Langton Capital – 2016-03-24 – Adnams, Pact, YUM brands, Premier Foods & other:
A Day in the Life:
Proof if proof were needed that adult ‘children’ are still children at heart came over the weekend when one of our ten-year-old daughter’s brothers announced that he was holding her gerbil hostage until she returned the TV remote – which had disappeared and which, I believe, was being held to ransom itself until some earlier wrong was righted.
‘It’s not a gerbil, it’s a hamster’ was an early retort after which the brother snuffled and said, ‘whatever, I just hope it can swim…’
But this, apparently, was still not enough to persuade our little girl that she should cede CBBC in favour of Final Score on that particular Saturday evening and, even when brother threatened to feed the hamster to the ducks, no quarter was given.
I’ll just have to hope that, if I’m kidnapped in my dotage, the ransom note goes to somebody else. On to the news:
Pub, Restaurant & Drinks Producer News:
• Adnams reports FY numbers, sales down a shade at £65.7m (2014: £66.0m), PBT £4.7m (£4.4m), EPS per A share, 171.1p (158.1p).
• Adnams FY: Chairman Jonathan Adnams reports ‘I am pleased to report that the Company made good progress in 2015 with our operating profits rising by 7.3% to £4,093,000. We noted at the half year that turnover was 3% behind 2014, however this improved in the second half of the year, to leave us just 0.5% short of the prior year.’
• Adnams FY: Says ‘the economic mood for much of 2015 was reasonably buoyant, though it is clear that consumer spending patterns continue to evolve quickly, and it has been very important for us to keep our finger on the pulse of the market and our eye on future trends.’
• Adnams FY: Reports ‘the diversity of our business, spanning beer, spirits, shop retail, hotels and pubs also gives us some protection against any downturn in particular markets. One of the most notable features of 2015 was the growing regulation of the beer and pubs sectors together with continued changes to the many taxes that the industry pays.’ Chairman goes on to say ‘in March we were pleased to see, for the third year running, a cut in beer duty rates. The penny a pint reduction was welcome, particularly when reflecting on the above inflation duty increases that had preceded these cuts, with duty having risen 42% in the previous five years.’
• Adnams FY: Reports ‘total UK beer sales fell by 1.5% in 2015, a disappointing result after the modest growth the previous year, though in line with the long-term trends dating back to the later 1970s. However, within the beer market we saw the continued growth of beers brewed by smaller producers. UK cask ale sales, a subset of the total market, were 0.8% ahead of last year and sales of bottled and canned ales were 6.3% ahead. The continuing switch to the off trade is also a long-term trend, though another of those trends, the growth of lager relative to ale, seems to be turning around, aside from premium and craft lagers. The main lagers being sold are still those of the major international brewers, however we are hopeful that consumer tastes will increasingly open the door to products such as Adnams Dry Hopped Lager and the purchase of craft brewers by international brewers
• Adnams FY – outlook. Chairman writes ‘I observed earlier that the economic environment in 2015 was reasonably buoyant. Sentiment at the start of 2016 has been less so. The uncertainties created by the forthcoming EU referendum may have some role in this, though global economic conditions seem less benign. The impact of this on consumer spending and our own sales is always hard to judge, however there seems a fair likelihood that 2016 will be a tougher year for the economy than was 2015. In terms of the alcohol business in particular we saw somewhat lower January sales and it is hard to escape the conclusion that a growing interest in following ‘dry January’ may have had a role in this. January is far from the most important month, however the trend is perhaps indicative of the growing prominence of public health messages.’
• Pact Coffee is reported to have cut 16 jobs around a week after abandoning a fund-raise on Crowdcube. The business raised less than a fifth of its intended cash. UK Business Insider reports CEO Stephen Rapoport as saying ‘it’s true that we made 16 redundancies yesterday from the team of 74. It was an incredibly hard decision as my team are like family but ultimately the right thing for the business and I had full board support. These redundancies are unrelated to our decision to delay fundraising, and will not affect the quality of our coffee, customer service or our rate of growth.’
• Yum Brands is in talks with KKR and another PE group to sell a minority stake in its Chinese business of as much as 19.9%, valuing its China operations at c$10bn.
• BHS is close to securing cash from a private equity investor and its creditors have pushed through a rescue package that slashes the high street chain’s rent bill. Gordon Brothers Europe, which briefly supported electrical retailer Comet before its collapse in 2012, is understood to be stumping up a £60m secured loan.
• Google is bringing its Android Pay mobile payment service to the UK as it continues to keep the pressure up on Apple’s rival system. The service will support MasterCard and Visa as well as many of the UK’s banks such as Bank of Scotland, First Direct, Halifax, HSBC, Lloyds, M&S Bank, MBNA and Nationwide. Android Pay will be able to be used both on the high street and on the London tube, buses, and trains.
• Welsh brewer and pub operator SA Brain has posted sales and EBITDA growth of 3% in the year to 26 September to £127m and £13.4m respectively. Much of the growth was down to the group’s Coffee#1 store openings, which grew LfL sales by 8.5% and overall sales by 34%. Chief Executive Scott Waddington commented: ‘In the current financial year, Coffee#1 will remain an expansion vehicle for the business, with the necessary infrastructure now in place to accelerate our rate of new openings.’
• The ALMR’s Future Shock report concludes that young people between the ages of 19 and 24 are increasingly choosing food over alcohol. The study finds that 60% of young people drink out less than once a week, while around 50% of young people eat out at least once a week.
• ALMR Chief Executive Kate Nicholls said: ALMR Chief Executive Kate Nicholls said: ‘Young people are increasingly planning their social lives around eating-out, turning away from drink and towards food. On average, under-25s are eating out between 5-6 times per month… The boom in eating-out, particularly in casual dining outlets, has seen a renaissance of our high streets driven by younger consumers. This is not only helping to drive growth in our local economies, but help contribute to healthier consumption and changing attitudes towards alcohol.’
• Bookatable’s Quarterly Dining Trends has found British cuisine to be gaining in popularity, now accounting for 27% of bookings on the website.
• Over 79% of respondents to new research by HospitalityGEM believe the quality and range of restaurants in shopping and leisure centres has improved over the past three years.
• Meantime CEO Nick Miller is to step down after five years at the company and will be replaced by Laura Edwards as general manager.
• Adrian Johnson has stepped down as chief exec of EAT and chairman John Derkach will assume some of his responsibilities, writes MCA.
• The ALMR has warned against the introduction of heavy-handed powers that may threaten licensed premises in the government’s Crime Prevention Strategy.
• BBPA chief executive Brigid Simmonds has praised the government’s decision to extend pub hours for the Queen’s 90th birthday party.
• Subway has opened its 5,000th European store with the launch of a new unit in Livingston, Scotland. There are now more than 44,000 Subway stores in over 110 countries, with 300 stores opened in the UK and Ireland alone last year.
• Retailer optimism has grown for the second quarter in a row, according to the Association of Convenience stores Voice of Local Shops survey of 1,210 retailers.
• Abta is advising travellers to allow more time to clear security checks as more than two million British holidaymakers look to head overseas for Easter.
• Villa specialist Meon Villas has been sold by Tui to luxury villa specialist Oliver’s Travels.
Finance & Markets:
• World markets: UK mixed but Europe down yesterday. US lower and Far East down in Thursday trade
• Oil price down a dollar or so at around $40.50 per barrel
Premier Foods’ Bid Approaches
Group rejects all-cash bids at 52p and 60p as they ‘materially undervalue…etc.’
• McCormick & Co. (US:MKC, $12bn mkt cap, c130yrs old) approached PFD with 52p all-cash offer on 12 Feb. This was rejected.
• It came back at 60p cash on 14 March. Also rejected.
• McCormick now subject to Put-Up-Or-Shut-Up deadline of 5pm 20 April.
Rationale for Bid:
• Guess we’d have to ask McCormick but new markets (for MKC) beckon & brand overlap looks obvious
Rationale for Rejection:
• Chairman David Beever (corporate finance veteran, vice-chairman of SG Warburg etc.) says bid ‘represents an attempt to capture the upside value embedded in Premier’s business that rightfully belongs to Premier’s shareholders’
• Says it ‘does not fairly reflect the benefit to McCormick of gaining control of Premier’.
• Says PFD’s capital structure (debt & pension deficit heavy, equity light) means that we should focus on premium to EV
• The premium here is clearly much less significant
• Co sees ‘strong future for an independent Premier’ driven by product innovation, exports etc.
• Recent innovations have ‘delivered gains in volume, value [and] market share’
• Co is ‘at an inflection point in terms of its longer-term prospects’
• Is upping sales guidance from 1-2% p.a. to 2-4% p.a.
• Expectations for FY to Mar 16 unchanged, some asset carrying values to be written down
Tie up with Nissin (Japanese noodle co, turnover c£2.5bn):
• Perhaps fair to say ‘co-op agreement’ comment has been rushed out
• No flesh on bones, may lead to strategic shareholding, seat on board (of PFD) etc.
• We’ve gone out on a limb with this one – see earlier comments/notes on sugar legislation, milk (and other input) price, pension ‘deficit’ etc.
• We believe the company’s ‘inflection point’ comment. Not only because trading is improving but also because the group has become a bid target.
o Re marketing spend, quality hires, capex, product development, exports, debt stability etc. the group is much-improved
o Directors bought shares in material amounts in 2014 and 2015
o The pension fund ‘deficit’ could be a surplus. Who in their right minds would fund 40yr pension liabilities using temporarily-low 10yr bond yields? In which case why define the ‘liability’ that way?
o Actions speak louder than words & McCormick seems willing to put its money where its mouth is.
Bid Approach: A Defining Point between Eras?
• The future for an independent Premier has brightened -but independence is no longer a given
• The bid approach marks the defining point between eras
• PFD was a stale cake, a financial basket case – only now, it would appear, it isn’t
• The group is attractive to its competitors & we have some evidence (admittedly the approaches were only ‘indicative’) that the pension ‘deficit’ is not a poison pill
• And the co is cheap. It is trading (including bid spec., debt & pension deficit) at around 1.5x EV. Unilever, for example, is trading at 2.9x.
• Hence if (and it’s a big if) a bidder could reduce costs & open up new markets for PFD products, why wouldn’t it be prepared to pay quite a lot more than the above?
• Here PFD’s geared nature favours equity. Some 2.2x EV, for example, equates to 110p for shareholders
• Shares are trading below the approach & even below 12mth highs. Yet the co is 1) much improved and 2) may be ‘in play’. Go figure:
Premier Foods – McCormick Response:
McCormick confirms facts, seems to be appealing over heads of PFD directors…
• McCormick & Co. has agreed the basic facts outlined in our morning email
• McCormick goes on to detail a number of reasons why the acquisition makes sense
• But here, it’s intended audience is its own shareholders rather than those of PFD
Reading between the lines:
• McCormick says it would ‘leverage McCormick’s innovation and marketing capabilities and strong balance sheet to improve on the execution of Premier Foods’ strategy’
• It says it would ‘grow Premier Foods’ presence in international markets through McCormick’s global scale’
• And it would ‘realize synergies to enable further investment in Premier Foods’ iconic British brands to drive growth’
• ALL SUGGESTS TO US THAT MCCORMICK COULD AND SHOULD PAY MORE
• MKC’s comments confirm our view that there are synergies to be mined and new markets to be opened up
• In which case how can the company expect to pay only a fraction its own EV/sales multiple in order to seal the deal (see our a.m. email)
• Unless it believes that the target company (and its shareholders, advisors etc.) are asleep at the wheel
• In which case thank you but no, independence seems like an acceptable alternative
Retail Roundup from Nick Bubb:
Today’s Press and News:
Kingfisher: We couldn’t follow the whole of yesterday’s Kingfisher final results webcast at 9am, because we were keen to see the Game Digital results webcast at 9.30am, but the market was pleased that profits were better than feared and we picked up that the new Brico Dépôt venture in Romania has been disappointing (with the management team changed), the remaining 30% stake in the ill-fated China business has been sold and that B&Q is opening a new trial “big box” store format in June/July (along with similar trial stores in France, Poland and Russia).
Planet ONS Watch: We will find out at 9.30am today what life was like last month on the High Street on that bizarre parallel world, the Planet ONS, via the Office of National Statistics Retail Sales figures for February (the 4 weeks to Feb 27th). In the real world, it was, of course, a disappointing month, as per the flat BRC-KPMG survey, but, for what it’s worth, our friends at Capital Economics still expect overall year-on-year seasonally adjusted sales volume growth of 4% and so have pencilled in a small 0.5% month-on-month dip in February.
BHS Store Rent Watch: Having noted yesterday that several of the 40 worst/over-rented BHS stores in the CVA plan include retail park stores, it’s only fair to flag that where rents are set at current market levels, eg in Doncaster, Romford, Norwich and Exeter, plus shopping centre anchor stores like Cribbs Causeway, BHS generates a healthy profit contribution. Such secondary market towns are good examples of where customer demographics help the new BHS focus on the “purposeful and organised mum”, who organises their family’s life through stylish practical solutions. Not many people expect BHS to last for long, nevertheless, given the weight of competition in the High Street from Primark etc, but management have some breathing space…
News Flow Next Week: After Easter, the big two events coming up on the horizon are the Marks & Spencer Q4 update on April 7th and the Tesco finals on April 13th, but next week is quiet, with just the monthly GFK Consumer Confidence survey on Thursday morning to look forward to. 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:
THOMAS COOK UPDATES ON Q2 TRADING:
• Bad day for a travel stock to update on numbers yesterday.
• But shares recovering some of their poise in Wednesday trading. Up around 3% at time of writing.
• And Fosun, holder of 5.8% of TCG equity and stated buyer of 4.2% more was active in London yesterday as it looked set to close a £300m deal to buy the Thomas More Square Complex in what would be its largest real estate deal in Europe.
JD WETHERSPOON’S SHARE BUY BACK:
• Feeling of déjà vu here but JDW has once again been buying back shares.
• Yesterday bought back 70k at 699p per share.
• Takes the total since 20 Jan to 2.03m shares.
• Group spent £13.6m (at 668p per share) buying shares back in the year to date.
PREMIER FOODS ATTRACTS BID:
• Notes above.
COMMODITY & INPUT PRICES:
• Oil price up a little overnight. Off the top but trading at around $41.40 per barrel.
• Gold price sharply down over last two days. Now trading at around $1,225.50 per ounce.
• Gold oil ratio (number of barrels it takes to buy an ounce of gold) sharply lower at 29.6 versus 30.2 yesterday and 31.9 as recently as last Tuesday. Suggests the markets are becoming a little more risk-tolerant.
• Lumber prices (think Mondi) up 12% on the last 12mths.
• Sugar price picking up sharply. Now some 26% higher over the last 12mths.
RANDOM INFORMATION, HOPEFULLY NOT ALL OF IT USELESS:
• Sterling down against both the US$ and the Euro.
• Betting companies have their ‘worst Cheltenham in living memory’.