Langton Capital – 2021-07-07 – PREMIUM – JDW, Wahaca, Rank, OTB, Ten Ent., 19 July, WFH, labour etc.:
JDW, Wahaca, Rank, OTB, Ten Ent., 19 July, WFH, labour etc.:
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A DAY IN THE LIFE:
Many times I have thanked my lucky stars that ‘turning it off and back on again’ usually does the trick with most things technical.
Because, whilst the above could be referred to as Plan A, there is often no Plan B in the Brumby household or the Langton office.
Or, rather, there is a Plan B, but it consists simply of swearing, shouting, hair-pulling, crying and breaking down or, if the time on the 24hr clock is into double figures, of drinking until either the problem goes away or, well, Plan B has to be repeated.
Anyway, Plan A worked yesterday when my laptop denied that it had a hard drive and stated, categorically, that everything I had ever uploaded to the cloud was no longer there.
So, should we get through to the final, we’ll be facing Italy. On to the news:
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JD WETHERSPOON – FULL YEAR TRADING UPDATE:
JD Wetherspoon has updated on full year trading and our comments thereon are set out below:
• JDW reports that ‘as at 4 July 2021, 850 Wetherspoon pubs were open, out of a total of 860. Most of the closed pubs are at airports.’
• It says during outdoor trading (12 April and 16 May), ‘about 500 pubs were opened, and like-for-like* bar and food sales were minus 49.0%.’
• It adds ‘like-for-like sales from 17 May to 4 July, when pubs were fully open, were minus 14.6%.’
• The company has not benefited from the Euros, saying ‘for the period from 17 May to 10 June, before the UEFA Euro 2020 football tournament started, like-for-like sales were -8.1%. From 10 June to 4 July, during the tournament, like-for-like sales were -20.8%.’
• It says ‘apart from a limited number of exceptions for individual matches, Wetherspoon pubs have not televised UEFA Euro 2020 football matches.’
• JDW says ‘trading has been helped by the addition of outside seating. Landlords, landowners, and local and licensing authorities have been extremely flexible in accommodating extra outside space – which has helped Wetherspoon and the licensed trade generally.’
Balance sheet – debt, capex etc.:
• JDW says it has opened two new pubs in the last six months and has a pipeline consisting of ‘75 projects. 18 are new pubs and 57 are extensions and upgrades to existing pubs.’
• The group adds that, after the 75 are completed, ‘Wetherspoon plans to invest approximately £750 million on a similar range of projects, in the following 10 years, which may result in the creation of about 20,000 jobs.’
• The company ‘remains in a sound financial position. Net debt was £865 million on 4 July 2021 and is expected to be around £833 million at the end of this financial year.’
• It has secured covenant waivers, up to and including the quarter to July 2021 and it ‘proposes to enter discussions with its lenders regarding waivers for the next financial year in due course.’
• JDW says that ‘the interim rise to VAT of 12.5%, in September 2021, will result in Wetherspoon having to increase food prices by around 40 pence per meal’ and says this ‘will make the entire hospitality industry less competitive vis a vis powerful supermarkets.’
• The group says it has been misrepresented in the press a number of times and says that apologies and corrections have been received.
• Tim Martin says JDW ‘continues to expect to make a loss for the year ending 25 July 2021.’
• The group hopes to be back in line with 2019 in the financial year 2021/22.
• Mr Martin says that, as the group said on 19 January, ‘the company’s principal ‘scenario’ estimated sales in the financial year starting 26 July 2021 to be in line with financial year 2019, which remains our current best estimate, on the basis that restrictions are ended, as the government currently intends.’
PRIVATE COMPANY ACCOUNTS – OAXACA (TRADING AS WAHACA):
Oaxaca, which trades as the more recognisable Wahaca, has reported numbers for the year to 28 June 2020 to Companies House. Whilst the numbers are quite historic, the accounts and the audit report were signed on 27 May 2021, meaning that the comments therein are a little more contemporary. Our comments are set out below:
• Wahaca reports that revenues in the year under review fell to £34.7m from £50.2m in the prior year.
• The Company is picked up in the press as saying it will make a rapid recovery post its CVA and Covid. But, in the year to 28 June, it reports a £17.0m loss before tax after £9.9m of exceptional items (which included a £8.1m asset impairment charge)
• The group made a loss before tax of £4.2m in the prior year after recording exceptional costs of £1.1m.
• Wahaca, as at 28 June 2020, had accumulated losses since incorporation (which occurred in 2006) of £29.3m and negative shareholders’ funds of £29.0m.
• The Company’s Co House filings show that, since its year end above, it recorded a CVA (in October last year) and allotted new shares in November and December
• Wahaca reports ‘the business was trading in line with expectations until the outbreak of Covid-19 in March 2020 which led to all of the restaurants being forced to close due to government restrictions.’
• The company says it ‘took swift and decisive action’ etc but it ‘continued to lose cash throughout the final quarter of the year due to the lack of revenue.’
• Wahaca says ‘the ongoing disruption and financial impact of the pandemic meant that subsequent to the year-end the Group was forced into undertaking a number of restructuring actions in order to safeguard the long term viability of the business. This included entering into a Company Voluntary Arrangement’ which ‘compromised certain lease and investor liabilities’
• The company also secured ‘a further injection of funds into the business. This [the CVA] resulted in the closure of 12 sites and a significant debt write off.’ See summary in Pubs & Restaurants below.
• Wahaca says ‘the restructuring actions that the Group has undertaken have left the business with a solid financial platform from which to grow once the restaurants are allowed to fully reopen again.’
• It says it ‘additionally fully developed a successful delivery revenue channel which has performed well during the last two national lockdowns, helping to mitigate cash burn.’
• Wahaca says ‘the Directors’ are fully confident that the brand love and recognition remain very strong…and that the recovery will be relatively swift once restaurants are allowed to fully reopen.’
• The Company, remembering that the accounts were signed only 6wks ago or so, says ‘the Directors have considered the relevant risks and uncertainties and have a reasonable expectation that the Group and the Company have adequate resources to continue in operational existence for the foreseeable future.’
• It says ‘thus, they continue to adopt the going concern basis in preparing the annual financial statements.’
• But it does add ‘whilst the Group expects to be able to operate through any further periods of lockdown and government restrictions, the Group expects to be able to rely on the continued availability of the government job retention scheme (furlough) on similar terms as we have seen during 2020 and 2021. In the unlikely event that furlough or a similar scheme is not made available to the Group, whilst the Group has some additional mitigations it could implement, ultimately liquidity could become a concern and covenants breached should future lockdowns occur over an extended period of time.’
• It says ‘as the availability of a future furlough scheme after September 2021 is not within the control of the Group, this represents a material uncertainty over going concern.’
• The auditor, KPMG, draws attention to this as a material uncertainty, but it does not object to the use of the going concern principle
• KPMG does say that, ‘in the event of future lockdowns, and if such support is not made available to the group by the government, liquidity and covenants could be breached.’ Wahaca shares this risk with much if not most of the hospitality sector
PUBS & RESTAURANTS:
• Small mercies that cost nothing. Downing Street has confirmed that pubs will be allowed to stay open later for Sunday’s Euro 2020 final, with premises able to stay open for an extra 45 minutes until 11.15pm. Pubs will also be allowed to stay open for events such as royal weddings.
• The CEO of Greene King, Nick Mackenzie, has welcomed the ‘possibility of profitable trading for the first time since March last year’ as restrictions are set to ease on 19 July. Mackenzie called on the Government to support the sector with business rates and duty reform and to tackle short term issues around recruitment.
• The British Beer & Pub Association predicts that England fans will buy 6.8 million pints on Wednesday when the national team plays Denmark in its semi-final of the Euros. It says ‘this is more than during England’s quarter-final match against Ukraine, as the feel good factor continues to spread amongst fans of the Three Lions with the squad progressing through the tournament.’ The BBPA says that, ‘if restrictions had been lifted already…this would have been nearer 12 million pints, showing the huge impact restrictions have had on the viability of the sector.’ The BBPA says ‘if the team goes on to win, a final at Wembley awaits, which would be a huge boost to our pubs and the nation.’
Proposed 19 July changes:
• Responding to proposed changes in the rules on 19 July, some industry leaders have suggested they do not go far enough whilst others have said they will keep some rules in place.
• City Pub Group chairman Clive Watson has told the BBC’s Radio 4 that his company will encourage compliance with some Covid rules post 19 July in order to avoid crowding. Mr Watson says ‘I think that staff should be encouraged or instructed to wear masks, I think that’s very important, and I also think from a customer’s point of view we will still try to offer as much service as possible at the table.’ He adds ‘what we don’t want is a free for all scrum at the bar, with lots of people queuing up. Nearly 50 per cent of our customers order their food and drink via the app, we want to continue that, with the rest ordering at table. We want to continue that as well.’ Watson says ‘it’s not like flicking a switch back to February 2020. We’re not going to say you cannot order at the bar – but we’re going to make it as easy as possible to order from the table. We’re not going to militant about
Working from home:
• The Bank of England is to ask staff to come into the office for one day a week from September. My goodness. COO Joanna Place says the bank plans to encourage more flexible working after the pandemic. Staff said that they would like to continue working from home at least two days a week. Perhaps they would, wouldn’t they?
• Further comment: As always, times this by 1,000 and the impact on Pret, Costa, Fuller’s, Young & Co and other city-centre (and particularly London) operators is pretty material. Sales may struggle to return to pre-pandemic levels any time soon and profitability may move in the wrong directions. There are, to say the very least, conversations to be had with landlords.
• On that front, we are awaiting definitive news re any ‘ombudsman with teeth’ that could be created in order to help landlords and tenants come to some agreement on which (if any) rent arrears should be paid and which should be written off. And, with regard to write-offs, landlords will want to know if they have any recourse to government (AKA the taxpayer) or whether they are going to be pressured to ‘take one for the team’.
• Sajid Javid has confirmed that from 16 August people who are fully vaccinated will not have to self-isolate if they have close contact with a positive coronavirus case. Contacts will instead be advised to take a PCR test as soon as possible. Younger hospitality staff will start having second jabs about a month from now (on the sample of one, a c25yrs old, who’s second jab is 14 August. Walk-in centres may be somewhat faster off the mark). See Loungers’ comments above.
• UKH says the ‘announcement doesn’t go far enough, quickly enough. The sector is experiencing severe staff shortages, compounded massively by the absence of team members who have been told to isolate despite not having shared shifts with colleagues who tested positive.’ It says ‘introducing a test to release system for fully vaccinated people from the middle of next month not only fails to recognise the carnage the current system is causing hospitality and the wider economy, but also significantly discriminates against a huge proportion of our workforce. Around 60% of our staff are aged between 15-34 and the vast majority will not have had the opportunity to receive both jabs by the 16th August.’
• Further comment: UKH says ‘with cases predicted to continue to rise, this means that hospitality’s recovery after 16 months of lockdown and severely disrupted trading will be harmed. Operators will be forced into reducing their operating hours or closing venues completely. We urge the Government to move quicker on this issue to prevent the summer being cancelled and vast swathes of the population unnecessarily confined to their homes.’
• The sooner restrictions (including self-isolation) are relaxed, the greater will be the number of infections (albeit predominantly across younger people) and the greater is the risk of variants, transmission to older people (no vaccine is 100% effective) etc. It’s all about balance and, with criticism coming from both sides of the debate, this is the compromise that the government has alighted upon.
• Loungers’ chairman Alex Reilley tweets ‘without the abolition of 10-day self-isolation requirements for all those pinged by T&T this will shut hospitality down. Two-thirds of our near 5,000 employees are under the age of 25 so will need to wait weeks to be double-jabbed. This is going to be utter chaos.’ He says ‘the vast majority of hospitality staff are young & will have only been recently invited to have their 1st jab. If the govt are saying that people who are pinged by T&T who aren’t double-jabbed still have to self-isolate for 10 days there are going to be an increasing number of hospitality venues that are going to be closed by T&T. Young staff won’t be eligible for their 2nd jab for a few weeks and with rising cases hospitality businesses will be increasing paralysed. It will be lockdown in all but name.’
Company & other news:
• Fulham Shore owned brand Franco Manca is to open on Baker Street in London. Solicitors are believed to have been instructed on more than half a dozen other sites, which should come on line before the group’s year-end next March. Other locations are believed to include St. Albans, Blackheath, Bishops Stortford, Cardiff & Cheltenham. York, whilst on the radar, is at the other end of the alphabet.
• Mark Selby, co-founder of Wahaca, expects the restaurant chain to make a swift recovery after undergoing a CVA which saw the closure of 12 restaurants last year. The CVA also saw lenders and shareholders write off £25m in debt and inject a further £5m into the business. See comment on private companies above.
• Legal & General has cautioned that Wm Morrison could be taken over by a private equity for the “wrong reasons,” saying that the US buyout firm that has agreed to buy the Yorkshire-based retailer could strip assets, punish suppliers and financially engineer the retailer’s balance sheet in order to create returns. Legal & General says potential buyers should not buy Morrisons to take advantage of a possibly undervalued property portfolio, to load it up with debt, or to cut its tax bill. This may well be wishful thinking.
• With the triple lock still apparently in place, old age pensions are due to rise by 8% this year (see finance & markets). Whether ethical or sensible or not, this should benefit the grey pound and the venues in which it is spent.
• Friska, a Bristol-founded healthy fast food chain, has been sold by administrators to a third party. The chain operated eight sites across Bristol, three in Manchester and one in Birmingham.
• The Telegraph write that ministers are warning that high streets may never fully recover from Covid-19. Luke Hall, the minister for regional growth and local government, said Covid-19 had been the “largest, most synchronised shot to the economy, our social lives and the high street in living memory” and a full recovery could be impossible. Some one in seven shops across the UK are currently vacant.
HOTELS & LEISURE TRAVEL:
British exports. Some up, some down:
• The Majorca Daily Bulletin reports that a crackdown on gatherings in four areas of Majorca and Ibiza is being imposed after a surge in Covid cases. Capacity limits of 100 indoors and 200 outdoors are being imposed, with the number of people per table being reduced to 6 indoors and 10 outdoors.
• Spain’s ministry for industry, energy and tourism reports UK arrivals to Spain in May were down 97.4% compared to 2019 to just 51,155. Arrivals from Germany were down by more than two thirds to 338,408.
Other travel news:
• On the Beach Group reports that it has successfully completed its placing. It has placed 7.9m shares at 330p each to raise gross proceeds of approximately £26.0 million. The Placing Price represents a discount of approximately 5.0% to the closing share price of 347.5 pence on 6 July 2021. The group said yesterday that ‘the Board believes it is in the Group’s best interest to seek supplementary financing now to: provide OTB with greater resilience, flexibility and firepower through the current downturn by restoring the Group’s cash position to a similar position to where it was following the placing in May 2020; ensure that, ahead of an expected recovery of the international travel market in calendar year 2022 involving the release of pent-up demand, OTB will have sufficient funding available to increase marketing spend and to support the necessary short-term investment in working
• The World Travel & Tourism Council reports that the European travel sector fell by 51.4% to €987bn in 2020, its second biggest economic collapse. Despite this, Europe remained the top global region for international visitor spending.
• STR has reported that the Euros have been drawing in crowds but “hoteliers in the city [London] say it’s still a far cry from the massive demand spikes they would have seen in more typical circumstances.” It quotes the 361-room Hilton London Wembley as saying its property had seen some additional business on the night of the England-Germany game but that “it was not fantastic.”
• Balpa pilots union has demanded Rishi Sunak ‘makes good on his promise’ to protect jobs by issuing a sector-specific extension to furlough as it argues travel is ‘the only sector remaining in lockdown’. Balpa’s letter states that aviation has faced ‘18 months of heavy losses’ and that international travel is still crippled by regulations and a lack of public confidence.
• Thackeray Estates plans to regenerate the Queen Victoria Street and Friar Street area in Reading have been approved. The plans for the Grade II-listed buildings include a market square and an aparthotel.
• Esken Ltd, formally known as Stobart Group, has sold 30% of its stake in London Southend Airport to CGIOF River in a deal worth £125m. The partnership will also see CGI contribute to the development of the airport going forward.
• Heathrow is to trial fast-track lanes for fully-vaccinated arrivals in partnership with British Airways and Virgin Atlantic.
• Rank Group has updated on its banking facilities saying it is ‘pleased to announce that it has signed a new two year £25m Revolving Credit Facility agreement with Lloyds Bank plc.’ It adds that ‘the facility provides the Group with additional liquidity and the opportunity, when we are confident that the Group is delivering sustainable positive cashflows, to accelerate investment in the Group’s transformation plan.’ Rank says ‘the new facility is subject to the same financial covenant waiver and associated conditions, including a quarterly minimum £50m cash and available facilities test, that are in place across the Group’s other bank facility agreements’ and it is ‘in addition to the Group’s existing £55m RCF and the remaining £108.4m term loan.’
• Ten Entertainment Group has updated on H1 trading saying that it has seen an ‘excellent customer response since reopening, driving like-for-like sales growth’ alongside ‘a return to cash generation and profitability.’ The company says all 46 centres across the UK reopened safely on 17 May with over 650,000 visits and they saw 22.5% like-for-like sales growth in the first six weeks of opening compared to 2019. The company says it has ‘returned to profit and cash generation’ and adds its ‘cash position is secure, with over £23m of liquidity headroom.’
• Re the outlook, Ten Entertainment says ‘the underlying business model remains highly attractive and strongly cash generative. While the pent-up demand is likely to subside, the business continues to be well positioned for growth with its well-invested estate and focus on customer experience. The removal of the final Covid-19 restrictions on 19 July will be the last step in TEG returning to its full operating potential.’ CEO Graham Blackwell says ‘I am delighted with the commitment and hard work of our teams across the UK who have welcomed back our customers with a safe and highly successful reopening programme. We are looking forward to recommencing our investment strategy in the second half of 2021 and to continue developing our family entertainment experience throughout the UK.’
• Mid-market private equity investor Livingbridge has invested in World of Books, a UK online re-seller of second-hand books.
FINANCE & MARKETS:
• Markit has reported its UK Construction PMI for June saying that it has risen to 66.3 from 64.2 in May. Any number over 50.0 is indicative of growth. Markit says ‘sharp increases in business activity were seen across all three main areas of the construction sector monitored by the survey.’ It says ‘June data signalled another rapid increase in UK construction output as housing, commercial and civil engineering activity all expanded at a brisk pace.’ This is the fastest rate of increase in 24yrs.
• Further comment: We’re not building or construction analysts but what we do know is that construction is one of the areas that can move most rapidly when it comes to hiring staff, increasing the hours for existing staff, giving more business to sub-contractors (subbies) etc. This feeds through to the wider economy, including the hospitality sector, fairly rapidly.
• The state pension is set to rise by 8% from April next year. The OBR says this will cost the Treasury (AKA the taxpayer) some £3bn per annum more than previously expected.
• City AM reports that London businesses took more than £16bn in taxpayer money through the government’s two largest Covid-19 support schemes. This is broadly in line with numbers nationwide.
• The FT reports PE house KKR is to set up specialist team to buy distressed assets in the UK from their existing owners.
• The OBR reports that there is an “increasingly risky” situation developing due to high levels of debt.
• Further comment. Risks to the government are elevated as absolute levels of government debt have risen sharply and the ongoing cost of Covid adds to the debt pile. Referring to ‘once in a lifetime’ shocks such as the 2008 financial crisis and the Covid pandemic, the OBR told BBC radio ‘there are reasons to believe that these kind of shocks are becoming more frequent and more severe. And also that government finances are becoming increasingly exposed to these kinds of shocks.’
• Inflation. Samsung has said that its quarterly profits will rise by 53% amid a global chip shortage. Prices have risen sharply. Heading the other way, oil prices tumbled yesterday after OPEC producers failed to agree a volume for supply increase.
• Sterling down at $1.3801 and €1.1672. Oil price lower at $74.63. UK 10yr gilt yield sharply lower at 0.63% (down 9bps). World markets down yesterday but London set to open up by around 15pts as at 7am.
RETAIL WITH NICK BUBB:
• Nick is taking a well-earned break. He’s back on Monday.