Langton Capital – 2022-08-24 – PREMIUM – Mobility, energy, inflation, losers, Time Out, Rekom, hotels, CINE etc.:
Mobility, energy, inflation, losers, Time Out, Rekom, hotels, CINE etc.:PREMIUM EMAIL – PLEASE DO NOT FORWARD: A DAY IN THE LIFE: Bit busy today. On to the news: ENERGY COSTS (this went out to clients earlier in the week): Introduction: Higher energy costs hit consumers – but they also represent a real and present financial danger to many hospitality operators: A few instances: • Alex Reilley, chairman of Loungers, yesterday tweeted ‘we hedged our energy contract in May ‘21 (pure luck as that’s when our contract ended) until 2024. If we had to enter into a hedge today it would cost an EXTRA £17m!’ • This represents an additional £85k per (albeit quite large) unit. This will not be survivable for a large number of small or single-site operators. • Responses to Mr Reilley include a number of examples. One, single pub, operator says bills are moving from £1,400 a month to £10,000. Others are saying that their heating bills will exceed their rents. • We are aware of one, three-site restaurant chain, that will see its bills rise from £150k a year to £500k a year. Another says £30k to £150k but the multiple, of somewhere between tripling and quintupling, seems around the same. What this means: • Because there is absolutely no help on offer, this could be a bigger threat than Covid. • Putting prices up could be counter-productive (as consumers are facing their own heating crises) and a few percentage points in any case simply would not be sufficient. • The government, save for the odd sound-bite, is currently not functioning. The choice, very soon, will be either to come up with a comprehensive solution or see large swathes of the High Street simply shut down. Some points of differentiation: • Just now, many if not all hospitality operators are being tarred with the same brush. • But some operators are more power intensive than others. Restaurants may use more power than drink-only venues. Some operators may cut their hours. Some have higher margins and will be able to ride this out and, sadly, some will not. • Large tenanted chains could find that their tenants struggle. These will often be smaller units in comparison to managed sites. Other: • In an update to the above, it was interesting to see electricity firm EDF say that the energy crisis will destroy viable firms. This would appear to be true. It makes the case for government intervention, once there is a government again, somewhat compelling PUBS & RESTAURANTS: Cost of living crisis: Philippe Commaret, a senior executive at EDF Energy UK, has said that people face a ‘catastrophic winter’ if the government doesn’t step in and provide further support… • The Liberal Democrats, Labour and most major energy suppliers are calling for the energy price cap to be frozen at current levels. Commaret said EDF had seen a 30% rise in calls from customers under stress and struggling to pay their bills. • Mr Commarat continues, saying ‘all ideas to keep bills for customers flat should be considered.’ He says ‘without further support from the government, more than half of UK households will likely be in fuel poverty by January.’ He concludes that ‘we face, despite the support that the government [has] already announced, a dramatic and catastrophic winter for our customer.’ • Langton. There is surely likely to be major government intervention. It’s just that, at the moment, there is no government. This, the energy crisis, will have to be near the top of the agenda for whoever moves into 10 Downing Street after 5 September. By way of context, if something isn’t done, demand for non-essential goods & services is likely to fall away rapidly in the autumn. Energy costs – the operator view: A survey by The Morning Advertiser has found that 70% of operators do not expect to make it through the winter without government intervention… • The MA finds that nearly 80% of operators said they could not afford the increase in energy costs. Measures suggested so far include reductions in VAT and business rates through to a cap on energy prices for business. • Langton. Without major intervention, many of the measures being suggested may be little more than a small drop in a big bucket. Directionally, that is good but, in the scale of things, it won’t change the outcome for many. Major price rises are unlikely to be a good idea as the consumer him/herself is in a tough spot. VAT cuts aren’t material enough. • Ed Bedington, editor of the MA comments that this is ‘an “extinction event” for hospitality and that’s no exaggeration. Increases of the kind we’re seeing are totally untenable and need to be addressed now, not in a few weeks’ time when the Conservatives pick a new leader.’ Being realistic, nothing is likely to happen until after 5 September. The MA says that energy bills could be ‘the final straw for many businesses.’ SIBA and CAMRA have issued a joint letter to the Chancellor, highlighting the struggles small brewers are facing in light of inflation and recommending that the government places an ‘urgent cap on energy prices for small businesses’ while offering grants for renewable energy technology. • The letter also states concern that the 5% reduction in duty for beer sold in pubs might get delayed. Roy Allkin, Chairman of SIBA, said ‘It is also vital that the…new discounted draught duty rate is extended to the smaller twenty and thirty litre containers used by small brewers’. Inflation & the economy: Rival Rishi Sunak has said that Tory Party front-runner Liz Truss would force the UK economy into an ‘inflation spiral’ unless she drops the policies that look set to win her the leadership…. • The Guardian quotes Mr Sunak’s campaign as saying that ‘the reality is that Truss cannot deliver a support package as well as come good on £50bn worth of unfunded, permanent tax cuts in one go. To do so would mean increasing borrowing to historic and dangerous levels, putting the public finances in serious jeopardy and plunging the economy into an inflation spiral.’ • The TUC is calling for a new minimum wage of £15. That would embed inflation. Bank of England governor Andrew Bailey, who would appear to have since been obliged to change his view by the facts, had suggested that it would be transient. S&P Global Flash PMI readings for August were out yesterday & they came in slightly below estimates. See Finance & Markets below. The search for losers: We have commented on ‘un-lockdown losers’ (online, delivery, recent opportunistic IPOs etc) previously and it would appear that others are doing the same. Brokers yesterday singled out Halford’s as a potential target when it comes to consumers cutting back their expenditures. Any other comments or suggestions as to upcoming losers would be welcome, please drop us a line… • Broker Panmure says that Halford’s is ‘naturally at some risk’. The shares fell by 16%. The broker says that consumers may cut back on spending on motor car accessories etc and motor makes up 70% of Halford’s revenue. This may be true. Other brokers may suggest that, if the replacement cycle for new vehicles were to be extended by hard-pressed households, then repairs could increase. • We could see companies operating on thin margins as being at material risk if both costs rise and consumers cut back. Demographics also matter. If a business has customers who are price sensitive and not very well off, they, the customers, may cut back on spending, particularly if the operator in question attempts to put prices up. Costs, access to labour etc.: The BBC reports that Luke Johnson has admitted that Brexit has cost the UK economy money and has reduced growth… • Mr Johnson was part of a panel on Radio 4’s The Today programme. Johnson was a vocal supporter for Brexit saying the decision to leave the EU would see British businesses prosper in the new environment. Johnson went on to say ‘I think there are real problems around imports and exports and I hope we can introduce new liberalising laws that will mean we can take advantage of being outside the EU.’ • Mr Johnson says growth opportunities have been lower and concedes ‘that’s a disappointment,’ He does not consider it a good idea to change, saying ‘if we spent our lives punishing ourselves and refighting the last war over Brexit we’re not going to make progress.’ Other news: Google’s mobility data stats show that London is still stuck much further below ‘normal’ than is the rest of the country. True, there were train strikes. However, at some point, there may have to be a reappraisal of just what ‘normal’ means. COMPANY NEWS: Time Out Group plc has announced it ‘has agreed a short-term unsecured loan facility of up to £8.0 million bearing interest at a rate of ten per cent. per annum with Oakley Capital Investments Limited… • Time Out says that the loan plus interest will be repayable by 30 November 2022. It says ‘the Facility will provide near term liquidity and collateral for the development of Time Out Market Porto, whilst the Company finalises longer term refinancing of its current loan facilities, which is expected to complete by the end of November 2022. Cash reserves stood at £4.8 million, as at 30 June 2022, however they are partially ring-fenced within the Markets division under the terms of the existing facilities.’ • Oakley and sister company Oakley Capital Private Equity own together some 44% of Time Out’s equity. Time Out says that its independent directors (three of the non-independent directors being involved with Oakley) say they believe ‘the terms of the Facility are fair and reasonable insofar as shareholders in the Company are concerned.’ There is a commitment fee of 2 per cent. per annum on undrawn funds and an arrangement fee of 0.5 per cent. of the amount of the Facility. Nightcap has announced another opening for The Cocktail Club in Canary Wharf, London… • The company, which has made some 15 trading update statements in the year to date, says that ‘the new opening in Canary Wharf is the seventh new opening for The Cocktail Club since it was acquired by Nightcap and takes the total number of The Cocktail Club sites to seventeen.’ • It adds that it ‘now has 36 sites within its estate and a further 20 premises under offer or in legal negotiations for all its brands.’ CEO Sarah Willingham says she is thrilled. The company also announces that the completion of its £10.0m debt refinancing facility with HSBC. Individual Restaurants Ltd reports a loss after tax of £8.2m for the financial year ending 27 March 2022, down from a loss of £23m the previous year… • The operator of the Piccolino, Riva Blu, and Restaurant Bar & Grill brands reported adjusted group EBITDA of £3.1m, up from a loss of £4m in 2021. During the period, Individual Restaurants appointed Karen Forrester as CEO, closed four less profitable venues, and acquired five additional venues through a £15m bank loan. The MCA reports that Oakman Group CEO Dermot King’s biggest concern is the impact of soaring energy prices. Oakman has a cap on the price it pays for energy until 2025, however, consumer spending will be dented by their own energy price increases. King said the group has pushed through average price rises of 7.5% and that it couldn’t rule out a further increase later this year as ingredient costs rise. • Without seeking to comment on Oakman directly, it must be a fantastic boon to have energy prices capped till 2025. However, as Alex Reilley commented re the Loungers’ position earlier in the week, the timing of contract renewals is a matter of good fortune rather than good planning. • We would suggest that the smaller the company, the less likely they are to have an energy contract. That does mean that smaller operators will perhaps feel the chill winds of higher prices much earlier than will their larger peers. This is a tragedy for the companies concerned but it could present an acquisition opportunity for some acquisitive companies. • And, as smaller companies tend to have a human face – and their owners are voters and perhaps opinion formers – they may receive support once the current zombie situation ends. In the longer term, of course, everyone will pay spot prices sooner or later. Nightclub operator Rekom (was Deltic, formerly Luminar) has said that it is proud to be opening a new venue in Cardif. Rekom says that the unit will receive a £1.2m investment and will be the first location in the UK for its Heidi’s Bier Bar… • Rekom operates over 200 bars, pubs and clubs internationally and 48 in the UK. In addition to Proud Mary Pub, other venues in Wales include a further three in Cardiff – PRYZM, Heidi’s Bier Bar and Steinbeck & Shaw – plus ATIK Wrexham and Fiction Swansea. HOLIDAYS & LEISURE TRAVEL: Lodging Econometrics predicts that 450 new hotels will open in Europe this year, with 188 already trading. It also forecasts that a total of 840 hotels with a combined 126,000 rooms will open in Europe across 2023 and 2024. The overall European development pipeline for new hotels is led by the UK with 309 projects, followed by Germany (258 hotels), France (152), Portugal (123) and Poland (85). • By way of example, Lewisham Travelodge has officially opened on Lewisham High Street, one of four hotels that Travelodge is opening in London this year. The opening of Lewisham Travelodge takes the company to 595 hotels across the UK, Ireland and Spain. Gatwick Airport claims its operations are ‘business as usual’ and that capacity limits will come off at the end of the month. Despite this, around 26 EasyJet flights in and out of Gatwick have been cancelled today at short notice, with the airport blaming staff sickness. The Caterer reports that some hotels are considering ‘closing for winter’ as energy contracts get renewed at three or four times the original price. Russell Imrie, managing director of the Best Western Plus Keavil House Hotel in Crossford, Scotland, said some smaller operators were considering just opening for the tourist season. Imrie said that ‘this will probably apply to restaurants as well’… • This isn’t an altogether bad idea if the bulk of your trade comes in summer and heating bills, as they probably are in parts of Scotland, are pretty high in the winter. However, for pubs & restaurants in cities, shutting over the Christmas period is surely not something that they would consider doing – that’s if they weren’t obliged to by administrators, liquidators, the VAT authorities or whomever. Eurostar has said that it will not reintroduce stops in Kent until at least 2025. It says the post-Brexit border situation makes it impractical and too expensive. It adds that the EU’s entry/exit system, which is due to be in place by the end of May 2023, will add “further complexity”. OTHER LEISURE: The Telegraph reports that Cineworld has paid $100m in fees to bankers and lawyers over the last two years in its ‘ill-fated survival battle…’ • The paper says that it paid $9.1m in advisory fees and $46.5m in ‘amendment fees for refinancing’. In 2020, it spent ‘$46.6m on legal and adviser fees to set up new debt facilities’ reports The Telegraph. It says that the ‘repeated refinancing efforts have failed to prevent a crisis’. • And so it would seem. As mentioned yesterday, it will be interesting to observe the management and directors advising investors that they have lost all of their money whilst, at the same time, suggesting that they should keep their jobs and be funded with more cash. TWEETS ON ENERGY COSTS (23 AUG 22): • 1 of 4. Energy costs. Two impacts a) consumers, b) small businesses. Both severe. No help (for Co’s) on offer so cd be ‘worse’ than Covid. What’s the plan? Current zombie status of Gov’t unforgivable. Screeching U turn very, very likely. • 2 of 4. Energy costs. £1k to £5k in little over 12mths. Peanuts to many on Gov’t benches but these are unthinkable sums to many, many people. Major, but maybe temporary, transfer of income needed to support quality of life of the less well off. Gov’t zombified. What’s the plan? • 3 of 4. Energy costs. We need to prevent a decline into hopelessness. You tell a man to walk a mile, he walks a mile. You tell him to walk 1,000 and he doesn’t try. Energy price rises are of that magnitude. Social stats, crime etc will likely reflect this very quickly. • 4 of 4. Energy costs. You want a reason to help? How about ‘you should’? It’s simply the right thing to do. You want a selfish reason? How about, ‘keep the workforce educated, motivated, well-fed and incentivised’. You will also save on barbed wire, guard dogs & shotgun shells. FINANCE & MARKETS: S&P Global Flash PMI readings for August were out yesterday & they came in slightly below estimates. S&P says the numbers ‘signalled a further slowdown in business activity growth across the UK private sector.’ The overall figure for the economy was 50.9 against estimates of around 51.1. Services was a slight beat at 52.5 (estimate 52.0) but manufacturing reported a fair old wobble at 46.0 (estimates around 51.0. Any number above 50.0 implies expansion… • That said, S&P says ‘the rate of expansion was the weakest for 18 months and pointed to only a marginal increase in output. The loss of momentum was often linked by panel members to relatively muted customer demand as well as shortages of both labour and inputs.’ • S&P says that inflationary pressures moderated as ‘UK manufacturers signalled a sharp and accelerated fall in production during August, with the rate of reduction the quickest seen since May 2020.’ Employment numbers were ‘solid’ but ‘optimism around the 12-month outlook for output remained relatively subdued in August, with the overall degree of positive sentiment staying only slightly above June’s 25-month low.’ • S&P concludes that ‘the UK private sector moved closer to stagnation in August, as mild growth of activity across the service sector only just offset a deepening downturn at manufacturers.’ It adds that ‘waning customer demand amid the weaker economic outlook, and shortages of both staff and inputs, were reported to have hit goods producers hard, with firms registering the quickest drops in output and new work since May 2020.’ • S&P does not shock when it says ‘the tightening of financial conditions via interest rate hikes, the cost of living crisis, labour shortages and strained supply chains are all likely to dampen economic performance further and keep costs elevated in the months ahead.’ Moneyfacts reports that a key mortgage rate, it’s two-year fixed term rate, has risen to 4% for the first time in nine years. The rate was 2,34% in December, Five-year fixed cost 4.24%… • At a time when utility and energy costs are rising rapidly, this will take more money out of consumers’ pockets. True, the fact that many mortgages are fixed means that the impact will not be immediate but, over time, this will feed through to demand with negative implications for cash-spend on non-essentials. Following the perceived threat to cut off supplies to Europe over the winter, wholesale gas prices are back to trading at close to a five-month high. Sky reports ‘the price of British gas for immediate delivery is off 2.5% this morning but on Monday traded as high as 503p a therm.’ • Sky reports ‘the expectation is that prices will remain at elevated levels for some time – although it is worth noting that gas consumption in continental Europe has been unusually low this summer as big industrial users, such as the German chemicals sector, have not been using as much gas as they were this time last year.’ • The UK energy price cap to be implemented in October will be announced later this week. There is likely to be a large increase with a further rise set to kick in from January. HM Revenue & Customs data reports that some 110,970 domestic properties were sold in the UK during the month of July, more than any month since last September. Sterling slightly higher at $1.1818 and €1.1868. Oil up at $99.80. UK 10yr gilt yield up another 6bps at 2.56%. Markets are now betting on interest rates hitting 4% by next Easter. World markets down yesterday but London set to open up a couple of points as at 6.30am. FORTHCOMING NEWS: Very quiet week in the run up to the August Bank Holiday weekend. Flash PMI numbers are released yesterday. RETAIL WITH NICK BUBB: Nick is taking a well-earned break & is back after the Bank Holiday. |
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