Langton Capital – 2021-07-29 – PREMIUM – M&B, Diageo, Compass, Everyman, AB InBev, McDonald’s, Uber etc.:
M&B, Diageo, Compass, Everyman, AB InBev, McDonald’s, Uber etc.:
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A DAY IN THE LIFE:
The number of out-of-office replies to our morning email is running at 3x normal levels and, rather than try to beat the holidaymakers in question, Langton will soon be joining them.
There won’t be an email next week or the week after as we jet, or rather drive, to the sunny climes of the Yorkshire Dales followed by the steamy environs of the Deep South (a.k.a. the Derbyshire Peak District).
We’ll be doing out bit, undertaking on-the-ground, staycation research. This will doubtless involve chatting up publicans, sampling beer, pies and chips and shovelling down ice-cream.
But we’re here for the remainder of the week and, come holiday-time, we’ll tweet the odd bit on @brumbymark. On to the news:
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MITCHELLS & BUTLERS – Q3 TRADING UPDATE:
Mitchells & Butlers has this morning updated on Q3 trading and our comments are set out below:
• MAB says that sales comps are on a 2-year basis versus 2019 and also ‘include the benefit of the temporary reduction in the rate of VAT on food and non-alcoholic drink sales.’
• The group says it opened 16% of its estate on 12 April when it was allowed to trade outdoors. Openings rose to 44% by 16 May and ‘during these initial 5 weeks like-for-like sales were at 63% of pre-Covid levels, as previously announced.’
• The group says most remaining pubs were reopened since 17 May (with indoor trading) and it says during this time, sales have been ‘volatile’.
• MAB says ‘in the first 5 weeks like-for-like sales were strong at 98% of pre-Covid levels, supported in particular by pent up consumer demand on full re-opening.’
• However, it says ‘across the following 5 weeks activity was slower on average, with like-for-like sales at 89% of pre-Covid levels although most recently there has been some sign of improvement following further easing of restrictions on ‘Freedom Day’ in England.’
• The group adds ‘aside from the impact of selected games during the Euros, sales have generally been stronger in suburban and food-led brands, with city centre sites being the most challenged.’
• Total sales year to date, including 18 weeks of enforced closures, are at 35% of pre-Covid levels.
Balance sheet and cash flow
• MAB says ‘as at 24 July the Group had cash balances on hand of £203m, with undrawn unsecured facilities of £150m. £39m is currently drawn on the Liquidity Facility within the securitisation.’
• It says it ‘has now signed a relationship agreement with its major shareholder, Odyzean Ltd, in line with our stated intentions at the time of the Open Offer.’
• CEO Phil Urban says ‘the continuing uncertainty relating to the pandemic still makes forward guidance difficult, and is likely to do so at least until into the Autumn.’
• He adds ‘however with our diversified portfolio of well-known brands and largely freehold estate, and our continued focus on efficiency though our Ignite programme, supported by a strengthened balance sheet, we are in a strong position coming out of the pandemic as restrictions ease further.”
• This is a realistic statement which illustrates that, whilst demand is there at certain times, trading is volatile and there are still risks to recovery.
• 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:
• UKH CEO Kate Nicholls has told the MCA’s The Conversation that she believes the hospitality sector has a fundamental role to play in rebuilding communities, the economy and the health and wellbeing of the nation. But, she says, ‘we need government help to allow us to do that.’ She says ‘we now need to put the flesh on the bones for that but they give us two really strong hooks to go back and ask for the support we need because clearly this crisis has gone on for far longer than the government anticipated when they put in place the financial support measures for the sector.’
• Further comment: It is fair to say that the Covid-19 pandemic has lasted longer than many people anticipated. Albert Camus, in his novel The Plague, has one character tell another that plagues last longer than expected, longer than wanted and longer than people can remain vigilant. Donald Trump said it would be over by Easter (2020) and our own government thought it was back to normal by Independence Day (4 July), also last year.
• But is it lasting longer than many other elements of the government anticipated? The Treasury and the boffins though, thought differently to some other front line politicians. Messrs Whitty and Vallance were talking many months or years (and say Covid will be with us forever) and the support schemes – at least lower rates and VAT – run well into 2022. Certainly, hospitality would like to see VAT remain low and business rates to stay below normal levels but, at some point, the Treasury will baulk at the cost.
Company & other news:
• Diageo has reported full year numbers saying that it has ‘delivered strong net sales growth, particularly in North America, our largest market.’ it adds ‘reported net sales (£12.7 billion) increased 8.3%, with strong organic growth, partially offset by an adverse foreign exchange impact. Organic net sales growth of 16.0%, driven by growth across all regions and a benefit from lapping a reduction of inventory levels by our customers in fiscal 20.’
• Further comment: Diageo CEO Ivan Menezes says ‘we delivered organic net sales growth across all regions, led by a strong performance in North America, and we held or gained off-trade market share in over 85% of our business.’ He adds ‘a key priority has been supporting the hospitality sector through the pandemic, including our $100 million global fund to enable the safe re-opening and recovery of pubs and bars. We have also built on our successful ESG track record with the launch of ‘Society 2030: Spirit of Progress’, our new 10-year action plan to shape a more sustainable and inclusive business.’
• Menezes adds ‘while our business has recovered strongly in fiscal 21, with net sales growth on a constant basis ahead of fiscal 19 in three of our five regions, we expect near-term volatility in some markets. However, I remain optimistic about the growth prospects for our industry, with spirits continuing to gain share of total beverage alcohol globally and premiumisation trends remaining strong. I believe Diageo is very well positioned to capture these exciting opportunities to drive long-term sustainable growth and shareholder value.’
• Compass Group has updated on trading saying that Q3 has been a ‘further quarter of margin improvement – and first time outsourcing momentum continues’. The company says that group revenue was up by 36.4% in Q3 (against soft comps) and year to date revenue is down by 16.1%.
• Further comment: The company says ‘we continue to benefit from the acceleration in first-time outsourcing and market share gains. In Q4, with the ongoing reopening and mobilisation of sites in some of our biggest markets, we expect to be trading at 80-85% of pre-COVID levels and our operating margin is expected to increase by a further 50-100 bps to 5.5%-6.0%.’ Compass adds ‘we are confident in our ability to return to a Group underlying margin above 7% before we return to pre-COVID volumes. In the longer term, we remain excited about the significant structural market opportunities globally, the potential for further revenue and profit growth, and shareholder returns over time.’
• Anheuser-Busch InBev has reported Q2 results saying that it saw ‘continued momentum in 2Q21 with top-line growth ahead of pre-pandemic levels.’ CEO Michel Doukeris says ‘the consistent execution of our commercial strategy – centred around winning brands, category development and digital transformation – delivered continued momentum in the second quarter with top-line growth 3.2% ahead of 2Q19 pre-pandemic levels, even in light of ongoing COVID-19 impacts. Looking forward, we will continue to build upon our customer- and consumer-first approach to drive growth and value creation.’
• AB InBev says volumes were up by 20.8% in Q2 saying ‘own beer volumes up by 20.5% and non-beer volumes up by 23.2%. In HY21, total volumes grew by 17.0% with own beer volumes up by 17.7% and non-beer volumes up by 12.6%.’ Total revenues were up by 27.6% with branded revenue outside of their home markets up by 19.3%. The company says ‘in 2Q21, combined revenues of our three global brands, Budweiser, Stella Artois and Corona, increased by 23.0% globally and by 19.3% outside of their respective home markets. In HY21, the combined revenues of our global brands increased by 26.2% globally and by 31.4% outside of their respective home markets.’
• Further comment. The company says ‘normalized EBITDA increased by 31.0% in 2Q21 and by 22.1% in HY21. Normalized EBITDA margin was 35.8% in 2Q21 and 35.3% in HY21.’ The group adds ‘our net debt to normalized EBITDA ratio was 4.4x at 30 June 2021 compared to 4.8x at 31 December 2020.’ The company has seen demand pick up markedly in the wake of hospitality reopening across its markets.
• UK car production has been hit by shortages of staff and semiconductors warns the SMMT.
• McDonald’s has reported Q2 numbers well ahead of forecasts. The company also raised its guidance for fiscal 2021, saying that the recovery was faster than it had anticipated. LfL sales, albeit against easy comps, rose by 40.5% in the second quarter and were higher than the same quarter in 2019. CEO Chris Kempczinski said that ‘people are venturing out and establishing new routines.’ The group’s shares were down 2.5% or so on the news.
• Further comment: McDonald’s reports that around 70% of its units across the US are open. It says that US same-store sales were up by 25.9% versus a year ago and up by around 15% compared to 2019. Total revenue rose by 57% to $5.89 billion in the quarter with net income more than quadrupled to $2.22 billion. EPS was $2.37, higher than estimates of around $2.11 per share.
• NewRiver has announced that CFO Mark Davies ‘will now relinquish his position as the Company’s Chief Financial Officer and stand down from the Board with immediate effect.’ Mr Davies is also CEO of Hawthorn Leisure and he will retain this role. Hawthorn’s sale to Admiral was completed earlier this week. NewRiver CEO Allan Lockhart says Mr Davies ‘has also been a driving force and visionary behind NewRiver’s pub strategy which began with us acquiring our first portfolio of 202 pubs from Marston’s in 2013, buying Hawthorn five years later and culminating in an agreed sale of our community pub business for £222.3 million this month. On behalf of everyone at NewRiver, we wish Mark the very best for the future and sincerely thank him for everything he has done for the business.’
• Pizza Pilgrims is to open its first permanent site for its New York pizza-by-the-slice concept Slice next month in Finsbury Park.
HOTELS & LEISURE TRAVEL NEWS:
Inbound quarantine restrictions lifted:
• Fully vaccinated visitors to England from the US and the EU (excluding France) will no longer have to self-isolate from next Monday. Transport secretary Grant Shapps says ‘we’re helping reunite people living in the US and European countries with their family and friends in the UK. From 2nd August at 4am people from these countries will be able to come to the England from an amber country without having to quarantine if they’re fully vaxxed.’ He added ‘we’re also able to confirm the restart of international cruises and flexible testing programmes to help key workers and drive our economic recovery.’
• Further comment. TTG reports CLIA UK and Ireland managing director Andy Harmer as saying the decision was “very good news for the industry”, describing how the success of the sector’s domestic restart had “led the way” towards the international resumption. He says ‘the cruise industry has worked intensively during the past 18 months in collaboration with the government, health authorities, ports, and other industry bodies to develop enhanced protocols that protect guests, crew, and the destinations we visit.’
• Heathrow CEO John Holland-Kaye said the news was welcomed. He said ‘the government has made the right decision to safely further reopen international travel. We will now work with colleagues in the industry to boost UK trade, reunite family and friends, and generate billions in new tourist income.’ The Airport Operators Association commented ‘this is a significant and welcome step forward that will be a boost to airports, our inbound visitor economy and the many families who will be able to reunite after a long and difficult period.’ It adds ‘there remain considerable challenges for our airports and aviation sector and our road to recovery remains long. We urge the government to work with industry to continue opening up travel by putting more countries on the green list, reduce the cost of testing and provide the much-needed financial support for the difficult months ahead.’
• Further industry comment and implications for outbound. UK Inbound says this is a ‘fantastic step forward that will allow the £28 billion inbound tourism sector, which supports over 500,000 jobs across the UK, to finally restart.’ It says there are still ‘substantial barriers’ preventing a rapid return to normality, saying ‘the valuable 2021 summer season is all but lost for inbound tourism, meaning thousands of businesses and jobs will continue to be at risk over winter.’
• There are no promises of reciprocity, leaving the outbound sector with little obvious to celebrate. However, the UK’s pubs, clubs, restaurants and hotels stand to benefit from an increase in inbound visitor numbers. Indeed, competition for hotel beds could become somewhat greater.
Company & other news:
• Grant Shapps has said that the English ban on international ocean cruising will be lifted on 2 August. Shapps made the announcement via Twitter.
• The Mirror suggests that ‘sun-seeking Brits could see their holiday plans thrown into disarray after it was reported Spain could replace France and be placed on the quarantine list.’ Spain may become an ‘amber-plus’ country though, in the short term, it looks as though arrivals will be managed in the same way as those from all other EU countries with the exception of France (see above).
• Travel Weekly quotes a ‘senior industry source’ as saying that outbound sales for August are not expected to pick up substantially whatever the government decides in a review of the traffic light system due this week. The source says ‘the situation is not as clear as it would have been because of France and the uncertainty around the amber list. It will continue to be an incredibly late market.’
• Further comment: Holiday companies want customers to book early so that they can commit to beds and ‘lift’ (aircraft seats). This most definitely has not been happening this year. The ‘source’ quoted above says ‘it’s not the volume, it’s the margin that matters now, and it’s not just the state of play at the moment, it’s about confidence in the medium to long term. We’re moving in the right direction [and] the data seems to support the argument that strong vaccination supports an opening up.’ The source adds ‘summer will be more damaged than we hoped. It’s a market in which you don’t have to make a decision. You’re not going to lose out by delaying.’
• Pilots’ union BALPA has said that the move to allow fully vaccinated passengers from the EU and US into the UK without quarantine may be too late to save many jobs in the travel industry. It says ‘we are halfway through the only profitable part of the year – summer – and UK travellers still face huge restrictions in the countries that will allow us in, preventing a real recovery. We are rapidly heading towards the cliff edge end of furlough in eight weeks’ time and as a result, Balpa is in negotiations with airlines to prevent further job losses.’
• Uber’s shares fell yesterday on reports investment firm SoftBank could sell a third of its stake in the ride-hailing app. Separately, Moody’s reports that the company’s acquisition for $2.25 billion of Transplace Holdings, a provider of transportation management solutions and third-party logistics services, was credit negative for Uber because of the large expected increase in debt.
• Everyman Media Group has updated on H1 trading to 1 July saying that 33 venues re-opened on 17 May 2021 and ‘the business returned to profit and cash generation on re-opening and for the remainder of the period, social distancing measures remained in place until 19 July.’ The co says it is ‘pleased to report that market share has grown since re-opening, re-enforcing the strength of the Everyman offer.’
• Further comment: CEO Alex Scrimgeour says ‘we are delighted to have welcomed back so many Everyman customers since re-opening in May, subsequently delivering a period of profitable, cash-generative trading. The speed and confidence with which the Everyman community has returned, together with our increased market share, demonstrates the ongoing appeal of our offering. People are clearly still looking to spend a great time out with friends and family, in an environment which instils confidence and provides high quality hospitality; now more than ever.’ The CEO adds ‘with significant available liquidity and more positive market conditions we are excited to be again turning our focus to plans for growth.’
• Facebook has reported that it expects revenue growth to slow down “significantly” in the second half of 2021. In Q2, the company saw revenue rise to $29bn, up from $18.69bn last year.
• Alphabet, owner of Google and YouTube, has reported another record quarter. Revenues rose by 62 per cent rise to $61.88 billion in Q2, up from $38.30 billion a year ago.
FINANCE & MARKETS:
• The Nationwide Building Society yesterday reported that annual house price growth had slipped back to 10.5% in the year to July, down from 13.4% in the year to June. Month-on-month, prices fell by 0.5%. A small rise had been anticipated.
• Further comment. The Nationwide says ‘the modest fallback in July was unsurprising given the significant gains recorded in recent months. Indeed, house prices increased by an average of 1.6% a month over the April to June period – more than six times the average monthly gain recorded in the five years before the pandemic.’ It says ‘the tapering of stamp duty relief in England is also likely to have taken some of the heat out of the market.’
• The Telegraph reports that homeowners have been releasing equity from their houses and using the cash to buy more property.
• Further comment. This is both sensible and risky, the latter as it involves individuals taking an even more geared position relative to their most valuable (but illiquid) assets. The Times meanwhile, quoting Savills – who do have something of a vested interest here – reports that house prices could rise by 21.5% in the 5yrs to end-2025. As Savills says that prices will rise by 9% this year, it is expecting perhaps a short 3% for each of the following 4yrs. General price inflation may edge above 4% later this year. Savills says ‘some of the growth generated by the extraordinary market conditions of 2020 and 2021 could unwind at times during 2022, but we see nothing on the horizon that would trigger a major house price correction.’
• The US Fed has said that the US economy is making progress due to the rollout of vaccinations.
• Sterling mixed at $1.3928 and €1.1746. Oil price up at $75.12. UK 10yr gilt yield up 2bps at 0.58%. World markets mixed yesterday and London set to open around flat as at 7am.
RETAIL WITH NICK BUBB:
Today’s News: The Pets at Home Q1 update (for the 16 weeks to 15 July) reports 30% sales growth and based on trading in the year to date management feel that full-year group underlying pre-tax profit will be £130m, at the top end of the current range of analyst expectations (“The UK pet care market is robust, with the ongoing increase in pet ownership, combined with the prevailing trends of pet renewal, humanisation and premiumisation, creating a long-term tailwind for growth”). The Dr Martens Q1 update covers the 13 weeks to 30 June and the 52% sales growth (up 64% in constant currency) was “slightly ahead of our expectations, with a strong end to the period” and, despite various challenges and tougher comps to come, “we remain confident in the delivery of our guidance for FY22”. In other news, there have been strong trading updates and profit upgrades from three of the Motor retailers
This Week’s News: The Amazon Q2 results will be announced this evening in the US.