Langton Capital – 2016-01-21 – More on JDW, SAB Miller, easyHotel, Hostelworld & other:
A Day in the Life:
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Find previous emails at http://www.langtoncapital.co.uk/daily-notes/
Is it just me or is the mighty Microsoft taking a bit of a liberty with its One Drive product?
Because the software goliath, which has inveigled its way into every aspect of my PC – and indeed my life – seems to be default-saving some documents to One Drive without even asking me.
Or it may have asked me at some point and maybe I didn’t say ‘no’ firmly enough or whatever but the long and the short of it is that, when I can’t find a document on my C-Drive or on Langton’s external supercomputer (the external hard drive that lives on the bookshelf in the corner of the room), it’s probably going to be on One Drive.
And worse than wasting time looking for a document is finding and working on an earlier version without realising that the feeling of déjà vu is considerably more than just a feeling so how about I send Microsoft a bill to cover the time I’ve wasted on the above and other issues?
Say 50 hours at £100 an hour?
No, how about 100 hours at £200 per hour? Mr Gates is a rich bloke, he’d hardly notice and, while I’m at it, I think I’ll ask him to stop pestering me to upgrade to Windows 10 which, according to the nerds out there in the nerd-o-sphere, still has enough bugs to feed a world of frogs to say the very least.
Anyway, here’s hoping that today’s a better day on the markets than yesterday was. On to the news:
JD Wetherspoon – Q2 Update – Conference Call:
Q2 Update – Conference Call:
Following its Q2 update, JD Wetherspoon this morning hosted a conference call for analysts and our comments thereon are set out below:
Margin weakness is due to planned wage hikes. The group says ‘other cost rises have not been significant’.
But why guide down on profits, what’s new? Cost pressures have been ‘broadly as expected’. That’s not an answer but co says it has ‘taken a slightly different view as to how costs will evolve’.
Overall, supermarket pressure has been maintained. There is limited scope for price increases.
Margin? This is an outcome rather than an input. If LfLs pick up, then the margin will edge up. Free cash flow remains very strong.
Margin outlook? Not giving this number. Guiding more to profit. To hit numbers, they may be around current levels.
Margin. Plenty of questions on this topic (of course) but co does point out that profits & EPS are still at (or now near) record levels.
Inflation in the pub industry ‘always seems to be higher than reported CPI’. Understood. Not helpful for margin, clearly.
January trading? Won’t give granular updates. If it was ‘materially different’ then it would have been highlighted.
The weather? Mild weather was helpful but the flooding was clearly negative. Two pubs are still closed.
Sees craft beer as an exciting and fast-growing area.
Is 10-15 the ‘new normal’? For the next 2-3yrs this may be the case. Freehold reversions have become a larger part of the capex profile.
Disposals? These are hard to predict, particularly re timing. Some from June are still on the market. The will unlikely be sold by year end.
What kind of profit contribution will be lost on sold units? There will be some foregone profits but these units are below average in terms of contribution. Retained sites in the area should pick up some if not most of this lost profit.
The group had acquired units during the credit crunch for very modest amounts (circa half-full-cost) but there has been a degree of cannibalisation. Most sales, however, are because the group has outgrown the site.
Profit on sale? Modest – but these are not poor units. Group does not have a ‘tail’ as such.
Why is debt rising if you are opening fewer pubs? Was £601m and will ‘go up slightly’. Some costs from last year’s openings are flowing through. There are some freehold reversions & maintenance capex remains significant. The above assumption is not accounting for material disposal proceeds.
Langton View: JD Wetherspoon’s shares have initially responded rather negatively to this morning’s news. At the time of writing, they are down some 9%.
Whilst understandable on the back of a 5% to 10% edging back in forecasts, we see this as an overreaction.
Having said that, JDW arguably does little to help the bulls when it comes to its share price. Its updates are brusque and (blessedly at 7am in the morning) brief and there tends to be a lot of comments to the effect that ‘it is what it is’.
Taking the various influences into account, we see JDW’s rating, down below 14x on even-downgraded next year numbers, as too low for such a good operator.
Timing is everything, of course, and today’s fall is not a surprise. That said, we see real value and would take such weakness as a buying opportunity.
Pub, Restaurant & Drinks Producer News:
• SABMiller has released its Q3 update, with Africa and Latin America providing strong sales growth for the brewing giant. Reported results were dragged down by the ‘significant’ depreciation of its key operating currencies against the dollar, but constant currency trading was robust in its growth markets, pushing volume growth of 4% and group NPR growth of 7%.
• Latin America NPR rose 8% on the back of a 5% rise in volume, while Africa saw growth across the same metrics of 12% and 8%. Group lager volume growth accelerated during the financial year to 3% in the quarter, underpinned by growth of 7% in Latin America and 6% from subsidiary businesses in Africa.
• Premium lager brand volumes grew by 4% and global lager brands volumes increased by 8%. Subsidiary total beverage and lager volumes grew by 8% and 6% respectively, building on second quarter momentum and helped by favourable weather conditions in some markets. Meanwhile, soft drinks volumes grew by 8% — a source of growth throughout the industry — with double digit growth in Africa and a subdued performance in Latin America.
• Alan Clark, Chief Executive of SABMiller, went into more detail: ‘This was a very strong quarter with volume growth of 4% and group NPR growth of 7%. The majority of our subsidiary businesses achieved strong growth. Africa performed well across the board, with group NPR in South Africa growing by 16% and our African subsidiaries by 18%. In Latin America growth was led by Colombia and the Asia Pacific region benefited from volume and NPR growth in Australia. Europe had a stronger quarter, with all of our subsidiaries in growth. Group NPR growth was held back by headwinds in our associates’ and joint ventures’ major markets and continued industry trends in the USA’
• Charles Wells reports FY numbers to end-Sept. Revenues +0.9% at £188.9m with operating profits +4% at £8m.
• Charles Wells. Bedford based brewer and pub operator attributed its growth to ‘steady sales margins and strong cost control across the group.’
• Charles Wells. Group committed >£3m to improving its brewery with a further £2.5m spent on tenanted & leased pubs. Group says it also expanded its managed house portfolio with four sites now in its Apostrophe pubs division. CEO Justin Phillimore reports ‘the year has been one of steady progress in many areas. Beer sales volume increased and in retailing we invested in new pub developments to good effect.’ He adds ‘improved sales were driven by new products and marketing promotions’. Sales outside the Uk remained at 17% of total sales.
• Charles Wells’ CEO Justin Phillimore reports ‘we have had many challenges and consumer confidence still seems to be recovering but we have made great progress and our plans will continue to deliver results in 2016.’ He concludes ‘I am confident that the hard work and commitment of everyone at Charles Wells will drive development of our beer brand and pub portfolio even further, ensuring that the consumer remains at the heart of everything we do.’
• BBPA cautions on arrival of new £5 & £10 notes. The ‘plastic’ £5 notes will appear in September with £10 + £20 following in 2017 + 2020. The Bank of England will be unveiling the full design and security features for the new £5 note around June. BBPA CEO Brigid Simmonds comments ‘this is a big change for banknotes, and we all need to be aware. The BBPA has been involved in a Bank of England working group, and advising on training tools for staff so pubs can be as prepared as possible for the new fiver in September.’
• Pub and restaurant property prices rose by c10% in 2015 according to Christie + Co, suggesting that sites will continue to be an issue this year.
• Brewhouse & Kitchen has seen LfL growth of 17% in its un-invested estate and some 79% in its invested estate in its first quarter to December 2015. The up-and-coming group opened two new sites in the period stocked with its customary wide range of draught beers, some of which are brewed on site, and is celebrating the tripling in size of its estate in a year.
• Kris Gumbrell, Chairman of Brewhouse & Kitchen, said: ‘We came into this year confident that our offer was right for the market and we have been rewarded by strong growth across our business, in revenue, sites and guest awareness. We have been particularly delighted with the growth of gift cards. The group sold over £35,000 worth in the run up to Christmas plus an additional £21,000 in sales of brewing experience days and beer “master classes” as gifts… A key element of our offer is the ability for guests to come and receive a unique experience working with the pub’s head brewer for a day or enjoying a fantastic evening of fun and education where they can attend a beer masterclass, or a food and beer matching experience.’
• Stonegate Pub Company’s Classic Inns estate is celebrating the British sausage by hosting a sausage festival throughout February and March.
• Coca Cola has launched a new ‘one brand’ marketing strategy that will include all of the Cola variants available to consumers.
• Aldi has opened its UK online wine shop, offering cases of six wines each ranging in value from £22 to £120.
• EasyHotel updates on trading, says it ‘is in line with the Board’s expectation in both its owned and franchised hotels.’ It has also announced plans to open in Birmingham. CEO Guy Parsons reports ‘we are delighted to be investing in the UK’s second largest city.’ He says ‘in line with the strategy, the current financial year to date has seen an acceleration in both the owned and franchised hotel development pipelines as the Company continues to establish itself as the leading branded super budget chain.’
• Hostelworld updates on trading, says results ‘are anticipated to be in line with the Board’s expectations.’ Feargal Mooney, CEO, comments ‘we are pleased with the financial performance of the Group in 2015. Following the re-branding of the Hostelworld and Hostelbookers websites, the integration of the Group’s technology platforms, the continuing advancement of our mobile offering and November 2015’s successful IPO, we look forward to the current year and beyond with confidence. ‘
• STR reports US hotel industry increased REVPAR by 6.4% in 2015. Rate rose by 4.4%, occupancy was up by 1.7%.
• Reuters reports that 13 Nov Paris attacks cost city’s hoteliers as well as those elsewhere in the country €270m in lost revenues.
• International tourist arrivals up to 1.2bn (+4.4%) in 2015 according to UN World Tourism Organisation numbers
• The US hotel industry is on shaky ground after the Baird/STR Hotel Stock Index reported a 5.7% decrease from November to December. The same index fell 20% to 3,095 in FY 2015. ‘Hotel stocks finished near the lows of the year as investors remained concerned about slowing global growth and other macroeconomic headwinds,’ said David Loeb, senior hotel research analyst and managing director at Baird.
• US hotels: ‘Domestic hotel fundamentals slowed a bit in November and more so in December, and questions remain from both management teams and investors whether the relative weakness experienced at the end of 2015 will carry over into the new year, which has caused the hotel stocks to remain under pressure recently. Nonetheless, we have a positive view of hotel stocks for 2016 given solid fundamentals and stock valuations at significant discounts to our view of private market values.’
• The Federation of Small Businesses says businesses have started to lose confidence in the UK government to make tough infrastructure decisions. A decision has yet to be reached on airport expansion, with Heathrow and Gatwick continuing to campaign for an extra runway.
• A 46% jump in airfares helped push UK inflation to an 11-month high in December – the largest rise since 2002.
• 32 Red updates on trading, says full year EBITDA expected to be slightly ahead of expectations. CEO Ed Ware reports ‘I am delighted to report a record revenue performance for 32Red in 2015, despite significant regulatory and tax headwinds. This excellent outcome is a reflection of the strength of the 32Red business, our talented and dedicated team, as well as our first class marketing and appealing brands.’ He concludes ‘underpinned by our reputation for providing a first class customer experience and leading online gaming brands, 32Red is in excellent health and we are excited by the opportunities ahead.’
Finance & Markets:
• Car manufacturing in UK hit 10yr high last year with more vehicles exported than ever before. Some 1.6m built (+3.9%). The SMMT reported that nearly four out of five cars were exported, up by 2.7% on 2014. It said ‘Europe is our biggest trading partner and the UK’s membership of the European Union is vital for the automotive sector in order to secure future growth and jobs.’
• US consumer prices fell in Dec leading to suggestions that the March interest rate hike may be put on hold
• World markets: UK sharply lower yesterday, Europe too. US also lower but Far East markets up in Thurs trade
• London equities in bear market as the ‘official’ definition is a retracement of more than 20% from prior peak.
• Oil price still hovering around the $28 per barrel level, trading at around $28.10 this morning
• The rate of unemployment in the UK has fallen to its lowest in over a decade at 5.1% but wage growth has slowed. While the number of people out of work fell by 99,000 to 1.68 million in the three months to November, average weekly earnings growth came in below expectations at 2%.
Retail Roundup from Nick Bubb:
N Brown: Given the Online trading boom at Christmas, expectations should have been high for the home shopping group N Brown ahead of today’s Q3 (for the 18 weeks to Jan 2nd), but the weather also made life difficult and although overall sales growth was decent enough at +4.1% LFL, the gross margin took a bit of hit, to leave profit forecasts unchanged. CEO Angela Spindler trumpets that “We are on track to meet full year expectations, and we move into 2016 with real energy and confidence in our future”. There is an 8.30am analysts conference call.
Next: We flagged on Tuesday that the highly-respected “Mr Share Buyback Man” has been sitting on his hands over the last week or so, in his eyrie at Next HQ in Leicester (after blowing nearly £100m on buying back Next shares in the immediate aftermath of the disappointing trading update on Jan 5th). But on such a weak day in the stockmarket as yesterday, he had to make another move, to avoid the accusation that he’d lost his nerve…and he duly picked up c£5m of stock at c6548p. Nick Bubb – firstname.lastname@example.org
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:
• See two earlier flash notes.
• Shares still down around 7% on what, for Wetherspoon, was not a particularly negative update.
• Certainly the meaning of ‘bottom of the range’ was teased out of the company during the conference call – and it was not pretty, the ‘range was said to be £69m to £89m – suggesting a c6% or so downgrade – but the company is still growing and is still taking market share.
• And the rating, at below 14x reduced numbers, is beginning to look attractive.
• Sure, frustrated observers (let alone holders) will ask ‘when’s the company going to bring home the bacon?’ but this may well be a buying opportunity.
• That said, as we saw arguably with Gregg’s and Restaurant Group when their PERs were inflating, shares can overreact in both directions.
• But enough, already. None of this ‘on the one hand but on the other hand’ business. We think JDW is a good company and we see the shares, at these levels, as cheap.
• Shares fell on Alton Towers crash.
• Recovered virtually all of their drop (which was, perhaps, a little bit too much, too soon).
• And have now given more than a half of that recovery back.
• Puts them, market turbulence notwithstanding, firmly back in ‘interesting’ territory.
Random information, hopefully not all of it useless:
• WH Smith up 6% (in a dreadful market) on Xmas update beat. Has been a heavily shorted stock & there’s a squeeze going on. Group’s LfL sales were better than expected with the travel division +5% in the 20wks to 16 Jan. CEO Steve Clarke says ‘we expect profit growth for the year to be slightly ahead of plan’.
• Adult colouring in. No joke. WH Smith says its High Street performance was ‘driven by successful promotions in our stationery and seasonal categories and continued good sales of ‘colour therapy’ in books’.
• Equity market now at 3.5yr lows. If a 20% drop from recent highs is defined as ‘a bear market’, then we are within a whisker of that now.
• Travel stocks strong yesterday, TUI, Thomas Cook. Today, not so much.
• Sterling stable. However, yesterday, it touched 7yr lows versus the US$.
• UK CPI ‘doubled’ yesterday from 0.1% to 0.2%. Microscopic changes, that’s for sure but, for the record, CPI in the UK is now at its highest level since January.
• See earlier email for comments on slowing UK & world economy. We featured a negative PwC confidence survey, Mark Carney comments re delayed interest rate rises, IMF reduced forecasts & comments on currencies. A slowdown may happen – look at China – and markets may overreact on the downside. Moderated growth, however (as opposed to a recession) would hardly be the end of the world.
• Oil price still very weak. This (below) is a non-inflation-adjusted 25yr chart. Shows oil back to levels of c15yrs ago. Note also that the world functioned perfectly well with oil at c4x current levels for around a 5yr period until just over a year ago.
Further retail comment – Nick Bubb:
• Today’s Press and News: There is plenty of coverage on the front pages of the view of Bank of England Governor Mark Carney that interest rates don’t need to go up this year, but on the Business pages there’s plenty of Retail news to keep the papers happy, with Next, Ocado, ScS and MySale all in focus on the retail beat yesterday.
• The Daily Mail market report story that Amazon is considering launching a takeover bid for Ocado saw the shares spike sharply first thing yesterday, but they ended the day “only” 7% up and the Times market report notes the scepticism in the City, as the company didn’t issue any statement, although Lex column in the FT wades into the debate with a piece headlined “Plan B”, concluding that a takeover would help Ocado gain scale.
• The Daily Mail today flags the news that Holland & Barrett has been accused of squeezing small suppliers and that Aldi has launched its Online wine business (as noted by several other papers). The Times goes big on the embarrassing technical glitch in Next’s special dividend programme and the Telegraph flags that MySale, the Australian Online retailer backed by Philip Green and Mike Ashley, has returned to profit, whilst the Guardian highlights that Sports Direct has been accused of “abusing the legal process” by a High Court judge in the Rangers FC case.