Langton Capital – 2018-10-15 – Pat Val debacle, rescue, Sept tracker, RTN, slow growth…
Pat Val debacle, rescue, Sept tracker, RTN, slow growth…
A DAY IN THE LIFE:
I needed to prove I was over-21 on Saturday to buy a flimsy letter-opener and, I suppose, that’s a good thing.
Not that I think for a moment that my grey hair and grizzled exterior makes me look anything like a teenager but rather because the staff avoided the allegation that they were being ageist (in asking a person’s age) or any other ‘ist’ for that matter.
Anyway, bit of a rush this morning as the Pat Val debacle rolls on. But, as everyone seems to have a view on everything these days, here’s a question for you. Who said: ‘if you can’t forecast well, forecast often’?
Was it; John Maynard Keynes, Bugs Bunny or the IMF? Clue – it was JMK. But, though nobody seems to be taking the slightest notice of the great man’s wise words, it’s still as relevant today as it was in the 30s.
No more RNSs from CAKE as we write. On to the news:
PATISSERIE VALERIE – FURTHER DEVELOPMENTS:
FRIDAY’S DEVELOPMENTS – Co beat its recent record & managed three RNS announcements during the day.
1. Announcement that Chris Marsh, Finance Director, had been arrested and released on bail.
2. Annoucment that £30m cash was really a £10m overdraft, group would earn £12m EBITDA in FY19 (pre-exceptionals) versus earlier estimates of nearer £30m. Group rescued by £20m Luke Johnson injection (£10m to come back to him on share placing) and £15m placing with investors.
3. Announcement that the placing of 31.5m shares had taken place and that trading in (some of) them should commence Thursday.
THE INVESTIGATION TO DATE:
• Announcements 1 and 3 can be taken as read. A wrinkle remains that only 10m shares have been placed. The other 21.5m are conditional on a General Meeting estimated around 1 November. The group points out that its investigations are at an early stage, implying that more news could come out before the GM to OK the share issue.
• Announcement 2 is a sorry outlining of the position to date. Specifically:
o The c£30m of cash was, on closer inspection, a £10m ‘secret’ overdraft. This leads to questions such as who at Barclays and HSBC (per Sunday Times) authorised the overdrafts? Who were the signatories? How realistic is it to believe that everything, completely everything, was down to the rogue actions of one man? And how, given that Pat Val had tangible net assets at its H1 of c£84m, can a very material £40m swing in cash (cash) from the declared to the actual, go unnoticed?
o £20m is needed ‘immediately’ for the company to continue trading. This has hopefully been addressed.
o ‘Irregularities’ have likely ‘affected the historical financial statements of the Company.’ Meaning the results presented by the directors (all bar one of whom remain with the company) to the City and to shareholders, likely gave a false impression of the performance of the company. If the earnings were wrong, the growth was wrong. If the growth was wrong, the multiple attached to earnings was wrong.
o ‘Limited work [has been] performed to date’. That is, there may be more announcements to come. Chairman Luke Johnson & CEO Paul May said on Friday ‘at this stage, the Directors cannot predict the outcome of those [further, more indepth] investigations with any degree of certainty. Any further findings of financial irregularity within the Group could result in yet further material losses for the Company, its shareholders and wider stakeholders.’ It should be said that these further losses are possible rather than expected.
o EBITDA for FY19 should be around £12m pre exceptionals. This compares with the c£30m being forecast less than a week ago. On 15 May, CEO Paul May said that ‘trading after the period end [that is from end March to mid-May] is in line with management’s expectations.’ These expectations have now been radically rebased.
o Terms of the rescue. £10m 3yr zero interest loan from the chairman. A second bridging loan of £10m, also from Luke Johnson. A £15m placing at 50p (£10m of which will repay the second loan from Mr Johnson). Bank lenders will have to stand still on debt recovery. The HMRC will be paid. Presumably also landlords who had begun to move to take back properties etc.
o If the above doesn’t go through, ‘there can be no guarantee that alternative financing will be available…and therefore the Group would likely enter into immediate administration.’ That, and the fact that directors, even non-executive directors, could be held personally liable for CAKE’s debts if they knowingly traded whilst insolvent, has clearly focused minds.
• Speed, decisiveness & 2,600 jobs (and a viable business) saved.
• Everything else.
• Whilst most are completely blameless, all bar 1 of the 2,500 staff members who allowed this situation to arise are still involved in the running of CAKE. This will surely not be the case in a few months’ time.
• When observing M&B lose two years’ worth of profits via a mistimed hedge instrument a little more than 10yrs ago, we commented ‘this is a monumental, career-ending debacle of the first order’. The FD went first but, within around 3yrs (we lost count) but the company went through four or five CFOs and the same number of CEOs and chairmen. The relative magnitude of the loss at CAKE would appear to be similar. It will be interesting to see just what other parallels there are over time.
• Also, the advisors. I mean, really. Really? Just how did this happen?
• Provisions, intangibles, even pre-opening costs and exceptionals may be open to some debate but cash, well, is cash. Only in this case, it obviously wasn’t.
• The group’s AGM will be interesting. Last year it was in December. Given that the auditors may take their time making sure that the numbers add up, the full year figures and the AGM could be markedly later this year.
• The accounting treatment of the £40m swing in cash will be interesting. If it comes off shareholders’ funds as an exceptional, retained profits will be reduced by c2/3 and shareholders’ funds themselves (post the £15m placing and including intangible assets, which could themselves be written down) will be around 25% lower.
• In short, the company has woken up and everything before today, high margins, £30m in the bank, a loyal and stable shareholder base etc., was a dream. Reality is when the shares are re-listed.
VALUATION – the 50p placing price was far from an accident:
• CAKE used to have 103m shares in issue at 430p to give a market cap of £440m.
• It has issued shares at 31.5m shares at 50p. The Theoretical Ex Rights Price (the price at which, all other things remaining equal, the shares should recommence trading at) is therefore 340p but, of course, that is meaningless.
• The £12m of EBITDA mentioned could 1) be correct but 2) may also suffer from trust issues. The latter will be reflected in a lower rating.
• An EV/EBITDA multiple of six, for example, would imply an EV of £72m. If cash is the £15m share placing less the £10m of overdrafts just discovered = £5m net. Mr Johnson’s £10m loan is on both sides of the equation. Then £72m + £5m is available to the 135.3m shares in issue or 57p per share.
• A (we-need-to-work-on-our-trust-issues) PE ratio of say 12x could be used. EBITDA of £12m is forecast for Sept 2019. Historically, PBT was £5.4m lower than EBITDA. In this instance, that would give £6.6m of PBT. Knock off a bit for notional tax gives say £5.6m after tax or 4.1p per share. A PER of 12x gives 50p.
• An EV/EBITDA multiple of 5 would imply 48p and a PER of 10x would give 41p. The discovery of any further irregularities would blow these numbers out of the water. Of course, any higher multiples, which imply a level of trust that might be hard to source in practice, would produce higher valuations.
• Shocks such as those suffered by CAKE are arguably more likely to create sellers of the shares than they are buyers.
• What shareholders thought they were buying into before last Wednesday – the company and the people running it – have not quite turned out as expected. Haloes have slipped, pixie dust has disappeared, reputations have been tarnished etc.
• There is still a lot of risk re the investigations.
• The company has got a plan (which is good) but it has to execute (and this is uncertain).
• There is likely to be a churn of the share register – though this will be mitigated somewhat by the block held by the chairman.
• The Sunday Times, which features a column by CAKE Chairman Luke Johnson, says ‘Johnson faces questions over how he managed to miss such a fundamental financial breach at a company where he is executive chairman’.
• It quotes Johnson as saying suggestions that he is stretched too thinly over his portfolio of assets are ‘fair criticism’. Advisor ISS called for shareholders to vote against Johnson’s re-election as a director at Elegant Hotels back in February. The Telegraph said this was due to ‘concerns his sprawling business interests mean he cannot be effective on the board’. The Mail on Sunday suggests that similar concerns were expressed in January re CAKE. Mr Johnson is stepping back from his Sunday Times column & says he will spend more time at Pat Val.
• The crisis may also prompt questions as to who else knew, or should have known, that Pat Val’s financial statements were misleading.
• Luke Johnson is reportedly not taking shares in the fund raise & will consequently see his stake diluted to 29% from 37%.
• Fears that CAKE will be taken private seem to have been put to one side for the moment. However, chairman Luke Johnson tells the Sunday Times ‘public companies can be very difficult to turn around and rescue’ because nothing can be done in private.
• Mr Johnson has been a phenomenally successful businessman but, he tells the Sunday Times, situations such as that at CAKE do lead one to question one’s own competence.
• The irregularities were doubtless a big miss by remaining board members. But, though its margins will be much more ‘normal’ than shareholders had previously hoped, CAKE is a fundamentally sound – though less profitable – business.
• The Telegraph suggests Crystal Amber was planning a convertible debt deal that could have rescued CAKE without as much dilution to ordinary shareholders. Where there is less dilution, however, there is often more risk. And the proposed deal may have taken too long to prepare.
• Legal action could ensue. The directors may both sue and be sued, the advisors may be targeted, the company itself may be the recipient of writs etc. as no end of people look for somebody (other than themselves) to blame for last week’s events.
• Paul May (currently CEO of Patisserie Holdings) has stepped down from his position as a board member of The Restaurant Group. Not clear whether he jumped or was pushed but, like Mr Johnson, he has plenty of work to be doing at Pat Val in the near term.
• Trust, as we all know, takes longer to build than it does to destroy. Same goes for reputations etc.
SEPTEMBER COFFER PEACH TRACKER:
• Tracker says ‘September delivers a late summer bonus for pub trade’ as managed pubs see like-for-like sales grow 1.9%.
• Whilst markedly below inflation, this number is better than that recently reported by the on-trade
• Restaurants saw a 0.2% decline in LfL sales in September
• The Tracker reports ‘sunny weather in September again proved good news for Britain’s managed pubs, with collective like-for-like sales up 1.9%. Including restaurants, the sector was up 1.1%, less than half the rate of inflation needed to stand still in real terms.
• Karl Chessell at CGA says ‘as ever, the good weather played a big role, and although restaurants as a whole failed to benefit, it provided an overall boost for the out-of-home market as the public were tempted out,.’
• London was +2.0% whilst the regions were +0.9%. London pubs and bars were +3.0%. The wet-led market was good.
• Coffer Corporate Leisure reports ‘although casual dining chains are collectively finding trading difficult, they are not in wholesale retreat. Despite some high-profile announcements of site closures, many are still opening in new locations, especially out of London.’
• Total sales growth including new openings was 3.5% suggesting that, though slowing, new openings continue to be a drag on LfL sales.
• The above does not comment on margins, which will be lower if chains have been discounting in order to drive sales. Which they have.
• Ditto delivery. Sales here will have helped sales but often only at the cost of margin.
PUBS & RESTAURANTS:
• As mentioned above, Paul May, currently still CEO of Patisserie Holdings, has stepped down as a director of Restaurant Group. RTN chair Debbie Hewitt, who has moved quickly on this issue, says ‘on behalf of the Board, I would like to thank Paul for the very valuable contribution that he has made since joining the business. We understand and accept his decision to step down and wish him all the best for the future.’
• The Sunday Times has reported Gourmet Burger Kitchen is ready to undertake an insolvency process to close outlets and cut rents.
• The Sunday Times further announced that the Business Growth Fund has placed The Coaching Inn group up for sale, after the fund put £14.5m in the group in 2015. The 15 freehold strong pub chain has appointed Sapient Corporate Finance to oversee the exit.
• Harry ramsden’s has posted a £5m loss after restaurant closures, the Sunday Times has reported.
• Research from UKHospitality and CGA has found that LfL sales have declined 0.6% in the year to August 2018 in the UK hospitality sector. Kate Nicholls, Chief Executive of UKHospitality, says: “Businesses are still facing a considerable amount of instability both economically and politically as Brexit approaches. It is at times like these that concise, clear and authoritative advice and insights become more valuable than ever. The fourth edition of our Future Shock report provides hospitality with the best advice to ensure they are prepared to meet the challenges ahead and capitalise on trends at the cutting edge.’
• Public Health England has announced new guidelines that would introduce calorie caps for certain dishes, as the organisation targets reduction in childhood obesity.
• A new report conducted by The Scottish Parliament Information Centre has announced that the number of breweries in Scotland has increased by 229% in 8 years to 115.
• Antic London and Downing LLP have placed 11 of the 48 London pubs the group operates up for sale.
• The US now has 9,000 Subway stores offering delivery.
• PepsiCo will source plastic comprised of 100% recyclable material in an agreement with Loop industries.
HOLIDAYS & LEISURE TRAVEL:
• STR reports London hotel occupancy down 0.1% to 86.9%, ADR down 3.1% to £158.93 and RevPAR down 3.2% to £138.04 in September.
• A panel of five travel industry executives urged businesses to be optimistic ahead of Brexit and ‘not plan for the worst’. However, uncertainty has perforated the industry with On the Beach CEO Simon Cooper saying ‘There’s no guidance on what a no-deal Brexit would look like so it’s very difficult to plan for what you can’t know.’
• The UNWTO reports international tourist arrivals up 6% in H1 2018, with all regions of the world showing ‘robust growth’. Europe, Asia and the Pacific led the growth, each recording a 7% increase in arrivals.
• Manchester Airports Group (MAG) reports a 3.3% increase in passenger numbers to 60.3m in the 12 months to September. The figure includes numbers from Manchester, Stansted and East Midlands airports but not Bournemouth airport, which was sold to RCA capital in December 2017.
• The Indian no-frills hotel start-up Oyo Rooms has declared its intention to expand into China. The group recently received a $1bn investment from Japanese group SoftBank to enable the hotel group for international expansion.
• Endless, a turnaround investor, acquires American Golf through a pre-pack administration, beating Mike Ashley to the deal.
FINANCE & ECONOMICS:
• The EY Item Club has suggested that the UK will see low economic growth for the next three years in the case of a Chequers’ Brexit. It says a no-deal Brexit could cut growth even further.
• EY predicts GDP growth of 1.3% this year and 1.5% next. Any failure to agree a deal could see growth ‘significantly weaker’. EY says ‘heightened uncertainties in the run-up to and the aftermath of the UK’s exit could fuel business and consumer caution. This is a significant factor leading us to trim our GDP forecasts for 2018 and 2019.’
• EY reports ‘the UK economy is going to experience a period of low economic growth for at least the next three years, and businesses need to recognise this and adjust accordingly. They should also consider a sharp downside to the economy in the event of a no-deal Brexit and make preparations for such a scenario.’
• ECB boss Mario Draghi has cautioned Italian officials to ‘calm down’.
• Sterling down at $1.3111 and €1.1351
• Oil up at $81.44
• UK 10yr gilt yield down 4bps at 1.64%
• World markets: UK & Europe down on Friday but US higher. Far East down in Monday trade.
• Brexit etc.:
o EU officials reportedly saying a deal has been done. UK allegedly to stay in Customs Union. Is workable but will upset pretty much everyone.
o Philip Hammond has said the pace of Brexit talks has picked up and a deal could deliver a boost to the UK economy.
o Theresa May will meet with EU officials this week.
o Food & Drink Federation, commenting on Technical Notices says ‘these technical notices demonstrate the shambolic ‘no-deal’ Brexit which is taking shape. For more than two years now, we’ve been talking about the chaos that would ensue in such a scenario. Now the fifth biggest economy in the world unveils its masterplan – turn a major section of motorway into the most expensive long-term lorry park in history.’
o EY Item Club says a Chequers Brexit will mean 3yrs of low growth and an exit without a deal will be less good.
o Others maintain Brexit will be a success.
o Tory civil war continuing. Labour knows, if it gets its act even partially in order, this could present it with a two-term administration.
PRIOR DAY LATER TWEETS:
• Later tweets: Pat Val seeks to maintain its two-RNSs-a-day record. Announced CFO arrested. Some spec a pre-pack will be revealed as soon as today
• You couldn’t make it up. CAKE. An involved, been-there, done-that chairman, ‘decent’ auditors, ‘clean’ figs & goes hero to zero in 10mins
• Travel industry worried Jan sales, usually strong for summer, will be poor this year ahead of the 29 March Brexit Day
• Can a President who calls his Fed Reserve crazy nutcases, or whatever, ever really look in the mirror??
• Trump says his policies ‘have hurt China’. Like that’s a good thing. US trade balance with China hitting new record deficits
• OBR says an “abrupt & disorderly” Brexit could have severe short-term impact on UK economy. No kidding? Could be like 3dy week in 1974.
• CAKE. Irregularities, suspensions, possible extinction event comments, arrests, you name it. Possible statement before noon
Later, later tweets:
• CAKE keeps up ave. of 2 RNSs a day w. rescue proposal out. Needs immediate cash £20m, Luke poss 2x £10m loans, issue £15m shares at 50p
• CAKE admits prior results not correct, EBITDA c£12m in FY19 (nineteen) v £25m for FY17. Historic numbers therefore bollox, your honour?
• CAKE: Lots of caveats, warnings etc. But, if shareholders put more cash in, who will run the co? Existing guys credibility tarnished, surely
• CAKE says if it doesn’t get proposed emergency cash, it will call in administrators. Canaccord (where were they?) running the book
START THE DAY WITH A SONG:
Last Thursday’s song was End Credits by Chase & Status. Today who sang:
Let me play among the stars,
Let me see what spring is like
On a, Jupiter and Mars
RETAIL NEWS WITH NICK BUBB:
• Saturday Press and News (1): The main focus in the Saturday papers was on the worst week for the FTSE 100 index since February (“Torrid week puts bull run in peril” was the front page headline in the FT), as well as the emergency rescue of the embattled cafe chain Patisserie Valerie (whose FD has been arrested by the police) by the ubiquitous Luke Johnson, who was the subject of a couple of interesting profiles (“Pundit with taste for deals finds himself in sticky mess” in the Times and “Head of pastry group that came within a whisker of failure” in the FT).
• Saturday Press and News (2): The news that Sports Direct is buying the freehold of Frasers in Glasgow for £95m got plenty of uncritical coverage in several papers, eg in the Telegraph, the Daily Mail and the Guardian, with headlines about the “Harrods of the North” and “800 jobs saved”, but the Times found other things to concentrate on, including a detailed exposé of how the Coast fashion chain went bust and was cosily bought in a pre-pack deal by its fellow Kaupthing owned company, Karen Millen (earning an angry rebuke in the Business editorial column for the way this enabled it to dump all its High Street shops). The news that the struggling Regis/Supercuts hairdressing chain has suddenly launched a CVA plan to get its rents down was featured in the Times and the Guardian. And the Times and the Telegraph both illustrated the news that the Hamleys toy chain fell into a £12m loss last
• Saturday Press and News (3): The Times also noted that the struggling American Golf chain has been bought out of administration by the restructuring firm Endless and on its News pages it flagged up the bad reviews that the John Lewis home furnishings business is getting on Trustpilot (“Middle classes are losing faith in John Lewis”). The “Share of the Week” in the Times’ Money section was Games Workshop (it recommended a “Hold”), whilst the “Hero of the Week” in the Daily Mail was Roger Whiteside of Greggs, for getting the company back “on a roll”. The Daily Mail also noted the elevation of interim FD Ray Kavanagh to be the CFO of Game Digital, whilst the market report in the Telegraph flagged an upgrade by Credit Suisse on ASOS on Friday.
• Sunday Press and News (1): The main focus in the Sunday papers was on the problems of the embattled cafe chain Patisserie Valerie and instead of the normal Sunday Times column for entrepreneurs by the beleaguered Chairman Luke Johnson there was an interview by Oliver Shah (“Nightmare at the cake counter”) with the man in the spotlight, in which he said he felt a “moral obligation” to put his own money into Friday’s emergency rescue plan. The Sunday Times also splashed the lurid news that Patisserie Valerie had run up debts of nearly £10m in secret bank accounts…The Sunday Times also flagged that the struggling restaurant chain Gourmet Burger Kitchen is set for another clash with landlords via a CVA plan.
• Sunday Press and News (2): In terms of mainstream Retail news, the main revelation was the Sunday Times story that B&M is looking for an acquisition to break into the French discount market. The Sunday Times also flagged that Inditex is trying to pull out of the Zara and Bershka stores that it opened in 2012 on Oxford Street in the Park House development opposite Selfridges. The Mail on Sunday highlighted the new 2 hour meal delivery store being trialled in parts of London by Waitrose and continued its new campaign for “Fair play on Tax” with an interview with the boss of Waterstones, James Daunt, in which he said the Government should go after the companies that “play the tax game” and agreed with Tesco boss Dave Lewis about the need for an Online tax to relieve the pressure on Business Rates. The Mail on Sunday also noted the recent £100,000 purchase of shares in Ocado by Luke
• Superdry: Given the increasing number of fashion retailers complaining about the warm autumn weather, we had been wondering how poor old Superdry had been getting on and, lo and behold, it has come out with a profit warning today…The warm September and first half of October is said to have hit sales of sweatshirts and jackets across the east coast of the US and in Europe, as well as in the UK, and Superdry say the impact on full year profits will be around £10m. It is not clear how it comes up with this figure and there are only sketchy details on sales trends, with the biggest surprise is not the “low-single digit” sales decline in Stores in the first half (to end October), but the Ecommerce growth of only “mid-single digits”. And there is a double-whammy, in the form of a mysterious warning that additional FX hedging will cost £8m. CEO Euan Sutherland still trumpets that “Superdry is
• News Flow This Week: Things are busy again this week (and there has been a reassuring update from Shoe Zone today). Tomorrow brings the interims from the beleaguered Footasylum, closely followed by the latest Kantar/Nielsen grocery sales figures (for the 4 weeks to Oct 6th/7th). The ASOS interims are on Wednesday. Then Thursday brings the ONS Retail Sales figures for September and the John Lewis Cheltenham store opening.