A Day in the Life:

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Find previous emails at https://www.langtoncapital.co.uk/daily-notes/ 

Coming down to London yesterday, a fellow passenger explained to the guard that he was on the wrong train as his own had been cancelled. An everyday occurrence, you may say but his excuse? Well there was a trampoline on the line between Darlington and York.

Ah, ‘of course’ said the guard. There would be.

Anyway, with memories of Reggie Perrin’s 1970s excuses flooding back, let’s leave it at that. On to the news:

The News:

Pub, Restaurant & Drinks Producer News:

• Brewdog co-founder James Watt has refuted claims his Aberdeen-based company is overvalued following its ambitious crowdfunding campaigns.  Onlookers have questioned whether a PE ratio of 116 might be too high for a fast-growing brewery company, regardless of its momentum. Watt countered: ‘We’ve been the fastest-growing drinks company in the UK for the past three years – we’ll hit £100m in revenues by 2017. We would tell [critics] to look at Fever Tree, which is valued at more than £450m. If you compare our growth rate and fundamentals, I’ll think you’ll find we compare very favourably.’

• Stonegate has reopened The Grapes in Beverley with a new breakfast menu after completing a £200,000 refurbishment. The pub will boast a ‘greater range of cask ale, new and improved choice of proper pub food, even better superb sports viewing facilities and a weekly line up of entertainment’ going forward.

• Mayfair Equity Partners has agreed to acquire the controlling interest of 91-strong YO! Sushi from Quilvest Private Equity in a deal valuing the group at £81m. Executive chairman Robin Rowland commented: ‘In Mayfair we’ve found the right partner to support YO! Sushi through its next stage of development. YO! Sushi offers an accessible, fun and healthy eating out experience no matter when and what the meal occasion. This presents us with significant further growth both in the UK and internationally.’

• Yorkshire-based pub and bar operator Market Town Taverns has appointed Al Cross from 15-strong Halewood Capital as its new managing director.

• The government’s chief medical officer is to recommend a significant lowering of the official limits of alcohol that can be safely drunk daily and weekly. The UK’s new guidelines will also say that women should not drink alcohol at any point during pregnancy or while trying to conceive.

• Brakspear has opened its first managed pub in London and seventh in total, the Pocket Watch in Shepherds Bush. Brakspear chief executive Tom Davies said, ‘The demographic of Shepherds Bush has changed dramatically over recent years, creating an exciting opportunity for us. We’ve reinvented the pub from traditional boozer to “third place”, where customers can enjoy a drink or a quick bite, chat with friends and maybe watch some live sport. It’s a community pub with a modern twist and we’re confident it’ll quickly become a favourite place to spend time in Shepherds Bush.’

• Subway and Euro Garages have opened their 100th integrated store at Holtspur Service Station in Beaconsfield, Buckinghamshire. Euro Garages has completed its goal to invest in and open 100 Subways by 2016, creating around 700 jobs in the process, and now plans to open a further 75 Subway sites by the end of the year.

Travel & Hotels:

• Foreign Secretary Philip Hammond has said that airport security measures must be reviewed in the aftermath of the downed Russian aircraft over Egypt. Flights were delayed on Friday as Sharm el-Sheikh airport struggled to cope with new government restrictions imposed on hold luggage. Many holidaymakers in the Red Sea resort face lengthy delays before they are repatriated.

• Airlines have cancelled flights to Sharm el-Sheikh until 25 November following a Foreign and Commonwealth Office ban on all but essential travel. Thomson, Thomas Cook and Monarch have cancelled flights until 25 November as thousands of Brits wait to make the flight back to the UK.

• EasyHotel announces Master Development Partnership with MAN Investments LLC in Middle East. CEO Guy Parsons reports ‘we are delighted to enter into this new partnership with MAN Investments. MAN has established a significant geographical foothold in the region in a number of business areas, many of which are targeted towards value conscious consumers, which makes them a great cultural fit for easyHotel. With land prices currently at a premium, their capacity for speed and scale of development is impressive and a considerable competitive advantage.’ He concludes ‘we expect the partnership to drive rapid growth for the easyHotel brand in the Middle East that should deliver further shareholder value. The partnership will greatly improve brand awareness in the Middle East, giving us a platform to consider further opportunities in the region.’

• Canadian group Fairfax is taking over Kuoni group’s traditional tour operating activities in Hong Kong in conjunction with Thomas Cook India. The deal is expected to be completed by the end of the year.

• Luton airport passenger figures passed 12 million in 12 months for the first time in its history in October, marking 19 months of growth. The airport is currently undergoing a £110m development project to increase annual capacity to 18 million passengers. CEO Nick Barton said: ‘With air capacity in the southeast being such a pressing issue we are committed to playing our part to meet demand and providing the best possible experience for all our passengers.’

• Eurotunnel could take a stake in London City airport as part of a consortium after it was put up for sale this year.

• Japan is close to meeting its 2013 target of attracting 20 million visitors by 2020 and is on target for 19.9 million visitors this year alone. Japan National Tourism Organisation (JNTO) said global visitor numbers were already up 49% year-on-year for January to September 2015 as a result of the cheaper yen and airfares.

Other Leisure:

• With its China JV fresh in the mind of investors, Merlin Entertainments has appointed Yun (Rachel) Chaing to its board. Ms Chaing’s ‘appointment will add further breadth to the Board’s existing sector, geographic and governance experience, with particular expertise in the property, consumer and e-commerce sectors within the Asian markets.’ The group adds ‘Rachel is currently Partner and founding member of the private equity activities of Pacific Alliance Group (PAG), one of the region’s largest Asia-focused alternative investment managers with over $11 billion in funds under management across Private Equity, Real Estate and Hedge Funds. She currently holds Non-Executive positions with Hong Kong-listed Sands China (a majority-owned subsidiary of Las Vegas Sands) and Hong Kong-listed Pacific Century Premium Developments (PCPD) which specializes in the
development and management of premium property and infrastructure projects in the Asia Pacific region.’

Finance & Markets:

• The Organisation for Economic Co-operation and Development has noted a ‘deeply concerning’ global slowdown in trade. The performance of China in particular will lead to lower global growth this year, with global GDP now expected to increase by 2.9% compared to a forecast of 3% in September.

• IEA tells The Economist that Britain could benefit from a Brexit. It would, wouldn’t it?

• Eurozone will only release next tranche of loans for Greece after implementation of reforms (it says)

• World markets: UK down yesterday, ditto Europe. US lower + Far East down in Tues trade

• Oil price down a little further, trading around $47.40 per barrel

• Eurozone investor confidence up in November beating expectations

Langton Licensed Retail Index – Major Movers

The LRI was down 2% last week, while the FTSE all-share was broadly unchanged at -0.03% as oil and technology stocks held the wider market up.

The LRI’s biggest constituent Whitbread skewed the index down with a 4.01% fall.  SSP Group meanwhile was up 1.44% as last week travel sentiment improved, though this will likely have been undone by growing suspicions of foul play in the Egyptian plane crash.

In pubs MAB was a riser this week up 1.78%, continuing a good run of form of recent weeks having risen some 9% over the past month, while Marston’s was down 1.42% and Greene King down 0.19%.

Wetherspoon shares reacted badly to a further margin retraction at last week’s Q1 trading statement. The group’s margin was 6.2% for the 13 weeks to 25 October, having been 7.7% for the same period last year and though LfL growth was 2.5%, it’s fair to assume a chunk of this was down to pricing. The group hasn’t announced any share buybacks yet, but we’d be very unsurprised to see them doing so in the coming days.

In the tenanted pubcos, Enterprise was down 3.72%, but Punch saw its shares up 11.47% ahead of its numbers on Thursday.  The market will likely be expecting new CEO Duncan Garrood to update on strategy, which, while unlikely to be notably different to Enterprise Inn’s own strategy update, will likely improve market sentiment.

Similarly in the London pubs, Young’s was up 3.32% ahead of its interims on Thursday, while Fuller’s saw its shares fall 5.08% (albeit on a very large spread).

Trading updates come out on Thursday from Punch, Young’s and The Restaurant Group so next week’s LRI update will likely be driven by trading news. Will Brumby – will.brumby@langtoncapital.co.uk

Premier Foods Reports Return to Growth:

Premier Foods has this morning reported H1 numbers to 3 Oct, announces first quarterly growth in two years:

Group says ‘branded sales growth driven by innovation and investment’

Co reports branded sales in H1 increased +0.1% and Q2 up +1.6%. This represents the ‘first quarterly increase for two years’

Trading profit is +8.4%, adjusted PBT is +21.6% with adjusted EPS +21.9%.

Group states reported PAT is £21.7m vs loss of £49.1m last year

Net debt is ‘£585.3m in line with expectations’ and the group says this ‘will reduce significantly in H2’

It adds that its combined pension deficit reduced to £32.8m from £211.8m

The group is still pulling the capex and marketing levers and announces the introduction of a new brand; Paul Hollywood premium baking mixes

CEO Gavin Darby says ‘we are pleased to see Group branded sales growth in both the first half and second quarter of this financial year, as well as Trading profit progression.’

He adds ‘this reflects the clear benefits from our continued commitment to brand investment and innovation’ and says ‘it is also encouraging to see strong sales growth in our International business following the investment we’ve made in additional resources.’

Re the outlook, Mr Darby says ‘in the third quarter of the year, we expect to deliver positive Group branded sales growth, with Sweet Treats performing more strongly than Grocery.’

He concludes ‘the industry backdrop remains a challenging one, but with strategies which are delivering tangible results and significantly higher marketing spend planned for the second half, our profit expectations for the year remain unchanged.’

Re the group’s largest business, Mr Darby says ‘in our Sweet Treats business, we are on track to deliver double digit margins in FY15/16 a year earlier than previously expected.’

Longer term, he says ‘looking further forward, we remain committed to investing for sales and profit growth, and expect to deliver branded sales growth for the Group of 1-2% in FY16/17 and the medium term’.

Langton comment: Premier Foods has had a torrid time of it. It restructured its balance sheet in April 2014 but then faced the problems associated with the ongoing grocery price war in the UK.

This has negatively impacted group numbers but, beneath the surface, a lot of progress was always being made. Marketing spend, after a multi-year hiatus, was stepped up and ditto capital spending.

Commodity prices have been helpful, the supermarkets are now ‘aligned’ (fewer but deeper brands, less SKUs etc.) and even the weather has been helpful and, perhaps tellingly, directors have continued to buy shares.

The group’s pensions deficit, though volatile, is down and debt should reduce significantly in H2. The group needs debt to be <3x EBITDA before it can pay a dividend but this should be possible perhaps as soon as FY18 or, we hope, even FY17.

Current forecasts have the group making around 8.7p this year to put its shares on a rating of 4.4x falling to 4.2x in the year to March 2016. There has clearly been a degree of scepticism here but, as the group continues to deliver, the shares should re-rate.

We have seen the catalysts as either 1) a return to growth, 2) a return to the dividend register or perhaps less excitingly 3) a slowly dawning realisation that the group has a future as well as a past.

The group has now hit number 1) and we thing that number 3) should be underway. With a following wind, and that has been sadly absent for a number of years, the shares should be capable of going much higher.

Retail Roundup from Nick Bubb:

Kingfisher: Today’s site visit for investors and analysts in Dublin has the rather dull focus of Kingfisher’s new company-wide unified SAP IT platform, which will be rolled out across the group. The IT pilot started in B&Q Ireland in July and there be will a number of in-store demonstrations highlighting some of the improved functionality for staff and customers! However, in that deathless phrase, “No material new financial information will be disclosed during this event and there will be no update on current trading”, with Kingfisher’s Q3 trading update (for the 13 weeks ended October 31st) coming up shortly, on November 24th.

BRC Retail Sales figures for October (4 weeks to Oct 31st):
We flagged yesterday that LFL sales growth was expected by the City to drop back to about +0.7% (after a strong +2.6% in September) in October, but the outcome of today’s BRC survey is somewhat disappointing, at -0.2% LFL. As ever, this disguised a pretty big divergence between Food and Non-Food Retail, with Food still down LFL, by perhaps -1.5%, but the big slippage came in Non-Food , with LFL growth slumping from 6%/6.5% in September to only about 1% up overall. David McCorquodale, the Head of Retail at KPMG, said: “October certainly looks to have slowed on the High Street, with many retailers probably feeling more tricked than treated…”. The Non-Food outcome was weak despite further strong growth in Furniture, which remained the best performing sub-sector. Clothing did reasonably well, helped by soft comps, but Footwear was down LFL, as were the
sub-sectors of Home Textiles, Health & Beauty, Stationery and Other Non-Food (which includes Electronics). The growth in Online sales of Non-Food products also slackened off a bit, increasing by 9.2% in October versus last year (with the Non-Food Online sales penetration rate reaching a record 19.1%), driving 1.5% of the overall growth in Non-Food sales.

John Lewis Sales Watch: So, moving on from October to November (the 4 weeks to Nov 28th), how did that great High Street bellwether John Lewis do last week? Well, the weather was unhelpfully warm for selling Autumn Fashion and the comp was quite tough (there was a cold snap in early November last year). So, we would only pencil in, at best, flat LFL sales overall (ex the impact of the new Birmingham store etc), ahead of Friday morning’s official figures for w/e Nov 7th.

Debenhams Sale Watch: In case you’re wondering, today’s “Winter Spectacular” (offering “up to” 25% off all departments) is exactly the same timing as last year’s Sale event from Debenhams, so it is definitely a planned promotion and not a panic response to a few weeks of poor trading. Nick Bubb – nicholas_bubb@hotmail.com

Monday Wrap:

This was produced for distribution yesterday afternoon: 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:

Terrorism & Leisure travel:

• Needless to say, the two don’t mix well.

• And the problems will luggage and with securing landing slots for airplanes sent on repatriation missions has ensured the initial phase of the crisis will not be over with as rapidly as had been hoped.

• The reaction thereafter is likely to last for years. Operators and not least their customers will favour non-North African resorts and capacity will be shifted accordingly.

• We have FY numbers from Thomas Cook on 25 Nov and TUI on 10 Dec at which time we will likely be given an indication as to how much the current disruption is likely to cost.

• As far as political fallout is concerned, the UK authorities were quick to ban flying and they will not be allowing baggage to return on the same flights as its owner.

• This suggests in no uncertain terms that the UK authorities believe the problem may be one of security as Sharm el Sheikh and that will raise questions both with regard to that destination and with regard to others.

• 10% of all Winter Sun bookings from Russia to Egypt have already been cancelled and more will follow. This amongst other things suggests that the tragedy will have longer-lasting ramifications for Egypt than it will for the tour operating industry as a whole.

Reinforcing our view re underlying trends:

• Horizon’s tells us this morning that artisanal coffee vendors continue to perform strongly.

• It also says those offering differentiated food are performing well.

• Soho House mentions that it is going to focus on chicken when it comes to restaurant rollouts.

• Goals Soccer has reiterated that tough comps caused by the FIFA World Cup in 2014 could be enough to ruin the year for some more focused operators.

JDW perhaps doing itself no favours:

• Refreshing though it is to see a group resolutely stick to its principles, it can be frustrating from time to time if you’re not completely clear on what they are.

• JDW is in the process of selling (or of otherwise disposing of) a couple of dozen leasehold pubs and it is now to sell some three dozen more.

• The total string of pubs that the group wishes to jettison may be only around 5% of total pubs (and a smaller proportion of group sales) but a slower new-openings profile and sold pubs are not what one has seen lately from JDW.

• It’s inevitable that the group will have ‘outgrown’ some of its pubs – they may have fewer opportunities re accommodation, food, breakfasts etc. – and disposals are to be expected.

• And with other operators, these may have been dribbled out at the rate of half a dozen a year or so suggesting that JDW has made a decision of some sorts regarding a) keeping some units longer than would other operators and b) selling a larger number of units all in one go.

• We do not believe that the group is struggling in its search for a strategy but do acknowledge that the bears may not be short of ammunition

Consumer spending:

• Consumers are hesitant when it comes to spending.

• Some have put this down to a period of catch-up-spending on large ticket items but others have said that it could be a more deep-seated reaction to the credit crunch.

• This would have the savings ratio rise permanently.

• With that in mind, the Observer has noted that ‘ghosts of crashes past still haunt the consumer Christmas’ and we see some mileage in this argument

• We have unemployment numbers on Wednesday alongside average earnings data.

• We would expect to see more people in jobs earning more money – but still spending remains anaemic

Random information, hopefully not all of it useless (re most leisure operators etc.):

• Pity poor All Leisure Group. Problems with its ships and now issues in Egypt (again) where the group operates tours. Shares were 200p in 2008 but now sell at 7p each.

• Punch shares have been strong over recent weeks. They’re up to 137p (from 87p) in 8mths and have risen by 16% in the last 3wks. The group reports FY numbers on Thursday. It will also at that time update on its strategy post the announcement of the MRO option for tenants. Here it is likely to mirror Enterprise Inns and the group’s share price would suggest that, for the moment at least, the market is willing to focus on the merits of the group and of its assets as a whole.

• It’s Singles Day in China on Wednesday, apparently. On said day, consumers are encouraged to spend a bit of money on themselves. This can have a very material impact on spending patterns overall. It might be mostly stationery, scarves and slippers but, China, being as large as it is, there will be a few BMWs & Jaguar motor cars and Patek Philippe watches thrown into the mix.

• Sterling down steeply (particularly vs US$) on assumption of delayed rate rise here & December rise in the US. Implications for holiday companies, commodity consumers, oil consumers and the rest covered in earlier emails.

• Oil price down (in US$ terms) partly on back of stronger US$.

• Soft commodity prices lower despite El Nino (see Sunday press comments). Commentators focusing on Cocoa and Sugar which, admittedly have been strong. The former is up 17% over the last 12mths whilst sugar, after a very weak mid-year, is now only down 4%.

• IHG shares down with a bump, at time of writing down 109p (c4%) on second denial that group is in merger talks.

• SAB disposal in North America thought to be nearing. This one will be giving us something to write about for some months to come.