Langton Capital – 2016-11-03 – Pub shares, Coke HBC, Morrison’s, holiday trends & other:
Pub shares, Coke HBC, Morrison’s, holiday trends & other:
A DAY IN THE LIFE:
So is Halloween some kind of new big thing or is it really just a chance for youngsters to intimidate householders into parting with their hard-earned cash (sweets, pah!) and for older Brits to have a few down the pub?
It’s commercial, tasteless and all the rest but I’m all for bringing back Odin and Thor and the rest and, if we did have to jam something into the calendar just ahead of Bonfire Night, then I suppose worshipping ghouls and ghosts and dressing up a bit doesn’t really do too much harm, does it?
But I can’t help thinking that the various age-groups, character types and the rest go at it with different objectives. Our 10yr-old, for example, selflessly spent our money on a bunch of pumpkins that she carved, lit and placed down our lane during the evening but these were promptly stamped on and kicked into the road by the teenagers who just wanted an excuse to shout a bit, trip each other up and drink warm cider from cans in the bushes.
But let’s not judge because we’ve all been there, admit it.
And the more mature people amongst us – go on then, perhaps just older – wanted to pop down the pub and would tolerate the fake cobwebs and painted on blood for the chance to have a couple of extra beers but, and here’s a challenge for you, if we were to invent another day/night to shoehorn into the calendar, what would it best be in celebration of? On to the news:
JD WETHERSPOON – ANALYSTS’ CONFERENCE CALL:
• Following its Q1 update, JD Wetherspoon this morning hosted a conference call for analysts and our comments thereon are set out below:
• JD Wetherspoon says that it does not expect LfL sales to remain at current levels
• LfLs. Group ‘had a strong summer’. This has slowed. The slowdown has been general’. Group sees 1-2% LfLs for the year as a whole as likely.
• Regional variations? No variation in the slowdown.
• Xmas bookings? No Xmas dinner this year. Menu goes out next week.
• Group won’t split LfLs between wet and food
• Won’t split between price & volume
• Impact of 53rd week on margins? No real impact
• Margin & costs:
• The higher margin is driven by higher-than-expected LfL sales.
• Seasonality of margin? Q1 is always stronger. It is a bit more exaggerated this year than last due to higher costs (pay) last year. More pay-rises will occur in April this financial year (April 17) compared with October last year
• Business rates? These changes occur in April 2017. Could be around 16%. That’s ‘quite hefty’. Around £7m p.a..
• Group has no currency hedges. But it does have a number of long-term contracts & JDW has not yet seen costs rise. It may be able to switch products if the price of some rise & others don’t. Drink can be 3-10yrs & food is a little shorter
• Tax rate should be ‘slightly lower’ than last year
• Interest costs? Around £30m (down slightly from last year’s £31.5m)
• Balance Sheet, Debt & Outlook:
• JDW is ‘going into this year with a degree of optimism’. It should benefit from prior capex. It will have ‘more cash to put into its existing estate’.
• Repairs & maintenance capex spend should be 7-8%. It will move to the top of that range. It was as low as 5.5% last year
• Do you expect any return on this capex? Yes, but it may be difficult to pinpoint. Particularly loos, carpets, staff facilities etc.
• If you sell 9 pubs this year, how many do you have left to sell? It put 80 on the market & ¾ have gone or are going. Group may grow at about a net 15 units per annum over the near term
• When do you aim to get below 2x debt to EBITDA? No target date given – but this could be 5-10yrs.
• Debt this year will be ‘similar to or a little higher than last year’.
• Does this mean buy-backs are now on hold? These are ‘always opportunistic’. The group doesn’t forecast when these will take place.
• Could still spend £0-60m on shares. Might, obviously, be near the £0m. Group will still go through with the Whitewash proposal (to allow further purchases if Tim Martin goes through 30% as a result of buy-backs)
• How much spent on buy-backs this year to date? Around £18m.
• Why change your leverage levels? Says ‘as the company matures, it will not need to add debt to the same levels – or possibly at all’. Group says Tim is a ‘young-61’ but when management changes, group may run on lower leverage.
• Langton View: JD Wetherspoon has painted a picture for the remainder of the year. Margins & LfL sales growth will decline from current levels and costs (rates, labour, commodities) will increase.
• Much of this is an industry rather than a stock issue but it is, arguably, not entirely consistent with a PER of nearly 20x earnings.
• Great company though it is, JDW’s shares may at present be fully-valued.
PUB, RESTAURANT & DRINKS PRODUCERS:
• Punch. Group bought back £65m of c15% PIKs last week with cash earning c1%. That should enhance profits by maybe £8.5m. Drops through to an earnings increase of maybe 3.5p per share after notional tax charge
• JDW shares fell sharply on trading update yesterday but halved losses by day’s end.
• Markets near all-time highs but GNK shares near 4yr lows.
• Whitbread shares said to be over-sold following lacklustre trading update last week. They have since fallen further
• Coca Cola HBC updates on Q3, says ‘volume trends developed as expected in the quarter with a 1.0% decline against very tough comps’. Says ‘established market volumes continued the trend seen in the first half of the year on much tougher comparatives in the quarter; the 2.5% volume decline was driven by Water in Italy and Austria.’
• Coca Cola HBC reports ‘price increases taken in Emerging markets drove the 8.1% FX-neutral revenue per case growth’.
• Coca Cola HBC Q3 group volumes down 1%. Established markets -2.5%, developing markets down 4.2%, emerging markets +1.3%. CEO Dimitris Lois comments ‘performance in the third quarter was as expected, with lower volume reflecting the exceptional growth we saw in the third quarter of 2015. We are pleased with our commercial initiatives, which delivered an improvement in currency-neutral net sales revenue per case. The business is trading well and we remain confident in meeting our expectations for the full year.’
• Jamie Oliver is set to buy back the franchise for Jamie’s Italian restaurants in Australia following previous owner Keystone Group’s fall into receivership. Oliver is ‘excited’ to bring the six restaurants, located in Sydney, Perth, Brisbane, Adelaide, and Parramatta back in-house, alongside a current portfolio of 42 UK and 25 overseas sites.
• HelloFresh rival Gousto has raised fresh funds to better compete in an increasingly crowded food delivery market. While Gousto is a London-based company established by former Rothschild bankers, Rocket Internet-backed HelloFresh is from Berlin and is now a global competitor, valued at €2.6bn in a round of funding last year. Gousto does not disclose revenues but said its turnover had grown by more than 200 per cent each year for the past three years and that it delivered nearly 100,000 meals each week to UK customers. The latest £10m of funding brings the total amount the start-up has raised to £28m since 2012, compared with $250m for HelloFresh.
• Petrol and diesel prices increased sharply in October by 4.4p to 116.7p for petrol and by 5.2p to 118.7p for diesel — their highest level since July 2015, per the RAC. The weak pound has amplified the rise in price of crude oil for UK consumers, resulting in what the motor body claims to be the biggest monthly increases for three and a half years. It now costs £64.20 to fill the 55-litre petrol tank of a typical family car and £65.25 to fill up a similarly sized tank in a diesel car.
• Wm Morrison updates on Q3 to 30 Oct, says LfL sales ex-fuel +1.6%. Incl. fuel, LfL sales were down 1.2%.
• Wm Morrison says ‘we continue to improve the shopping trip which is attracting more customers, with LFL transactions again strong (up 4.1%).’
• MRW says ‘prices fell during the quarter, with deflation of 1.0%’. It adds ‘our financial position is strong, and we are committed to further strengthening our balance sheet and lowering debt. Our net debt target remains c.£1.2bn by year end.’ CEO David Potts comments ‘our like-for-like sales have now been positive for a year, which is thanks to the hard work and dedication of the whole Morrisons team. There is a lot more we plan to do. We will keep investing in becoming more competitive and improving the shopping trip, and I am confident we will serve our customers even better during the important trading period ahead.’
• The quarterly ‘Beer Barometer’ from the BBPA shows a 3.4% decline in Q3 beer sales year-on-year, although last year’s third quarter benefitted from the Rugby World Cup. Q3 sales figures were up on 2014 levels. A big change in beer tax policy, which has seen three duty cuts and a freeze in the past four Budgets, means that beer duty is now 17% lower than it would have been under the previous beer duty escalator, providing a welcome boost to growth.
• ‘Whilst the overall trend is moving in the right direction, with the challenges of Brexit, it is vital we continue to enjoy supportive tax policies that boost consumer confidence in beer and pubs,’ commented BBPA CEO Brigid Simmonds. ‘We do need to see further beer tax cuts, so that we can compete with our European neighbours when we leave the EU, as many of these countries benefit from substantially lower tax rates on beer.’
• Burger King’s parent company, Restaurant Brands International, is in talks with possible backers including Pret a Manger owner Bridgepoint. RBI wants to raise funds from private equity backers to buy out individual Burger King franchisees in the UK to become the master franchise in the country. Most Burger King’s 700-plus UK restaurants are franchises, with several dozen corporate sites.
• Millennials increasingly choose to stay indoors and watch TV rather than visit the pub, according to a poll of 2,000 adults by satellite TV service Freesat.
• Scottish craft brewer Innis & Gunn has launched a £1m equity crowdfunding campaign as it aims to double turnover to £25m within the next three years. The campaign gives a pre-money valuation of just over £49m for the brewer, or four times turnover, and is already over 70% towards its target of £1,005,000. Innis & Gunn wants to use the money to establish four new locations, expand capacity, and introduce new technology.
• The importance of Halloween in the retailing calendar has grown dramatically over the past ten years, with festive changes such as stocking pumpkins a must for many c-stores.
• The number of plastic carrier bags used across the UK has fallen from 8.5bn to 1.1bn over the last two years, per IRI market intelligence.
LEISURE TRAVEL & HOTELS:
• Monarch has cancelled flight & holiday bookings to Sharm el-Sheikh for the foreseeable future saying that there is not indication from the UK Government yet as to when the airport will re-open to flights. Monarch says ‘if and when the airport does reopen then we will assess whether we start flights and holidays again.’ Around 700k Brits per annum had been visiting the resort.
• Jet2’s rapid expansion has seen it close in on Thomas Cook and create a new ‘big three’ in travel, according to the latest Atol data. The operator’s new licence is 45% bigger than its previous Atol and allows it to carry 2.27 million passengers in the 12 months to September 30 next year, just 178,000 fewer passengers than Thomas Cook. The steep drop reflects Cook’s focus on higher-margin business and a lower forecast for this year. Tui is out on its own with a licence for 5.3 million passengers, more than double Cook’s figures.
• The threat of strike action by easyJet pilots has been averted after they voted in favour of new proposals from the airline.
• UKinbound figures show confidence levels among the UK’s hospitality and tourism businesses are at a 12-month high. UKinbound’s chief executive officer Deirdre Wells said operators should be ‘cautiously optimistic’ and reiterated the need for further support from the Government, adding: ‘It is imperative this trend continues but we need the support and backing of the Government through a strong narrative promoting the UK as a welcoming destination; along with continued access to the Single Market and the Open Skies Agreement,’.
• Bridgepoint Development Capital has acquired UK educational trips operator Inspiring Learning, marking the 14th investment in its second fund, which totalled €353m.
• Dominion Hospitality has purchased the Chapman Group, which owns and manages 28 hotels and puts in the south of England.
• Facebook has warned that advertising sales’ growth will slow ‘meaningfully’ in the next few months as it tries to avoid alienating users. Shares fell 7% in after-hours trading, as advertising revenue comprises the clear majority of the group’s revenue (over 97% in its latest Q3 figures, or $6.8bn of the $7bn).
FINANCE & MARKETS:
• UK construction companies have seen an increase in business activity in October month-on-month, with the Markit/CIPS PMI moving from 52.3 to 52.6. IHS Markit’s senior economist Tim Moore described the news as ‘positive’ but warned that ‘respondents noted that Brexit-related uncertainty and concerns about the UK economic outlook had held back investment spending.’ He added: ‘While business activity has picked up since the third quarter, the recent phase of new order growth has been the weakest for three-and-a-half years. Subdued new order intakes contributed to a fall in construction sector business confidence for the first time since July.’
• The average UK home now costs a whopping six times average annual earnings at £205,904, according to Nationwide, despite historically tending towards 3-4x earnings. Low interest rates have managed to fuel demand in place of real wage growth, driving prices up by more than 20% over the last three years.
• Nationwide reports house price growth stalled in October. Price of the average house actually dropped by twenty quid.
• US Fed keeps rates on hold. Rate rise in December still on the cards. Fed says ‘the committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives.’
• It’s being suggested that carmakers may be supported by the tax-payer post Brexit if tariff-free trade cannot be agreed.
• Eurozone manufacturing activity increased at its fastest rate in 3yrs last month supported by strong production in Germany
• World markets: UK, Europe & US all down yesterday. Asian markets mostly higher in Thursday trade
• Oil price a little lower. Brent Crude changing hands at around $46.90 per barrel
• Sterling a little stronger against the US$ at $1.23 per dollar. Up from a little below $1.22 a couple of weeks ago but was $1.46 in June
YESTERDAY IN A NUTSHELL – SELECTION OF TWEETS, LIVE TWEETS ON WEBSITE:
• JDW Q1: LfL sales in the 13wks to 23 Oct rose by 3.5% (total sales +2.3%, impacted by pub disposals). Group says LfLs slowed to 2.3% in last 5wks
• JDW reports its operating margin, excluding property gains, was 8.6%, compared with 5.8% in the same 13 weeks last year.
• JDW reports it has opened one new pub since the start of the financial year and has sold nine
• JDW says ‘the Company remains in a sound financial position.’ It says debt to EBITDA of 0-2x will be targeted longer term
• JDW debt targets at odds with sharply higher capex levels and with share buybacks
• Just Eat has reported a ‘strong’ Q3, with like-for-like group order growth up 34% in the three months and 38% in the year to date
• Individual Restaurant Co, which owns the Piccolino brand, has reported turnover of £62.7m for the year to end-March
• Horizons’ latest Ones To Watch report suggests ‘a slowdown in entrepreneurial activity’ in the foodservice sector in last 6mths
• The NIESR has said that families will be poorer next year as household incomes shrink and inflation surges to c4%
• NIESR estimates economy will grow 2% this year & 1.4% next. It had previously expected growth this year of 1.7%.
• NIESR expects job growth to stall. Says ‘uncertainty could lead to a delay in firms’ hiring plans’. Unemployment to rise to 5.6% next year
• MLC says London hotels have benefited from ‘the steep fall in the value of sterling after the 23 June 2016 referendum’.
• Later Tweets: JDW says margins will fall for remainder of year, LfL growth will slow, wages, rates & commodity costs rising. What’s not to like? PER c19x
• JDW: Great co that it is, price of shares still a little on the high side. Co says will wind in financial gearing over 5-10yr view
• US markets nervous on Trump recovery. S&P now at 4mth low. Other markets skittish. Europe down for 7 sessions, oil price down
• ONS says input price inflation now at 69mth high. Exporters are exporting but inflation set for c4% before end next year says NIESR
• Dessert bars now a thing, apparently. Bottled water, fruit juice & cakes are on the up. Pays to evolve but give me a pie & a pint any time