Langton Capital – 2021-04-28 – PREMIUM – Whitbread, current trading, home working, beer, loans, Entain etc.:
Whitbread, current trading, home working, beer, loans, Entain etc.:
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A DAY IN THE LIFE:
Our essay crisis (self-imposed by us ignoring the requirement to produce a quarterly VAT return and our annual accounts in the same week) was exacerbated yesterday by our overriding need to watch two robins in the garden fighting over the possession of a puddle.
The one claimed ownership, ruffled up its feathers and splashed around for all the world as though it owned the place, whilst the other looked on jealously and occasionally tore the hell out of a piece of grass or tossed a twig aggressively in the air.
Which seemed to cheer up the puddle-owner immensely. As he continued cavorting around before emptying his bowels in the water and flying off squawking after which it was necessary for us to research avian violence online before breaking for a coffee and then a quiet sit down. We’ll try again today. On to the news:
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WHITBREAD – FULL YEAR NUMBERS:
Following the release of its FY numbers yesterday morning, Whitbread hosted a webinar for analysts and our comments thereon are set out below.
The numbers (see also earlier email):
• Occupancy slipped from the normal 75% plus to 40% in March last year, a negligible 1-2% in April and May, and a Covid high of 58% in September. Occupancy then fell to 35% in November (Lockdown II) and 23% in January (Lockdown III).
• The group benefited from £154m of furlough receipts. The company has impaired goodwill and other valuations by £348m.
• CFO Nicholas Cadbury says the group should get back to pre-Covid margins in FY24 (the company is a February year-end). The co is working on a range of potential outcomes and they may not fit neatly into one particular year or another.
• Whitbread says it moved from 6 hotels at the beginning of the year under review to some 30+ now with another 42 in the pipeline
• The German market is challenging at present. The group has ‘materially accelerated’ its pace of growth. The recovery in Germany may ‘be about 2mths behind the UK’. The independent competitor set will be ‘constrained’.
o Occupancy in Germany is 10% to 15%.
• Group has ‘line of sight’ to 60k rooms in Germany.
• Opportunity for M&A? There have been and will be opportunities. Government is propping up some operators at present. No reason why the group should not be no1 in Germany.
Reopening and medium term trading:
• Some 90% plus of the group’s hotels are open in the UK. Occupancy in the UK is around 30%. The ‘vast majority’ will open from 17 May. The group expects a strong leisure staycation market.
• ‘Trade’ business demand has been relatively stable, but ‘office-based’ business demand is not yet materially present. The co does not believe this will happen ‘until after the summer’ – and it may have ‘been structurally altered’. Outer London is trading more in line with the UK’s provinces
• Group believes it should be back at pre-Covid levels by 2023. The UK to UK market will be stronger than that driven by overseas visitors.
• Any problems re-hiring staff? WTB is c40% staff turnover in normal times. Attrition rates have fallen during furlough.
• Further forward, the group believes investments made now should give it a trading advantage ‘for several years’. It is ‘investing to win’. Covid will accelerate the ‘contraction in competitor supply’. Indies are still 48% in the UK (but 70% in Germany).
o This had been running at c1% p.a.. During the financial crisis, it went up to 2%. The same could happen now.
o There may be some visibility from 17 May or 21 June as a number of operators may choose not to reopen (or not be able to).
o There hasn’t been an expansion of the IHG or Accor budget brands for some time
• The group believes that ‘Travelodge is doing pretty well, as well.’ But not as well as Premier Inn. It also has a higher rent roll and is more heavily leveraged.
• Group has ‘line of sight’ to 110k rooms in the UK. The pipeline has been ‘scrubbed’.
• The group has little visibility & will not be giving profit or sales guidance. Leisure bookings are picking up currently. A further lockdown is possible – but not in the core projections.
• WTB says it will break even in this financial year at 55% occupancy levels with room rates 6% down on FY20
• The best the restaurants can do on outside-only is break even. Demand is tied to hotel occupancy – but more so breakfast than evening meals
Balance sheets, cashflow, debt & marketing:
• Net debt at the year end was only £47m. The company says its total liquidity is around £2.2bn. Liquidity is ‘robust’. Debt covenants will not be tested until March 2023. Capex will move back to pre-Covid levels this year.
• Company will open around 1,500 Premier Plus rooms this year.
• The step up in marketing cost could be maintained. This is under review. Cash burn is running at around £40m per month.
• The company will not be paying back furlough payments. The co says it needed the help and it is, during normal times, a major tax payer
• Occupancy is currently c30% in the UK with leisure travel set to be permitted from 17 May. The staycation market will be big this year. The group ‘over-indexes’ in the regions (vs London) and in UK guests. Both sub-sectors should be relatively positive.
• WTB’s Rights Issue is 1) precautionary and 2) potentially predatory. There will be opportunities over the medium term both in the UK and in Germany. The group believes there are and will be opportunities in Germany.
• See also our earlier email. WTB will be better positioned than a number of its competitors with a largely freehold estate and its Rights Issue cash having driven debt down to currently negligible levels. Under the range of envisaged scenarios, the group should take share and continue to build its estate.
PUBS & RESTAURANTS:
• S4 Labour has weighed in saying that it’s data suggests that ‘hospitality like-for-likes are down 10.5%, with 70% of sites trading at similar or above 2019 levels.’ This is a) a good performance but b) does not account for the units that are still closed and who may be down by as much as 100% on a LfL basis depending on whether or not they have any delivery or click and collect business. S4L says ‘there is little change in the number of sites that were able to open in the second week of re-opening, with 45% of sites still not trading, and those that were trading, saw like-for-likes 10.5% down compared to the same week in 2019.’ S4L says ‘despite the decline, the distribution of sites trading at similar or above levels to the same week in 2019, has jumped from 45% in re-opening week, to 70% of sites last week. The figures should be viewed in the context comparing pre-pandemic trading
• Langton comment: As mentioned, this is a good performance from those operators that are open. Outside may be a third of covers (this will vary widely) suggesting that those open operators have come withing a hair’s breadth of 2019 numbers (which was inclusive of Easter) with only a third of their capacity. Operators were helped by the weather and by the novelty value they afforded customers – but these are reassuring numbers. Pity the operators who did not (inexplicable) or could not (obvious) reopen. S4L says ‘we expect 70% of open sites trading at similar or above 2019 levels to be the benchmark until operators are allowed to utilise all of their capacity if the weather holds and it’s not a surprise that sales are down, with sites being so hampered by outdoor only rules.’
• S4L goes on to say that ‘hospitality sales last week were only down 7.5% compared to the highs of EOTHO levels, with drink down 2.6% and food, while no longer subsided by the government scheme was only down 11.6%.’ This is further evidence that wet sales are outperforming food. It says ‘the figures suggest enthusiasm for a first drink in the beer garden faded very slightly and so it has become even more important that sites who can only operate at a limited capacity, or are not able to trade at all, get the support they need to survive.’
Working from home or homing from work:
• The City of London is biting the bullet and is planning to convert offices left vacant after the pandemic into hundreds of new homes as part of a recovery strategy. The BBC reports ‘the City of London Corporation, which looks after the Square Mile, is aiming for at least 1,500 new homes by 2030.’ Admittedly, that’s a modest number and a relatively long timescale.
• Langton comment: The City told the BBC ‘firms have told us that they remain committed to retaining a central London hub but how they operate will inevitably change to reflect post-pandemic trends, such as hybrid and flexible working.’ It says ‘the Square Mile must evolve in order to provide an ecosystem that remains attractive to workers, visitors, learners and residents.’ Quite. The Beeb writes ‘the pandemic has accelerated a shift to a new way of working that has seen many firms shake up routines. BP staff, for example, are set to work from home two days a week going forward.’ It adds ‘IWG, the world’s biggest flexible workspace provider, also expects a big jump in demand once pandemic subsides and “hybrid working”, a mixture of going in and working from home, becomes more common.’
• The desire to provide space for said hybrids may be father to that thought, but we broadly agree. Just what the appearance of 1,500 DIY residential kitchens in the City means for demand for coffees, sandwiches at lunch and the like means, isn’t yet clear. But it isn’t short term positive. The City is talking about affordable housing which, presumably, implies relatively high density. Residents may be more likely to shop in the off-trade though, on the margin, they will doubtless buy the odd pizza, coffee and tray of sushi.
Other Covid news:
• The Daily Mail reports that pubs are facing a shortage in draught beer after strong demand in pub beer gardens and the like. CAMRA says ‘the beer shortage issues that are being faced my some publicans across the UK is a serious problem that is affecting their ability to trade efficiently and turn a profit. Since reopening, pubs have faced an increase in demand from customers as many people flocked to pubs across the UK, so it is a real shame that some pubs are unable to stock some of their best selling products.’
• Other Covid news see premium email: A selection of feedback in no particular order:
o Draft beer, as reported above, is indeed in demand.
o Landlords are getting a bit punchier when it comes to demanding rent.
o Apps are great but some reports of punters, having parted with their money, waiting up to an hour to have their food & drink served.
o Getting staff back from furlough may be tough. 30% or 40% may have either disappeared or not be a) willing to take their employers’ furlough cash but b) be less willing to do the hours or evenings that they had done last year.
o US and other brands are eyeing sites. There are plenty available. The price pushing seen when Five Guys, Mod and others were outbidding each other last year, won’t be coming back in a hurry. As always, there are lots of poor and / or leasehold sites available. Good freeholds, not so much.
New loans & rent arrears on the balance sheet:
• The ICAEW reports ‘small businesses that have accepted government support in the form of CBILS and Bounce Back Loans may find themselves at a crossroads as they seek a way through distress into recovery.’ It quotes licensed insolvency practitioner Mazars as saying that many operators have survived due to government help. It says some now owe money to banks, landlords, suppliers, the HMRC (VAT and PAYE) and to the government via CBILS and bounce-back loans.
• Langton comment on further CVAs, landlords etc: Suppliers and staff are the first to get paid, government and landlords perhaps the last. Mazars says ‘most of these companies have been paying their suppliers, so the trade position is fairly clean. But some are looking at whether they should they carry on with the company as it is, or if they could, instead, use an insolvency process to wipe it clean and potentially start afresh.’ A CVA could even leave existing shareholders intact.
• The ICAEW then goes into some detail as to the legal issues etc. It is not our intention to plum those depths but rather simply to raise the issue that there are a lot of fractured balance sheets out there and suggest that insolvency practitioners may have a busy few months ahead of them. If landlords push too hard, they may find that there is nothing there to push. Re the government, many operators are intensely grateful for the help they have received. Whether they are grateful enough to pay back their loans, remains to be seen.
• Mazars says ‘we’re also seeing the need for proper forecasting.’ That’s often a good start. It says directors have never been this stressed (at least not in the recent past). It says ‘it’s very difficult to be black and white in insolvency practice. There is always a grey area, but we do always take a very ethical position. I have said to some directors that I could not recommend that they go through an insolvency process because, although it was available to them, it was not in the best interests of the company’s creditors at that stage. We have to maintain our position and give the right advice.’
Company & other news:
• Deliveroo yesterday announced a two year delivery partnership following a successful trial ‘which has helped to attract new and younger customers.’ Deliveroo says ‘it will expand its Deliveroo service to 110 new shops across the country with up to 400 new Waitrose shop roles created by the expansion plan.’ This will increase the number of shops to 150 in total by the end of the summer. Deliveroo says ‘as we expand further across the country, this partnership will mean more choice and selection for our customers.’ Terms are not given. Waitrose could add 400 jobs.
• Starbucks has reported Q2 Fiscal 2021 Results saying that LfL sales grew by 9% in the US and by 91% in China where the group is up against lockdown comps. CEO Kevin Johnson says ‘I am very pleased with our progress to date in fiscal 2021, as our second quarter results demonstrated impressive momentum in the business with full sales recovery in the U.S. Our strong results validate our ability to adapt to changes in our environment and the needs of our customers.’ He says ‘we have positioned Starbucks for the inevitable great human reconnection that we see unfolding in the U.S. and will propagate in every market around the world.’
• Langton comment: SBUX reports that global LfL sales were up by 15%, driven ‘by a 19% increase in average ticket, partially offset by a 4% decline in comparable transactions.’ It says ‘Americas comparable store sales increased 9%, driven by a 22% increase in average ticket, partially offset by a 10% decline in comparable transactions; U.S. comparable store sales increased 9%, driven by a 21% increase in average ticket, partially offset by a 10% decline in comparable transactions.’
• SBUX reports ‘international comparable store sales increased 35%, driven by a 26% increase in comparable transactions and a 7% increase in average ticket; China comparable store sales increased 91%, driven by a 93% increase in transactions, slightly offset by a 1% decline in average ticket; International and China comparable store sales are inclusive of a benefit from value-added tax exemptions in China reinstated as of January 1, 2021, of approximately 4% and 9%, respectively.’ In most markets, SBUX has been seeing a slight reduction in customer numbers but an increase in spend per head. The company says ‘operating margin of 14.8% increased from 8.1% in the prior year primarily driven by sales leverage from business recovery and the lapping of COVID-19 related costs in the prior year, partially offset by growth and investments in wages and benefits for store partners.’
• Deliveroo has appointed Karen Jones to its board. It reports that she will become Chair of the Remuneration Committee and join the Audit committee.
• Carlsberg has reported Q1 numbers saying ‘the Group delivered a good start to the year.’ It says total organic volume growth was 11.5% with reported growth of 12.8%. Organic growth was negative 5.8% in Western Europe through to +29.7% in Asia. The company updates on the full year saying ‘uncertainty remains high. However, in light of the good start to the year, we raise the bottom end of the range in our earnings expectations for 2021.’ It says organic growth in operating profit should be within the range of 5-10% (previously 3-10%).
• CEO Cees ’t Hart says: ‘COVID-19 continues to impact people across the world. As in 2020, our top priorities remain the health and wellbeing of our employees, supporting our customers to the best of our ability and safeguarding the financial health of the business.’ He says ‘the Group had a strong start to the year in Asia and Central & Eastern Europe, while Western Europe was significantly impacted by the extensive lockdowns and restrictions across the region. With COVID-19 continuing to be a challenge in many of our markets, our geographical exposure showed its strength, as strong volume growth in several markets across all three regions more than offset challenging circumstances in other markets.’ The CEO concludes ‘although the uncertainty as to how the pandemic will evolve in the coming quarters remains high, we’re pleased that we can raise the bottom end of our earnings
• Nichols updates on trading saying that it has seen ‘strong growth achieved by the Vimto brand in the UK and a solid start to the year for the Group’s International business have largely offset significant declines in the UK Out of Home route to market. As a result, total Group revenue in the period decreased by only 5.9% to £30.7m against the prior year, despite the impact of the UK lockdown.’
• Langton comment: Nichols says it is outperforming the wider UK drinks market. Re the outlook, it says ‘the Board is confident that the Group, underpinned by the strength of the Vimto brand and the Group’s diversified business model, remains well placed to deliver its long-term strategic ambitions.’ It concludes ‘should the UK Government’s planned roadmap out of lockdown continue, and assuming the absence of further lockdowns later in the year, the Board expects full year adjusted profit before tax to be broadly in line with current market expectations.’
• DoorDash in the Us is offering a three-tiered pricing structure for restaurant operators, with the lowest commission fees set at 15% and the highest set at 30% reports NRN.
• Waitrose has reported that the sales of picnic food have grown
• Asahi reports its Super Dry is the Worldwide Partner of Rugby for the World Cup in 2023 in France
HOTELS & LEISURE TRAVEL:
• EasyJet and easyJet holidays have flexible policies regarding flight changes in order to boost consumer confidence in booking trips
• Travel Weekly quotes private equity firm ECI Partners as saying that the value of domestic holiday companies has risen as a result of increased staycation numbers.
• The US and the EU are to recognise each-others’ vaccine passes. TTG reports talks have yet to commence between the EU and the UK.
• TUI boss Fritz Joussen has said that vaccination success is key to growth but that talk of quarantines is toxic.
• Ryanair says domestic holidays will be dumped once Brits are permitted to travel overseas. It’s a view.
• Cyprus and Malta and other destinations offering quarantine free travel to vaccinated Brits. Presumably vaccinated anybody.
• Insurer Battleface has looked into what customers would pay for a Covid test. Only 4% would pay £75 plus. The average price people would be willing to pay was £22. This is an aspiration as tests currently cost 5x that or more.
• BA is hoping wealthy tourists will fill seats left empty by business travellers.
• The CAA has said Heathrow cannot put its charges up by 10%. This is the subject for further discussion as operators vie with each other to direct any wall of money that they can identify in their direction.
• Ipsos Mori has found that almost two thirds of business travel managers believe that ‘travel returning to pre-pandemic levels is not desirable’.
• Lyft has sold its driverless vehicle unit to Toyota
• 888 Holdings has updated on Q1 saying that revenue growth of 56% was ‘driven by strong growth in regulated markets’. It says total revenue was $272.5m. CEO Itai Pazner says ‘the strong momentum in 2020 has continued into the first quarter of 2021, with a new all-time-high for FTDs and revenues, although year-on-year trends were partly inflated by the disruption to sporting events at the end of the prior year period, and increased demand for digital entertainment during this period across our main markets.’ He concludes ‘we remain very pleased with the strong momentum in the business and the continued positive customer reaction to our suite of new products and innovations. As a result, and underpinned by the Group’s strengths as a product-centric, responsible, and diversified operator, the Board believes that 888 has an outstanding platform to deliver continued strategic progress during
• Entain yesterday reported that it has made a ‘revised offer of A$3.5 billion to the Board of Tabcorp to acquire its Wagering and Media business.’ It says it ‘believes that the Revised Proposal is compelling both in terms of the value it represents for Tabcorp shareholders in cash, and certainty of deliverability.’ It says a further announcement will be made as appropriate.
FINANCE & MARKETS:
• Sterling a little weaker at $1.3877 and €1.1491. Oil up at $66.63. UK 10yr gilt yield up 2bps at 0.78%. World markets heading better yesterday after Europe moved lower. London set to open up around 20pts.
RETAIL WITH NICK BUBB:
• Today’s News: Today’s Sainsbury finals (for the year to March 6th) follow up on the bullish Kantar figures yesterday flagging that Q4 LFL sales picked up to +11.3% (ex-fuel), driven by Argos and noting that “we have carried good underlying trading momentum into the new financial year and started the year strongly”. However, given the tough comps ahead as customer behaviour normalises, the company is “prudent about prospects for the year”, although “we continue to expect underlying profit before tax in the financial year to March 2022 to exceed that reported in the year to March 2020 (£586m) and we are comfortable with consensus forecasts of around £620m”. The surprisingly short Dixons Carphone pre-close update also flags strong trading since January, thanks to very strong Online growth, with group LFL sales up by 12%, but there is no upgrade to full-year profit expectations and the