Langton Capital – 2021-02-05 – PREMIUM – Valuing companies, Carlsberg, OTB, Sportech, YUM, Hostelworld etc.:
Valuing companies, Carlsberg, OTB, Sportech, YUM, Hostelworld etc.:
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A DAY IN THE LIFE:
I was thinking the other day about logarithmic scales versus linear progression.
Apologies if I’m butchering this definition, but a logarithmic measure means that, for every increment that a scale rises (say by one), the product rises by a factor (say it doubles or trebles or rises by a factor of ten).
Hence, it’s describing a curve rather than a straight line, and it’s often applicable in life.
The Richter Scale, for example, is logarithmic. An earthquake measuring five on the scale is ten times as powerful as one measuring four – but only a tenth as destructive as one measuring six, etc.
And my belief that I can ‘do’ maths or ‘work’ Excel is often shattered when I meet the next guy up on some kind of logarithmic scale.
I might be a four but they’re ten times as good as me at five and, distressingly, it often transpires that they are only in the foothills when it comes to understanding something and that I’m just some mental midget in the undergrowth (and we follow this up a bit in the Premium Email below).
Anyway, that thought doesn’t cheer me up much so but a look at the calendar does – as it’s Friday. On to the news:
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• There are books written on this. But we’ll keep this brief as a) we don’t know much and b) we haven’t got unlimited time
• We were looking at Gamestop the other day. We didn’t get involved but it did raise several questions as to valuation, some practical and others a matter of principle.
• Worth might be described as the net present value of future benefits.
• If you know your income this year, next year and every year. And you know your cost of capital. Then you can determine value.
• With gilts, you know your income per annum, and you know what you’ll get back at the end of the gilt’s life. If you know your cost of capital, then you can work out it’s value.
• With shares, it’s much harder. You’re not looking at straight lines here. Or even curves because you might be looking at asymmetrical parabola, random spikes, waves, crests and troughs and all the rest.
• I mean what’s your cost of capital is hard enough. But what about the income stream? Do you model competition, business cycles, inflation, currency movements, fashion?
• Already the ‘garbage in, garbage out’ principle is rearing its ugly head. But you probably see what I’m getting at.
• This could get very complicated, very quickly.
• But it’s Friday so we’ll just refer to the Day in the Life above and suggest that people are drawn to straight lines.
• Analysts, government planners and the rest don’t have bent rulers.
• Although maybe that’s a little unfair as and Langton can put ‘plus 2%’ in a cell in our model and, hey presto, we’ll project a curve.
• But life’s not like that, it comes in wavy lines. And, whilst I’m sure there are boffins who can work out the net present value of the area beneath a wavy line whilst getting all the debits and credits in the right place and the right year as they do so, I haven’t yet worked with any of them.
Going full circle:
• Which does mean that ‘animal spirits’ remain important.
• ‘Gut feel’ and the like can still drive behaviour.
• We watched some of the comments on Reddit re Gamestop.
• ‘Don’t lose faith’ and ‘it’s going to $1,000’ etc and all we could think of was tulips. But the market will do what the market will do.
• Still, if we were valuing a retail video game company, we would have thought you should start with revenues about where they are now, project them down to zero over a sensible period of time and work out the area of the triangle beneath that line. No wonder we’re not billionaires.
PUBS & RESTAURANTS:
• The Local Data Company has created a platform pulling together around what it believes to be 90% of the properties available on the market. It tracks more than 680,000 retail and leisure units across the UK.
• LDC co-founder and MD Barnes Oswald says ‘vacancy rates are the highest they have been since our records began and are likely to increase as the fallout of the pandemic continues. This platform will provide a critical means by which to connect prospective tenants with the influx of retail space coming on to the market.’
• Oswald adds ‘market disruption that was already happening prior to the pandemic has been accelerated and from this we will see a ‘next generation’ of retail and leisure businesses, some of which will grow to be household names. This platform can be pivotal to that process as well as supporting local economies during this challenging time.’
• Stay in a Pub suggests that UK pubs are in an ideal position to benefit from what is likely to be a bumper 2021 staycation season. Stay in a Pub says: ‘we need to ensure that pubs have visibility on the internet as 70% of accommodation is booked online.’ It is ‘to invest over £100k in a marketing campaign through social media using Facebook, Instagram and Google to drive awareness of pubs in the accommodation sector.’
• Pubs are particularly active in the short break market. Stay in a Pub highlights that ‘over recent years there has been a surge of investment in pub accommodation and Christies believe pubs with rooms have a premium valuation in excess of 25%. This third income stream for pubs is profitable in its own right but also adds to the food and beverage sales and can be a lifesaver for rural pubs.’
• Licensing solicitor Poppleston Allen points out that ‘Liverpool City Council has made the decision to remove its existing Cumulative Impact Policy as part of its recent Statement of Licensing Policy Review.’ Additional regulations were presumably not deemed either a) necessary when hospitality is shut or b) helpful when it is allowed to reopen and has to pull itself up by its bootstraps.
• The BBPA has calculated that up to 87 million pints of beer will be thrown away as a result of pub closures during Covid lockdowns around the UK.
• The Telegraph reports that Oaktree is backing backs Rooney Anand’s ‘£500m swoop on Britain’s pubs.’ It says Oaktree is putting £200m into new company, RedCat, in order to provide equity which, in addition to borrowings, will be used to acquire UK pub assets.
• The operation looks like a blank sheet as the Telegraph says ‘RedCat will look at buying either individual businesses or operators outright. It will target pubs in the south and east of England with a further £300m in debt funding expected to be raised.’ Rooney Anand says ‘there is no set playbook. I am not trying to recreate Greene King. I see myself as someone who’s investing in a sector that has been oversold, where people have taken cover and written it off and have been too quick to say: ‘It’s not going to recover’.’
• Anand adds ‘I’ve always been a strong believer in the great British pub. It has survived the Blitz, the Great Plague and the credit crunch – always bouncing back and taking its rightful place at the heart of the community.
• Carlsberg has reported Q4 and full year numbers saying that revenue was down 8.4% organically and down 11.2% on a reported basis. Organic volume was down by 3.8%. Adjusted net profit was up by 3.3% to DKK 6.4bn.
• Carlsberg CEO Cees ’t Hart says: “The COVID-19 pandemic has impacted lives worldwide and was a significant challenge for Carlsberg in 2020.’ He continues ‘while the pandemic is not yet behind us and we don’t know how long it will remain a challenge in 2021, we believe that Carlsberg will emerge even stronger from the crisis. During 2020, we adjusted our cost base to a new reality and implemented new ways of working. These changes have led to a more flexible company, making us optimistic about our ability to deliver on our longterm strategic priorities.’
• Carlsberg says ‘the Group’s financial situation remains strong. Despite COVID-19, we improved our operating margin, delivered strong cash flow, increased dividend per share, carried out a sizeable share buyback programme and strengthened the business through acquisitions. We’re pleased that the Supervisory Board will recommend a further increase in the dividend for 2020 in addition to initiating a new share buy-back programme.’
• Compass Group yesterday apologised for its part in the provision of free school meals that fell short of expectations saying ‘we have apologised to everyone who has been affected’ and adding that it had made ‘several corrective measures that include improved supply chain processes, additional guidance and resources for our employees, and stronger quality assurance checks.’
• KFC, Pizza Hut & Taco Bell brand owner Yum! Brands has reported Q4 and full year numbers saying that LfL sales fell by 1% in Q4 but that digital sales hit a quarterly record of almost $5bn. Q4 earnings were 108c, down 32% on the same quarter last year.
• Yum CEO David Gibbs says ‘Yum! enters 2021 a stronger company primed to profitably grow system sales this year and beyond. Despite the challenges of 2020, our full-year results demonstrated our resilience and validated the strategies we put in place during the transformation of Yum!.’
• CFO Chris Turner says ‘Q4 results are evidence our brands remain effectively positioned to win in an off-premise environment and that our business model is positioned for sustained rapid growth once we emerge from the pandemic. Overall Q4 system sales declined 2%, including a 3% headwind of the 53rd week in 2019, with slightly positive net units year-over-year and a 1% same-store sales decline. With iconic category-leading brands and a uniquely diversified global portfolio of over 50,000 restaurants, Yum! is well positioned to grow and maximize value creation for all our stakeholders for years to come.’
• By the brands, Yum! worldwide system sales fell (pre-currency impact) by 1% at KFC, by 3% at Taco Bell and by 6% at Pizza Hut. KFC sales in the UK were up by 14% in Q4 but down by 2% in the year
• Stonegate Group has announced that it is donating all its surplus non-alcoholic products in venues across its managed estate to local charities. Colin Hawkins, Operations Director for Stonegate Pub Company, says ‘we’re delighted to be able to give away our short-dated products to a range of worthwhile causes. We wanted to give each GM the autonomy to choose where it goes, as they all have relationships with their local charities and their fingers on the pulse of their local communities, to know exactly to who and where the food and drink would make the most difference.’
• AB InBev has announced an investment of more than $1 billion over the next two years in its facilities and communities across the US. It says the capital expenditure programme will be used to expand its operations – in particular its hard seltzer production.
• Shake Shack says it ‘is thrilled to announce that it will open a delivery-only Shack in Cambridge on Tuesday 9th February, delivering Shack favourites to the people of Cambridge for the very first time via Deliveroo.’
• China import duties on Australian wine has driven a lot of its plonk into the UK. The Chinese market was the biggest importer of Australian wine in the first three Qs of 2020 (39% of exports). Sales into the UK were up 22% on 2020.
HOTELS & LEISURE TRAVEL:
• On the Beach has updated on trading for the 4mths to 31 Jan saying that ‘as a result of the four week lockdown in November and the subsequent UK-wide lockdown that commenced in early January 2021, combined with further reductions in winter flying programmes, consumer demand for forward holidays has remained very weak with UK traffic, bookings and spend on online marketing activity across the first four months of the financial year down 73%, 83% and 85% respectively.’
• It says it has cut sales and it says ‘we expect booking demand to remain weak until these restrictions are lifted and vaccine deployment is more widespread, both in the UK and our major travel destinations, which will impact H1 and full year performance.’ The group ‘continues to believe that the forthcoming period offers an unprecedented opportunity to drive market share gains and as a result has continued to invest in the areas that will drive the largest benefits in the medium term.’
• On the Beach CEO Simon Cooper says ‘in the first four months of our financial year have seen differing tiering levels across the UK, followed by the current nationwide lockdown and ban on international leisure travel. Clearly this has and continues to impact booking volumes and the Board believes that booking volumes will remain weak through H1 and into H2. Following the prudent activities undertaken in the last financial year, the Group remains in a strong and debt-free financial position. The Board is confident about the Group’s long term strategy and we will continue to evaluate the growing range of exciting opportunities to build our market share both in the UK and internationally.’
• Quarantine hotels will formally commence on 15 Feb. Around 1,000 new rooms will be needed each day. Labour says it is “too little, too late” and says it “is beyond comprehension that these measures won’t even start until 15 February.”
• The UK government is under pressure to announce details of its hotel quarantine plans. It says it is still working on them. Health Sec Matt Hancock says an operational plan may be revealed ‘in the next few days.’
• Former head of the WTTC David Scowsill has told Travel Weekly that the tough travel restrictions now in force in the UK were “inevitable” and hotel quarantine “makes sense” and “should have happened a long time ago”.
• Many hoteliers will be anticipating a revenue bump if travellers are forced into their sites.
• The twelve travel organisations making up the Save Future Travel Coalition are calling on the UK’ Chancellor Rishi Sunak to deliver financial support to the travel sector in his March Budget. They will not be the only economic sector pitching for monetary help.
• The coalition is asking for furlough extensions, business rates relief and VAT deferrals. Although he has softened his language recently, Mr Sunak has previously said he is not in the business of saving firms (and sectors) that cannot be rescued. As with many politicians, the words used may change dependant on the audience.
• The Global Business Travel Association has said that spending on business travel will only recover to pre-pandemic levels in 2024. Even then, some markets may only be at 75 to 85 per cent of pre-pandemic spend by that time. China and the Far East will have more than recovered whilst Europe and North America could be seriously lagging.
• Hostelworld announced yesterday that the ordinary resolution necessary to change the borrowing limit for the purposes of its Articles of Association to a fixed amount of €40 million was passed. It says it ‘is also pleased to announce that it is now in advanced negotiations with a lender in relation to a new €30 million debt facility and will provide further updates in due course.’
• Heathrow workers are to launch a wave of strike actions today as part of a row over wages. Harsh but perhaps nobody will notice. Heathrow said last year it would cut pay by 15% to 20% for about half of the 4,700 staff in engineering, airside operations and security. Union Unite has said most staff will be worse off than that.
• Edinburgh airport has said that the outlook is “bleak.” It has announced that its passengers numbers in 2020 were the lowest since 1995. Although passenger numbers should recover somewhat later this year, they will currently be tracking lower than that. Numbers were down by 99% between April-June and by 83% between July-September and 90% between October-December.
• STR has reported that occupancy across the US hotel industry was down by 30% in the week to 30 Jan. Rates were also 30% lower and REVPAR was down by 51%.
• Fred Olsen Cruise Lines has cancelled its sailings until the end of June. It says ‘we are constantly reviewing our back in service dates in line with the latest government guidance, and working closely with CLIA and other industry bodies towards a return to sailing.’ It says ‘this extra time allows us the opportunity to fully understand how the roll-out in the vaccine affects the procedures we operate on board and ashore.’
• Sportech has updated on full year trading to end-Dec saying that ‘the Group continues to drive operational efficiencies through all its business lines and anticipates that FY 2020 Group adjusted EBITDA will be in line with the Board’s expectations. During 2020, capital preservation and net cash position became more crucial metrics.’
• CEO Richard McGuire says ‘the Group was historically dependent on live spectator attendance at sporting events which were obviously heavily impacted by the global pandemic and we therefore took the necessary actions over the period to safeguard the Group.’ He adds ‘following corporate activity announced in recent months, the Group structure and business will adjust during FY 2021. We remain focused on our US headquarters in Connecticut where management and personnel remain fully motivated to be part of the States’ expanded gaming solution alongside our Connecticut gaming neighbours.’
FINANCE & MARKETS:
• The Bank of England says that the UK’s rapid Covid-19 vaccination programme should help the economy bounce back strongly this year. It expects economic decline of 4.2% in Q1 after the 10% fall expected for calendar 2020.
• The Bank then says the UK should return to growth ‘as consumer confidence returns’. Governor Andrew Bailey says good vaccine news should ‘support a sustained recovery throughout the rest of the year.’
• The Bank says the UK jobless rate should rise to just under 8% later this year as some staff coming off furlough will be made redundant. The Bank held interest rates at 0.1% and QE at a targeted £895bn.
• Markit reports a decline in UK construction in January. Its PMI registered 49.2 for the month, down from 54.6 in December and below flash estimates. Markit says ‘the construction sector ended a seven-month run of expansion’ with firms reporting ‘major delays with receiving imported products and materials from suppliers.’
• Car sales fell 40% last year to a 50yr low reports the SMMT.
• The UK government and the EU say talks over border checks in Northern Ireland have been ‘constructive’.
• Sky reports that a third of house sales fell through in January.
• The BBC reports on the 71 pages of red tape now needed to get a lorry-load of fish into the EU from the UK.
• Sterling stronger at $1.3679 and €1.1434. Oil up at $59.17. UK 10yr gilt yield up sharply at 0.45% (up 7bps). World markets mostly better yesterday with London set to open up around 2pts.
• Construction PMI a miss at 49.2 (est. 52-53). Ends run of growth. Companies now looking through Covid to recession. Markit says ‘concerns [re] economic outlook had led to greater hesitancy among clients, especially for new commercial projects.
• Hospitality wants people out & about. Not possible now, later maybe. But some concerns about changed habits. E.g., Telegraph re Amazon ‘UK crowned Amazon’s hottest market as lockdown sales surge.’ We want them to un-surge. But you can’t always get what you want.
RETAIL WITH NICK BUBB:
Today’s News: A week on from the confirmation that Boohoo was in exclusive discussions with the administrators of Arcadia over the acquisition of the Dorothy Perkins, Wallis and Burton brands, there is still no more news, but the embattled French Connection has reacted to the spike in its share price yesterday by announcing that it has received not just one, but two, separate bid approaches, from two new US scavenger funds: Spotlight Brands and Go Global Retail. Even after the c40% jump in the share price yesterday, the business is only capitalised at c£15m, so few will spend much time thinking about this shrivelled husk of a company or the stewardship of its veteran boss, Stephen Marks, but it is a minor surprise that the bid interest hasn’t come from the ubiquitous #MadMike, after missing out on the carve up of Debenhams and Arcadia…
BDO High Street Sales Tracker: Given the impact of the lockdown on non-essential stores and the impact of the highly changeable weather on Fashion sales, the BDO High Street Sales Tracker for medium-sized Non-Food chains painted a gloomier picture for w/e Jan 31st…BDO Fashion LFL sales were down by nearly 20%, with Store Fashion sales down by as much as 97%…Total BDO LFL sales (including a handful of Homewares and Lifestyle retailers, as well as the Fashion retailers) were down by just over 9% (down 8 The UK was coldest since 2010. Aberdeen was coldest since 19844% in Store sales and up 105% in Online sales). As always, please remember that the BDO index is just an unweighted average of percentage changes in the sales of their reporting retailers, so it shouldn’t be taken too literally.
Weather Watch: It has been rather mild and wet this week, but memories about “the weather” are always notoriously short-term and often too London-centric…so, ahead of the BRC-KPMG Retail Sales survey for January on Tuesday, we have turned to the Retail weather consultants Planalytics to check on how last month’s weather “should” have affected trading on the High Street (and Online) across the country…And their overview for the calendar month of January was headlined “Cold and Wet for Many”, noting that although the South-East largely escaped the snow up’t North, the UK overall saw the coldest January since 2010 and in Aberdeen it was the coldest since 1984. Overall, the monthly mean temperature of 2.9C was 3.3C below last year, albeit it was only 1.7C below “normal”. Across the country, in terms of the sales of key seasonal products, Planalytics estimate that the theoretical impact on
Next Week’s News: Tuesday brings the BRC-KPMG Retail Sales for January, the Ocado finals and the latest Nielsen grocery sales figures. The Dunelm interims are on Wednesday, along with the Mothercare EGM (to approve the move to AIM etc). Thursday brings the Ted Baker Q4 update, along with the Tesco EGM (to approve the special dividend etc).