Langton Capital – 2015-09-14 – Daily Wrap: Interest rates, MOD Pizza, commodity prices, the FRI & other:
Leisure Wrap & Other:
So the trading day is grinding to a close. We’re another day older but are we any wiser? After a day of intensive head-scratching, pen flipping and gossip, we have been considering the following. As always, contact us if you’d like further details:
Interest rates etc.:
• There’s small news (that could be part of a bigger trend, e.g. consumer confidence at 3mth high) and there’s big news.
• Interest rates going up for the first time in 9yrs (in the US, 8yrs in the UK) is definitely in the latter category.
• The Fed will announce its Sept decision whilst the UK is in bed, the early hours of Friday morning.
• The betting, just, is on an eighth of a percentage point rise.
• This would 1) not really make any difference to anyone but 2) would send the clear message that rates are not a one-way bet.
• Whatever the Fed does, it will be blamed for something but, as the ‘natural’ level of rates is arguably between 3% and 5%, the sooner it begins the process of normalisation, the better.
• NB – it’s always worth remembering that the ‘average’ rate implies that the spot rate spends half the time above it and half below. That has pretty far-reaching implications if the ‘normal’ rate should be 4%. Inflation could be an issue at some point but, in politics, tomorrow is never.
Evolution continues apace, corporate actions a-plenty:
• So MOD is to bring DIY pizza to London? Could be interesting but 1) haven’t we got rather a large number of pizza operators already and 2) how’s DIY working out for Vapiano?
• Yo Sushi may soon join Las Iguanas, La Tasca, Spirit Group (finally) & other chains in having a new owner this side of Xmas. Moto is also expected to change hands, Sportech has announced a bid-approach and other betting & gaming operators have been combining their businesses furiously (or have been trying to) over recent months. This may be indicative of a number of markets where organic growth is relatively hard to come by and where the temptation to acquire growth has become irresistible.
Commodity prices etc.:
• The annualising of major changes can have what shouldn’t be (but often are) far-reaching implications.
• When wet-led pubs lap a World Cup, for example, it’s to be expected that sales will come under pressure but, whilst this is widely-known, it can still lead to easy-copy headlines – ‘sales sharply down in June’ or whatever.
• This will be happening with commodities, soon. Arabica Coffee, for example, is down by around 35% over the last 12mths but, as the majority of the fall happened a little less than a year ago, it is around flat over the last 6mths.
• The same is broadly true for such widely-varied commodities as pig meat, Brent Crude & feeder cattle.
• Hence we may shortly be getting headlines – crude up over last 12mths or lumber higher on one year view.
• Indeed Wheat (see below), despite being flat on its backs, looks to be already fractionally up on a 1yr measure:
Langton Food Retail Index – The Grocer’s Dozen
• The FRI had a week to forget with just three of the 12 companies posting a rise in share price as the index fell 1.6% compared to the FTSE’s 1.24% rise. This week saw the return to the market of Conviviality Retail, fresh from its £200m acquisition of drinks wholesaler Matthew Clarke.
• Grocers: It was a week to forget for the grocers, who were all down save for Marks & Spencer, whose marginal 0.5% rise to 505p was not enough to match the wider indices. Tesco, which has been questioned in the press for its board’s lack of share purchases, fell 1.37% to 183.41p while the volatile Ocado dropped by 4.41% to 312.68 – its lowest level so far in 2015.
• Discounters: B&M Retail retained its price of 314.9p per share but has lost around 10% of its value over the past three months. The ambitious retailer currently has a £3bn market cap and shares are priced at 30 times earnings, falling to 25 times earnings next year. Poundland fell 5.88%, more than any other company in the FRI, while Mccoll’s also fell by 1.9%.
• Specialty/Wholesale: As mentioned above, Conviviality returned to action and its shares jumped by more than 20% to a new level of 183p as the market reacted bullishly to its announcement of the Matthew Clarke acquisition. The group’s shares are now up by nearly 50% since its 2013 IPO, giving it a dividend yield of 4.5% and a PER of 15.
• Conviviality is aiming to triple its sales across its c600 stores to £1.1bn over the next three years and has already grown its net profit from £4.8m in 2013 to £11.2m in 2015. Increasing scale should also allow the company to improve its operating margins, which currently stand at 2.5%. However, considering the placing shares to finance its recent purchase were sold at 150p, potential investors might be put off by its current levels. Jack Brumby – firstname.lastname@example.org
Random information, hopefully not all of it useless (re most leisure operators etc.):
• Oil price down a little, seems to be having trouble getting through $50 and, with China slowing, shale oil and Tehran coming on stream etc., it may continue to do so.
• Sterling is rallying against the US$; good news for commodity importers.
• Lidl has said that it is going to make a push into London, intends to have c300 stores within the M25. Should give all of those fully-priced Tesco and Sainsbury outlets a bit more of a run for their money.
We’re so 21st Century, this morning’s Tweets (diff. font size denotes importance):
1. Chas Dunstone (Carphone Warehouse, latterly Five Guys in UK) to bring Seattle-based MOD pizza to UK via JV
a. MOD (made-on-demand) Pizza has 70 outlets in US + operates “enlightened capitalism,” aggressively competes but pays top wages
2. Craft Beer Co. reports 22% jump in turnover across its six units ahead of the opening of its next site by the Gherkin on Mitre Street
3. Bill’s is to slow down the rate of its openings after expanding to over 60 sites in the past three years, according to the M&C
4. Consumer spending rose 3% in August thanks in part to strong growth in restaurants (+11.4%) and pubs (+12.4%).
5. The M&C reports that Be At One has secured new sites in Camden and Sheffield. Business posted 30% sales rise in H1
6. Lidl is planning to open stores in central London and aims to have around 300 new sites within the M25.
7. Kuoni has announced this morning that the sale of its European tour operating activities to REWE completed on Friday
8. Hotel prices in England and Wales have jumped up in the Rugby World Cup’s host cities
9. Yo! Sushi is reported by Sky News likely to be bought by Mayfair Equity Partners in a deal to value the chain at less than £100m
a. Sunday Times reports the clock is ticking for a £1bn Moto bidder, suggesting that Equity Partners Infrastructure is front-runner
b. Sportech announced Friday that it had received a proposal from Contagious Gaming re a bid for the company
10. B of England’s Kristin Forbes has warned that interest rates might have to rise sooner than expected
11. Germany’s finance minister has said the global economy faces a financial bubble from central banks injecting cash into economies
12. China data suggests slowdown. Factory output numbers came in below estimates on Friday with growth of 6.1% v hopes of 6.4%