Langton Capital – 2021-03-08 – PREMIUM – Marston’s, beer gardens, Deliveroo, Caffe Nero, holidays, staycations etc.:
Marston’s, beer gardens, Deliveroo, Caffe Nero, holidays, staycations etc.:
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A DAY IN THE LIFE:
It was the late Hans Rosling who suggested that your worldview, unless you make positive and regular efforts to update it, is likely to be 30-40yrs out of date.
This because, if you’re of a certain age, you may well have been influenced 20yrs ago by your teachers – and they themselves studied whatever they studied another 20yrs prior to meeting you in their classrooms.
They knew people who knew people who knew people who fought for Empire and then, because you have friends of the roughly the same age and social background as yourself, you might find you have a pretty effective little echo chamber going on.
And, unless you stick your head out of it from time to time, you’ll spend your life wondering why India’s GDP is higher than ours, how come China’s building skyscrapers that don’t fall down and when will it next be our turn to win the FIFA World Cup?
I think I knew, roughly, the populations of the world’s largest few countries when I was at school. But the USSR’s gone, Yugoslavia’s a distant memory, there’s only one Germany and the populations of Mexico, Nigeria, Vietnam & some other countries have trebled or more since I last got lines for throwing another lad’s shoe onto the school roof.
So, try to keep up, Brumby, keep up.
Anyway, as we passed February last week, we’ve added another Cultural Month. To see what we got up to check HERE and let’s move on to the news:
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MARSTON’S UPDATE ON SA BRAIN TRANSACTION:
Marston’s on Friday hosted a webinar to discuss its recently-announced Brains transaction and our comments thereon are set out below (this was emailed out to clients on Friday).
• This has been a critical period for the industry with the roadmap to reopening and the budget
• The group’s key strategic considerations remain a) to reduce debt below £1bn by 2024, b) to grow organically and c) to consider M&A opportunities
• The area will remain an attractive one for M&A and today was about the SA Brain transaction
• This is an opco-propco structure, a capital light mode of expansion. MARS has proved itself to be an attractive opco partner
• The company was well-positioned to move quickly, which it did, and it offered everything that Brain needed – and at short notice
• MARS already had 106 units in Wales. It now has over 200. The fit is good, SAB is 30% food (in managed)
• There are opportunities to convert some units to franchise (MARS has >500 franchised pubs in its estate), addition of space, accommodation…
The terms of the deal:
• 99 of the units are taken on long leases with a 5yr break. There are 8 sites to be purchased freehold with expansion opportunities. The core deal is therefore 107 units
• There are 30 ‘turnaround’ sites (low profits that may be sold by SAB) and 10 sites operated on a management agreement.
• The Brain’s brewery is not a part of the deal. Any decisions thereon are with Brain. CMBC is ‘not likely to want to buy it.’
• Unit EBITDA is £14m, rent £5.5m & overheads £1.5m with £2m of depreciation, leaving £5m. Upside via move to franchising, overhead reduction & synergies is perhaps £2m to £3m p.a. The return on investment is thus very good
• One year’s rent has been paid with another to be paid in April with £4m changing hands to buy the freeholds. This (£15m) will be covered by MARS normal disposals proceeds.
• For the propco, the use of its new tenant’s covenant could/should lead to a valuation uplift
The future (re infill & low-capital expansion):
• Covid could accelerate change. But good pubs (and good pub managers) will still be popular and needed.
• MARS offers what freeholders need. It is a one-stop shop (both geographically and by unit-type). Several of the questions (below) focussed on this.
• Units are more likely to be wet led. This is where the franchise opportunities are greatest.
• The SAB deal could influence the decision-making of some regional pub companies. That is, should they really be property companies?
• How many of these deals would you like to do? It will be driven by opportunities. Co is now low-80%s freehold. Could do c200 pubs & still be c70% freehold. Quality is key. MARS ‘will stay disciplined’
o MARS cannot really say how many units may become available. The money coming into the sector is looking for freeholds. The capital providers may need operators.
• Might you opco-propco some of your own properties? Co is ‘open to the idea’ of the freehold % reducing – but the low 70s has been mentioned.
• How many units will reopen on 12 April? Still running the numbers, considering the weather etc. Over 90% have outside areas. Should be ‘reasonably more than a half of the estate…’ The co has invested in ‘inside-out’ spaces.
• City centres? Less than 10% nationwide. Only two sites in central London. The suburbs are markedly less risky than city centres in the short & medium term.
• Welsh budget? The main UK points, VAT & furlough, are UK-wide. A slight difference is the 100% rates holiday (in Wales) until March 22. There is less clarity on reopening.
• Debt. Co will pay down its most expensive debt first (where possible).
• Dividend policy. It will be ‘cashflow based’. No decisions have yet been made.
• Reporting? SAB will not be reported separately but MARS will comment on progress.
• Disposals. £5m to £10m p.a. are likely. MARS ‘does not need to make major disposals’.
• Marston’s, from the point of view of a propco, is a one-stop shop, geographically and by product type.
• Valuing an estate at the reciprocal of its rent could be (and the Brain deal would suggest, is) attractive to cash-strapped estate owners.
• This note focuses on the Brain deal. See earlier and subsequent pieces for comments on reopening, the Budget, the CMBC deal and other.
• We would suggest that Marston’s debt is reduced and is set to fall further, a professional and experienced management and it has a well-financed, still largely-freehold estate.
• The hospitality industry is likely to see supply reduce going forward and Marston’s is well-positioned to prosper.
PUBS & RESTAURANTS:
• All eyes will soon be on the long-range weather forecasts.
• The BBC reports UK Hospitality as saying ‘England’s pubs have been deluged by people eager to book space from when beer gardens reopen on 12 April.’
• Certain pubs have ‘taken hundreds’ of bookings in just a few hours. The BBC reports ‘demand has been so high that scammers have even taken to advertising fake pub bookings.’
• Emphasising that the ‘pent-up demand’ often spoken about is real, UKH says ‘our members that can open outdoor areas have reported strong interest from customers, which is not surprising after such a long period of closure.’
• Communities secretary Robert Jenrick has told councils to cut red tape to make it easier for pubs and restaurants to use outdoor space. Jenrick says planning rules for al fresco dining and temporary shelters must be waived.
• CGA says its research ‘shows the very close correlation between sunshine and sales.’ This is not surprising as the beer garden, for many pubs, is ‘the largest room in the house’ (or actually out of the house).
• CGA says ‘the gap in sales is wider at weekends, when more people are able to take advantage of good weather in the On Premise. Takings on sunny Fridays and Saturdays are 6% or £38 per hour higher than the average day.’
• CGA concludes ‘there will be more reason than ever to hope for good weather when hospitality is able to open again for outside trading from 12 April. CGA’s online outlet and location targeting tool RISE reveals that just over 26,000 pubs, bars and restaurants in England have outdoor areas that could potentially host guests—43% of the total—but many will not be viable in poor weather.’
• Schools go back today. The government has said that it wants to leave a minimum of 5wks between un-lockdown measures. Pubs and restaurants should be able to serve customers out of doors five weeks today. That date is the earliest possible so, fingers crossed, there will be no blip up in statistics between now and then.
Longer term implications:
• Foodservice analyst Peter Backman has suggested that ‘foodservice demand in city centres will fall in the short term.’ He adds ‘when it returns, the composition of demand is likely to be very different to how it was pre-Covid-19; it will certainly be different to how it looks today while the virus is still very active.’
• Specifically, Mr Backman says ‘with a dramatic fall in the number of tourists and fewer commuters, demand from locals will become significantly more important, albeit within a smaller market in the short to medium term.’
• Backman also says ‘with the ongoing absence of commuters the functional, breakfast and lunchtime, food to go market will also be reduced. It will have to use its space and financial resources effectively.’
• High-spending tourists ‘will return but not for a time; mass tourism will also return, but may not reach historic levels for some years.’ Backman says ‘while the short term may be bleak, Big Ben and the Eiffel Tower will continue to attract tourists well into the future.’
• Langton comment: The above is a) probably right in our opinion and b) it will fundamentally change, at least for a time, the way in which pubs & restaurants were valued (by region, outlet type, location within a city etc.)
• The advantages of suburban units are currently to the fore and, if city-centre tourists do not return for a while and offices do not fill up in the short term, then urban units could struggle and this has implications for profitability for the operators and for rents for the property-owners.
• Backman says, and we agree, that ‘these changes in the structure of demand imply a change in the foodservice Heat Map of each city centre. Yesterday’s red-hot zone will be cooler tomorrow; and former cold zones will turn into tomorrow’s hot ones.’
• It may not be easy to get excited about suburban Barnsley, Bristol or Bradford (vs the West End or the City or units close to railway stations) but, given where customers are going to physically be (and not be) over the coming months and years, this may be where we are.
• City centre breakfasts may struggle. Coffee shops near railway stations (or in railway stations) ditto. Grab n go lunches to be eaten by office workers may see reduced levels of sales.
• Ultimately, landlords will have to take note. They may be inflexible, in which case operators could leave (or go bust) and new entrants will be hard to find. Or they can try to get ahead of the curve, perhaps cut rent or make an element (or all) of rent based on turnover.
• There will be survivors in city centres and some operators will prosper – but there may be fewer of them and they may have to bring something to the party. The era of lazy, me-too, often PE funded operators being able to do well may have passed.
• The flip side is that relevant operators, offering what consumes want to eat or drink, where they want to buy it and at a price they are prepared to pay, could do very well indeed. They will have less competition, rents could fall and site acquisition opportunities could be better than they have been for several decades. This will persist for many years.
• Clear Sight says that ‘sentiment on the COVID-19 situation is now more positive than at any time since the start of the pandemic: 46% of UK adults believe that the worst is behind us, rising to 58% among those who have been vaccinated.’ Confidence in the UK government’s handling of the crisis, driven by recentism, had risen by 10 points in the last two weeks.
• Clear Sight says ‘the outlook of UK business leaders is also recovering, with the leisure, hospitality and culture sectors recording significantly greater confidence in their prospect of surviving the crisis.’
• Accountant and auditor BDO has reported that confidence in service industries is at a 12-month high ahead of the hoped reopening for hospitality and non-essential shops on 12 April. BDO says its optimism index is up to 94.13 in February, from 86.6 in January on the back of reopening plans and vaccine rollout success.
• BDO says ‘with business lifelines extended in the shape of the prolonged furlough scheme, and an extra dose of support provided to hospitality via extensions in business rates relief and the VAT cut to 5pc, there is reason to believe this optimism can be sustained as we gradually emerge from the depths of lockdown.’
• The NTIA says ‘the Budget is yet another statement from the Chancellor that has failed to recognise the need for additional support for the night time economy sector.’ It says ‘we welcome the extension of VAT and rates relief, and that more money is going to hospitality and the Culture Recovery Fund (CRF). But both of these interventions again reveal the Chancellor’s inability to comprehend the specific challenges faced by night time economy businesses, such as nightclubs, casinos and bars, many of which have been entirely unable to open during the pandemic and face higher costs relative to wider hospitality.’
• BP has told 6,000 of its UK staff (and 25,000 of its staff worldwide), that they will not need to work from the office permanently going forward. City centres may struggle to be as busy as they were in the past for some time to come.
• The government may extend the moratorium on evictions this week.
Company & other news:
• Much Press on the Deliveroo IPO. The company is apparently giving bonuses of up to £10,000 to its delivery riders. There will be shares for customers and a lot of noise is being made. Some £50m of shares will be made available to individuals registering via the company’s app.
• Founder Will Shu says ‘I want to thank our riders who have been working with us for years, delivering great food and such a fantastic experience for our customers. They have been central to our growth and will continue to be.’ The Guardian says ‘the payout is likely to prove controversial as Deliveroo has faced heavy criticism over its couriers’ pay. It argues they are self-employed, independent contractors not entitled to the national minimum wage, holiday pay or pension contributions.’
• Langton Comment: We have an issue with the price and would still question whether there is a sustainable market – once the operator, the rider and Deliveroo have all taken their cut. Deliveroo reported a 62% increase in revenues for the year to end-December 2019 (to £772m) but losses increased from £243m to £318m.
• The company said, in its arguments as to why Amazon should be allowed to buy a stake, that it was near to going bust. The pandemic will have changed things but for how long is not clear. Deliveroo had accumulated losses of a mind-boggling £909m as at end-2019. We just don’t know that there is enough in the price that the customer will be willing to pay for a meal to keep everyone (the restaurant, rider, Deliveroo etc) in profit.
• The Times reported on Saturday that six former and present staff members of Caffè Nero, who worked with the company since 2016, had confirmed that they had changed dates on produce for sale. Caffe Nero denies that this is in any way standard practise and says ‘this activity has never been tolerated in the 24 years of Caffè Nero. This has never come as an issue in the past. There is nobody in the leadership team that would tolerate such activity.’
• The Times reports that Nero adds ‘whilst Caffè Nero, like every responsible food retailer, is committed to minimising food waste and encourages employees at every level to ensure that stores are run efficiently, and not be overstocked with food that might go unsold or consumed, it is not the case that Caffè Nero employees are in any way incentivised to ‘change labels’.’
• The Telegraph reports Richard Caring as saying that his Bill’s Restaurants chain has a secure future. It refers to the company’s recently filed accounts in which it says that, though the company breached covenants with HSBC last year, it has secured a waiver on covenants since. Caring is quoted as saying ‘with the support of our landlords and bank, we are confident that we will secure the future of the restaurants and the 3,000 members of staff who have worked so very hard and put up with so much difficulty over the past 12 months.’
• Domino’s Pizza has this morning reported that it has reached an agreement to sell its business in Sweden for €2m (£1.8m) in cash. It says the transaction is expected to complete on 2 May. DOM says ‘the disposal of Domino’s Sweden is part of DPG’s planned exit from all directly operated international markets, to allow management to focus on its core UK and Ireland operations, as announced by the Company in October 2019, and follows the exit in 2020 from Domino’s Norway.’ At the date of the announcement, Domino’s Sweden operates 14 stores in Sweden. The value of the assets was £9.8m.
HOTELS & LEISURE TRAVEL:
• From today, travellers from England to overseas destinations will have to prove they are allowed to travel, or risk being turned away from the airport. A “Declaration to Travel” document from a government website will need filling in.
• There are slightly different restrictions in Northern Ireland, Scotland and Wales, with no declaration for travel form yet required.
• Cyprus looks set to open its borders to vaccinated Britons from the start of May.
• Former TUI and easyJet executive Chris Browne says the airline sector will take two years to recover from the “turmoil and devastation” of the pandemic, reports Travel Weekly.
• ABTA is said to ‘remain hopeful’ that the government will provide additional taxpayer cash to travel. CEO Mark Tanzer told a Travel Weekly webcast, however, that he ‘was disappointed the broader travel industry hasn’t been recognised as needing support. The industry has effectively been closed by government health policies.’
• Melia hotels CEO Gabriel Escarrer has backed plans to create a safe travel corridor between the UK and Spain. He says ‘we know that transmission of Covid-19 takes place mainly internally and not through travel.’
• Gatwick is to levy a £5 drop-off charge from today.
• Domestic holiday prices are reported to be rising.
MORE LEISURE SNIPPETS:
• Goose Island Brewery’s Cadbury Crème Egg flavoured beer is reported to have sold out within an hour of launch. More is being brewed.
• Five Points Brewing is to open what it says is the largest taproom in Hackney next month.
• Starbucks in the US is to roll out dairy-alternative oat milk nation-wide.
• California-based E&J Gallo reportedly produces over 70% of the US wines priced at £7 and over sold in the UK off trade
• Mike Ashley says his Sports Direct empire may have to close shops as the Budget did little to help retail.
• Sainsbury is the first supermarket to say that it will forego the business rates suspension relief announced by chancellor Rishi Sunak
• Saga aims to recommence its cruise business on 27 June
• Marriott says it will make a cash award of four hours’ pay to staff getting vaccinations.
• Accor has said it will secure sufficient vaccine to inoculate all its staff by the end of the summer.
• Moody’s reports that the Las Vegas Sands Corp’s move to sell its Las Vegas assets, including The Venetian Resort Las Vegas and the Sands Expo and Convention Center, is ‘credit positive because they will provide the company significant additional capital, enhancing liquidity while providing flexibility to continue to reinvest in Macau and Singapore, as well as pursue additional growth opportunities and debt reduction.’
• Moody’s says that ‘while the Las Vegas assets provided some geographic diversification, they are not likely to contribute significant cash flow in 2021 before the sale, and they are relatively small in terms of LVSC’s overall revenue and EBITDA. Over time, the company is likely to continue to invest in its integrated resorts in both Macau and Singapore. Additional growth opportunities are also likely, including domestically in the US, which would include developing integrated resorts as well exploring digital gaming opportunities.’
FINANCE & MARKETS:
• The US economy added 379,000 jobs in February after two months of little progress. US unemployment fell from 6.3% to 6.2%.
• The Halifax says that the extension of the stamp duty holiday has “removed uncertainty” for house buyers. It says house prices in February slipped back by 0.1% to leave them 5.2% higher than a year earlier.
• Sterling mixed to a shade lower at $1.3835 and €1.1611. Oil higher at $70.67. UK 10yr gilt yield down 2bps. World markets mixed on Friday but London set to open up around 52pts.
RETAIL WITH NICK BUBB:
• Saturday’s Press and News (1): The front-page headlines of the Saturday papers were pretty mixed: the FT highlighted a big fall in Anglo-French trade volumes in January (“Brexit barriers hit UK-Europe trade flows”), but it also flagged “Johnson under pressure as nurses consider strike over “pitiful” pay offer” and the Guardian ran with “Nurses threaten strike as Hancock defends pay offer”. The Times went with the Covid vaccine roll-out (“Variants will not hold UK back, says top scientist”) and the Telegraph bemoaned the plan to stop people using vaccine passports to travel Overseas for Easter: “Travel permits to stop Easter holidays abroad”. The Daily Mail, however, focused on the continuing row about the cost of Carrie Symonds’ “make-over” of No 10: “No 10 Décor Scandal: Tory HQ “Cover Up” Exposed”.
• Saturday’s Press and News (2): In terms of Retail stories, the news that #MadMike had lashed out on Friday afternoon at the Government over its “near worthless” Business Rates relief package in the Budget (and warned that Frasers Group would not now be able to justify its planned investment in buying some Debenhams store sites) was picked up by the FT, the Daily Mail and the Guardian. The Times focused on the problems of John Lewis, flagging that JLP was, controversially, not going to repay the Business Rates relief given to Waitrose because of the costs/losses incurred in the John Lewis business through the Covid pandemic and highlighting the plan to close more High Street stores and open “concessions” in Waitrose (“So long, partner: John Lewis is pulling out of town”).
• Saturday’s Press and News (3): The Times also noted that the sales boom over the last 12 months for supermarkets has done little for profits, as Morrisons will highlight on Thursday, and that tough comps now lie ahead (“Grocers will have to raise game after year of plenty”). Morrisons was also the “Share of the Week” in the Daily Mail, which noted its lacklustre share price performance in recent years. Burberry was one of seven tips for post-lockdown recovery in the Daily Mail. The main Business story in the Times was that health campaigners have claimed victory after Tesco agreed to set itself public targets to sell healthier food. On a different note, there was a big feature in the FT on the plans of several Overseas fast food chains (like Jollibee, Fireaway, Wingstop and Wendy’s) to enter the UK market, to fill the gap left by store closures on the High Street (“Takeaways seize
• Sunday’s Press and News (1): The headlines on the front pages of the Sunday papers were also pretty mixed: the Observer went with “Ministers face public backlash on 1% pay offer to “NHS heroes””, the Sunday Telegraph ran with “Frost tells EU to stop sulking at Brexit” and the Sunday Times flagged that “Queen “won’t watch the Harry and Meghan circus””. The Mail on Sunday trumpeted the fact that skools have been sent 57m Covid test packs ahead of re-opening: “We’re finding real freedom!”.
• Sunday’s Press and News (2): In terms of Retail stories, there was more about the upcoming Deliveroo IPO than John Lewis, but, ahead of Thursday’s results, the Observer had a preview, headlined “John Lewis needs to stay special – while trying to stay alive”, noting that John Lewis will not name the planned 8 store closures, as landlord negotiations continue. The Mail on Sunday flagged that John Lewis is launching its first “Buy now, pay later” scheme for Online Homewares. The Mail on Sunday also noted that Morrisons’ final results on Thursday will highlight that the annual sales of its wholesale arm are now over £1bn. The Sunday Times had a feature on Asda, headlined “Nail bars and salons: the Issa’s plans to fill space at Asda”, summing up the debate in the industry on whether what worked in petrol station shops for the Issa brothers will work in superstores. The Sunday Telegraph had
• Sunday’s Press and News (3): In terms of all the post-Budget Economics comment columns in the Sunday papers, we would, as usual, highlight the columns by the Sunday Times Economics correspondent David Smith (“Sunak got it right, but the economy still needs fixing”), in which he argued that the Chancellor’s plans depend on tight control of public spending and by the veteran City commentator Jeremy Warner in the Sunday Telegraph (“The big lie nestled at the heart of Sunak’s spend now, pay later strategy”), in which he highlighted that “Downing Street wants to spend like Germany and France, but tax like the United States”. There was also a good column by the veteran Economics commentator of the Observer, William Keegan, headlined “Beware a small-state ideologue posing as a big spender”. And the Political correspondent of the Observer, Andrew Rawnsley, penned an interesting column
Today’s News: A busy week has kicked off today with the belated finals from the embattled footwear retailer Shoe Zone, for y/e Sept, which are predictably awful, with revenue down 24% to c£123m and a loss of nearly £15m. There is no update on current trading, given the store closures, but the company has announced that it has revived the Lilley & Skinner brand (which readers of a certain age might remember) and that its new FD is no less than a personage than Terry Boot (the previous FD was called Peter Foot!).
Friday’s News: We somehow missed the news on Friday morning that #MadMike had lashed out on Friday at the Government over its “near worthless” Business Rates relief package in the Budget (and warned that Frasers Group would not now be able to justify its planned investment in buying some Debenhams store sites). And the Russian discount retailer Fix Price announced that it had priced its London IPO at the top of the range, although in first dealings on Friday the shares struggled to hold on to the 9.75 level, denying a short-term profit to its backers.
This Week’s News: Tomorrow brings the BRC-KPMG Retail Sales survey for February (with another “Food good/Non-Food bad” split likely), the DFS interims, the CapCo finals and the latest monthly Nielsen grocery sales figures. On Wednesday we get the Just Eat finals and the Fix Price IPO unconditional dealings. Thursday then brings the Morrisons finals and the John Lewis Partnership finals, whilst the Hammerson finals and Mothercare’s move of listing to AIM follow on Friday.