Langton Capital – 2017-09-05 – 888, Restaurant Group, Hawthorn, consumer spend etc.:
888, Restaurant Group, Hawthorn, consumer spend etc.:
A DAY IN THE LIFE:
So, determined to get ahead of the pack, I’m considering sending out my Christmas cards.
Admittedly, there may be only a small number of them (the dog, the tax man, the local parking wardens etc. and they can all have last year’s cards with the recipient’s name scribbled out) but it would help to get the job off my to-do list and, with the Christmas carol tapes being dusted off in the supermarkets (and the ‘seasonal aisles’ soon to be fired up with their quotas of Halloween, Bonfire Night and, yes, Christmas holiday goods), it seemed as though the time is right.
Hence, whilst it might be over 20 degrees outside & it’s still not getting dark until nearly 8pm, I’m thinking ahead. Somebody has to and it can’t be wrong. On to the news:
60 SECONDS: RESTAURANT GROUP: DOES THE VALUATION MAKE SENSE?
The scene is set…
• The market responded well to Restaurant Group’s first half trading update last week, with shares up c10% (338p).
• Confidence is growing in Restaurant Group’s turnaround but its sales trend is negative at a time when its industry is oversupplied and facing cost pressures.
• Management itself says: ‘like-for-like sales and margins will come under inevitable pressure in the short term,’ as a result of the above.
• Warren Buffett famously remarked that turnarounds seldom turn. At the very least, they often take longer than anticipated (perhaps due to our innate optimism bias).
• So, is the market suffering from optimism bias here?
But what about valuation?
• An interesting (though admittedly not like-for-like) comparison might be drawn with pub companies Greene King and Marstons.
• The recent purchases of Admiral Taverns and Punch Taverns suggests this is an area of the market that is currently undervalued.
• We will look at price-earnings ratio, dividend yield, sales trends, and price to book value: Sorry for poor fomatting.
RTN GNK MARS
PE (pre-exceptional) 11.3x 9.4x 8.3x
PE (post-exceptional) n/a 13.6x 9.1x
Forecast PE 15.2x 9.5x 8.2x
Dividend Yield 5.1% 5% 6.4%
Dividend Cover n/a 1.5x 1.9x
YoY Dividend Growth 0% +3.6% +4.3%
Qtly LfL sales trend -2.2% (H1) +1.5% (FY) 1.3% (Q3)
PTBV 3.71x 3.06x 1.37x
• Given the above information, we question whether Greene King and Marstons deserve to be on such modest PE ratios considering their positive sales growth profiles.
• Restaurant Group is making the requisite changes to its operations (simpler menus, better value, rationalising suppliers).
• But, considering current market conditions, it is possible that the scale and depth of its turnaround is being underestimated.
PUB, RESTAURANT & DRINK PRODUCERS:
• Time Out has announced the acquisition of 80 MÉS 4 PUBLICACIONS, the Group’s Spanish licensing partner who currently runs Time Out in three cities in Spain. It says ‘the Time Out brand launched in Spain in 2008 to inspire and enable people to make the most of Barcelona and has been constantly growing ever since; Time Out Madrid followed in 2014 and Time Out Girona in 2016. In each city, Time Out Spain has established leading online, mobile and social channels, a Live Events programme and in Barcelona, a highly-curated, free magazine.’
• Time Out CEO Julio Bruno reports ‘over the past several months, we have expanded Time Out Group’s footprint around the world as we continue to deliver on our strategy to grow our network of owned and operated businesses. We now have a strong presence in APAC and the acquisition of Time Out Spain will further consolidate our already significant presence in Europe.’
• Time Out reports it ‘is hugely popular with both locals and visitors in Barcelona, Madrid and Girona. They are all vibrant, exciting cities and key travel destinations, making them great additions to our owned and operated network as we evolve Time Out as a worldwide digital, transactional business. I am delighted to welcome these very talented, successful teams to Time Out Group and to continue to inspire people to make the very best of those amazing cities.’
• CEO of Sainsbury’s, Mike Coupe, claimed that additional red tape after Brexit could lead to food rotting at Britain’s borders. Mr Coupe said ‘[currently] we put things on a lorry in Spain and it will arrive in a distribution centre somewhere in England, and it won’t have gone through any border checks.’
• HSBC downgraded ratings for JD Wetherspoon and Greene King last week amid concerns about the impact on the pub sector of consumer weakness and rising input costs. A survey carried out by the bank found that if money was tight 30% of people would first cut spending on eating out and 15% would cut drinking out.
• Pizza Hut plan to improve profitability and cash generation by the end of this year by closing 5 restaurants and refurbishing more than 40. The 266-strong chain will have renovated 90% of its estate by the end of this year and revealed that sales increased 3% year-on-year to £233m for the year ending 4 December 2016. The company also opened its first site in five years at the White Rose shopping centre in Leeds in July.
• Pub & Bar magazine has announced a number of the speakers for its 11 October Pub Goers Conference. The event features presentations from Cardinal Research, director of Be At One, Andrew Stones and Alan Armstrong, head of marketing at Stonegate Pub Company. Mel Marriott, MD of Darwin & Wallace, will discuss how the design and style process of a pub or bar can influence the appeal of venues and Jason Thorndycraft, operations director of The Deltic Group, will look at millennials and the late night sector. Fuller’s & Cask Marque will be represented and Brigid Simmonds, CEO of the British Beer & Pub Association, will update attendees on legislation and the latest work from the BBPA.
• Hawthorn Leisure, the 250-strong pub group founded by a former Merrill Lynch investment banker, has suffered an increase in pre-tax losses to -£8.9m after getting hit by refinancing costs. Sales dipped by 1.4% to £19.9m.
• Canadian restaurant chain Tim Hortons is preparing to open a number of sites across the UK following the introduction of its first unit, in Glasgow, in June. Locations in Manchester, Cardiff and Belfast have been confirmed for the brand, which already has more than 4,600 restaurants worldwide.
• Pizza Hut and Pizza Express employees may join the McDonald’s strike over demands for a £10 wage. Ian Hodson, national president of The Bakers’ Food and Allied Workers Union, told Daily Star Online that he fears there will be more strikes unless pay is improved. He said: ‘We have had a significant uptake in membership since announcing the McDonald’s strike. People are fed up of the poor wages across the whole industry.’
• Retail sales recovered in August despite inflation continuing to put pressure on shoppers, as like-for-like sales grew by 1.3%, per BRC and KPMG, with back-to-school purchases helping the performance. The British Retail Consortium cautions that weaker consumer spend is still a risk, however, and sales fell in other summer months.
• Consumer spending in the UK grocery market pushed up prices and consumers cut back on the amount of goods they bought in the second quarter of the year. This stands in contrast to a wider European trend of increased purchases and has been aided by the weaker pound. While total spending on food, drinks and toiletries rose 3.7% in Europe in Q2 — pushing spend to its highest point since 2014 — the amount of goods bought in the UK declined in the period, with the 2.9 per cent growth in spending coming purely as a result of a 3.8 per cent rise in prices, partially offset by a 0.9 per cent decline in volume.
HOLIDAYS, LEISURE TRAVEL & HOTEL:
• Cost savings and a 5.6% increase in TrevPAR meant that hotels in Europe posted a 10.6% year-on-year increase in GOPPAR in July, per HotStats.
• York-based Quartz Travel has ceased trading after 13 years. Insolvency practitioner Begbies Traynor reports ‘the company’s financial difficulties have arisen from a dispute with its managed services provider, through which holidays were booked, and resultant court proceedings.’ Thomas Cook confirms that the firm’s contract as a Freedom member was terminated earlier this year.
• Ryanair chief Michael O’Leary has warned again that ‘flights will stop if Britain does not reach agreement with the EU by March 2019’. He went on to say: ‘The British underestimate the extent to which voices in Europe are lobbying against UK flights. The French and Germans are saying “There should be a deal, but it should require strict observance of all existing EU rules and regulations”. Airlines and tour operators need this [agreement] by September or October 2018 or we’ll be left with no alternative but to cancel flights certainly from November 2018 so we can fill them somewhere else.’ Speaking in London, O’Leary added: ‘I don’t really think there will be disruption in April 2019, only because the UK government will be panicked into an interim agreement.’
• 888 Holdings reports H1 numbers, says ‘outstanding Casino and Sport growth drives record revenue performance’
• 888 reports H1 revenue +3% at $270m with Casino +6%, Poker +1% and Sports +35%.
• 888 H1 reports exceptional charges of $50.8m, some $45.3m of which relates to UK VAT settlement.
• 888 H1 EBITDA adjusted for exceptionals of $47.5#6m (+8%) with adjusted PBT of £37.6m (+12%). H1 dividend 4c vs 3.8c last year
• 888 reports ‘strong Sport momentum continues reflecting customers’ increasing recognition of 888Sport as a premium sports betting brand’. It says mobile is driving growth. It has made ‘continued strong progress in Spain’ and is seeing ‘excellent momentum in Italy’. CEO Itai Frieberger comments ‘888 has delivered further revenue growth and operational progress in the first half of 2017 resulting in a 9% increase in revenue at constant currency. This pleasing outcome was driven by continued growth in 888’s core Casino vertical, strong momentum in the fast-growing 888Sport and a good performance in Poker.’
• 888 CEO Freiberger comments ‘the Group’s strong strategic momentum continued as 888 developed its positions in regulated geographies, achieved greater diversification across products and markets and further enhanced operational efficiencies. Our progress was driven by 888’s technology, leading CRM capabilities and cutting-edge marketing expertise.’ He concludes ‘888 is an agile business with an adaptable and entrepreneurial culture and team. Whilst the industry will continue to face regulatory headwinds in the second half of the year as further described below, trading in Q3 has started well and in line with the Board’s expectations. Underpinned by this momentum as well as the proven strengths of the Group’s business model the Board remains confident that 888 will achieve further progress and deliver its expectations for the full year.’
• Gear 4 Music has updated on H1 (end-Aug) trading saying total sales were +44% at £31.2m. The group is seeing ‘continued strong growth in the UK and across Europe’. It says ‘active customer numbers increased by 44% to 390,000.’
• G4M says it has made a ‘strong start for new distribution centres in Sweden and Germany’. CEO Andrew Wass comments ‘we are very pleased with our trading performance over the last six months, with 44% revenue growth being ahead of our expectation for H1 as indicated at the start of the year, and equates to two-year growth of 150%.’
• G4M says ‘revenue growth in our core UK market continues to be strong, alongside very strong growth in our international markets, driven by our new distribution centres improving our customer proposition resulting in market share gains across Northern Europe.’
• G4M says expansion will eat into margin. It says ‘a period of investment into our proposition and infrastructure in H1 has increased our operational costs and restricted margins in the short term. Encouragingly, revenue growth over the last six weeks supports our expectation that, as previously stated, revenue and profitability is likely to be more H2 weighted in FY18 than in FY17.’
• G4M concludes ‘we remain focused on delivering long-term sustainable growth through investment in our people, products, websites and operational capabilities, and raising £4.2m growth capital in May 2017 has enabled us to start accelerating investment in these key areas. The Group continues to trade in line with our expectations and is well prepared for a busy seasonal period.’
• The British government said yesterday it would decide as ‘soon as is reasonably practicable’ whether to refer Rupert Murdoch’s $15bn bid to buy pay-TV group Sky for an in-depth review.
FINANCE & MARKETS:
• UK construction PMI fell yesterday from 52.0 in July to 51.1 in August. Any number over 50.0 implies expansion
• The much larger (80% of the economy) services sector PMI comes out at 9.30am today.
• Gold up to its highest level in a year on the back of North Korea fears.
• Oil down to $52.22
• Sterling down vs dollar at $1.2935
• Pound lower versus Euro at €1.086
• UK 10yr gilt yield unchanged at 1.06%
• World markets: UK & Europe down yesterday with US shut. Asia mostly down in Tuesday trade
o Labour’s new policay (remain in single market for as long as we want) amounts to not leaving the EU. Labour considers UKIP a busted flush
o Barnier etc. contend that single market membership isn’t on the table if the other ‘freedoms’ (travel, capital, ECJ etc.) are not included
o Promising everything to everybody could get Labour into no10 as Brexit debacle rolls on
o Sunday Times reports (current) PM May has approved a £50bn exit payment. Others disagree.
o Sainsbury CEO Mike Coupe says food may rot at UK borders. Brexiters say ‘what does he know?’
YESTERDAY’S LATER TWEETS:
• Later Tweets: Less than a 40% chance of further rate rise in US this year report money markets. US closed yesterday for Labor Day.
• US cinema attendances dire. Were down >50% y-t-d a couple of months ago. Trend may hop the pond. Not good for leisure park operators
• C&C gets into pubs via partial purchase of Admiral. Had earlier taken a tilt at Spirit.
RETAIL NEWS WITH NICK BUBB:
• BRC Retail Sales figures for August (the 4 weeks to Aug 26th): We flagged yesterday that August was again likely to show some modest LFL sales growth overall, of perhaps +1.0%, thanks to the autumnal weather and today’s outcome is slightly better than expected, at +1.3% LFL. The exact Food/Non-Food split of sales last month is, as usual, buried in a 3-month moving average (+1.8% LFL for Food and +0.6% LFL for Non-Food), but it looks like the two sectors were broadly similar, with Helen Dickinson of the BRC noting that “Non-Food returned to growth as shoppers’ attentions turned to homewares, autumn clothing ranges and the new school term”. The hot weather in August last year meant that the Homewares/Furniture sectors faced very soft comps, so they fared best of all this year, but kids clothing and footwear sold well and Household Appliances was the only category to record an overall
• Halfords: Today’s scheduled update from Halfords covers the slightly odd period of the 20 weeks to 18 August and although there is no mention of “the weather” or the phasing through the period, the last few weeks haven’t been ideal for camping or cycling and may well have taken the edge off trade, because the overall Retail LFL sales growth of 3.5% is a bit below expectations (despite the benefit of the later Easter, weak Q1 comps and the fine weather in June/July). Nevertheless, CEO Jill McDonald (yes, she’s still there) trumpets that “a combination of good planning and execution meant that we optimised sales from the staycation summer, with strong growth in camping, roof boxes and cycle carriers” and the company says “We continue to anticipate FY18 Group profit before tax to be in line with current market expectations. All financial guidance for the full year remains unchanged”.
• Games Workshop: The recent autumnal weather has been ideal for an “indoor” retailer like the toys chain Games Workshop, which, amazingly, now has a higher market cap than once mighty Debenhams (£530m plays £480m). And it has issued a brief trading update today to flag that “Following on from the Group’s update in July, trading for the first quarter of the current financial year has continued strongly. Sales and, given the high operational gearing of the business, profits for 2017/18 to date are therefore well above the same period in the prior year”.
• News Flow This Week: As we move on into September, tomorrow brings the much-awaited Sports Direct AGM. Thursday then brings the Dixons Carphone AGM, the Carpetright AGM and the Conviviality AGM.