A Day in the Life:

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

I still struggle to get my head around the idea of infinity. I mean it’s a very big number and, when applied to time, it’s a very long time.

Nonetheless, I find it interesting and, as I’m particularly attracted by the idea of the monkey with a typewriter writing the entire works of Shakespeare whilst the animal next to him writes the same works in French, I’m waiting for the dog to clean the house whilst wearing a tutu.

And, though I know as I look around our dog-hair-strewn living room it’s not likely to happen in my lifetime (and certainly not in his if he carries on the way he is), you can never say never.

Anyway, optimism has always been one of my weaknesses and I won’t hold my breath so, before I start thinking about probabilities, let’s move on to the news:

Marston’s Full Year Results:

Full Year Results – 52wks to 3 Oct 2015:

Marston’s has this morning reported preliminary full year numbers for the 52wks to 3 October and our comments are set out below:

Financial Results:

Group has reported underlying Group revenue up 7% to £845.5m

Underlying PBT is up 10% to £91.5m. Underlying EPS is +10% to 12.9p. The final dividend is +4.7% at 4.5p taking the year total to 7p (+4.5% on last year)

The group has seen ‘profit growth in all trading segments despite disposals’

Cash flow, balance sheet, new openings, debt etc.:

Operating cash-flow is up £34.5m to £162.3m and debt to EBITDA is down by 30bps to 5.1x

Some 25 new pub restaurants have been opened this year

More Taverns have been converted to Franchise, the group now has c550 Franchised pubs in operation

The quality of the Leased business has been much improved. The estate is now in LfL profit growth and rents are up

The Tenanted operation has delivered an increase in average profit per pub of 15% in 2015 (due in part to disposals) with the profit contribution on average up c40% since 2012 

Divisional trading, costs, margins etc.:

The group updated on divisional trading on 14 October saying that full year LfLs were +2.2% in Premium & Destination, +2.0% in Taverns, +4.0% in leased (EBITDA) and +5.0% in the Beer Company

Re the first 7wks of FY16, the group says ‘the year has started well, with both pub trading and beer volumes in line with expectations.’

Marston’s says ‘at this early stage in the year we remain confident of achieving our targets for the full financial year and are on track to complete the new-build and lodge expansion plans’.

The group, which has reported a 30bps increase in margin ‘through a disciplined approach to discounting and tight cost management’ says that the financial impact of the NLW ‘compared to our existing plans, will be moderate’

MARS says ‘our focus will centre on improving the quality of service to mitigate further the impact of the cost increase.’

Strategic issues:

MARS points out ‘since 2013, we have reduced the size of the pub estate from 2,050 pubs to a core 1,600 pubs which now substantially completes the disposal programme.’

The quality of the estate has been markedly improved. The group says ‘average profit per [leased] pub, a good indicator of pub quality, has increased to around £100k per pub, up around 40% since 2012.’

New-build remains the group’s ‘key growth driver’ (134 units added since 2009) but the move to Franchise has helped profits and good quality Leased units (and indeed the breweries) remain core to the group going forward

Whilst it operates in a competitive environment and will have to fight in order to secure share, the group holds five components as key going forward:

Operating a high quality pub estate  

Operating a range of pub brands and formats  

Offering value for money across all food and drink

Securing leadership in the UK beer market  

Keeping the best people

Conclusion:

CEO Ralph Findlay reports ‘the three year transformation of our pub portfolio towards an optimised estate is now largely complete.’

He says ‘we approach 2016 with our business successfully positioned at the forefront of industry trends with high quality, well-invested pub assets which are fit for the future.’

Mr Findlay reports ‘looking forward, we remain on track to open at least 20 new-build pubs this year and have in place a carefully selected site pipeline in key regional locations for 2016 and beyond.’

He adds ‘whilst new-build, food-led pubs remain our core growth driver, we have evolved our strategy to capitalise upon other opportunities for expansion where we see attractive returns potential.’

Overall, Mr Findlay concludes ‘at this early stage of the current year trading has begun well and we look forward to building on this momentum over the months ahead to deliver another year of good progress for the Group.’

Langton Comment: over recent years, Marston’s has transformed its business.

It has disposed of a material number of tail-end pubs and has built 134 destination, food-led outlets at an attractive EBITDA multiple of under 6x. The more mature new-build units, which have already been revalued once, are likely to have put on more value.

Return on capital targets for these freehold units remain between 13% and 15% depending on location.

The disposals have materially improved the quality of the group’s earnings. The group has been selling £20k per annum EBITDA units and has been adding sites that have been capable of generating £300k and £400k.

In its Group Overview, the company says that its pubs, tenanted, leased and managed combined, were contributing an average of £72k p.a. in EBITDA in 2013 and now, only 2yrs later, a smaller number of pubs in total are contributing 40% more at over £100k per pub per annum.

The disposal process has been dilutive but this has now worked its way through the system and the group will be back into earnings growth.

Margins are up at a time during which the group has been beating the market in terms of LfL sales growth. Current trading is ‘in line with expectations’ and, as these are for a c2% plus increase in LfL sales over the year as a whole, we would expect that something in that region has been returned in October and November.

Given that November will have been tougher than October (per M&B on Tuesday and others), this suggests that MARS is beating both the Coffer Peach Tracker and a number of its larger competitors.

It has to be said that October and particularly November are not large months and Christmas is clearly all to play for.

MARS is growing EPS and cutting its debt. Debt (at 5x EBITDA), will remain broadly level in absolute terms this year but, as earnings are growing, it should fall as a multiple of EBITDA. Fixed costs cover is >2x and is not out of line with RTN and other ‘lowly geared’ (but leasehold) operators.

MARS shares are trading on less than 12x current year earnings and offer a 4.6% yield. The group is capable of delivering double-digit EPS growth into the medium term and its shares offer extremely good value.

Thomas Cook – Full Year Numbers:

FY Numbers – Analysts’ Meeting:

Following the announcement of its full year numbers this morning, Thomas Cook hosted a meeting for analysts and our comments are set out below:

The Numbers:

Fankhauser – TCG’s performance was good but ‘this was one of the most difficult years in my 30yrs experience in leisure travel’.

Exceptional charges are down by £177m and the group has made its first profit after tax (of £19m) in five years

Margins are better though there has been some inflation in bed costs. Higher margins in UK & Northern Europe were partly offset by lower margins in Airlines Germany and in Continental Europe

Germany is ‘highly competitive’ due to excess supply. There were more holidays sold in the Lates market this year

Tunisia cost the group around £22m. Some £61m of costs were cut as a part of the ‘cost-out’ programme

Regional EBIT. UK £119m v £84m. Continental Europe £71m v £90m. Northern Europe £96m v £78m & Airlines Germany £56m v £47m.

Free cash flow was £161m, year end debt was £139m (post a £92m equity injection from Fosun). Group is much more able to withstand geopolitical upheaval

Overview, financial targets etc.:

Group hit cost saving targets a year ahead of target & has done well in the UK business

Group has ‘achieved a step change in financial performance’.

Market for leisure travel remains in growth. Has grown almost every year over the last 20yrs.

Targets going forward are simpler. Group will grow own-brand hotels + differentiated holidays. Retailing will be online & offline (omni-channel) and costs will be cut further

Group believes it can generate c£55m of incremental operating profit by moving to differentiated holidays and own-hotels. Could earn c£25m from enhanced in-resort services. Cost out should save another £25m plus

Fosun: Should begin trading early next year. Team is on the ground in Shanghai. This segment could be as big as existing segments (or bigger). The Club Med partnership is operational and the hotel fund is recruiting

New operating model could bring benefits of £100m to £120m by FY18 net of costs involved & some more general cost inflation. Cash conversion should be >70%.

Sales should grow by ‘at least’ 2% to 3% per annum

Current trading & outlook:

UK bookings +8% for winter 15/16 with selling prices +2%. N Europe is +7% and +9% respectively. Continent down 6% but +6% with Condor down 1% and down 1%

Summer is ‘off to a good start’.

Dividend pay-out should be 20% to 30% of net profits with the first dividend out of FY16 earnings – the group will not pay an interim dividend. Board will consider a step up in the pay-out ratio in due course

Questions & Answers:

Geographic growth going forward? Group intends to drive profits ‘in every market’.

Put option in the hands of the Co-op re retail units? This exists & the group is providing for around £80m of costs.

Cost of Sharm? This is ‘a low single digit figure’. Group has stopped flying. It is following government advice. It was a diminished destination post the Arab Spring in any case.

Capex? This has risen this year & will remain high in FY16 before falling to c£160m thereafter. Most has gone into systems.

Airline delay compensation? This has impacted profits, claim rate has hit c80% & the group will further target punctuality going forward.

Delays in setting up hotel investment fund? Both sides committed but it is taking a little longer than expected. There won’t be any properties added in calendar 2015 but there should be income in FY16. It will be accretive from FY17.

Group is well-financed, has optionality.

Pension deficit? Had a triennial review. Costs should be £26m.

Langton Comment: Over rather a long meeting, TCG was able to reassure investors that it had ‘achieved a step change in financial performance’ and, perhaps more importantly still, it insists that there is more to come.

The group has identified credible areas of growth and has put numbers on its aspirations.

The £100m to £120m of incremental EBIT is said to be after some costs but, as is the way of these things, there may be some further mitigating costs – or competitor reaction – that brings this number further down.

Nonetheless, TCG seems to be firmly signalling that near term profit forecasts are achievable and that the group should be able to deliver further growth thereafter.

We buy into the idea that leisure travel is a growth industry and see TCG as an established – and now stable – player. There have been – and probably will continue to be – external issues that cause problems from time to time but, at a single-digit multiple and with the prospect of further action re Fosun out three, Thomas Cook’s shares offer good value.

The News:

Pub, Restaurant & Drinks Producer News:

• SSP Group constant currency operating profit jumped 17.6% to £97.4m in the full year to 30 September, helped by 3.7% LfL sales growth. The group credits a strong performance in North America (revenue up 14.3% to £201.6m) and the Rest of the World (revenue up 11% to £154.4m) alongside its ongoing operational improvement initiatives, and notes an ‘encouraging pipeline of new contracts’. Underlying earnings per share increased 19.4% pro forma to 12.3p, putting shares in the food travel group on a PER of 24.1 falling 20.

• The group generated free cash flow of £54.7m (2014: £58.2m) following an increase in taxes and dividends paid as a result of growth in its North American business. The group also paid an outstanding £12m of exceptional costs as a result of its 2014 IPO and its debt level has been brought down from £371.1m to £319.8m.

• SSP Group says the new financial year has started in line with management expectations and adds that its geographical and sectoral diversity insulate it somewhat from global political events. The food travel group has identified ‘significant structural growth opportunities’ and says this, alongside its programme of delivering operational efficiencies, leaves it well placed for future growth.

• Autumn Statement broadly welcomed. Small business rates relief extended, apprentice levy to impact bigger firms. BBPA CEO Brigid Simmonds comments: “The extension of Small Business Rate Relief for another year is welcome, and is worth £25 million, and is something we had specifically requested. One third of pubs will qualify, 15,000 premises, in total.’ However, she goes on to say ‘it is very disappointing that the Chancellor has not extended retail relief for a further year – this is effectively a £1,500 tax increase for the majority of pubs, and will add £46 million to pubs’ rates bills.’ She says ‘I do welcome the announcement that small businesses like pubs will typically not be burdened with the Apprenticeship Levy, as this would have placed an excessive burden on what are mostly small businesses. It is crucial that the Levy system is
straightforward and allows those that pay into the Levy fund to access their full contribution to support apprenticeships.’

• BHA report on Britain’s Food Service industry says such businesses serve >4m customers per day. Healthier alternatives now on offer, some 94% of respondents are reducing salt in their meals, 88% are including more fruits and vegetables in menus, 88% are training chefs on cooking healthy options etc. CEO Ufi Ibrahim reports ‘this is a remarkable achievement and significant work is ongoing to further improve menus and choice in the FSM offer. Similarly, there has been positive engagement across many restaurant and hotel caterers, demonstrating the willingness of industry to work with Government to improve public health and reduce obesity in the UK.’

• Greene King Tracker (Oct) provides ‘reason to be upbeat about the prospects of the leisure sector’ & show increases across the board.

• GNK Tracker: Shows ‘uniform spending increases across Drinking Out, Eating Out and Other Leisure.’

• GNK Tracker: Says ‘events such as the closing stages of the Rugby World Cup, big cinema releases in the shape of Spectre and half term have helped boost spending for households across the country.’

• GNK Tracker: Re Xmas says ‘there is much evidence that this positivity will continue into the Christmas period’. It says ‘over a fifth of adults [are] saying they expect to spend more on presents this year than last.’ The Tracker goes on to says ‘the positive figures in this report provide further evidence for a recovery that is starting to benefit consumers up and down the country.’

• GNK Tracker: Says in Oct average British household spent £206 on out of home leisure up some £18 (9%) year-on-year but down £3 m-o-m. It says ‘despite weather that was colder, wetter and less sunny than for the same month last year Drinking Out has seen a year-on-year increase of £5 (11%). This reflects the long term upward momentum in consumer confidence, with year-on-year increases in spending on all leisure categories.’

• GNK Tracker: Says spending on Other Leisure was strongest across categories at +13% y-o-y. Eating out remains largest category.

• GNK Tracker says ‘y-o-y increases across the board are a compelling indicator of the economy’s strength’ but does point to m-o-m falls.

• GNK Tracker reports ‘household spending on eating out in London fell by 11% in Oct vs a 4% decline nationally’. Says falls not evenly spread.

• GNK Tracker: Says ‘consumer confidence is looking up for the Christmas period as 23% of households think they will spend more on eating and drinking out this Christmas compared to last year while on 20% expect to spend less.’

• Deltic Group is to rollout its Shoreditch-inspired Steinbeck & Shaw concept and plans to adapt the ground floor bars at Pryzm sites in Bristol and Cardiff. CEO Peter Marks told M&C: ‘If you’re a cool young man or girl and you like going to London and you’re more east end than west end then guess what, we’re coming. Steinbeck & Shaw takes a lot of inspiration from what’s going on in London and translates it in a stripped-back, warehouse, edgy design. There isn’t a template for it but there are elements we can transfer. It’s about the feel and the target audience.’

• The value of the global luxury spirits market will nearly double in the decade to 2020, according to Euromonitor figures. While the growth of volume of total spirits sales is expected to remain slow between 2015 and 2020, the luxury spirits segment will increase by 30% to top £12.8bn. China is expected to be one of the key drivers of growth during the five-year period.

• Punch has formed an exclusive partnership with actor Neil Morrissey’s pub company to run ‘a number of pubs’ across the UK. The news comes after the success of their initial collaboration, the Plume of Feathers in Barlaston, Staffordshire, which opened in March 2015 following a £400,000 refurbishment.

• Diageo has sold its Saumur house Bouvet Ladubay to the Monmousseau family for an undisclosed sum as the drinks giant looks to reduce debt. The move fits in with Diageo’s policy of exiting wine and offloading United Spirits acquisitions that do not fit in with its strategy. The group has already sold off most of its Australian wine holdings to Treasury Wine Estates for £390m.

• Virgin Wines is anticipating a bumper Christmas for online wine sales and is expecting some two million bottles to be shifted this December. CEO Jay Wright said: ‘We are expecting Christmas 2015 to be our biggest trading period in our history. With more shoppers turning to the convenience of online to prepare for the festive season, expectations are high. We’re expecting to sell an additional 40,000 cases of wine due to the growth in our core business and the seasonal effect on our gift business.’

• Cider and pizza concept The Stable has another London site lined up, this time in Brentford, and hopes to move into Whitechapel next year. M&C writes that the group, in which Fuller’s has a 51% stake, is understood to be opening at Kew Bridge Road opposite an existing Fuller’s pub.

• The ALMR has welcomed the extension of business rates relief for another year in yesterday’s Autumn Statement. ALMR Chief Executive Kate Nicholls said: ‘The extension of the small business rate relief for another year is certainly welcome as this is something the ALMR has consistently pushed for. It is disappointing, however, to see that once again we are in a position of urging the Government to hasten with real and meaningful change to the business rates system and to bring about root and branch reform.

• ‘This is increasingly a system that sees business relying on multiple discounts and allowances and is a recipe for confusion or avoidance, something the Treasury has already highlighted. The licensed hospitality sector is carrying an enormous burden in the shape of business rates, with pubs accounting for 2.8% of all UK tax receipts; a situation that is plainly unfair and unsustainable for some businesses.’

• It’s Black Friday tomorrow.

Travel & Hotels:

• The travel industry is offering a number of deals for agents and customers this Black Friday. Princess Cruises has launched a four-day offer from Friday on 29 of its voyages next year, while Carnival Cruise Lines is offering a trade incentive for agents to receive a £20 Love to Shop voucher for every Carnival sale on Friday.

Finance & Markets:

• Chancellor George Osborne has surprised some by dropping plans to scrap benefits for low-earners but has kept his target for budget surplus in 2020. The Chancellor also declared that there will be no cuts to police spending. The former announcement will keep cash in the hands of some consumers most likely to spend it.

• World markets: UK & Europe up yesterday, US up in later trade and Far East up in Thurs trading

• Oil price a shade higher at around $46.25 per barrel

Retail Roundup from Nick Bubb:

Arcadia:
Ahead of yesterday’s final results (for y/e August) from Philip Green’s fashion empire Arcadia we flagged that the sale of the heavily loss-making BHS back in March would make the figures look better and BHS was indeed stripped out of the comp. But, on an ex-BHS basis, underlying profits for the core business were much higher than we expected for 2013/14, implying that BHS’s real operating losses last year were far higher than were revealed a year ago. Still, that’s water under the bridge now and the key point is that Arcadia managed to stage a modest recovery in operating profits in 2014/15, from £238m to £252m pre-exceps (on flattish total sales of £2.07bn), despite the competitive pressure on such struggling mid-market chains as Dorothy Perkins, Wallis, Burton, Miss Selfridge and Evans. It would, of course, be fascinating to know how much the
“jewel in the crown” of Top Shop/Top Man (now 25% owned by the US fund Leonard Green) contributed to that outcome, but, alas, the minority interest line of the P&L was left out of the press release again…As expected, Philip Green was gloomy about current trading, given the mild autumn weather, with LFL sales running down by 2.3% over the first 10 weeks of the new-year, despite the weak comps…

Today’s Press and News:
The Chancellor’s Autumn Statement obviously dominates the press today and the Daily Mail headline “Whatever happened to Austerity?” sums it all up quite well, but the final results from the privately-owned fashion retailing group Arcadia also get plenty of coverage in today’s papers, with the FT flagging up Philip Green’s priceless quote that “The last few weeks have been soft. I don’t want to make excuses. It has been very, very mild”. The Daily Mail also reports that John Lewis has banned its employees from using staff discounts on its website on Black Friday. In terms of today’s news, there are 2 unexpected events: the convenience store chain McColl’s has announced that its veteran CEO James Lancaster is to step down (albeit at the time of the IPO in Feb 2014 it was made clear that he would retire within 2 years)
and Tesco has said that it has settled one of the class actions by US shareholders against Directors following the overstatement of commercial income announced in Sept 2014, by paying $12m with no admission of liability…Nick Bubb – nicholas_bubb@hotmail.com

Wednesday 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:

Thomas Cook thoughts in brief (see also below):

• Leisure travel is a growth market and, within that market, Thomas Cook is a stable, established player

• The Fosun situation could be very interesting going forward and, despite geopolitical events buffeting the company from time to time, we believe that, on only around 10x current year earnings, the group’s shares are cheap

German market:

• It’s big but is it attractive?

• Heard yesterday – ‘most leisure retail offers have struggled in Germany’.

• Reminded of yesterday – Domino’s struggling in Germany.

• Reminded of this morning – AO World losing money in Germany, says lost £10m in H1 and will be investing materially in H2.

• Reminded of this morning – Thomas Cook finds German market difficult.

• So when is ‘investing materially in marketing’ actually throwing good money after bad? Genuine question.

• Whitbread has a few Costas in Germany and it’s about to invest heavily in the budget hotel market.

• At the risk of being contradicted, we believe that hotels work as well in Germany as they do elsewhere on the Continent so maybe this is a business where UK operators may belie the rule and actually make money in the country.

Random information, hopefully not all of it useless:

• Oil price showing the first bit of sustained strength for some while.

• Having said that, the price is only back to that of 2wks ago.

• Nonetheless, with Sterling down against the US$, the price of oil to UK consumers has gone up a little over the last few days.

• Other commodities back to the same old, same old. Softs down except El Nino, metals weak, etc.

• Travel stocks took a pasting yesterday but all recovering today. Whitbread looking interesting at down 3.24% Tuesday but up 3.09% at the time of writing. TCG also recovering.

• Merlin down but recovering, TCG down but recovering (markedly) etc. etc.