Langton Capital – 2018-09-07 – Greene King, EI Group, Gear4Music, costs, coffee & other:
Greene King, EI Group, Gear4Music, costs, coffee & other:
A DAY IN THE LIFE:
Bit busy this morning what with trading updates and the like. On to the news:
GREENE KING AGM TRADING UPDATE:
Greene King has this morning released the trading update that will accompany its AGM later today. The period covered is the 18wks to 2 Sep 2018 and our comments are set out below:
• Greene King reports that ‘the positive momentum in Pub Company continued through the summer.’
• It says the company continues to drive top-line growth and aims to deliver long-term value creation for its shareholders.
• GNK says positive momentum has continued with 18wk LfL sales +2.8%
• The group points out that this is ahead of the market (+1.2%) and says that ‘growth over the last 10 weeks was 3.2%.’
• GNK adds ‘this strong performance was underpinned by the ongoing benefits from our sales driving investment to further improve our Value, Service and Quality, and boosted by the weather and a successful World Cup.’
• Wet looks to have outperformed food sales with the group commenting ‘our Greene King branded local pubs traded particularly well with LFL sales of +5.5%, driven by very strong LFL drink growth. 3.7m pints of beer were sold in total during England’s seven World Cup matches and LFL sales on the day of the semi-final were up 61%.’
• GNK says LfL net profit in Pub Partners was down 0.4% after 16 weeks.
• The group says this was ‘impacted by the timing of higher overhead costs which we expect to balance out over the year.’
Brewing & Brands:
• GNK reports ‘total beer volumes in Brewing & Brands were up 4.0% and own-brewed volumes were up 0.3%.’
Balance sheet & other:
• GNK reports that cost mitigation is ongoing & the group intends to offset gross cost inflation of c.£45-50m
• Greene King says ‘we are making good progress with our refinancing programme, which will reduce the cost of debt and increase flexibility.’
• The group will dispose of 100-110 pubs this year. It expects to open around nine new pubs.
• Little additional comment though the group does say ‘we continue to focus on profitably driving top line growth, developing a more streamlined and efficient organisation and further strengthening our capital structure to deliver long-term value creation for our shareholders.’
• Greene King has reassured that trading at both its managed and its leased & tenanted pubs, has continued to demonstrate positive momentum.
• Wet will have outperformed food (given the weather and the World Cup) and, though there is no real guidance on margins and costs continue to be an issue, this should help the bottom line.
• Greene King’s shares have lost their mid-year gains and now stand near to 12mth lows.
• The group, where forecasts are still somewhat fluid, is cheap on most measures. The asset backing is substantial, the shares trade on a PER of 7.5x and offer a yield of over 7%. The group has a multi-decade record of not cutting its dividend and it will no-doubt strive to keep that record intact.
• GNK is pulling the levers over which it has control but sales, margins & profits will remain under some pressure. Spirit integration issues are ongoing but trading is currently somewhat more positive.
EI GROUP UPDATES ON 47 WEEK TRADING:
• EI Group updates on trading. EI Group yesterday updated on trading for the 47wks to 25 August ‘in conjunction with the launch of a £150 million unsecured bond offering and the tender in respect of its outstanding £97 million convertible bonds.’
• EI sees 47wk tenanted LfL income up 1.3%. Managed pubs in operation more than a year see revenue +6.6% LfL.
• EI Group says, in its Pub Partnerships division, ‘we have seen good trading in the second half of the year to date, aided by the good summer weather and England’s prolonged success in the FIFA World Cup. Our leased and tenanted estate has increased like-for-like net income growth to 1.3% in the 47 weeks to 25 August 2018, up from the 0.6% delivered in the first half of the year. We continue to invest in our leased and tenanted business in order to enhance estate quality and drive income growth and we are working closely with our publicans to mitigate cost pressures.’
• EI says in its managed pubs, it is ‘on track to finish the current financial year with some 365 managed pubs, in line with our previous guidance.’
• Managed pubs owned throughout the period (and the comp period) have seen LfL sales +6.6%. Beer sales have been particularly strong.
• The group has more units trading free of tie. It says ‘we now have 376 such sites and so have already achieved our previous guidance of 375 commercial properties by the end of the financial year.’ Pubs owned over both periods have seen LfL net income growth of 6.7%.
• EI says ‘we have appointed Rothschild & Co to assist us explore various possible routes to optimise value. This may include the disposal of all or part of the portfolio.’
• EI Group has increased the size of its revolving credit facilities from £140m to £150m and extended term from Aug 2020 to Aug 2022.
• EI Group CEO Simon Townsend says ‘trading performance has steadily improved throughout the year across all areas of our business. Our largely wet-led estate has benefited from the good summer weather and the successful FIFA World Cup underpinned by our continuing investment programme as we further evolve the profile of our portfolio to optimise returns.’
• The group concludes ‘we continue to manage our balance sheet obligations proactively to ensure that we are able to drive long-term growth in shareholder value.’
• Langton view: This is a reassuring update with some satisfactory numbers from the tied estate alongside more tangible signs of growth in the managed business.
• Trading is tough but EI Group is evolving its offer. It is managing units and looks set to sell some of its commercial properties.
• The group is having to work harder for its money but, whilst we are still at an early stage in the company’s evolution, the signs are so far reasonably hopeful. As with most pub companies, the group’s shares are not expensive and, though the numbers depend upon the valuer’s interpretation of the outlook for the pubs market, EI remains strongly asset-backed.
PUBS & RESTAURANTS:
• The Good Pub Guide’s annual survey shows the average cost of a pint in London has risen 24p to £4.44 over the past year. The average for the whole of the UK is £3.69.
• After four years of preparation, an application has been submitted for the transformation of the former Northallerton Prison site in North Yorkshire into a retail, leisure and business destination.
• MCA’s Food To Go Tracker shows that food to go is taking an increasing share of meal and snack occasions, up 0.5% year-on-year for the year to end June 2018.
• MSPs gathered yesterday to celebrate the continuing success of Scotch Whisky, with more distilleries (128) now operating across Scotland than in the past seventy years. Earlier this year, the SWA announced the industry’s highest ever exports figures – with more than £4.37bn in exports being sent to over 180 countries across the globe, as well as the record numbers of tourists visiting Scotch Whisky distillery visitor centres, with more than 1.9 million visits taking place in 2017.
• 3Sixty Restaurants has identified its first conversion of an M&B pub since the two companies announced their joint venture last month, per MCA. The Cedar Tree in Nuneaton is being refurbished as the latest Ego in a Pub and will become the group’s 18th site. It is expected to open in mid-October.
• Gin and premium Irish whiskey are the fastest-growing spirits in Ireland, according to figures from the Irish Spirit Association (ISA) that show gin sales up by 47.2% and premium Irish whiskey sales up by 40% in 2017. Patricia Callan, director of alcohol beverage federation of Ireland (ABFI) said: ‘This report showcases the dynamism within the Irish spirits sector, the sector is offering Irish consumer an extensive choice of high quality products which are loved all around the world.’
• PepsiCo has committed to achieving 50% recycled plastic in its bottles throughout the EU by 2030 in compliance with the European Commission’s recycled plastics pledging campaign.
• Carlsberg will replace its plastic can holders in multi-packs with recyclable glue in the UK. The development and testing of the adhesive was a three year process for the brewing giant.
• Starbucks will open its first store in Italy in Milan on Friday with a new ‘roastery’ format featuring marble flooring and wooden panelling.
• Ofgem proposes an energy bill price cap of £1,136 a year for ‘typical usage’, saving 11m households an average of £75. The cap will take effect at the end of December and stay in place until 2023.
• Codacons, an Italian consumer group, has filed a complaint with the national competition watchdog about Starbucks overcharging customers at its new site in Milan. The price of an espresso will be €1.80, almost twice market price.
• British farmers are now able to recruit up to 2,500 non-EU nationals for seasonal harvesting work post Brexit.
• The Asda Price Guarantee will come to an end on 3 October, no longer refunding shoppers if the items they bought were not 10% cheaper than in rival supermarkets.
• Bakkavor, a supermarket ready meals producer, warns rising commodity prices could lower demand from shoppers saying ‘pressure has continued across our cost base’. CEO Agust Gudmundsson said he expected ‘little change’ in the economic conditions.
HOLIDAYS & LEISURE TRAVEL
• High levels of e-coli have been found in the hotel where two guests died last month in Egypt, according to tests carried out by Thomas Cook. The company still cannot gain access to the couple’s room but said that ‘standards fell below what we expect from our hotel partners’.
• Gear4music has updated on trading to end-August saying revenues rose by 36% to £42.5m. The group says active customer numbers increased by 40% to 547,000.
• G4M says it is making good progress with its European distribution. CEO Andrew Wass comments ‘we have continued to make good progress over the last six months, with sales growth during the period of 36% being ahead of our expectations.’ Mr Wass says ‘our core UK market continues to perform well and with the UK distribution centre upgrades we announced in May progressing to plan, we are well positioned to deliver further strong sales growth during the busier second half of the year.’
• G4M says, however, ‘as noted in our AGM statement, we have seen an increase in competitive pressures across our industry which is having an impact on short term gross margins.’ The company concludes ‘the Board expects EBITDA for the full financial year to be in line with our expectation.’
• The BPI reports the British record industry earned £408m overseas last year with Ed Sheeran, Sam Smith and Dua Lipa fueling demand. However, the BPI also warned that a ‘bad Brexit deal’ could harm British music’s profits.
• Luxembourg based PE fund CVC bids £275m for a 51% stake in Premiership Rugby but reports indicate the clubs value the league higher than the bid. The fund previously sold Formula One for €8bn in 2016.
FINANCE & ECONOMICS:
• Sterling up a fraction at $1.293 and €1.1122
• Oil down 80c or so at $76.47
• UK 10yr gilt yield down 5bps at 1.42%
• World markets: UK & Europe down yesterday with Dow in US higher. Far East lower in Friday trade.
• Brexit etc.:
o Operation Yellowhammer suggests government preparing for tax shortfall & more calls on its resources in the event of a no-deal Brexit
o Government would have to ‘refocus’ its priorities. Spending departments told to look to their own budgets for funding rather than expect more from central government.
o PM says this is nothing new. Adds ‘we have been clear that we are making preparations for a no deal scenario and this is just part of that work.’ Brexit supporters say it is an attempt to revive Project Fear.
o Michel Barnier has said it would not be possible for the UK to remain in the single market for goods without other commitments. Like staying in the EU, for example.
o BBC’s Newsnight programme suggests Northern Ireland is moving towards demanding a vote on reunification with the South.
o FT suggests MPs may have ‘no choice’ other than to vote in favour of the Government’s Brexit proposals.
PRIOR DAYS LATER TWEETS:
• Later tweets: See e/m. Pricing. It’s possible to leave various mass-market pizza restaurants having spend £40 per head & be neither sated nor drunk.
• Non-discounters focus on EDLP (everyday low pricing). It worked for JDW. Check out Fulham Shore (Franco Manca) on https://www.youtube.com/watch?v=7VpE1aXyTLM
• DART Q1 sees leisure bookings ‘growing slightly ahead of our 25% summer 2018 seat capacity increase.’ Overall trading in line
• US trade deficit hits $50bn per month. Say it quick & it doesn’t sound like a lot. No, hang on. It’s that word ‘billions’ that does it…
• Langton reveals Langton e/mail still brilliant. Also, free. Sign up on website, no strings. http://www.langtoncapital.co.uk/?p=1638
START THE DAY WITH A SONG:
Yesterday’s song was Killing in the Name of by Rage Against the Machine. Today, who sang:
No crime if there ain’t no law,
No cops left to mess you around
No more dreams of mystery chords
No more sight to bring you down
RETAIL NEWS WITH NICK BUBB:
Trade Press (1): The cover of Retail Week magazine today is a graphic about futuristic shopping for furniture, to flag up a big feature on “Retail comes to life” (“How Augmented Reality can transform your business”). RW also has a feature on the John Lewis and Waitrose “& partners” rebranding, with exclusive articles by the two MD’s, Paula Nickolds and Rob Collins, on what it means to their businesses. RW also has articles about the Farfetch plan for an IPO in New York and the plans of Chinese Online giant JD.com to enter the UK market. And in his column the Editor looks at the Mike Ashley/House of Fraser situation (in the light of the growing unease about the behaviour of the previous HoF management) and thunders that “while there may be much to blame Ashley for, the predicament of House of Fraser suppliers isn’t one of these things”.
Trade Press (2): In Drapers magazine, the Editor flags up in her column a new initiative on Sustainability in Fashion (the subject of a major new Drapers conference next March). In terms of News stories, Drapers focus on the clash between Mike Ashley and Frank Slevin, the former Chairman of House of Fraser, whilst, in terms of breaking news, the Drapers website maintains its run of exclusives on HoF, flagging that the Edinburgh Woollen Mill group has pulled all its brands out of House of Fraser, but that Mike Ashley has offered financial support to some other HoF suppliers. Drapers magazine also highlight that back-to-school business got “top marks” in the Fashion trade and has a number of feature articles, eg on the Mr Porter Online menswear brand and the new Hugo Boss store in Westfield White City.
BDO High Street Sales Tracker: We flagged on Wednesday that Fashion sales at John Lewis were usefully boosted last week by the more autumnal weather and today’s BDO High Street Sales Tracker for small/medium-sized Non-Food chains for last week, w/e Sunday Sept 2nd, is also brighter. The BDO figures are, it should be noted, unweighted…but at least they are now providing a combined Store and Online sales figure and, for what it’s worth, BDO Fashion Store LFL sales were 2.6% up last week and, including Online Fashion sales growth of over 21%, Total Fashion sales were up by 5.2%.
News Flow Next Week: Things are busy again next week, kicking off with the ABF (Primark) pre-close update on Monday. Tuesday then brings the JD Sports interims and the Superdry AGM. The Dunelm finals are on Wednesday, but they will be overshadowed by the high profile Sports Direct AGM that day…Then on Thursday we get the Morrisons interims and the much-awaited John Lewis Partnership interims.