Langton Capital – 2017-05-18 – Marston’s, M&B, SSP, Thomas Cook, Compass & other:
Marston’s, M&B, SSP, Thomas Cook, Compass & other:
A DAY IN THE LIFE:
Too many results to keep up today & first meeting two miles away at 8am. Hopefully time to comment tomorrow but, for the moment, let’s move on to the news:
MARSTON’S H1 NUMBERS – full note to follow:
• MARS H1: Group reports revenue +3% at £440.8m, PBT +3% at £33.7m and EPS of 4.8p (+4%)
• MARS H1: Says it now has a ‘high quality pub and beer business continuing to deliver growth’. The group comments it is seeing ‘revenue and earnings growth despite late Easter’
• MARS H1: Leverage is maintained at 5.0x, fixed charge cover improved to 2.6x
• Group reports LfL sales +1.6% at Destination & Premium outlets, +1.7% at Taverns & own brand beer is +2%
• MARS H1: Group proposing an interim dividend +3.8% at 2.7p
• Marston’s has also announced the acquisition of Charles Wells Brewing and Beer Business for £55 million.
• MARS says that the purchase ‘extends our number 1 position in the premium bottled ale and cask ale markets, and enhances our share of the premium canned market.’ It also ‘strengthens our presence in London and the South East and presents a platform to expand into Scotland.’
• The purchase is based on an enterprise value of £55 million equates to 9x current EBITDA before synergies. MARS comments that the transaction to be funded through equity placing as announced today. Some 9.9% of new shares are to be issued. CEO Ralph Findlay comments ‘we are delighted to have agreed to acquire Charles Wells Brewing and Beer Business. It is a high quality brewing business offering us opportunities to extend our trading area in the South of England and Scotland, and brings a range of well-known and popular brands into our portfolio. We also aim to develop further our range of international licensed brands, and look forward to working with our new overseas partners, including Estrella Damm, Erdinger and Kirin.’
• Marston’s is to purchase Charles Wells’ 16 acre brewing site in Bedford.
• MARS H1: Current trading (for 30 weeks incorporating Easter) ‘remains encouraging’
• MARS H1: Group is on track to open 23 pubs and bars and 8 lodges in current financial year
• Group has also acquired three Pointing Dog Premium pubs in May and it has announced the agreement to purchase seven Destination and Premium pubs
• MARS CEO Ralph Findlay comments ‘Marston’s has been transformed over the last 10 years by the consistent implementation of our established strategy. In that time, we have built around 200 pubs on new sites representing 60% of the Destination estate today, and we have developed a leading premium pubs and bars business.’
• MARS comments ‘the Taverns estate has been repositioned, having sold around 1,000 pubs and introduced pioneering franchise-style agreements designed for community pubs. In Brewing, we lead the premium ale market and benefit from a growing contribution from craft beers and international licensed brands, including premium European lager brands.’
• Overall, CEO Ralph Findlay comments ‘our market position will be enhanced by the acquisition of Charles Wells Brewing and Beer Business and we remain confident our strategy will continue to create value for shareholders.’
• Langton comment: Marston’s has reported robust results and has demonstrated that it is possible to grow LfL sales without sacrificing margin. The group’s shares trade on around 10x this year’s earnings and yield some 5.2%.
• The group has an attractive, well-managed estate of largely freehold properties and its shares are not trading on a demanding rating. Marston’s, along with all of its peers, is exposed to the UK consumer but it is selling product that the consumer would like to buy at a price they are prepared to pay.
MITCHELLS & BUTLERS H1 ANALYSTS’ MEETING:
• Following the release of its H1 numbers this morning, Mitchells & Butlers hosted a meeting for analysts and further comments are set out below:
• M&B reports that trading is improved across most of its brands. Both invested & un-invested units are better.
• The value end of the market is toughest
• Group denies it is ‘buying its way to growth’. Returns on capex are nonetheless c18%. M&B says that ‘more recent investments have been stronger than the average’
• H1 profits were £7m lower. Around £4m of this is due to the movement of Easter from H1 to H2
• Cost headwinds are a real issue. The situation is ‘unprecedented’
• Group expects c£55m of extra costs this year with the same again in FY18.
• M&B says that it needs 3% to 4% LfL growth in order to hold profits static. JDW said the same thing last month.
• M&B is moving in the right direction but it has not hit 4% in the last 10yrs. Hence forecast downgrades.
• The group is performing more strongly than the market, at least in sales terms. There is a move to premiumisation. This will increase cash margins but decrease percentage margins. It is consistent with the 4.8% drop in food volumes described in M&B’s statement.
• Balance Sheet & Other Issues:
• M&B reports that March 2016 pension discussion are ongoing. A further review is due in March 2019. Best case is dotting eyes and crossing teas but worst case is that an agreement is problematic
• M&B does not believe it will be making acquisitions of chains where it has to pay goodwill. Single site purchases are more likely.
• M&B is ‘making progress’ in disposing of 78, mostly smaller, wet-led units
• Positive sales momentum has continued into H2 but M&B notes that real income growth has recently turned negative
• Mothers’ Day and Easter were good but costs will be an issue for the remainder of 2017 and into 2018.
• The group does not believe that, across the industry as a whole, these costs can be managed away. Cutting portion sizes risks alienating customers. Overall, prices will therefore rise
• Recent Sterling strength is helpful
• Discounting has been more aggressive recently. Some 50% off was offered (by competitors) in November and January. This will drive footfall away from M&B but, for the moment, the group will not get involved
• M&B has been outperforming its peer group ‘since last September’. There is less new capacity coming on the market at present
• Premiumisation will continue. The group is ‘only a third of the way through its transformation’
• A large number of factors are responsible for M&B’s recovery. Group says ‘there is no silver bullet’.
• Apps are becoming a big deal. Both back of house (labour scheduling etc.) and in the customer-facing side of the business. The company has 6 Apps & has thus far had c825k downloads
• Overall, the group is pleased with its progress but it acknowledges that there is quite some way to go
• Langton Comment: M&B’s shares have fallen on profit downgrades and on the group’s comment that further cost pressures are likely in FY18.
• The group, however, has told it like it is. Most of M&B’s peers agree that cost pressures are out of the ordinary though M&B perhaps goes further than many in saying that they are ‘unprecedented’.
• In addition to industry-wide issues, M&B will continue to reposition its portfolio and this will not be without some cost & execution risk.
• Nonetheless, we believe that the group is making the right moves. Whilst its share register is an issue when it comes to buying the shares (and it would help if the pension review were completed), today’s sharp price drop does move them towards fair value.
PUB, RESTAURANT & DRINK PRODUCERS:
• Discounting on the up (per M&B and others). Frankie & Benny’s offering 2-4-1 on mains, Pizza Hut 25% off mains after 3pm, Bella Italia, 30% off food, Café Rouge 40% off mains, Pizza Express 25% off food etc. etc.
• Lib Dem manifesto. ALMR welcomes guarantee for rights of EU workers to stay in UK. The ALMR comments ‘the Lib Dem manifesto highlights the importance of tourism and touches upon a number of issues that the ALMR has been focused on recently. Chiefly, the protection of rights for EU citizens in the UK, which is essential for the country’s eating and drinking out sector, so heavily reliant on non-UK workers.’
• SIBA comments on Lib Dem manifesto, which highlights the importance of pubs to local communities.
• SSP Group has reported a 24.7% increase in underlying operating profit to £42.8m on the back of a 2.9% rise in like-for-like sales, driven by air passenger travel and retail initiatives. Underlying operating margin rose by 30 basis points at constant currency to 3.7% and underlying profit before tax jumped by 49.6% to £34.7m, while underlying earnings per share grew by 40% to 4.2p.
• Commenting on the results, Kate Swann, CEO of SSP Group, said: ‘SSP has delivered another good performance in the first half of 2017 and we continue to make progress on our strategic initiatives. Constant currency operating profit was up 25% driven by good like-for-like sales growth and further operational improvements. We have had a particularly strong period of new contract openings, growing our presence across the world particularly in North America and the Asia Pacific region. The pipeline is robust and we are pleased with the new contracts won in the first half. Our Joint Venture in India has started well and we are encouraged by the progress we are making there.
• ‘Looking forward, the second half has started in line with our expectations and whilst a degree of uncertainty always exists around passenger numbers in the short term, we continue to be well placed to benefit from the structural growth opportunities in our markets and our programme of operational improvements.’
• Total sales in the first 19 weeks of 2017 grew by 7.5% for Greggs, where like-for-likes were up 3.6% (2016: 3.7%). The baker and food-to-go specialist saw further growth in its breakfast, drinks, and ‘Balanced Choice’ options, while 87 shops were refitted in the period, 42 new shops were opened, and 14 were closed, making for a total of 1,792 shops trading at 13 May. Greggs also invested in its systems and supply chain during the period. Greggs sounds a note of caution on the outlook with regards to pressure on disposable incomes and input cost inflation, although the group sees ‘increasing visibility of costs for the second half and anticipate[s] this pressure to ease towards the end of the year.’ The group adds: ‘Whilst this pattern will constrain profit growth in the first half of the year we expect to make progress in line with our previous expectations for the year as a
• In the past 3 years, the number of customers using order and pay from their mobiles has doubled. Research from CGA and Zonal’s Go Technology suggests 40% of 25 to 34 year olds prefer to use their smartphone to order food and drink and have items delivered to their table. The survey also shows that 67% say they would pay more cash for food and drink if they could order from mobile.
• An open letter from Wetherspoon’s boss Tim Martin to Theresa May urges the Prime Minister ‘to take the moral highground’ as ‘virtually no one wants hard-working immigrants from the EU to leave the UK’.
• In the US, McDonald’s has extended its McDelivery programme through UberEats into LA, Chicago, Pheonix and Columbus. The company generated nearly $1bn in delivery sales last year alone.
• The M&B owned, Harvester, has launched a new Groupon deal offering a meal and drink for two for £20. This 38% discount follows a similar offer by M&B brand, Toby Carvery, on Groupon.
• UK wage growth now lagging inflation. Wages +2.1% in March, CPI was 2.3%. CPI has now risen to 2.7% (April). Wage rate numbers not yet available.
• Unemployment numbers fall 53k to 1.54m in the 3mths to end-March. Rate of 4.6% is lowest in 42yrs.
• Number of people in employment hits all-time highs. NIESR comments ‘with a fall in unemployment to a record low of 4.6% and the rate of employment at a record high of almost 75%, the latest ONS Labour Market statistics suggest that employers are facing increasing difficulty sourcing the labour they need. Of the current 777,000 vacancies in the UK jobs market, 85% are in services, including health and social work. These vacancies have implications for the quality of services.’
• Re EU workers, NIESR comments ‘the statistics show that EU workers are continuing to meet employers’ needs yet, with the fall in the value of sterling and uncertainty around future rights to work in the UK, this may not continue.’ It continues ‘the government would be wise to guarantee the future right to remain for existing EU citizens in the UK and also to ensure that employers can continue to address labour shortages through migration, where their needs cannot be met locally’.
• B of England Agents’ Report suggests ‘consumer spending growth had moderated in real terms, as spending power had been hit by higher prices.’ It continues ‘in the labour market, recruitment conditions had tightened a little further, with skills shortages reported in a wider range of activities. Labour costs growth had edged up in manufacturing. But pay awards remained clustered around 2%–2½% across the economy.’
• B of England Agents comment ‘consumer goods price inflation had picked up markedly. That largely reflected the effects of sterling’s earlier fall feeding through supply chains and into retail prices. Consumer services price inflation had also increased, but to a lesser degree.’
• Consumer uncertainty during the first quarter of 2017 has resulted in a 3% fall in eating out sales, the MCA has reported. The MCA’s Eating Out Panel report for Q1 2017 found that the average number of eating out visits per head per month declined 8%.
• The Quilvest-backed, Tortilla, has reported LfL sales increasing 9% in the year to date.
• US psychologists have poured cold water on the theory that alcohol can create ‘happy drunks’. The Missouri based psychologists have said that alcohol does not so much change people’s personalities but can increase extraversion, with a person’s personality becoming louder.
• The MCA has reported that Swingers, the crazy golf and street food concept, plans to open a second site in London. The site is set to open in early 2018.
• AB InBev has announced it is to invest $2 bn into its US business over the next three years, as it looks to strengthen brands other than Budweiser. The group plans to promote its craft beer and nonalcoholic beverages.
• The local council of Shoreditch have unanimously rejected Time Out’s application for a food market concept. The Spitalfields Society welcomed the verdict saying ‘he Society applauds the Time Out Market concept but feels that it should be applied to an area of London that genuinely needs the regenerative benefits that it offers.’
• Franco Manca will open its 36th site in Richmond-upon-Thames on 18th May. The restaurant will hold 94 covers and is located in the old police station.
• A Palmer & Harvey survey suggests that retailers must adapt product mix and pricing to navigate a predicted 2017 food inflation rate of 3.3%. The ONS shows bakery prices +5.4%, packaged meat +10.9%, vegetables +14% and dairy +16.5% since the referendum.
HOLIDAYS, LEISURE TRAVEL & HOTEL
• Thomas Cook H1 numbers. Revenue +17% at £2.99bn, loss £177m (vs £163m), net debt £794m vs £818m last year.
• TCG H1: Group reports ‘robust demand for holidays driving growth’. Says ‘gross margin down 40 basis points, mainly due to weaker trading at Condor as previously highlighted’
• TCG CEO Peter Fankhauser reports ‘Thomas Cook has delivered a good performance in the first six months. The progress we’ve made on our strategy helped achieve a 3 per cent increase in revenues, with strong customer demand for our holidays despite the competitive environment.’
• TCG concludes ‘as we look ahead to the key summer season, we are seeing strong customer demand across most of our markets.’ CEO Fankhauser reports ‘based on current trading we expect underlying EBIT for the full year to be in line with current market expectations.’ He says ‘as I look across the Group, I see real momentum behind our strategy for profitable growth. By putting a clear focus on giving customers the very best experience when they holiday with Thomas Cook, and making our operations more efficient, I am confident that we can continue to transform the business and deliver increased value to shareholders.’
• US extended-stay hotels have reached the highest level of occupancy in a Q1 since 2006, this follows eight quarters of decline, the Highland Group has reported.
• Rank Group has reported that LfL sales grew by 1% for the 46 weeks to 14 May 2017, with digital revenue climbing 13%. The group reported Grosvenor Casinos’ and Mecca’s sales fell 1% and 2% respectively, due to lower margins and customer visits.
• Two in five leaders in the hospitality industry believe the visa situation post-Brexit needs clarifying. A further two thirds are worried that without a pro-tourism strategy, cost headwinds and restricted access to foreign talent pools will damage the industry.
• Tunisia’s state of emergency has been extended until June with the FCO warning that terrorists are “very likely” to carry out attacks in Tunisia.
• Strikes in Greece disrupted flights and trains on 17th May. The FCO said the strikes are ‘likely to cause disruption to all international and domestic flights’.
• Cineworld updates on trading to 11 May says ‘the Group achieved revenue growth of 21.3%, 15.8% on a constant currency basis.’
• CINE says ‘there are a number of exciting releases scheduled for May and June including “Wonder Woman”, “Pirates of the Caribbean: Dead Men Tell No Tales” “Transformers: The Last Knight” and “The Mummy”. Whilst still early in the year, the Group is on track to deliver a performance for the year in line with current market expectations.’
FINANCE & MARKETS:
• Oil up c70c at $51.98
• Sterling little changed, $1.2969 vs dollar & €1.1637 vs Euro
• UK 10yr gilt yield sharply lower at 1.06% (was 1.14%)
• World markets: UK, Europe & US down yesterday. Far East markets down in Friday trading.
YESTERDAY’S LATER TWEETS:
• Later tweets: M&B reports that trading is improved across most of its brands. Both invested & un-invested units are better. Value end is toughest
• M&B H1 profits were £7m lower. Around £4m of this is due to the movement of Easter from H1 to H2
• M&B spooks market with talk of costs. Headwinds a real issue. Situation ‘unprecedented’. Sees c£55m extra costs this year, same again next
• M&B says that it needs 3% to 4% LfL growth to stand still. JDW said same thing last month. M&B not hit +4% in a decade
• M&B has been outperforming its peer group ‘since last September’. There is less new capacity coming on the market at present
RETAIL NEWS WITH NICK BUBB:
• Mothercare: Ahead of today’s finals, the resignation of the FD Richard Smothers last week caused some concern, but there is nothing untoward in the Mothercare results on the face of it, although there are a lot of messy exceptionals and non-underlying costs and the boast that the UK business returned to profit in the second half is somewhat undermined by the revelation that this included a VAT recovery claim…
• CMA Watch: JD Sports announced the acquisition of the Go Outdoors back on Nov 28th, but it has taken until today for the wretched CMA to announce that it has decided not to refer the merger to a Phase 2 investigation…and all the problem was a few local store overlaps. JD Sports can now get on with integrating the business (which it has had to keep separate while the CMA has been reviewing the situation), but if the CMA took this long to clear this deal how long will it take to investigate the far more complex Booker/Tesco merger?
• Eve Sleep: As we flagged on Tuesday, the Retailing IPO market has been quiet for a while, but the pre-float placing of the Online mattress company Eve Sleep attracted a valuation of £140m (including £35m of new money, gross) and it will be interesting to see how quickly they burn through their cash. The co-founder and CEO Jas Bagniewski started his career as a consultant at Accenture, then worked at Rocket Internet as a Country Manager of various Online start-ups including Zalando and Groupon and then from 2011 to 2016 he was CEO of Zen Bedrooms, a D2C mattress company. Dealings start at 8am and the shares should go to a premium to the 101p placing price, despite the likely rocky stockmarket this morning…
• Planet ONS Watch: In the real world, April (the 4 weeks to April 29th) was much improved, thanks to the impact of the delayed Easter this year, as per the BRC-KPMG Retail Sales survey last week. But we will find out at 9.30am this morning what life was like last month on that bizarre parallel world, the Planet ONS, via the Office of National Statistics Retail Sales figures for April. For what it’s worth, our friends at Capital Economics note that, in theory, the ONS should account for shifts in the timing of Easter through its infamous “seasonal adjustments”, but they have still pencilled in a 2.0% month-on-month bounce in “seasonally adjusted sales volume” (to push the year-on-year growth up to 2.8%), albeit the City consensus is for a monthly volume rise of only 1.0%. We will, as usual, be focusing on the year-on-year movement in “non-seasonally adjusted sales value” (and the “Big
• Today’s Press and News: The bold front page headline of the Evening Standard last night was “The Big Squeeze” (to flag the increasing mis-match between wage growth and rising inflation), but, after the big sell-off on Wall Street last night, the FT front page headline is “Trump faces escalating crisis after Congress demands Comey memo”, whilst CityAM goes with “Trump turmoil rocks markets”, although the Telegraph flags to its readers the highlight of the Tory manifesto: “Middle-class lose winter fuel payments to fund social care”…In other news, the Guardian and the Times note that Ikea is to create 1,300 UK jobs in three new stores, whilst the FT features the news that John Lewis has been criticised by a financial website for failing to meet its ‘never knowingly undersold’ promise.
• News Flow This Week: At lunchtime the Asda Wal-Mart Q1 update will be released. Tomorrow brings the Moss Bros AGM update.