Langton Capital – 2016-10-18 – Ladbrokes, inflation, rising costs & confidence & other:
Ladbrokes, inflation, rising costs and consumer confidence & other:
A DAY IN THE LIFE:
So when do you use the word ‘flammable’ and when do you say ‘inflammable’.
I mean though the prefix ‘in’ would seem to suggest the contrary, they’re used to describe the same attribute and, roll the words around in my mind as I might, I can’t settle on which I would use if I were referring to an item of clothing, a piece of furniture or an item of packaging and don’t you think that the confusion could be downright dangerous?
Because with Bonfire Night coming up mightn’t a person with otherwise perfect English, on reading that his kilt or his tutu or whatever was inflammable be tempted to put his bum in the bonfire? On to the news:
RECENT WEBSITE ARTICLES:
• Domino’s Pizza here
• Recent notes – here
• Ongoing tweets, older emails found – here
DOMINO’S PIZZA UK – QUALITY AT AN UNREASONABLE PRICE?
• Current position:
o Domino’s UK’s business model is high margin, highly efficient, and spins off cash.
o However, LfLs in its recent Q3 statement were down (from +14.7% in Q3 2015 to +10.5% for its important UK market, which accounted for 93% of group revenue in the period).
o Meanwhile, DOM shares continue to command a premium, trading on 22x forecast earnings with a PEG of c1.9, at 320.36p (following a recent share split).
o This premium valuation remains even after the shares having fallen 5% on results day and 3% the day after. Today (Monday) they are down another 3%.
• Lower Quality Growth…
o In recent quarters, Domino’s UK has moved increasingly from opening stores in new areas to splitting existing trading areas between units.
o In the year-to-date, 34 of 51 new stores have been created by splitting existing trading areas rather than establishing new ones — the UK market is finite.
o On 08 June 2016, Domino’s UK spent £24m on acquiring ‘significant minority stakes’ in Domino’s Iceland, Norway, and Sweden.
o These markets are noted as having ‘an aggregate population of 15 million’.
• Valuation, valuation, valuation…
o Domino’s UK’s main drivers of growth now appear to be splitting existing UK trading areas and acquiring stakes in overseas master franchisees.
o While the group continues to remain attractive in terms of business model, we question whether its valuation range of 20-25x PE is justified in light of its changing strategy.
• Sustaining growth…
o If Domino’s UK is indeed looking abroad for its growth, Domino’s Pizza Poland stands out as a natural acquisition target.
o The World Bank says Poland has an urban population of 23 million and it is rapidly modernising its transport and infrastructure thanks to billions in funding from the Eurozone, which views the country as strategically important.
PUB, RESTAURANT & DRINKS PRODUCERS:
• Resolution Foundation says self-employed workers are earning less now than they did in 1994. The number of people self-employed has grown by 45% over the same period to around 5m.
• Deloitte survey shows British consumers at their most confident in 5yrs in Sept. London the exception. Deloitte reports that confidence across the country rose by 3pps but in London it fell by the same amount.
• BBC reading Langton emails, says ‘Inflation means inflation’. It then asks ‘but who wins?’ It says that the prices of drink, food, clothing and petrol will inevitably rise. Unless workers can secure pay rises – and why should employers grant them? – spending power could decline. Lord Haskins, the former boss of Hull-based Northern Foods, says that food price inflation could be running at around 5% by this time next year. The BBC points to the heady days of 1975, when inflation hit 24.2%. It says a return to inflation at those sorts of levels is unlikely but adds ‘nowadays, substantial pay rises are harder to come by, so a lower level of inflation can have a bigger effect on living standards.’
• The Pub Governing Body notes there were 21 referrals to the Pubs Independent Rent Review Scheme (PIRRS) regarding rentals and one lease renewal in 2016. There were 27 enquiries to the Pubs Independent Conciliation and Arbitration Service (PICAS) from tenants. Sir Peter Luff, Chairman of the Pub Governing Body said: ‘It has also been encouraging to see lessees continue to engage with PIRRS and PICAS and an increase in the number of resolved complaints within the set timescale to 70%, closer to the 2014 high of 74.9%. PIRRS and PICAS represent a convenient, cost-effective method is dispute resolution for licensees and the PGB continues to play an active and valuable part in the self-regulation of the sector.’
• Vineyard operator Richard Balfour-Lynn has said that Brexit will be a boon for UK wines as a lower Pound and possible tariffs will raise the price of overseas products. PSD Group reports Balfour-Lynn as saying ‘the possibilities are huge. There is so much negativity around Brexit, but there’s going to be a big opportunity to get UK consumers drinking English wine more as we are going to have a price advantage over the next few years. There’s going to be the opportunity to be more competitive.’ The UK is currently the largest wine importer in the world, taking stock from France, Italy and Spain to supply around 60% of the UK’s wine.
• Oakman Inns & Restaurants has purchased Westlands House, a former care home, for £1.5m for conversion into a ‘new town-centre destination and hostelry.’ CEO Peter Borg-Neal comments ‘we’re always looking to continue to grow our reputation for providing a modern, relaxing atmosphere and a welcoming environment.’
• Cider maker Thatchers has released its first ever gin made with apple cider, using its own Katy’s Apples, as it taps into the growing trend for craft gins and flavour variants. Described as ‘citrusy and refreshing, with floral and apple notes’, Thatchers Orchard Cut is available at Thatchers Cider shop at Myrtle Farm, with an RRP of £33.99.
• Constellation Brands is selling its Canadian wine business to Ontario Teacher’s Pension Plan for c$784.5m so it can focus on its ‘high-margin, high-growth brands’. Constellation expects to recognize net cash proceeds of about $571.3m, after debt repayment, from the deal and has also agreed to a deal to buy Washington-based Charles Smith Wines for $120m.
• MP Greg Mulholland has questioned the chief medical officer’s alcohol guidelines suggesting a maximum of just 14 units a week for men and women.
• Nick Clegg has warned that consumers face ‘crippling’ rises in wine prices if the UK leaves the Single Market. Writing in The Mirror, Clegg warned that the recent battle between Tesco and Unilever over the price of Marmite was just the ‘tip of the iceberg’ and added: ‘We must hold Theresa May’s government to account and fight to ensure what comes next is best for British consumers and businesses.’
• Lidl is looking to Texas as another target in its excursion into the US, having identified Virginia, North Carolina, New Jersey, and Delaware as its first stops.
• Restaurant Group directors buy quarter million pounds’ worth of stock. Chairman Debbie Hewitt has purchased 7,012 shares at 354p, CEO Andrew McCue has purchased 50k at 356.7p and CFO Barry Nightingale has purchased 13,617 at 362.5p, all on 17 October.
• US investment firm Cerberus is in talks to acquire stationary giant Staples’ stores across Europe, which includes 100 in the UK, for a nominal sum in a rescue deal. It is unknown whether or not the powerful New York-based hedge fund, which boasts $40bn AUM, would keep the struggling stores open, with a senior source commenting that: ‘[Cerberus] will assess the competitiveness of every part of the business but it is fair to say that some areas are more promising than others.’
• Staples’ UK retail operations posted £4.2m of losses on £220m of sales in the year to the end of January 2015, although its online and business-to-business divisions remain profitable.
• Cigarettes are no longer a core product for Britain’s corner shops and small retailers, according to research from antismoking group ASH which looked at 1,500 c-stores. The group found that cigarettes accounted for less than 10% of the shops’ profits, contradicting the tobacco industry’s long-standing claim that sales of tobacco products helped keep small retailers in business.
LEISURE TRAVEL & HOTELS:
• JLL has reported that the UK regional hotel market should grow considerably over the next two years. it says that new developments in cities outside London will attract a growing number of corporate and leisure guests.
• Staycations are expected to rise over the next 12 months due to Brexit, according to a new survey of 2,000 people from PwC. The study found that British consumers will prize spending on their ‘main holiday’ as their second top spending priority in the coming year, with grocery shopping coming top. However, 22% of respondents said they would consider reducing their main holiday spend if they felt ‘squeezed’ over the next year. Respondents were even more likely to cut spend on eating out (39%), going out (34%), and buying clothes, shoes and accessories (28%) first.
• A poll of 1,000 people by moneysavingexpert.com suggests as many as 40% of travellers have changed their plans for a last-minute winter getaway due the weak pound. Entrance to the Empire State Building in New York will now cost a family of four back £94 compared to £75 just 12 months ago, while families flying to Tenerife will find a two-course meal with wine at a mid-priced restaurant for a family of four will now cost around £90 rather than £72 this time last year.
• William Hill still Standing in the Kitchen at the Party. Will have to go it alone, for the short term at least
• Amaya reports it no longer intends to merge with UK’s William Hill. The group says discussions ‘have concluded, and Amaya and William Hill have determined that they will no longer pursue the merger. Amaya wishes the best for William Hill and its shareholders.’ The group reports ‘Amaya has been informed by its former Chief Executive Officer, David Baazov, that he continues to be interested in acquiring all of the outstanding shares of Amaya.’
• Ladbrokes has updated on Q3 trading saying that group net revenues rose by 12.1%. this was ‘supportive of our full year expectations’. Ladbrokes says it has seen ‘continued strong y-o-y growth trends’. Q3 was the ‘4th quarter of Group net revenue growth’. CEO Jim Mullen reports ‘we’ve emerged from a busy summer of sport with more evidence that our strategy of appealing to the recreational customer is delivering growth and we remain confident of delivering full year results in line with our expectations.’
• Ladbrokes says that, at Q3, it has ‘been encouraged by the customer reaction’ to its revised offers. It says ‘we have delivered growth for a fourth successive quarter in Group net revenue, and in Ladbrokes.com an eleventh in sportsbook staking and an eighth in gaming. In Australia, we’ve continued to enjoy tremendous success across all measures in the form of improved margin, strong staking and actives growth.’ CEO Jim Mullen continues ‘our margin has been resilient, benefitting from our strategy of focusing on the recreational customer, deploying BetStation across the estate and growing in football.’ He concludes ‘there remain significant opportunities and risks ahead.’
• Netflix has countered growth worries by sailing past new subscriber number estimates (3.2 million vs. 2 million), sending shares in the video streaming company soaring. In the quarter to end-September, Netflix had about 83.3 million subscribers and was present in more than 130 markets worldwide, with China being a notable exception. In the US, numbers rose 21% to 370,000 as hit shows such as Stranger Things and Narcos won over more subscribers. and helped quarterly revenues rise 31% to $2.29bn (£1.88bn). Netflix shares jumped by 20% on the results to $119.
FINANCE & MARKETS:
• The fall in sterling has acted as an important ‘shock absorber’ for the UK economy, says Bank of England deputy governor Ben Broadbent. On Monday it was trading at below $1.22 and €1.11, having fallen more than 5% in October and investors have also been selling off UK government bonds – sending the yield to 1.2%, the highest level since the Brexit vote. Bank of England governor Mark Carney said on Friday that the fall in the pound will lead to higher prices, a forecast since repeated in a report from the EY Item Club, while Mr Broadbent has added to the consensus that it is ‘likely’ that inflation would rise above the Bank’s 2% target in the next couple of years.
• Eurozone inflation rose to 0.4% in the year to September on the back of higher restaurant prices & rising rents & cigarette prices. Food and alcohol prices rose by 0.7% in the year to September. Sterling has fallen against the Euro by around 18% over the same period. Gilts fell yesterday. Some observers say this was as investors dumped the fixed return instruments for fear of upcoming inflation. Overseas holders will also have to have half an eye on Sterling.
• World markets: UK down yesterday & Europe also lower. US down but Far East higher in Tuesday trade
• Oil price stable. Brent Crude at around $51.85 per barrel.
• Sterling rose a little yesterday. Currently trading at around $1.223 per US$. Euro strong yesterday at around 111c to the Pound
• Gleeful Frankfurt reports banks with large UK operations (currently) are sussing out accommodation etc. in the German city
• Hubertus Vaeth, head of Frankfurt Main Finance, has suggested that banks will begin to move some of their operations to Frankfurt in H2 next year. Mr Vaeth is clearly talking his own book. However, he says ‘the precise size is still open. There will be some re-engineering to be done, and there is no pressure to hurry that up.’ Reuters reports Mr Vaeth as saying ‘we already see small teams, explorative teams looking into certain aspects. We see options for real estate, and we have very, very clear indications that things will be moved, however, not entire operations.’
YESTERDAY IN A NUTSHELL – SELECTION OF TWEETS, LIVE TWEETS ON WEBSITE:
• JD Wetherspoon founder Tim Martin has said that the dramatic fall in sterling is good news for the British economy
• BrewDog has postponed the launch of production at its new US headquarters as a result of delays in the delivery of key equipment
• BrewDog’s bar division made a £1.2m loss in the year to end-Dec compared with a loss of only £46k in the year before
• Bottled water company Highland Spring hit turnover of £103m in 2015 and reported PBT of £4.3m, up from £1.7m in 2014.
• STR’s preliminary hotel data for September 2016 shows falling occupancy in the London market, down 1% to 88.3%
• Former deputy PM Nick Clegg has suggested that a hard Brexit could lead to tariffs of up to 22% on food imported from the EU
• The prices of all grades of British wheat are rising, with UK feed wheat futures up 14% to £131.50/tonne since early summer.
• Eurostar is reported to be cutting train services and instituting redundancies as a result of a ‘challenging environment’ post 23 June
• UK economy faces “prolonged period” of weakness post Brexit vote reports Ernst & Young Item Club
• Bank of England governor Mark Carney says the Bank could tolerate higher inflation for the sake of growth
• Investor Jim Rogers has said Sterling will “certainly go under one dollar” if Scotland leaves the UK. Perhaps talking his book
• Other tweets: Did Tesco ‘win’ the Marmite battle. Bit like ‘beating’ the Russians in WW2; you’ll still lose in the end. The inflation-man cometh…
• Interest rates rising w/wide. UK 10yr gilts now >1.1% (was 0.5%). Lovely. Inflation, low growth? New name needed, how about stagflation?
• Ms Yellen wants ‘high pressure economy’. Try that on a bonfire, see how that works. Real world? Work harder or get poorer, punktschluss
• Kristin Forbes at B of England says UK may breach 2% inflation ceiling target ‘sharply’. Can’t keep the cost of Marmite down forever
• Mountain Warehouse IPO pulled, Pure Gym ditto. Worries re consumer? Good companies can still raise funds, DPP, EZH etc.
• Naked Wines to jack prices. They won’t be the last to do so. Prices simply going up. Plenty of argy-bargy to come as to who foots the bill
• So Brewdog doesn’t walk on water? Delays re US brewery, increased UK retail losses. Perhaps expanded too quickly?
• London hotel occupancy on the slide but REVPAR still rising. Go on, jack your prices a little further, what could go wrong?
• Gutless Tories (‘we know Brexit’s wrong but we’re acting under orders…’) make Nick Clegg look brave & principled. And that’s no mean feat…
RETAIL NEWS WITH NICK BUBB:
• ASOS: Today’s finals (to y/e August) from ASOS are marred by the £21m legal bill for the settlement of the trademark dispute, but before exceptionals PBT is up 37% to £64m on the back of 27% growth in revenues and the company says that “The pace at ASOS is continuing into the new financial year, which we are looking forward to with confidence: we expect growth in sales to remain in the previously guided range of 20% to 25%. Our margins will remain broadly stable as we continue to reinvest in customers through product, price and proposition…”. Analysts meeting 9.30am
• Burberry: As expected, the Q3 from Burberry (to end September) shows a return to Retail LFL revenue growth (of 2%, helped by a 30% jump in the UK) and the headlines of today’s pre-close reads, breathlessly, “Ambitious revenue growth and productivity plans on track. Successful implementation of straight-to-consumer runway collection”. Conf call 9am.
• Debenhams: The short statement from Debenhams yesterday simply said that the company is “pleased to announce that Sergio Bucher’s appointment as Chief Executive Officer commenced today, 17 October 2016”, but ahead of next Thursday’s final results he has a lot on his plate…He will be expected to have some “first thoughts” for the City on future strategy, so he will be closeted with his IR advisers, but there is little he can do to change trading plans before Christmas, so he will be praying that the weather stays cold and that the £200m pension deficit that Morgan Stanley flagged up yesterday isn’t too much of a constraint in the future. The lowly share price of just c54p (giving a market cap of less than £700m) implies that the City is not expecting the new CEO from Amazon to work miracles….