Langton Capital – 2016-12-01 – More on Greene King, cost increases, borrowings & other:
More on Greene King, cost increases, borrowings & other:
A DAY IN THE LIFE:
Walking through the City yesterday I noticed a couple of signs saying ‘Caution: Men Working Overhead’ and fair enough, I thought, but what do you want me to do about it?
Should I dash through the afflicted area or walk slowly and calmly whilst staring into the air? Should I be cautious and creep around like a bad smell or is there frankly little to do other than find another route to avoid a few drops of water from a window-cleaner or accept that, once in every 10bn journeys, I might get hit by a spanner falling from outer space?
And, coming to think of it, I’ve never seen a contractor handing out hard hats to people on the pavement suggesting that it’s probably the latter because, if you spend much time worrying about aircraft parts, meteors and spanners, then I suggest you ask someone just what’s floating around in every drop of water you drink or how many parts of insect detritus per million are acceptable for Corn Flakes. On to the news:
GREENE KING – ANALYSTS’ MEETING:
Following the release of its H1 numbers for the 24wks to 16 October this morning, Greene King hosted a meeting for analysts and our comments are set out below:
Full Year Numbers:
• The numbers were a H1 record, GNK has pointed out that all divisions are in profit growth
• Integration of Spirit is ‘ahead of schedule’
• LfL sales growth was 1.3%. Ex Fayre and Square, which has been a drag, LfL sales were +1.9%
• Tougher areas at the moment include ‘blue collar food’
• F & Square number have dropped (on conversion) from c150 to c100. By the end of 2018, the brand will have gone
• Returns on capital spent on conversion are 15% to 20%
• GNK opened 7 new units in H1. The group also disposed of 7 pubs
• Margins slipped from 18.6% to 18.1% & GNK is guiding for them to fall a little further
• Utility, forex, NLW, NMW, business rates, F&B costs will all impact FY17 and, more so, FY18 numbers
• Spirit synergies, already raised to £35m, should exceed that number
• The group does not intend to push prices too hard. It will seek to mitigate cost increases where possible
• The cost environment is ‘spiky’
• Home delivery is peripheral. GNK, along with most pub operators, would rather persuade customers to leave their homes for a night out
Leased & Tenanted:
• LfL EBITDA is +4.2%. Some 3 units were sold in H1 and 45-50 will be sold in the full year.
• The MRO experience to date is ‘in line with expectations’. There have been 24 requests as to Free-of-Tie options to date
Brewing & Brands:
• Brewing had a ‘relatively difficult year’. It still outperformed the industry but, as unprofitable contracts were cut, sales fell
• Margins, however, are better and profits are up. Selling O S Hen for £1 a bottle was perhaps not good for the brand image
• Marketing hasn’t been cut back
Cash Flow, Balance Sheet & Debt:
• GNK reminded analysts that its Spirit debentures pay 8%. The group should be able to refinance, albeit not for free, at nearer 4%
• Debt to EBITDA rose from 3.9x to 4.2x. It should remain near that number going forward.
Market Conditions, Strategy and Other:
• CEO Rooney Anand quoted MCA data suggesting that the managed market should grow strongly over the next 3yrs whilst revenues of tenanted & leased pubs will decline (in total)
• This will be partly due to more of the former and fewer of the latter. New entrants may take share.
• GNK aims to be the no1 pub company in the UK. Whilst the co is absorbing Spirit, it is very much BAU (business as usual).
• Re integration of Spirit. The group has made ‘great strides’ since the teams were brought together in May this year. The decision to relocate some pub company operations to Burton ‘was not taken lightly’
• The timetable for brand conversions has been extended. This is to balance demands re staff, cash etc. and is also partly a response to the ‘turbulent environment’
• Overall, the short term is secure but there are some uncertainties as to costs and demand from mid-2017 onwards
• Some unexpected cost increases, the scale of the change in business rates, utility & some F&B costs, which will be partially mitigated, will lead to reductions in FY18 forecasts
Langton Comment: Greene King has conceded that costs are rising more rapidly than anticipated and says that the conversion of ex-Spirit sites will take longer than initially planned.
The former is because of external events and will impact the industry rat her than GNK alone.
The latter may make sense but, overall, the factors outlined above will lead to lower margins and estimates for FY18 have come down.
Nonetheless, we would suggest that GNK is one of the UK’s better-positioned pub companies and, with its shares now trading at a single-digit multiple, it is not expensive. Affordable treats will remain, well affordable and there is something to be said for getting out of the house.
PUB, RESTAURANT & DRINKS PRODUCERS:
• DP Poland has announced the sale and sub-franchising of 4 corporately owned stores in Krakow to VKF Group. DPP reports ‘VKF Group is a Polish company established and led by new Domino’s sub-franchisee Wojtek Fronczyk. Wojtek Fronczyk spent the last 10 years in the UK managing Domino’s Pizza stores, during which time he was awarded Supervisor of the Year 2014 before becoming an Area Manager. Moving back to Poland in the summer of 2016 Wojtek joined the Polish Domino’s team as Area Manager for Krakow. Wojtek opened Krakow’s fifth Domino’s Pizza store in November 2016 under a management contract with DP Polska SA.’
• DPP reports that for the year ended 31 December 2015 the 4 corporate stores being sold recorded an EBITDA loss of PLN197k equivalent to £34k, at an exchange rate of PLN5.77:£1.’ It says ‘total consideration payable to DP Poland for the transactions is the net book value of PLN1,794k, equivalent to £347k at an exchange rate of PLN5.17:£1. Proceeds from the transactions will be settled in cash and used to fund the working capital of the Company. Following this sale DP Poland will have 13 corporately managed stores and 19 sub-franchised stores.’
• DP Poland reports that its ‘growth strategy is to expand through a combination of corporately owned and sub-franchised stores. Sub-franchising is core to the Domino’s Pizza model worldwide, giving the opportunity to individuals to leverage the Domino’s Pizza System and brand and to grow their own profitable businesses.’ CEO Peter Shaw says ‘we are delighted that VKF Group, led by sub-franchisee Wojtek Fronczyk, has acquired our 4 corporate stores in Krakow. Wojtek has worked as a highly successful Domino’s Area Manager in the UK and I am impressed by the impact he has already made working with us in Krakow since this summer. Extending sub-franchising is key to our expansion plans and I look forward to welcoming more sub-franchisees to more cities in the future.’ Wojtek Fronczyk adds ‘returning to my home town of Krakow as a Domino’s sub-franchisee has been a long-held ambition. I am
• BrewDog is adding a double or nothing element to its EquityforPunks USA crowdfunding round, which has so far raised over $30m of its $50m target. Investors may agree to all the investment or just a part being placed on the roulette table by the BrewDog founders. Investors will choose either red or black, with the majority vote being the color Watt and Dickie bet their chips on at the roulette table. If the bet is successful investors double their stake in the business. If the bet is not successful, investors keep the benefits of being an Equity Punk investor, including a lifetime discount on the beer, but their shares are returned to the company.
• Alcuin Capital Partners has acquired a significant stake in Koh Group and plans to provide finance for a further rollout of its Koh Thai Tapas and Koh Noi concepts, per MCA.
• Foodservice operators face paying 2% more fore supplies than they did last year, according to supply chain management company Prestige Purchasing. ‘Despite what CPI is showing, we’re seeing a noticeable rise in inflation for foodservice operators, and the widening gap between CPI and FPI is one of the many huge challenges operators are facing,’ said Prestige Purchasing chief executive David Read, whose FPI has analysed over four million lines of data points a month to create a more accurate picture for foodservice businesses. While consumers are protected somewhat by the continued supermarket price wars, political and agricultural supply issues have led to a ‘perfect storm’ which are driving prices up.’
• The Food To Go Tracker Q3 2016 from MCA shows the Food To Go market now comprises more than two in every five eating out occasions. Frequency has increased across all parts of the day year-on-year, with average spend up at breakfast, lunch, and for snacking.
• Romanian wine in the UK is expected to grow by c10% after production in the country grew by more than a third.
• Canadian coffee chain Tim Hortons is coming to Scotland and has signed a joint venture with Domino’s Pizza franchisee Surinder Kandola, writes MCA.
LEISURE TRAVEL & HOTELS:
• The World Travel & Tourism Council and the World Tourism Organisation have both called on Theresa May to lift the year-long ban on UK airlines flying to Sharm er-Sheikh.
• Kew Green Group, operator of over 50 hotels in the UK under major brands including Holiday Inn, Crowne Plaza, and Ibis Styles has changed its logo and revamped its website. The new brand identity coincides with the opening of the first Kew Green branded hotel in Hong Kong by HK CTS Hotels Co Ltd earlier this week.
• British Airways is aiming to fly more than 1.5 million passengers over the festive periods, between 18 December and 2 January.
• Britons spent the least on holidays out of four major European countries this year.
• European meetings budgets are expected to remain flat next year although overall activity might decline, according to the American Express Meetings and Events report. The report found that Britain’s decision to leave the European Union hasn’t influenced budgets but has caused businesses to act with more caution. The study showed that as Europe faces its share of ‘global political and economic uncertainty’, activity will shift in terms of numbers, size and length.
• London and New York City are this year’s most popular international and domestic destinations for Christmas travel by Americans. These are followed by San Juan, Cancun, Tokyo, Paris, Santiago, Puerto Vallarta, Manila, Santo Domingo and Bangkok, according to a review of almost one million plans made by Americans for travel over Christmas by insurance firm Allianz Global Assistance.
• Camelot, the operator of the UK’s National Lottery, has been targeted by hackers who accessed the accounts of thousands of online customers. In all, 26,500 of the National Lottery’s 9.5m registered players were accessed and these accounts have now been suspended.
FINANCE & MARKETS:
• Mark Carney has warned that household debt levels in the UK may be unsustainably high. Credit card debt is particularly onerous. Mr Carney said ‘we are going to remain vigilant around the issue, because we have seen this shift.’
• Carney says consumers are borrowing more. Says ‘it’s the early phase of re-leveraging, following a long period of improvement’.
• Strong US new hire numbers & rising consumer spending seem to point to December rate rise. The ADP National Employment Report shows private payrolls rose by 216k last month.
• US Commerce Department reports consumer spending +0.3% in October after a revised +0.7% in September
• Eurozone core CPI rose to 0/8% annualised in November
• World markets: UK & Europe up but US down yesterday. Far East mostly higher in Thursday trading
• Oil up sharply on hopes of production cuts. Brent crude trading around $52.25 per barrel
• Sterling up a shade at $1.2524 with £/Euro also up a bit at Euro 1.182
• US long rates higher with 30yr bond yields back through 3% at 3.02%.
• The International Underwriting Association has said that it is vital UK operators retain passporting if they are to prosper
YESTERDAY IN A NUTSHELL – SELECTION OF TWEETS, LIVE TWEETS ON WEBSITE:
• $GNK H1: Group revenue up by 13.8% at £1.04bn. Adj. PBT +14.6% at £139m w. ‘all divisions in profit growth’
• $GNK H1: Group EPS 36.0p (up 9.0%) & H1 div. 8.8p (+4.1%). Pub Company LfLs +1.3%. Suggests last 16wks c +0.5%
• $GNK H1: Pub Partners LfL net income is +4.2% w. own-brewed beer volumes down 3.8%. Implies sharp fall last 6wks
• $GNK H1: Spirit integration ‘continues ahead of schedule’ and it says ‘synergies [are] expected to be £30m this year.
• $GNK H1: Current trading ‘in Pub Company since the period end has improved versus the trends seen in the second quarter.’
• $GNK H1: ‘trading in Pub Partners and Brewing & Brands was broadly consistent with that seen in the first half.’
• $GNK H1: Caution. Says capacity has been going on and ‘eating at home has become more attractive due to’ grocery deflation & delivery
• $GNK H1: Caution – says are ‘demand challenges with higher consumer expectations for value, service and quality’ & cost issues too
• $WTB Cap. Mkts. Day: Says will hit 2020 targets & has ‘line of sight’ to larger numbers of units still.
• $WTB Cap. Mkts. Day: Group will save £150m in costs over 5yrs. It won’t be breaking this number down any further
• $WTB Cap. Mkts. Day: Group property has a book value of £3bn but it ‘is worth between £4.2bn & £5.1bn’ w. no lotting premium
• $WTB Cap. Mkts. Day: Sale & leasebacks should amount to £50m to £150m p.a. See email for much more detail
• Britvic FY. Revenue rose 10.1% to £1.43bn and like-for-like pre-exceptional EBITA grew 3.8% to £178.8m.
• Revolution Bar Group will have opened four Revolución de Cuba bars in the last eight weeks of 2016 as part of its plans to open 5 p.a.
• Shepherd Neame announces acquisition of Village Green Restaurants for a total consideration of £11.85m
• GfK reports that consumer confidence in the UK slipped to minus 8 in November from minus 3 in October
• German restaurant chain Vapiano is preparing a stock market listing that could value the group at €600m including debt
• Hotel booking specialist HRS has found that average hotel room rates across the UK’s major cities fell by as much as 20% in Q3
• Later Tweets: John Lewis sees ‘biggest ever week in John Lewis’s trading history’ in run-up to last Sat. BDO, however, says High St fashion was sluggish
• GfK says ‘we are viewing our economy over the past 12 months with increasing despondency’.
RETAIL NEWS WITH NICK BUBB:
Nick is on holiday.