Langton Capital – 2021-01-20 – PREMIUM – JD Wetherspoon, state aid, city centres, Entain, Netflix etc.:
JD Wetherspoon, state aid, city centres, Entain, Netflix etc.:
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A DAY IN THE LIFE:
Bit busy this morning. On to the news:
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JD WETHERSPOON PLACES SHARES FOR THE SECOND TIME DURING THE COVID PANDEMIC:
JD Wetherspoon Tuesday evening updated on Q1 trading and announced that it was seeking to raise around £93m via a placing of it shares. Our comments thereon are set out below:
• JDW has announced this morning that it has successfully placed 8.37m new shares in the company at 1120p, a discount of 5.3% to the closing share price. The placing raises approximately £93.7m for the company and the new shares represent just under 7% of the existing issued share capital of the company. There were no pre-emption rights. JDW reports that Columbia Threadneedle Investments will take 1m shares.
• JDW announces that, as indicated previously, ‘LFL sales decrease of 27.6% for the 15 weeks to 8 November 2020.’
• It says sales then slid. Comps likely became less meaningful.
• JDW says ‘sales in the latter part of the quarter, as the hospitality industry has indicated, were adversely affected by the introduction of changes to the tier categories, a 10pm curfew, a requirement to order all food and drink ‘at the table’, and the mandatory use of face masks when moving around inside pubs.’
• It adds ‘all pubs have been closed since 31 December 2020, from which point the company’s sales have been zero.’
• The company says its ‘long-term objective remains the same – to run individually designed and well-maintained pubs offering excellent products, at reasonable prices.’
• It adds ‘as in previous recessions, property prices are likely to decline, presenting opportunities for acquisitions at attractive prices.’
• The fund raise is to be considered in light of this.
Cash & balance sheet:
• JDW says it ‘has reduced costs as much as it reasonably can during each of the closure periods which have taken place since last March.’
• It says the ‘costs of non-furloughed employees, plus the taxes and other costs of furloughed employees, are £0.8 million per week during the closure period.’
• JDW adds that ‘repair costs have been reduced from a weekly run rate of approximately £1.6 million pre-Covid to approximately £0.25 million per week during the closure period.’
• General costs have also been reduced ‘from a weekly run rate of £4 million pre-Covid to approximately £1.1 million during the closure period.’
• The main board has taken salary cuts, capex has been reduced and dividends have been suspended.
• Some payments to suppliers have been deferred. JDW says ‘as at 14 January 2021, the company had £25.2 million of deferred payments to suppliers outstanding, reduced from £102.7 million when the majority of pubs reopened on 4 July.’
• JDW ‘has £18.0 million of deferred rental payments outstanding.’
• The company raised £137.7 million of new funds through a 15% share placing at £9 per share in April. It has availed itself of CLBILS and has other applications pending. It says ‘net debt plus trade and other payables have remained at approximately the same levels from the year end 2019.’
• It intends that its net debt to EBITDA has risen recently and it believes ‘that debt levels of between 0 and 2 times EBITDA are a sensible long-term benchmark, although higher levels may be justified at times of very low interest rates.’
More on the Share placing:
• The company yesterday evening announced that it was to raise between £92.1m and £93.7m through the issue of up to 8,370,000 new ordinary shares in a non-pre-emptive placing
• The accelerated book-building took place yesterday.
• JDW says ‘the duration of the current lockdown and ongoing restrictions are uncertain at this stage.’ It says it ‘has taken decisive action to preserve cash and ensure sufficient liquidity.’
• The company adds ‘the net proceeds of the placing will be used to further strengthen the company’s balance sheet, working capital and liquidity position during the period of disruption.’
• It says ‘the additional capital will provide sufficient liquidity to deal with very low sales after reopening, helping the company to return to growth as the market normalises.’
• JDW says ‘additional capital will facilitate the acquisition of new properties, which are likely to be available at favourable prices, as a result of the pandemic.’
• Interestingly, the placing coincided with news that former GNK boss, Rooney Anand, had raised £200m, also to invest in pubs.
• JDW says it is ‘considering the acquisition of a number of properties in central London, the freehold reversions of pubs of which it is currently the tenant, and properties adjacent to successful pubs.’
• It adds that it ‘may be possible to achieve a higher-than-average return on capital on properties acquired in the next few years, based on the company’s past experience.’
• JDW says ‘the duration of the current lockdown and ongoing restrictions is uncertain at this stage. The company’s current assumptions are that its pubs will remain closed until the end of March 2021.’
• It says that pre-IFRS16 losses before tax, exceptional items & depreciation (cash burn) is running at around £4.1m per week whilst pubs are shut.
• JDW says ‘in the absence of a share placing and an additional CLBILS loan, the company estimates that it has sufficient liquidity to the end of the current financial year.’
• It adds it ‘has traded well during previous recessions in the course of the last 40 years.’
• Company chairman Tim Martin says ‘the Covid‐19 outbreak is having a severe impact on the UK pub sector.’
• He adds ‘after a number of false starts, the hospitality industry generally anticipates a return to more normal trading patterns in the spring and summer, as a result of the introduction of a mass vaccination programme.’
• He says ‘the equity placing announced today will help the company, along with the other actions it has taken, to emerge from the pandemic in a strong position.’
• JDW has four potential scenarios. The central assumption is that pubs are closed to end-March. It says sales could be down 50% on reopening and rise by 5% per week thereafter.
• On this basis, sales this year (to end-July) would be down 30%, EBITDA would be £13m with a loss before tax of £112m. Debt would peak this financial year at £969m.
• Its ‘reasonable worst case’ scenario would see pubs reopen early-April at minus 50% and stay at that level for the remainder of the financial year. Under these circumstances, sales would be down 43%, EBITDA would be minus £33m and the loss before tax would be £159m. Debt would peak this year at £1.02bn.
• The remaining scenarios consider longer closure periods.
• The direction of travel (re trading) from August through to the current shutdown was negative – but news regarding vaccines has been good.
• There is light at the end of the tunnel. Part I of Plan A has to be not to faulter at this stage and Part II of the same plan has to be to prepare for expansion opportunities. Hence, the fund raise.
• We have questioned on a number of occasions whether companies that raised money early in the pandemic, some in March, might not have to come back for more.
• JDW has both defensive and potential expansionary reasons for having done so.
• Numbers (other than the critically important debt and cash-burn numbers) are not entirely meaningful at this stage.
• But pubs and JDW have weathered previous recessions and the opportunity to add freeholds is a real one.
• JDW’s assets recently earned £105m to £110m in PBT. Debt has increased but so has the opportunity to take market share.
PUBS & RESTAURANTS:
• The BBPA has stated that 74% of wet led pubs are still waiting to receive their Christmas grant promised to them by the Prime Minister. Emma McClarkin, Chief Executive of the BBPA, said: ‘Months have passed by yet still thousands of pubs are waiting on the grants they have been promised. It is unbelievable that so many pubs are still waiting on their Christmas grants and grants for the second lockdown. Considering we are now in a third lockdown it is scandalous’.
• The consumer group Which? has found a refusal to accept cash ‘creeping into the wider UK economy’. Natalie Ceeney, who wrote a report on the issue, commented: ‘The figures show that it’s not simply the odd coffee shop going cashless, but this is creeping into the wider economy. We can’t just blame individual businesses – many are going cashless because they can’t easily bank cash takings because their local branch is closed or some distance away’.
• The CBI has called on the government to give more financial help to struggling businesses, stating that the furlough scheme and business rates relief should be extended. It has thrown its hat in the ring ahead (well ahead) of Chancellor Sunak’s March Budget, proposing some £17.9bn of spending and tax measures. That may not go down too well if Mr Sunak intends to balance the books any year with a two in it.
• The CBI says ‘all along the Treasury has been rightly focused on protecting the viability of firms in building that bridge to the other side. We just have to finish the job. Now would be a very odd time to withdraw that support.’
• The Treasury says ‘we’ve invested more than £280bn throughout the pandemic to protect millions of jobs and businesses – and extended our self-employed and furlough schemes through to April so that people have certainty that help is in place. As the Chancellor has set out, the Budget will be the moment to take decisions in the round and outline the next stages of our Plan for Jobs. That has been our priority throughout the past year and it will be the priority for the year to come.’
Other pub & restaurant news:
• KAM Media says ‘the low and no category has hit the mainstream with consumer awareness of low & no increasing significantly over the last 12 months.’ It says that ‘nearly 1-in-2 consumers have now tried a low or no alcohol variant at home.’
• MD Katy Moses says ‘there’s no escaping the fact that 2020 has been a year like no other. Clearly such circumstances are going to have a distinct impact on consumer behaviour. We are still seeing similar levels of desire from consumers to reduce the amount of alcohol they consume as we did in 2019, suggesting that as drinkers, we are increasingly becoming aware of the need to drink responsibly and that we understand the benefits associated with moderation. This is especially higher for those in the 18-34 age bracket.’
• Will city centres bounce back?
• Chief Executive of Brookfield Asset Management, Bruce Flatt has commented on his decision to delist the property arm of the group: ‘Clearly there are differing views about real estate securities. Some people think people won’t go back to the office and that retail will be done online’. The result is that real estate holdings ‘are not trading at tangible value. It’s the right thing to take it private’.
• The Guardian writes this morning that ‘pubs driven to financial ruin by the impact of the pandemic could be bought up on the cheap under plans being drawn up by JD Wetherspoon as well as by a new venture fronted by the former boss of Greene King.’
• Both above-mentioned operators have raised money in the last 48hrs to buy, perhaps, distressed assets. Former GNK boss Rooney Anand is backed to the tune of £200m by an ‘an unnamed US-based private equity firm to acquire smaller pubs and bars, City sources told Sky News, which first reported the story.’
• Deliveroo has recruited Next CEO Simon Wolfson as a director as it plans its IPO on the London market. Deliveroo, which had been heavily loss-making, has been a beneficiary from the Covid-19 pandemic. Much will be riding on how much of the windfall it has received in sales it will be able to keep going forward.
• Arcadia, parent to Topshop, is set to close a further 31 shops after entering administration in November.
• The Davis Family, owner of the ‘the world’s smallest gin bar’ Tin of Sardines in Durham has announced plans to revive the historic Sunderland site Roker Toilet Block on Pier View.
• Champagne Shipments are expected to decline 18% in 2020, a fall of 50 million bottles.
• Northern Bloc, the Leeds based ice cream specialist has secured a seven-figure sum to expand within the vegan food sector.
• Per solicitors Poppleston Allen, Trafford and Hereford have removed their existing Cumulative Impact Policy as part of their recent licensing policy consultation.
HOTELS & LEISURE TRAVEL:
• President Trump has issued a decree to remove travel restrictions between the US and the UK, Ireland, Europe’s Schengen area and Brazil, with the bans on China and Iran set to continue. However, Mr Biden’s spokesperson has indicated that the bans will continue under the new president.
• Director general of IATA, Alexandre de Juniac, hints that vaccinations are likely to be required to fly across borders in the future. De Juniac said ‘For travel and tourism, testing is the immediate solution to re-open borders. And eventually that will transition to vaccine requirements.’
• Trivago acquires weekengo and weekend.com, a Dusseldorf-based start-up focused on finding travellers inspirational getaway packages.
• Royal Caribbean has agreed to sell its Azamara brand to private equity house Sycamore Partners for $201m.
• Norwegian Cruise Lines has extended the suspension of its operations until April 30, 2021.
• Following its rejected all stock proposal to acquire Entain, MGM Resorts will not make another offer for the company. Although it will not bid, both companies will try to drive success in the US through the BetMGM joint venture.
• Changed habits, Netflix benefits at the expense of hospitality.
• The BBC questions whether Netflix will be able to hang on to the subscribers that it has signed up during the pandemic. The company now has more than 200 million paid members, up more than 30% from 2019.
FINANCE & MARKETS:
• Government minister Kwasi Kwarteng has said that border delays and the rising cost of transporting goods to Europe are “teething problems” rather than a consequence of Brexit. The EU’s Michel Barnier said last week that increased friction costs would be permanent.
• Sky reports ‘UK ports and hauliers have reported a collapse in trade since the Brexit deal was implemented on 1 January, introducing onerous new customs procedures for British companies sending goods to Europe and Northern Ireland.’
• Business Secretary Kwasi Kwarteng confirms that the government is considering scrapping some EU labour laws.
• Sterling a shade better at $1.3661 and €1.1246. Oil higher at $56.32. UK 10yr gilt yield unchanged at 0.29%. World markets moving better yesterday with London set to open up around 20pts.
• JDW share placing, c£93m, going on now. JDW raised money in April. Would appear this whole thing has gone on longer than they, we, all of us hoped or thought. Unlikely JDW will be the only company that has to tap shareholders twice…
• JDW says it is looking to buy freeholds in London. In addition, buy in leases & buy properties adjacent to successful pubs. News coincides with Rooney Anand’s raising £200m for similar purposes. Too early to call a feeding frenzy. But straws in the wind…?
GENERAL RETAIL WITH NICK BUBB:
Today’s News: It’s a bit late in the reporting season for any big surprises, as the companies would have said something by now, but, even so, today’s Dixons Carphone Christmas update, the WH Smith AGM update and the Burberry Q3 update all strike quite a confident tone. The boom in Electrical sales driven by “working from home” is still benefiting Dixons Carphone, with LFL business up 11% and the highest growth in “large screen TVs, smart tech, food preparation, health & beauty and all areas of computing and gaming”. Interestingly, the key Nordics operation saw even stronger growth than the UK, at +19% and +8% respectively (over the 10 weeks to Jan 9th). Despite current store closures, Dixons Carphone expect to deliver full year profits in line with market expectations and the only reason to raise eyebrows (apart from the 40% slump in Mobile sales..) is the news that the CFO is