announced its Christmas trading update (with a similar pattern to Next, of weak Stores offset by strong Online sales). B&M’s perfect “lockdown winner” model of food and DIY/gardening sold in retail park locations delivered chunky 21% LFL sales growth in the 13 weeks to Dec 26th and that has enabled B&M to narrow its previous guidance for FY21 Group adjusted EBITDA to be within the range of £540m to £570m (after the voluntary payment of Business Rates in FY21 amounting to c£80m). As for Sainsbury, full year PBT is now expected to be at least £330m, compared with previous guidance of £270m, after Christmas LFL sales growth of 9.3% excluding fuel.
• This Week’s News: After the Walgreen Boots Q1 in the US this afternoon, tomorrow brings the Marks & Spencer Q3 update.
• Grocery Market Share Watch: The latest monthly Nielsen grocery market share figures (for the 4 weeks to Dec 26th) came out at c8am yesterday and covered broadly the same period as the rival survey from Kantar on Tuesday. The Kantar grocery sales figures (for the 4 weeks to Dec 27th) were up by 10.8% on an overall “Till Roll” basis, lower than the 13.8% growth in the previous period, albeit the growth was still flattered by the collapse in both the “on-the-go” food market and in the “food away from the home” market. The food price inflation rate edged down from 1.4% to 1.3%. On a pure “Grocery” basis (excluding Non-Food), overall Kantar sales were as much as 13.6% up, with Aldi/Lidl still lagging a bit with growth of “only” 11.6% combined (although Lidl massively outperformed Aldi…). Morrisons saw 14.1% gross sales growth on this basis, whilst Sainsbury was up 13.8%, Tesco was 14.3% up