Langton Capital – 2015-11-27 – Pat Val, Marston’s, Wagamama, holidays & other:
A Day in the Life:
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Find previous emails at http://www.langtoncapital.co.uk/daily-notes/
One of the firm’s most loyal and hardworking members is showing signs of wear and tear this week as the Langton Kettle has sprung a leak as plastic fatigue seems to have got the better of it.
That or it’s been used as a weapon in the hunt for the corporate mouse (or mice) that persists in co-habiting with us in our veritable building here in E1.
Either way, I would imagine that mixing water and 240v electricity rarely ends well and, rather than save the time value of money on the delayed purchase of a £5 kettle and risk electrocuting myself or pouring scalding water all over my arm at stupid o’clock in the morning, we’ve taken the decision, corporately, to raid the biscuit fund in order to buy another one.
It just seems like the right thing to do. On to the news:
Marston’s Full Year Results – Analysts’ Meeting:
Following the announcement of its full year numbers for the 52wks to 3 October earlier this morning, Marston’s hosted a meeting for analysts and our comments are set out below:
Group average EBITDA per pub is up to £100k. This is +15% in 2015 and +40% over two years
Reiterates it is beating the market on LfL sales but is raising margins
Profits have risen against a £4m disposal headwind and £2m pension hit
Rents are rising across leased units (+2.5% in FY15)
Beer had a strong year, innovation continues. Some 80% of beer is now sold outside the group + 70% of beer sold is premium product
Cost outlook is benign, 1.5% to 2% except for labour, which could rise by c4%
The group would not be drawn on 8wk FY16 LfL sales saying that the next 5wks are much more important.
Cash flow, balance sheet, new openings, debt etc.:
Property revaluation has led to a £54m net estate uplift
Group is comfortable with debt levels but ratios will improve as profits come in, capex falls & dividend growth (slightly) lags EPS
Marston’s strategic issues:
MARS’ key areas are 1) new build, 2) exploiting its broad range of offer types, 3) the move to controlling units (via franchise, new build) and 4) continued (though now modest) disposals
Anecdotally MARS is now confident enough to commission a new-build franchise unit and it mentioned one in Hull that turns over c£25k per week. Destination & Premium pubs now contribute >50% profits
New build costs have perhaps edged up by perhaps £100k to £200k per site. The group has visibility on c100% of the 20 planned for FY16 and some visibility on the following 2yrs
Both MAB and GNK are less active in the new build market
Other areas. Regarding accommodation, MARS now operates some 800 rooms. Thwaites has been integrated well. It is building 5 lodges FY16 vs 3 in FY15.
In FY16, capex will fall a little and Leased will complete virtually all of its disposals
NLW. MARS points out that only the move to 920p was ‘new news’ as far as it was concerned. This will cost c£2m p.a. The reduction in Corporation Tax, however, will save £1m.
The group may be in the market ‘for another Thwaites’. It has the distribution to make the most of further purchases
The group is working on ‘The Pub of the Future’ & may share its findings (further food, enthusing a younger market etc.) via a CM Day next year
Re Market Rent Only leases, the group has offered FoT rents for a number of years. It has not had much take-up and it does not expect a short term change
Industry-wide strategic issues:
Supply of pubs & casual dining outlets in some ‘hotspots’ is becoming a problem. MARS is operating in less pressured areas
M&B commented on Tuesday that the market for new entrants was frothy. It said it was in part reminiscent of 1999-2000 (a period that did not end well re specific co failures, industry margins etc.)
MARS turned down the opportunity to operate in West Quay Southampton but did open in Knutsford
National Living Wage & apprenticeship levies will impact all players – see above for Marston’s comments
The consumer outlook is generally positive but pricing power is weak. Some operators will attempt to pass on some of the NLW costs in FY16
Langton Comment: Marston’s has reassured that it is now through the period of dilution caused by the disposal of its bottom-end units and that it should now be in a position to deliver double-digit growth going forward.
The numbers speak for themselves in that MARS has reported industry-beating LfL sales whilst increasing its margins.
In future, we should expect more of the same. The group will push new build & continue to reshape its portfolio of pubs via selected disposals and the occasional transfer of units from one business model to another.
And the beer business seems to be moving from strength to strength. The group sells 80% of its product to third parties, 70% of which is premium ale. It has around 3,500 free trade customers and perhaps 8,000 national accounts.
We believe that current year forecasts (of around 13.75p in earnings with a dividend of c7.35p) are secure. At this level, the group’s shares are therefore trading on a PER of <12x and offer a yield of 4.5%. We would suggest that this fails to fully value the group’s expansionary prospects and represents an attractive entry-level for would-be holders.
Patisserie Valerie – FY Results:
Patisserie Holdings’ strong growth has continued, with full year revenue up 20% to £91.9m and adjusted PBT up a considerable 29.2% to £14.6m. The cake and coffee operator is proposing a maiden final dividend of 1.67, which would give the group a yield of 0.5%.
Chairman Luke Johnson commented on the year: ‘We strengthened our team following our IPO on AIM and have seen the benefits this year with new ideas and products enhancing our brands’ reach. We are well positioned for future organic growth and acquisitions and I am particularly pleased to be able to announce our maiden dividend. Our pipeline for new stores is strong and I am confident of another successful year ahead.’
As above, revenue has risen by 20% to £91.9m and adjusted PBT has increased 29.2% to £14.6m.
The group has benefitted from a strong performance in its 116-strong core Patisserie Valerie business. The division’s new afternoon tea product has performed well, bringing in an extra £1.2m in sales and contributing to the wider division revenue rise of 23% to £62.9m.
Pat Val’s online Cake Club now stands at 306,000 members, growing 72% over the past year, while the brand’s profile has also risen strongly on facebook.
Midlands-based Druckers’ revenue was up £0.2m to £12.4m and sales at 4-strong premium brand Baker & Spice also grew by £0.2m to £4.4m.
Meanwhile the integration of Philpotts has been completed. The 23-site premium sandwich retailer was acquired for £6.4m in February 2014 and has contributed
CAKE has opened a total of 26 stores over the last 14 months funded from operating cash flow, and another eight units have been opened since the end of the year.
The sites are located across a mix of high-streets and shopping centres, with two brasseries, 13 full service and five counter service units opened. These stores ‘are trading well and several stores are forecast to repay their initial capital well ahead of the 24 month hurdle rate we set for our investment.’
Patisserie Holdings is looking to open a further 20 sites in FY16 and say they have ‘opened 6 additional stores, exchanged contracts at 4 sites and are in advanced negotiations on a further 8 sites.’
CAKE is also targeting expansion of its Baker & Spice brand in the coming year.
The group says of its performance and outlook: ‘We delivered our ninth consecutive year of growth in 2015 and this upward trend has continued into 2016 as trading to date remains positive. We have already opened eight new stores in the seven weeks since the financial year end. We have a well advanced pipeline and a healthy balance sheet which puts your company in a strong position to deliver another year of solid growth in 2016.’
Patisserie Holdings shares have been strong and the group is one of the few successes of the recent spate of IPOs.
The group has acquired a strong portfolio of brands and as a consequence now has a number of avenues of growth it can tap into in order to justify its premium rating of 29.8 times earnings. Jack Brumby – email@example.com
Pub, Restaurant & Drinks Producer News:
• Wagamama intends to open four key restaurants in New York next year and has already secured its first site as the group looks to focus on expansion in the US. Speaking to M&C, global brand director Simon cope said: ‘We’ve talked in the past about wanting to expand significantly in the US with a target of 50-60 sites in the next five to six years. Having secured this flagship we hope to open four to five in New York in the next 12 months.’
• SA Brain has agreed an £85m finance package with Lloyds Commercial Banking and HSBC Corporate Banking to upgrade its pubs and expand its Coffee#1 chain. The brewer has 231 pubs and bought Coffee#1 in 2011, which operates 57 coffee shops around Wales, the south-west, the south coast and the Midlands.
• Aldi has parodied John Lewis’ man-on-the-moon Christmas TV ad with a 30-second spoof poking fun at the sentimentality of John Lewis’ effort. Aldi’s advert also shows an old man dressed in grey on a bench in space, but this time with two telescopes: one from John Lewis selling for £109.95 and one from Aldi, priced at £69.99.
• French spirits group Remy Cointreau has reported a 7.3% fall in H1 like-for-like operating profit to 107m euros, on the back of falling Chinese demand.
• The Hakkasan restaurant group plans to open five new sites, three in Indonesia and two in the US. The group operates over 50 restaurants after recently opening sites in Shanghai, Los Angeles and London.
• Consumer confidence slipped in UK in November to the lowest level since the summer per GFK. Index fell to +1 compared with a high of +7 in July. GFK commented ‘confidence appears to be depressed by a combination of wider economic, political and social events’.
• Survey by Devicescape has concluded that Wifi is best at Greggs in a poll of 40 high street shops and restaurants reports Propel. It says ‘the real takeaway here is not that Greggs has better Wi-Fi than the next brand but that the quality of high street Wi-Fi in the UK is really very good across the board. At the very least the connectivity offered by the brands we’ve listed, and many more we have not, is good enough to stream video to a smartphone.’
Travel & Hotels:
• The IATA has reduced its long-term growth forecast for airline passenger numbers to an expected 7 billion by 2034, down from 7.4 billion. The research also finds that the top ten fastest-growing markets will be dominated by Africa: Malawi, Rwanda, Sierra Leone, Central African Republic, Serbia, Tanzania, Uganda, Papua New Guinea, Ethiopia and Vietnam.
• Visit Britain is pleased that its core budget remains unchanged following the government’s spending review.
• Euromonitor International has said that tourism stands to lose the most as a result of repeated terrorist attacks. Passenger figures to Tunisia and Egypt fell markedly following attacks.
• Net bookings (which combines both daily bookings and cancellations) of train trips to Brussels tumbled 159% at the beginning of the weekend following its lockdown. The city’s metro and schools reopened yesterday.
• Travel agents saw passenger bookings to Paris fall 50% after a ‘dramatic’ fall in flight bookings in the week following the 13 November shootings. Leisure travel market data from GfK shows that total bookings for all destinations in the week to Saturday 21 November were down 15% year on year.
• Industry data analyst ForwardKeys said airline bookings to the French capital fell 27% at the start of the week and cancellations had increased. ForwardKeys CEO Oliver Jago commented: ‘There were last-minute cancellations of immediate travel plans, predominantly among business travellers. New bookings have also dropped dramatically.’
• The global travel and tourism sector is set to grow by 3.5% this year, according to figures from the World Travel and Tourism Council’s annual autumn update. The number is only slightly lower than the forecast at the beginning of the year despite a series of disruptive events the Ebola epidemic in West Africa, terrorist attacks in Tunisia, France and Mali, and political unrest in Syria and the Ukraine.
• Exponent Private Equity has bought daily deals website Wowcher from the Daily Mail General Trust for £29m. The PE firm has also purchased the UK and Ireland operation of US daily deals website, LivingSocial.
• Goals Soccer Centres has appointed Nick Basing as Chairman. He will be deputy chairman until May 2016. Current chairman Keith Edelman reports ‘Nick has a proven track record of managing and operating successful leisure companies and I look forward to working closely with him to ensure a smooth transition.’ Nick Basing comments ‘I am pleased to be joining the Board at this time. I shall work together with the management team and board to support the business and realise the company’s potential. I have a single aim which is to increase value for shareholders.’
Finance & Markets:
• World markets: UK & Europe up yesterday. Wall Street closed for Thanksgiving. Far East markets lower in Fri trade
• Oil price down on glut fears. Trading at around $45.35 per barrel
Langton Sparks up its Gameboy…
The video game market is now the most valuable digital entertainment segment
It’s bigger than film, bigger than music and is yet much more likely to grow than to shrink…
But the route to market is rapidly evolving & the role of the physical store is now in question
Elsewhere, industries (e.g. video rental, travel) are leaving the high street in favour of the internet. GAME DIGITAL arguably has some legacy issues.
Some of the Langton crew popped their heads into a Game Digital store for the first time in a long time recently. Game used to be an area where young adults would spent a significant amount of their time but, however with the advent of increased online competition, the group has been through the mill, having floundered, been taken private and relisted all in the recent past.
The group’s management and supporters are confident that the outlook for the companies remains positive. However some of the younger generation who used be the group’s stable customers suggest that physical game shops are now obsolete. So who’s right?
A Changing Industry:
On the surface, the numbers look good for Game Digital, with the value of the overall UK games industry estimated to have grown 10% to £3.9bn in 2014 (see here), however drill down into that and the numbers look somewhat more challenging.
In terms of games, physical software sales were down 6.3% at £935m, while digital sales were up 17.6% to £1.05bn, overtaking boxed software sales. Sony and Microsoft both now have online stores for their consoles, and we’re hard pressed to see why they’d be happy to let stores take too large a slice of the end margin, while in the PC space, Valve’s mysterious Steam platform seems to be growing an increasingly impressive share. As such, it’s fairly easy to imagine a future where CDs and other physical manifestation of software have gone the way of the floppy disk.
Console sales were worth £915m in 2014, however this was a rise of 46% on the previous year following the release of the Xbox One and PlayStation 4 in November 2013. The group’s console sales are therefore very reliant on the timing of the release of new, updated products. On top of this, margins on consoles are much smaller than on software. FY 2014’s console margin at GMD was 7.6% which fell to 4.1% for FY 2015 as the console cycle troughed and customers demanded discounted prices for now year old hardware.
Where the group does have grounds for some hope is the console pipeline going forward. Virtual Reality has the potential to genuinely change the way people play video games, and a decent slice of the VR hardware market could keep Game afloat. The VR hardware market is estimated set to reach $2.8bn globally by 2020.
However, we remain somewhat uncertain as to whether this market will be addressed via physical stores or online.
On a PE of c17x Game Digital is arguably priced as a company with the potential to grow. While this is certainly possible in the short term, the longer term trends look challenging to say the least. Somebody clever once said something like ‘don’t buy stocks that can be outcompeted by the internet’, and we’d suggest that this applies here. Will Brumby – firstname.lastname@example.org
Retail Roundup from Nick Bubb:
Black Friday Watch: The journos out and about in Oxford Street and Tesco London superstores report a quiet start to Black Friday, but they can’t tell of course how many shoppers are staying at home to shop Online or how much bsuines has been done already this week…And having noted the other day that Seb James, the ebullient CEO of Dixons Carphone, has been on Twitter a few times this week, flagging “…It’s going to be big” and then “Strong start…”, he said yesterday morning “This is a huge thanks for the work that has gone into making what looks like an extraordinary week. Commercial, retail, IT, ecomm everybody!”.
GFK Consumer Confidence Watch:
ScS Watch: If you’re looking to buy a new three-piece suite…then ScS promise “huge savings” in their Black Friday Sale today, which is perhaps why management are taking analysts out to look at their stores and nearby warehouse in Lakeside/Thurrock today (including a concession in House of Fraser).
“Drapers” Fashion Awards:
BDO High Street Sales Tracker: this weekly High Street sales index of medium-sized Non-Food chains organised by the accountants BDO is a good guide to underlying Fashion store trading momentum, even though it continues to exclude Online sales. Fashion LFL sales have been notably poor in recent weeks, despite weak comps, and BDO has reported today that last week, w/e Nov 22nd, saw disappointing trading again, despite the cooler weather at the weekend, with overall Fashion store LFL sales slumping by 4.6% (despite the fact that the same week last year saw Fashion LFL sales down by 2.9%). BDO blamed this on consumers waiting for “Black Friday” promotions…Total store LFL sales were down by 4.5% (including some Lifestyle and Homewares retailers), but overall Non-Store/Online sales were surprisingly good, up by nearly 20%.
News Flow Next Week: After “Cyber Monday”, a quiet week lies ahead, as we move into December, with the Topps Tiles finals on Tuesday the only scheduled news, although there are several AGM’s, including the ASOS AGM on Thursday and the DFS and ABF (Primark) AGM’s on Friday. Nick Bubb – email@example.com
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:
Marston’s FY comment:
• See also comments above.
• Bottom line is that MARS is growing sales > industry & raising margins.
• Estate is in better shape, shares on PER of <12x and yield 4.5%.
London spending, Greene King Tracker etc.:
• Our main problems with London are 1) occupancy costs and 2) new capacity being put on, particularly in casual dining.
• The above feeds through to margins (i.e. costs are higher) and lower LfLs (because total sales may edge up but there are more operators trying to scoff the cake.
• However, Greene King’s latest Tracker suggests that, whilst leisure spending y-o-y is still up in London, it is down month on month.
• It says ‘changes in total leisure spending month-on-month were very slight, with the greatest reductions in leisure spending among households in London and the South East where total spend fell £7 (3%).’
• It adds ‘among households in London and the South East, spend on Eating Out fell by £11 (11%) month-on-month, among households elsewhere the decline was limited, falling by just £1 (1%) against September.’
• This may be short-lived but it will make unpleasant reading in the Capital as the number of leisure outlets has been increasing and, if the total spend is actually down (even if only m-o-m) then this will be doubly painful.
Random information, hopefully not all of it useless:
• Autumn Statement broadly welcomed. But give us time, we’ll find something to moan about.
• Osborne brings home reality. If benefit recipients aren’t going to foot the bill then business (apprenticeship levy etc.) and rate payers (brakes coming of on rates) will have to do so.
• Fact of the matter is that there’s a bill to be paid, it wasn’t going to pay itself & a payroll tax, though it’s an irritant for many, is at least paid by Starbucks, Google and other foot-draggers.
• Sterling down against Euro and US$ at a time during which the oil price has been firming. Two or three days don’t make a trend but there is a little upward pressure on the price of petrol (in Sterling) developing.