Langton Capital – 2021-05-19 – PREMIUM – Marston’s, Mitchells & Butlers, current trading, holidays, beer duty etc.:
Marston’s, Mitchells & Butlers, current trading, holidays, beer duty etc.:
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A DAY IN THE LIFE:
I decided a few days ago to put up some Ikea shelves that had been resting in our garage – and the garage of our previous house – for the thick end of 20yrs, and they were still in pretty good nick.
No warping or whatever and they’re well-travelled, as I can remember buying them, in Geneva of all places, where the local telly told you to hold your nose and go to Ikea under the strap line ‘ne sois pas snob’.
Don’t be a snob because, in Geneva, which is not short of fur coats, small dogs and Russian emigres, it was thought demeaning to pitch up at Ikea where, horror of horrors, you might have to lug a load of planks out to the carpark where it might scratch the Bentley’s roof.
Anyway, I’d always found that they were pretty good and holding a few books off the ground and, as that’s what they were meant for, I had no complaints. On to the news:
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MARSTON’S – H1 NUMBERS:
Marston’s has today reported H1 numbers and our comments thereon are set out below:
• Given the restrictions on trading during the period – and the disposal of the beer business – the headline numbers are not entirely meaningful. Nonetheless, revenues were £55.1m vs £343, in the same period last year, with an underlying loss before tax of £122m (2020: loss £0.8m).
• The underlying loss per share is 16.7p (2020: profit per share of 1.2p) but the £291m profit on disposal of the brewing operations pulls the statutory numbers back up to a profit, with statutory EPS of some 31.5p
• As expected, there is no dividend. The company says ‘the Board believes that given the significant disruption to trading in the current financial year and continuing uncertainty it will be prudent to plan for no dividends to be paid in respect of financial year 2021.’
• It says ‘dividends have been an important component of returns to shareholders over many years and we will naturally look to resume dividend payments when there is sufficient certainty about the outlook.’
• Marston’s undertook a detailed review of its operations ahead of reopening and, as the required revenue to break even was relatively low, it reopened around 70% of its units in England on 12 April and around 70% of its Welsh and Scottish assets from 26 April
• This may have depressed LfL numbers but it maximised cash flow and the contribution to overheads in absolute terms
• LfL sales for the period since outside reopening (open pubs only and adjusting for the Easter weekend) show sales at around 80% of pre-Covid levels. Drink sales, aided by a warm spell in April, were 90% and food was 60%. Cold evenings curtailed food sales
• The group reports that it broke even in EBITDA terms during the month of April. Only a handful of the c700 units that it reopened failed to break even. The revenue required to break even will edge up when VAT rates and business rates normalise
• During times of total closure (hopefully not to be repeated), MARS burns around £4m per week
Cash flow and debt:
• Marston’s reports an outflow from trading of around £100m but, as a net c£230m was received as a result of the brewing JV, there was a net inflow for the period of around £110m
• There are no abnormal amounts owing to trade creditors or landlords and the outstanding VAT payment (c£46m) will be paid on terms running to the end of the year
• The contingent receivable as a result of the disposal of the brewing operations has risen from around £8m to c£24m
• Marston’s has drawn £164m of its £280m of bank facilities and it has £16m in cash. It has no refinancing requirements over the medium term and it has waivers on its securitisation covenants until January next year
• Group net debt is £1.23bn (down £150m over the last year). The group intends to reduce net debt to below £1bn by 2025.
Outlook & company comment:
• In a very active period, the SA Brain deal may be overlooked. This capital-light transaction, however, could become something of a template for further deals.
• Marston’s CEO Ralph Findlay reports ‘despite the challenges of the last year, the actions we have taken have ensured that Marston’s has emerged a stronger and more focused business with a substantially strengthened balance sheet, a 40% stake in Carlsberg Marston’s Brewing Company and a clear vision for the future.’
• Mr Findlay, who will leave the company at the end of the financial year, reports ‘I am confident that the business is in an excellent position to execute its strategy and deliver a return to growth as the country recovers from the pandemic.’
• The CEO says ‘whilst still early days, trading has been encouraging since we were permitted to open our doors for outdoor trading last month and it has been fantastic to have our teams back in the business, doing what they do best, and welcoming customers back into our pubs.’ He says ‘we look forward to all trading restrictions being removed next month which signals a return to some semblance of normality.’
• Re the upcoming management change, Ralph Findlay says ‘I am delighted to hand over the reins of Chief Executive Officer to Andrew Andrea later this year and am confident that both Marston’s – and its talented team of people – will be in extremely able hands under his stewardship.’ He says ‘Marston’s has a great opportunity ahead and I look forward to seeing the Group go from strength to strength as it embarks on the next exciting stage of its development.’
• Marston’s has been extremely active during the Covid pandemic. The company has finalised its Carlsberg JV and agreed on various waivers with its bondholders and added to its liquidity headroom. The company has secured the SA Brain estate of pubs via an innovative, asset-light deal and has seen off an opportunistic bid approach from Platinum Equity Advisors. More recently, the company has announced that long-standing CEO Ralph Findlay is to retire at the end of this financial year, to be replaced by current CFO, Andrew Andrea.
• What the group has not done has also been noteworthy. It has not issued equity, it has not increased its underlying indebtedness, it has not launched a CVA for any of its leasehold assets and it has not made any potentially risky capital transactions – either disposals (the brewing JV is strategic) or purchases of ‘distressed’ assets.
• Marston’s has shown that it can operate at profitable levels of turnover even under relatively severe restrictions and the freehold nature of its units means that trading outlet costs are reduced.
• It remains the case that forecasting is not yet possible but, looking longer term, pandemics are rare, hostelries have been popular for centuries, Marston’s debt is reduced, and it has a well-financed, largely-freehold estate.
• The company could make accretive acquisitions. It is in a good position to do so and the hospitality industry is likely to see supply reduce going forward and Marston’s is well-positioned to prosper.
MITCHELLS & BUTLERS – H1 NUMBERS:
Mitchells & Butlers has this morning reported H1 numbers and our comments are set out below:
• Although rendered relatively meaningless by the pandemic, the results were as follows. Sales in the period were £219m against £1.04bn last year. The loss before tax was £200m (2020: loss £121m) and the basic loss per share is 33p. There is no dividend.
• The group says that, when open, open pubs saw ‘like-for-like sales restricted to a decline of 30.1% against pre Covid-19 levels.’ Only 14 weeks of trading were permitted in the period.
• The company says it is ‘confident of emerging in a position of strength as restrictions are eased’ and adds that its ‘strengthened balance sheet through [the] successful £351m equity raise and refinanced debt arrangements’ put it in a good position.
• M&B adds ‘we started this period with 16% of our estate open, building to 44% as restrictions eased in Scotland and Wales, and based on the strong levels of bookings and demand we have seen open sites generating a level of outdoor sales that were 37% down on their total sales (outdoor plus indoor) pre Covid-19. As restrictions have eased further, we have this week re-opened almost all of our estate, now permitted to trade both indoors and outdoors.’
• No guidance but some underlying confidence.
• M&B says ‘whilst uncertainty and challenges still remain, we are encouraged by the successful roll out of the Covid-19 vaccination programme and the fall in infection rates and are confident, given the demand that we have seen so far since re-openings, that we will see strong consumer confidence in our brands supporting a rebound to profitability and cash generation once restrictions are fully eased.’
• it says ‘until that time, we continue to believe it is not meaningful to provide any forward guidance.’
Balance sheet and cash flow
• M&B says ‘we successfully launched our Open Offer on 22 February, raising £351m. The equity raise, plus the associated package of refinanced terms for our secured and unsecured debt, provides a strong platform of financial stability as we continue to manage our way through the remaining uncertainty presented by the Covid-19 pandemic.’
• It says ‘at the balance sheet date the Group had cash balances on hand of £141m, with undrawn unsecured facilities of £150m. Subsequently, we have had five weeks of limited outdoor trading from 12 April.’
• The co has ‘unsecured committed financing facilities of £150m to February 2024’ and has ‘extended covenant waivers and then amendments in place for the securitisation until January 2023.’ Net debt was £2,014m at the half-year end (HY 2020 £2,158m), including £542m of IFRS 16 lease liabilities (HY 2020 £543m)
Other comment & Outlook:
• Mitchells & Butlers’ CEO Phil Urban says ‘M&B was a high performing business coming into the pandemic. With the support of our main stakeholders, we are now well placed to emerge in a strong competitive position and look forward to the removal of remaining trading restrictions in June such that the business is able to return again to full and sustainable profitability.’
• The CEO adds ‘with our great estate, well diversified portfolio of brands and proven management team, we look forward to welcoming back our guests for great experiences in Covid-19 secure environments and focusing the business once again on continually enhancing our customer proposition while driving efficiencies through the Ignite programme.’
• M&B has announced back in February that it was to raise £350m from shareholders at 210p per share, a 36% discount. This to secure financing from its banks and to strengthen its finances. Mitchells & Butlers at the time also agreed a number of amendments and waivers to its debt covenants. Its major shareholders camee together in a new vehicle, Odyzean, in order to form a concert party ‘in order to help address the significant capital needs of Mitchells & Butlers and provide a clear and consistent framework for their future relationship with the Company.’
• We mentioned at the time that this looked somewhat like a take-private on behalf of the company’s major shareholders. But we said that an overhaul of the company’s financing was necessary.
• We remain of the view that M&B has great assets and an able management team. The comments regarding the ‘time and cost devoted to public company matters’ does suggest that the controlling shareholders are not in love with the idea of the company being listed. We said some months ago that moves to ensure a de-listing in the future cannot be ruled out.
• M&B’s shares rose sharply by around 50% earlier this calendar year on vaccine and reopening hopes and have since flat-lined at around current levels.
• We believe the company is well-positioned to succeed relative to many of its peers. The issue, as has been the case for some time, is whether smaller shareholders will participate fully in any further upside.
• There can be no meaningful guidance as to future trading at this time. Nonetheless, 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.
PUBS & RESTAURANTS:
• It’s still early days with a small sample size but there is plenty of comment out there on footfall and trading patterns. It’s still early in the week, the weather has been bad in parts and it’s not pay-week (or close to it) and we’re a way off the next Bank Holiday yet. Nonetheless, The Guardian reports The Fork (formerly Bookatable) as saying that a record number of tables were booked for a Monday, 12% more than on any single date since July 2020. The Fork says 88% of its client restaurants were open on this week compared with 47% when dining was allowed outdoors only.
• Langton comment: Given the novelty factor, pent up demand and historically high savings on one side and bad weather on the other, it is perhaps not wise to read too much into one or two days’ data. Nobel Prize winning behavioural economist Daniel Kahneman, in his seminal work, Thinking Fast and Slow, points out that the Law of Small Numbers can lead people to make incorrect predictions. He says sample sizes are often too small and sample periods too short. People demand answers and observers will supply them – but they are often wrong.
• In this particular case, a sample period of two trading days is far too short to say much definitive. What it would show is if the wheels fell off or not. Did the staff turn up, did the tills work, did your suppliers deliver, did the roof fall in etc. Kahneman says, and few truer words spoken, that people are not adequately sensitive to sample size. We favour certainty over doubt. we are prone to exaggerate the consistency of what we see. We jump to conclusions. Having got that out of our system, it’s good to be able to say that disasters appear to have been few and that the customer does appear keen to come out and spend.
• Springboard suggests that London and ‘historic towns’ have seen increased footfall but most other regions have recorded numbers below two years ago. Tenzo has reported that restaurant sales were up 4% on Monday compared to 2019. That’s a single day and, given the novelty factor, it may not give an accurate picture for the future. Tenzo says LfL sales week on week were up 70%. Tenzo expects more restaurants to reopen as we approach the weekend. See our comments on small samples, above.
• Clear Sight reports in its ‘Mood of the Nation’ snapshot, that some 48% of British adults now believe that the worst of the crisis is behind us – a new high. It says the ‘anticipated time horizons to normality [has shortened] slightly.’ It says ‘30% believe we’ll see ‘something close to normality’ before the end of Q3 – but just over half of us believe it’ll be 2022 (or beyond).’
• S4Labour has reported that sales on Monday, admittedly a sample of one day, were down by 10.3% on the same Monday in 2019. It says ‘the decline in sales was driven by a 24% collapse in drink sales, where restrictions continue to prohibit vertical drinking. Food sales were up 5% compared to the same Monday in 2019, indicating the majority of pent-up demand has dissipated, with outside service being re-introduced in April.’
• Langton comment: To make definitive statements on the back of one day’s trading, the recording of which must be open to all sorts of potential errors, is maybe misguided. S4L says ‘with the restrictions now allowing inside service to resume, the number of sites open jumped to 95%, up from 50% of sites open the week before. The high proportion of the industry now open means that like-for-like sales figures are particularly relevant, the sales data is no longer representative of the small portion of the sector that was able to feasibly open in the previous restricted conditions. Such weak sales performance demonstrates just how difficult it will be for hospitality to be profitable until all restrictions are lifted.’
• These are sweeping statements that, though perhaps directionally true, seem a bit premature. S4L says ‘the restrictions that were lifted this week disproportionately disadvantaged wet-led sites, as vertical drinking remains prohibited, while restaurants are able to deliver a service that is a bit closer to ‘normal’. It is worrying, but not a surprise, to see drink sales so weak, but it is disappointing that, given the bounce of previous reopening, food sales were only a few percent up on a normal Monday in 2019. It is clear that the easing of restrictions are a baby step forward, but we are still a long way from being able to trade anything like profitably.’
Company and other news:
o Oakman Inns has announced it biggest project to date, The Woburn. The pub and restaurant will reopen today alongside accommodation comprising 48 bedrooms together with seven cottages within the large courtyard. CEO Dermot King says ‘The Woburn could easily become the jewel in the Oakman Group’s portfolio of historic pubs and hotels’ and adds ‘The Woburn is perfect for those looking for a much-needed mini-break.’
o Recovery or frozen animation? The number of insolvencies in April fell versus the same number a year ago. Company Insolvencies (UK) reports that in April 2021 there was a total of 925 registered company insolvencies across England and Wales. This is 23% lower than that in the same month the previous year and 35% lower than that in the same month two years before. Company Rescue reports ‘the decrease in bankruptcies is thought to be driven by a fall in debtor applications and creditor petitions. The enhanced Government financial support for individuals and businesses since COVID-19 emerged has contributed to these falls.’
o A coalition comprising SIBA, CAMRA, UKH and others, representing Britain’s Brewers, pub companies, operators and beer drinkers, have come together to call for a cut in duty paid on beer sold in the UK’s pubs. SIBA says ‘the majority of beer produced by the UK’s independent brewers is sold into pubs. A lower duty rate for draught beer would support the Government’s levelling up agenda by investing into communities, supporting wet led pubs struggling to recover from the pandemic, and brewers and securing the employment of thousands in hospitality, particularity amongst young people.’
• Gordon Ramsay Restaurants is aiming to open another 10 sites in the UK by the summer, it says. Ramsay has earlier said that he has plans for 50 sites in the UK. The celebrity chef says ‘despite all of the pandemic related challenges, we have to be optimistic and forward thinking and invest back into our amazing industry.’
• The administrators of the Richoux restaurant group have sold the brand and its IP to Naveen Handa, who is reported to be associated with the Cairn Group.
• Euromonitor international reports that global alcohol sales fell by 6% during the last year, impacted by the closures worldwide of large parts of the on-trade. Among major markets, Euromonitor says that consumption in India was down 19%, in Spain it fell by 14% and in the UK it was some 10% lower. Sales rose in Australia, South Korea, Russia and Brazil amongst other territories.
• Restaurant Dive in the US reports on the labour shortage. It says ‘people are returning to restaurants in droves, excited to dine out and meet with friends. But this sudden ramp up in business after several months of slumping sales is creating a staffing challenge for operators.’
HOTELS & LEISURE TRAVEL:
Current situation – confusion leading to, well, confusion:
o Green list countries (or country, namely Portugal) are OK but with Matt Hancock and now Boris Johnson saying holidaymakers should not travel to amber countries, some holidaymakers have been wrong-footed. The PM said yesterday it was “very important people grasp what the amber list is – not somewhere to go on holiday”. Areas of confusion include – but are not limited to – the following:
o Refunds. The BBC points out that some travel companies are refusing refunds or changes of date to customers who have booked holidays to amber list countries. One company contacted by the BBC, Villa Plus, said ‘government advice on amber destinations is not legislation and whilst we empathise with those that may now choose not to travel due to the entry requirements they face upon return to the UK, we cannot provide them with a refund or credit for monies paid and they should seek compensation from their travel insurance provider.’
o Delays at airports. The government itself has said that travel may not be ‘normal’ and that delays at the UK border on return are likely. The first, one-week Portugal holidays should be returning next Monday.
o Cancellations (UK holidays). There is some talk of customers booking holidays at two or more hotels with a view to cancelling all but one at the last-minute. If true, this will cause severe problems. The Guardian quotes tech company Avvio as saying that UK hotel cancellation rates were running at “scarily low” levels. Consumers, confident in hotels’ refund policies, are being accused of ‘hoarding’ bookings.
o More on ‘hoarding’. Avvio says ‘many holidaymakers have booked both a foreign holiday and a UK stay, and our data shows they are often holding on to both. If they decide at the last minute to risk a holiday abroad, a late rush of cancellations in the UK would create chaos across the whole industry as hotels scramble to fill their suddenly vacant rooms. Many of these just won’t be filled, resulting in tens of millions of pounds in lost revenue.’
• Expedia reports that UK holidays are still in the majority for departure dates during May and into the short term future. Watching what happens at the airports seems like a sensible policy.
• The UK domestic holiday market should be a winner should reduced numbers of holidaymakers choose to (or be able to) go abroad. Langton comment: Whilst it would be unseemly to wish ill on the overseas holiday market, to some extent it is true that, if consumers can be persuaded to stay in the UK this summer, they will spend more in its pubs and restaurants.
• And there are signs that this could happen in the stories above. Journalists will surely be queueing up to film scenes of ‘mayhem’ at airports, because it is such easy copy. Furthermore, the very short number of green countries, comments from Matt Hancock that people should not travel for leisure purposes to amber countries and TUI’s comments that summer holidays are being pushed into Q4 (or even into next year) suggest that this summer could be strong in the staycation market. Oakman Inns’ timing (see above) looks fortuitous and other operators such as Marston’s and JD Wetherspoon have been adding rooms (or lodges in the case of the former) to their pubs where possible.
Other holiday & hotel news:
o Airbnb. Putting a brave face on it, Airbnb has suggested that, whilst holiday lets may be under pressure, a new market could develop for remote workers staying away from home whilst ‘working from home.’ Other workers may move permanently but then return to their old haunts and use Airbnb properties. CEO Brian Chesky says ‘if you think about where business travel is going in the future, it seems completely intuitive to me that as companies offer more flexibility, more people are going to live around the world.’
o STR leads on the labour shortage in the US hotel industry.
o Eurostar has reached a £250 million refinancing agreement with its shareholders and banks.
FINANCE & MARKETS:
o The UK rate of unemployment fell to 4.8% in the quarter to March (from 4.9% in the quarter to February). A tightening jobs market could lead to inflation – though the end of the furlough scheme could push in the opposite direction. UK job vacancies have hit their highest level since the start of the pandemic.
o Average wages. Average weekly earnings rose 4.0% in the three months to March. This was below the 4.5% expected and is somewhat inconsistent with a tightening labour market. The NIESR says it ‘predicts that average weekly earnings growth will be 5.3 per cent in the second quarter of 2021.’ It nonetheless maintains that ‘there is still significant slack in the labour market.’
o Sterling mixed at $1.4187 and €1.1595. Oil price lower at $68.05. UK 10yr gilt yield unchanged at 0.87%. World markets broadly lower yesterday and London set to open down by perhaps 66pts as at 7am.
RETAIL WITH NICK BUBB:
• Today’s News: There has been an unexpected trading update from Dunelm to flag that its Q4 is going so well that profits for y/e June are now forecast to be well above expectations: Dunelm now anticipate that FY21 PBT will be in excess of £148m, compared to the latest analyst’s range of £128m-134m. Over the last seven weeks, total sales increased by 59% on a 2-year basis against the equivalent period in 2019 and Dunelm note that “This high sales growth reflects the strength of our customer proposition and a variety of other factors including pent up demand following the extended store closure period, a buoyant homewares market and some benefit from the unseasonably cold Spring weather”. Dunelm also highlight, based on weekly Gfk homewares market data, that “In the five weeks since our stores re-opened, we have performed significantly ahead of the market”. In other news, Boohoo has
• This Week’s News: Tomorrow brings the Kingfisher Q1 update, the Next AGM, the Watches of Switzerland Q4 update, the N Brown finals and the McColl’s AGM. Friday then brings the ONS Retail Sales figures for April and the monthly GFK Consumer Confidence Index. Over in the US, Wall Street has more earnings reports from leading retailers this week, including Target, TJ Maxx and Lowes today; Kohl’s and Ralph Lauren tomorrow and Foot Locker on Friday.