Langton Capital – 2021-09-09 – PREMIUM – Firebreaks, WFH, disposable income, UK hotels, 888 G4M etc.:
Firebreaks, WFH, disposable income, UK hotels, 888 G4M etc.:
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A DAY IN THE LIFE:
What a difference a day makes.
True with regard to many things. And certainly the weather because the contrast is pretty stark as today we’re going to get a taste of the autumn and, if we didn’t seize the opportunity to cut the grass yesterday, we may not get another chance for a while, possibly not before 2022.
Anyway, that’s a roundabout way of alluding to me being a bit behind with tasks due to spending a chunk of the day in the garden, Wednesday. On to the news:
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PUBS & RESTAURANTS:
An October firebreak:
• Talk thereof could be sending shivers through the hospitality industry but the Independent runs with its story, backed up by members of Sage, that the UK could be in for an ‘extended peak’ of infections as the schools return and the weather drives people indoors.
• Further comment: This has to be odds against but, as an opportunity was missed last year (albeit under different circumstances), it has to be sensible to keep such a break in reserve. The Independent quotes its scientist as saying ‘this is essentially the precautionary break that Sage suggested last year.’ He or she says that it ‘would be sensible to have contingency plans, and if a lockdown is required, to time it so that it has minimal economic and societal impact.’ The scientist says ‘we are going to be at a peak, albeit an extended peak, quite soon, so it’s not really the same situation as last year, when failure to reduce prevalence would have resulted in collapse of the NHS and people dying in car parks.’
Working from home:
• A number of observers have highlighted the ‘network effect’ (in reverse) which suggests that, as a communication network with only one telephone would be useless, the same applies to workers returning to the office if they subsequently spend all of their time on Zoom.
• Further comment. Or, more specifically, if they believe they will. This may be a game of second guessing what your contacts are going to do. Langton comes down from York and has to plan ahead. We’ve been down to London perhaps 10x since the 3rd lockdown began to be lifted and maybe five of those weeks we’ve had no face to face meetings.
• But we wanted to be in London, feel the vibe etc so we came anyway. Now, however, we’ve got several face to face meetings a week and the excuse that ‘everything’s being done on Zoom’ could begin to wear a little thin.
• The ICAEW looks at remote working and quotes Global Integration as saying that ‘up to the pandemic, the big reason why companies didn’t embrace remote working was the management attitude to control.’ It says ‘a lot of managers didn’t trust people, fundamentally, to work remotely. That’s really been destroyed in the last year and a half. People have shown that generally they’re more productive and more engaged.’
• Further comment. This second statement may not be widely accepted because the first part of the comment still stands. Global Integration says the process of moving to a hybrid model may have to be ‘iterative’. It says that offices may be very quiet on Fridays and Mondays, but it adds that ‘if you’ve downsized your office as part of this change, the office will feel very crowded on the other three days.’
• This sounds believable but it’s not good news for landlords. And nor is it cheerful fayre for the sandwich and coffee shops that have become used to servicing offices that are full every day of the week.
Demand – the ability to spend. The pound in your pocket:
• Zoopla has reported that rents outside London have increased by 5% in the last year, their fastest rate in more than a decade. NI payments are about to go up, utility bills are rising, food and fuel prices have gone up and rail fares will rise sharply as they have been linked to a particularly high RPI number.
• Further comment. None of this puts money in the consumers’ pocket and all of it takes some out. Zoopla says ‘the demand for rental property, coupled with lower levels of supply, will continue to put upward pressure on rents.’ Hospitality spend is reliant on discretionary income. The money spent of food, fuel, taxes, rents and the rest will be dealt with first and the amount that is left is therefore reduced. This may need to be borne in mind when companies consider ‘taking price’ (i.e. gouging their loyal customers to make up for that absence of their disloyal ones) when VAT goes up (twice).
Labour & product shortages.
• The Morning Advertiser reports that Scottish bosses in pubs, hotels and restaurants north of the border believe a generation of ‘silver servers’ could help alleviate the current recruitment crisis in the industry. The Scottish Hospitality Group (SHG) is targeting anyone over 50, with or without experience, to join the trade.
• The BBC reports that the government is set to shorten HGV testing in order to help alleviate the shortage of drivers. It quotes an ‘industry source’ as saying ‘the government seem to finally understand the scale of the problem. For the first time they looked rattled.’ It is to be hoped that this does not impact road safety.
• Meanwhile, the MA reports that JD Wetherspoon is suffering from a shortage of bread, impacting 13 of its breakfast menu dishes. The food and drink industry is calling for a 12-month Covid-19 Recovery Visa to help alleviate the workforce shortages.
• Further comment. Pinch points. The Guardian reports that threatened strike action drivers at firms Booker and Hanson could disrupt supplies and drive up prices. This is small beer on its own but, as drivers flex their muscles, there could be further action forthcoming as none of the above is about making the cake bigger, it’s simply argument as to how it should be sliced up.
• In the US, the National Restaurant Association says that, while restaurants added 1.3 million jobs during the first seven months of this year, the industry is still short of around 1 million workers. Numbers employed actually fell by around 40,000 roles in August. The NRA says 26% of restaurants are looking for cooks and 17% are in need of servers. The NRA says that many workers left the industry when they were initially laid off and that they seem to be reluctant to return.
• Further comment: Restaurant Dive says ‘fifteen percent of hourly workers surveyed by Black Box/Snagajob said they have changed industries in the past year, while 33% would like to do so.’ It says that ‘thirty percent of former restaurant employees found office positions and 17% went into teaching or education, according to Technomic’s Crisis on the Front Lines study. Many have also turned to industries that are experiencing tremendous growth. Warehouse/logistics jobs, following a boom in online sales, are up 278% and on-demand jobs, which can provide more flexibility for both workers and employers, are up 183% compared to before the pandemic, according to Snagajob data.’
• Hospitality can offer rewarding careers but, in the US, the UK and elsewhere in the world, workers have been laid off or put on furlough quickly when revenues have fallen away. ‘Secure’ is perhaps a word that will need to be worked on going forward. Black Box and Snagajob say that ‘most workers are leaving the restaurant industry for these three reasons: to receive higher pay (28%); for access to a more consistent schedule/income (23%); and because they lack access to professional development and promotional opportunities (17%), according to Black Box/Snagajob.’
Company & other news:
• Airship Services has raised £500k from NPIF – Mercia Equity Finance to take advantage of increased demand following the re-opening of bars and restaurants. Airship’s software helps hospitality businesses to boost sales.
• Boxpark is reported set to accelerate its expansion after securing funding from private equity firm LDC. The company recently announced the launch of its new concept BoxHall which is set to open in Bristol next year.
• The proposed increases in NI contributions and dividend tax ‘will dampen the entrepreneurial spirit’ according to Suren Thiru, head of economics at the British Chambers of Commerce (BCC). The new health and social care levy will pay for reforms and the NHS in England.
• Star Pubs & Bars has said that its £38m investment into its estate will benefit 700 local pubs across England and Wales, creating an estimated 500 new jobs, according to the company. Almost 80 pubs will receive major makeovers, costing between £125,000 and £400,000 each.
• Amazon UK Services paid just £3.8m more corporation tax last year than in 2019, even as sales increased by £1.89bn, according to accounts filed at Companies House. The company’s corporation tax contribution was £18.3m in the year to December 2020 on reported profits of £128m. Sales increased by 64% to £4.85bn.
• Drinks Business quotes a recent survey conducted by The Bordeaux Index as saying that lockdowns have boosted sales of fine wines.
HOTELS & LEISURE TRAVEL NEWS:
• RSM’s Hotel Tracker reports that UK hotel occupancy rates have climbed for the third consecutive month, with the average occupancy rate rising from 30% in April 2021 to 65% in July. The average room rate was £89 in July, still behind the £110 average room rates in July 2019.
• Regent Seven Seas Cruises has resumed operations after an 18-month break, with the 750-passenger Seven Seas Splendor beginning a four-day relaunch on Tuesday.
• Cao Cao Mobility has raised $589m that will help the ride-hailing unit of Geely Automobile Holdings upgrade its technology and expand its fleet.
• Travel Weekly reports that Shearings has doubled the capacity of its 2022 holidays featuring Warner Leisure Hotels, the specialist staycation accommodation provider that is owned by Bourne Leisure. Shearings features 13 adult-only Warner Leisure Hotels in its programme.
• The CEO of Travel Counsellors has said that momentum is building on sales. Steve Byrne told a Travel Weekly webcast that the homeworking group’s leisure sales are at 75-80% of pre-pandemic levels. Byrne adds ‘it’s a great time for customers to book, particularly short-haul. Flight prices are super-competitive and there is availability. Compared to where we were two or three months ago, and last year, you’re seeing really positive demand for Spain and other European hotspots.’ He says ‘people are booking now to go this month in October. Then you’re starting to see momentum build for winter and next year.’
• Carnival has updated plans for new sailings saying that it will have ships in its Holland America Line back in operation by before next summer.
• Gear4music (Holdings) plc today updates on trading saying that UK revenue ‘returned to growth during July and August 2021’. It adds that it has seen ‘slower European revenue impacted by post-Brexit challenges’ and that, overall, ‘trading remains in-line with the Board’s expectation.’ The company has also announced an acquisition, saying that contracts have exchanged for the purchase of AV Distribution Ltd, to complete in Q3 FY22 for £9.2m, an EBIDTA multiple of 7.1x. CEO Andrew Wass says ‘as previously announced, trading during Q1 FY22 was stronger than the Board had expected although, as anticipated, behind the exceptional period of trading during FY21. UK sales have pleasingly returned to growth during July and August. European sales have remained behind last year, primarily as a result of post-Brexit cross border shipping challenges creating a less competitive delivery proposition
• Further comment: G4M says that its two new distribution centres in Ireland and Spain ‘will be operational by H2 FY22 as planned, and should eliminate most of the remaining post-Brexit challenges, significantly improving our European delivery proposition to provide a platform for further growth in our European markets by Q4 FY22.’ The company says ‘trading to date remains in-line with the Board’s expectations, although we remain mindful of ongoing uncertainties around COVID-19 and the potential for supply chain disruption during H2 FY22. As a result of the operational and commercial actions we are taking, and the acquisitions we are making, the Board retains a high level of confidence that the Group is well positioned to deliver on its long-term growth strategy.’
• 888 Holdings has formally announced the acquisition of William Hill International. It says the deal will create a global leader. 888 is paying £2.2bn for the assets. It says ‘the Acquisition will create a global online betting and gaming leader by bringing together two highly complementary businesses and combining two of the industry’s leading brands.’ 888 adds ‘the Acquisition represents a transformational opportunity for 888 to significantly increase its scale, further diversify its product mix and accelerate the upward shift of its revenue growth profile. The combination of 888 and WHI is expected to deliver significant operating efficiencies, including pre-tax cost synergies of at least £100 million per year1, leading to improved profit margins. On a pro forma normalised basis the Enlarged Group’s annual revenue and adjusted EBITDA in 2020 would have been $2.5bn and $464m,
• Further comment. 888 adds that the deal is ‘expected to be value accretive and deliver a post-tax ROIC that exceeds 888’s cost of capital in the first full year following the Completion.’ It says that ‘in order to fund the Acquisition, 888 has obtained fully committed debt financing from J.P. Morgan, Morgan Stanley and Mediobanca of approximately £2.1 billion, which includes approximately £1.6 billion (equivalent) of term loans and approximately £500m (equivalent) of bridge loans/senior secured notes. 888 has also obtained a fully committed revolving credit facility of £150m.’ The group is also to issue equity totalling around £500m. The board says it ‘believes that this funding structure and dividend policy will result in an appropriate balance between delivering shareholder returns, enabling the Enlarged Group to invest in further growth and enabling the Enlarged Group to achieve an
• Sportech has reported H1 numbers to end-June saying that revenue rose by 70.3% to £13.4m vs last year with adjusted EBITDA up to £0.3m from a loss of £2.4m. The group is reporting an adjusted loss before tax of £0.7m against a loss of £4.3m in 2020. CEO Richard McGuire says ‘the first half of 2021 marked a notably successful period of restructuring as Sportech completed business disposals, secured the move to the AIM market and built further on the online revenue gains from 2020. In recent weeks we also secured shareholder support for a proposed capital reduction and a significant capital return to shareholders and were delighted to announce a 10-year business relationship with the Connecticut Lottery Corporation to support their sports betting initiative.’ Sportech says that ‘the business is in a strong position.’
FINANCE & MARKETS:
• Andrew Bailey, the governor of the Bank of England, has said that worker shortages could exacerbate what is already a levelling off in the UK’s economic recovery. The Bank is also forecasting that inflation will hit a 10yr high of 4% later this year.
• The Bank governor said that the MPC was split four to four on whether the UK had recovered enough to meet the minimum conditions necessary to start tightening policy.
• The British Chambers of Commerce has cautioned that the NIC hike could derail the UK’s economic recovery.
• Sterling mixed at $1.3757 and €1.1644. Oil higher at $72.73. UK 10yr gilt yield up 1bp at 0.75%. World markets down yesterday and London set to open down around 60pts as at 7am.
RETAIL WITH NICK BUBB:
Today’s News: The Morrisons interims today look a bit disappointing, with pre-exceptional PBT down 37% to £105m and Q2 Retail LFL sales down by 4.6%, but the profit outcome is distorted by the Business Rates relief repayment and management expect “considerably higher” profits in H2 (“We are planning for significantly lower lost profit year on year in the key business areas of fuel, café, and food-to-go. Among other assumptions, we are also budgeting for minimal further direct COVID-19 costs, continued improvement in online and wholesale profitability, and lower marketing costs from the My Morrisons loyalty scheme and stakeholder discounts”). Full-year guidance is unchanged and 22/23 is expected to be much better, although we may never know, as the new owners (CD&R or Fortress) may not rush to divulge P&L information, notwithstanding the fact they have both been “very supportive
Yesterday’s News: B&M chose the unusual time of 9.36am to issue a trading update yesterday and flag that first half profits will be well above market expectations, despite the tough comps. There were no figures, but B&M said that “whilst group revenues year to date have been broadly in line with market expectations, gross margins have been stronger than originally anticipated in the core B&M UK business”. B&M went on to explain that “performance of General Merchandise and Seasonal categories has been particularly encouraging. Sell-through rates in those categories have been high and accordingly end of season markdowns have been limited”. As a consequence, the group now expects adjusted EBITDA for the 26 weeks to 25 September to be in the range of £275m to £285m (versus an analysts’ consensus estimate for H1 of only c£235m and the bumper £296m made in H1 last year).