Thomas Cook, City Pub Group, provenance etc.:

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A DAY IN THE LIFE:

The feeling that we were in the relatively peaceful eye of the Brexit storm over the last few weeks seems fitting.

Certainly, there were major upsets before we all calmed down over Easter and there could be more upset to come as we re-enter the maelstrom.

Because certainty there is not.

We don’t know if we’ll be inside or outside the EU by the end of this year. We don’t know what kind of Brexit, if there is one, there will be. We don’t know who the PM will be and we don’t know which party will be in power.

All of which allows business and consumer imaginations to run wild with a swashbuckling, free-trading but somewhat pariah Britain at one end of the spectrum, and Project Brexitgrad at the other.

Ho hum. On to the news:

THOMAS COOK. SUMMARY IN ‘HOLIDAYS & LEISURE TRAVEL BELOW: TCG’s shares fell 40% on Friday as they were deemed ‘worthless’ by a major broker. 20 May 2019:

Executive summary:

• When companies’ share prices fall, equity becomes a smaller part of EV and its value can ping up and down by large percentage amounts. This is the case with TCG. It could be worth 10x this figure. Or its shares could be worth nothing. Given the lack of certainty re trading (and airline sales, debt management etc.) some would-be investors may consider it to be, unfortunately, uninvestible.

The recent past:

• Thomas Cook’s shares had a torrid time of it on Friday. It’s shares were down 40% at 11.8p as a major broker suggested that they were ‘worthless’.

• The broker opined that the group’s debt and the value of its airline were about the same, suggesting that there was no value left over for shareholders.

• With Brexit delaying bookings, there are material uncertainties.

Structural problems:

• TCG operates a high fixed cost but low margin business. Such a model is particularly sensitive to shortfalls in revenue or to margin declines & the company says that discounting has increased.

• Seasonality means that cash will peak in September and then flow out of the company through the winter

Self-help:

• The group is looking to sell its airline & is in talks to secure funding for next winter, when cash seasonally flows out of the business. TCG is currently also cutting costs and jobs having announced 150 redundancies at its Peterborough head office and closed 21 shops at the cost of another 300 jobs

• Though TCG is an ATOL-protected business, adverse headlines could impact booking levels negatively. They certainly won’t help

Where we are now:

• The FT reports that hedge funds have been buying TCG’s debt at a discount. This is 1) unsurprising but 2) does suggest that, if a debt for equity swap or some such became necessary, equity would have a tough fight on its hands.

• Major shareholder Fosun, which owns c20% of TCG’s shares, has been touted as a potential source of funds

• The group’s 2020 bonds were trading at around 50p in the pound on Friday, down from 65p a week earlier

• Sky reports that ‘payment firms are seeking to hold on to millions of pounds of customers’ money owed to Thomas Cook Group in a move which underlines the financial pressures afflicting the 178-year-old tour operator.’

• Sky says ‘a number of other card acquirers are understood to have retained Deloitte, the accountancy firm, to advise them on their exposure to the business, which runs to hundreds of millions of pounds.’

• The FT reports that the group was in talks with ‘a range of suppliers [over the weekend] to reassure them it had “ample resources” to see it through the summer holiday season.’

• A bigger problem will be next winter. The UK Civil Aviation Authority told the FT ‘we can’t comment on the financial situation of any companies under the ATOL scheme.’

Langton comment:

• It’s hard to deem TCG’s shares investible

• This is 1) a great shame and 2) it’s not to say that they won’t be 10x this level in due course

• But the path to glory is unclear and, at given the current level of uncertainty, it might be best to observe rather than invest

HEALTH, DRINKING & PROVENANCER: Gregg’s is making a success of its vegan sausage rolls & vegetarian offers, meat-free burgers etc are in the news. Health & provenance are more important than ever. 20 May 2019:

Executive summary:

• Provenance, premiumisation, health consciousness etc have been moving up the agenda for some time. Companies have at least paid lip service to such trends for some time but, now, it appears as though such considerations have really become rather important.

How did we get here?

• c80% of adult males smoked in the 1940s. Now it’s <20%

• despite some comments seeking to highlight what is still seen as a problem, drinking per capita peaked around 2004

• Projecting this forward, some operators are pushing healthy, vegan options etc.

• This is no longer considered a bridge too far. It’s time may have come

• Gregg’s & others are making hay. Meat free burgers are in vogue etc.

Problems in practise:

• Social trends are often complicated. E.g. Boozed up Britain headlines are misleading, but obesity is at record levels and everybody’s sitting down too much

• Operators need to know their customers & accept they may be hypocritical

• They want value, quality, and provenance, but will only pay so much for it

• What’s more, demands change as customers start a family, buy a house etc.

• Ultimately picky consumers succumb to parenthood, they lack the energy to eschew McDonald’s, white bread, processed food etc. when they’re getting no sleep

So, what should operators do?

• Establish that a market currently exists for the product. Don’t push water uphill. Don’t rely on ‘educating’ would-be customers

• Establish that your market has a future. But don’t try to hold back the tide

• Take a view as to the size of the opportunity. Vegan tapas is a thin market in Barnsley. Pizza will work

• Then stick to your knitting & do what you do well. Don’t skimp on quality. Accept low margins if necessary. Offer permanent good value

GENERAL NEWS – PUBS & RESTAURANTS: 

• The City Pub Group has updated on trading ahead of its AGM saying that ‘year on year performance continues to be strong.’

• CPC chairman Clive Watson comments ‘we have enjoyed continued strong momentum since the start of the year. Whilst still early in the year, the Board believes the Group is well-placed to meet its expectations for the year as a whole.’

• CPC says ‘we have a range of excellent and high-quality new sites that we have acquired to come on stream.  We are continuing to seek further pubs in Southern England and Wales to build the estate and achieve our target of 65-70 sites by mid-2021.  We enjoy a strong balance sheet which enables quick and decisive decision making to purchase development sites or existing trading sites that can be improved in a softening market for acquisitions’.

• Deputy leader of the Labour Party, Tom Watson, will ask the CMA to investigate Amazon’s investment in Deliveroo. Watson said ‘Deliveroo’s CEO Will Shu welcomes a land grab by Amazon because ‘it is such a customer-obsessed organisation… He’s right, Amazon is obsessed. Obsessed with tracking tools, micro-targeted ads, extracting billions through monetising our personal data.’

• Fever-Tree will launch a range of pre-mixed gin and tonics to be sold at £2.75 each.

• UKHospitality has criticised the Southwark Council’s proposal to introduce a late night levy. Chief Executive Kate Nicholls said: ‘“It is incredibly disappointing to see another local authority entertain the idea of a late-night levy. The levy has been thoroughly dismissed as a credible option by the House of Lords Committee. It has been denounced by the House of Lords report and labelled unfit for purpose’.

• The UK’s independent food safety watchdog, The Food Standards Agency has recommended new labelling rules that would see the product’s allergens highlighted in bold. 

• A survey conducted by the Global Drug Survey has found that the UK drinks the most alcohol from a group of 36 nations studied.

• Big Food has reported that the trend for eating less meat is having an impact with global restaurant group’s, with McDonald’s teaming up with Nestle and Burger King with a ‘foodtech’ startup in order to offer meat-free burgers.

• Luckin Coffee shares closed 20% above its issue price on its first day of trading on the US market. The IPO raised $561m for the company, valuing it at $4bn.

• PepsiCo trials reusable packaging for Tropicana Orange and Quaker Cruesli in Paris. 

HOLIDAYS & LEISURE TRAVEL:

• Thomas Cook’s shares had a torrid time of it on Friday. It’s shares were down 40% at 11.8p as a major broker suggested that they were ‘worthless’.

• The broker opined that the group’s debt and the value of its airline were about the same, suggesting that there was no value left over for shareholders.

• With Brexit delaying bookings, there are material uncertainties. See more & Langton opinion in Premium Email.

• The Home Office is expanding an initial plan to abandon landing cards for international visitors, a move welcomed by UKinbound. Passengers will be able to use e-passport gates at UK airports and Eurostar terminals from Monday.

• Air Canada is set to acquire Air Transat for around $520m, or $13 per share.

• A ‘power issue’ at Manchester Airport caused 87 flights to be cancelled on Sunday, and delayed others by hours. A Manchester Airport spokesperson said  ‘most scheduled flights’ would operate as planned on Monday.

• Which? reports UK rail passengers lost an estimated 3.9m hours to delays in 2018. About 80 trains a day were late by 30 minutes or more, with 660 trains a day cancelled.

OTHER LEISURE:

• Google blocks Huawei from using its apps such as Gmail and YouTube on its range of smartphones, dealing a huge blow to the Chinese tech giant.  

FINANCE & ECONOMICS:

• President Trump has delayed a decision on whether to impose further tariffs on goods imported from the EU and Japan

• Sterling fell to a 4mth low after the collapse of talks between the Tories & Labour over Brexit

• Sterling down at $1.2732 and €1.1416. Oil up at $73.18. UK 10yr gilt yield down 3bps at 1.04%. World markets down Friday, Far East mixed Monday

• Japan’s economy grew by an annualised 2.1% in Q1.

• Brexit, politics etc.:

o Labour says it will not support Mrs May’s ‘fourth time lucky’ withdrawal bill in early June.

o Sir Keir Starmer has said that any withdrawal bill needs to include a public vote. He says this would ‘break the impasse’

o CBI boss Carolyn Fairbairn says that political debacle that is Brexit is a ‘crushing disaster’ for business in Britain. She says to the UK’s politicians ‘do whatever it takes and do it fast’.

o The Bank of England has suggested that some EU officials are presenting information to banks intended to persuade them to leave the UK

o Telegraph says Brexit is in ‘disarray’ partly due to the breakdown in Tory/Labour talks.

START THE DAY WITH A SONG:

Last Friday’s song was You Get What We Give by New Radicals. Today, who sang:

What if I say I will never surrender?

What if I say I’m not like the others?

What if I say I’m not just another one of your plays?

RETAIL NEWS WITH NICK BUBB:

• Saturday Press and News (1): The news that Amazon has bought a stake in the Deliveroo food delivery business was the big story in the Saturday papers (apart from the renewed weakness in sterling, on the latest setback to the Brexit talks). The Guardian highlighted that Amazon’s backing is unlikely to do much to improve the low pay for Deliveroo’s couriers, whilst the City Editor of the Daily Mail noted that Amazon has “opened a new front” in its battle with the supermarkets and Lex column in the FT flagged up the growth of “dark kitchens” to cater for the demand from millennials for ordering eat-in meals, thundering that “cooking might go the way of sewing over time”.

• Saturday Press and News (2): The other big focus was on the estimable Julian Richer, on the back of his decision to give away control of his Richer Sounds business to an employee trust: that made him the Daily Mail’s “Hero of the Week” and also merited a big feature in the Times on the “Ethical capitalist who gave staff richer pickings”, although the “Top Line” comment column in the FT noted that the Richer Sounds business is “stagnating” and thundered “be suspicious of entrepreneurs who redefine success”. 

• Saturday Press and News (3): In other news, the Guardian had a feature on the Darlington factory that makes the Quorn mycoprotein that goes into Greggs’ much-vaunted vegan sausage rolls, whilst the Daily Mail highlighted the growth of the Greggs share price, noting that “it takes a strong stomach to bet against Greggs’ continued success”. The Telegraph flagged that “a mysterious Asian buyer” has agreed to buy the freehold of the Sports Direct HQ and warehouse in Shirebrook and the Daily Mail also picked up on the news. And the Times and the Daily Mail both noted that the CMA is to investigate the JD Sports/Footasylum merger and has demanded that the two businesses be kept separate in the interim. The Times also had snippets about the news that the property company Capital & Regional has highlighted the impact of the rent cuts at Debenhams and that Ocado is having to lay off the 400
workers at its Andover warehouse (after it was destroyed by fire).

• Sunday Press and News (1):  The big focus in the Sunday papers was on Marks & Spencer ahead of the finals next week, with the City being softened up for another disappointing performance, with embattled CEO Steve Rowe using a feature interview with the Sunday Telegraph to insist that “major shareholders know this is a five-year programme” and that the M&S business is more focused on “the pace of change”. The Sunday Times noted that M&S is accelerating its store closure programme as profits dive, but the Observer’s results preview, however, highlighted that “M&S hopes going Online with Ocado will turn its food problems into trifles” and the Mail on Sunday flagged that M&S will boast next week of being “Britain’s fastest changing retailer”.

• Sunday Press and News (2):  The main Business story in the Sunday Times was that the CVA documents published last week by the beleaguered Philip Green reveal that LFL sales in his embattled Arcadia fashion empire fell by 7.5% in y/e August and that the rapid deterioration in Arcadia’s finances is being driven by Top Shop. The Sunday Times also had a feature interview with the outspoken boss of Lush Cosmetics, Mark Constantine, in which he attacked Amazon and Jeff Bezos because of their impact on the High Street. The Mail on Sunday had a feature interview with Philippe Chainieux, the bullish boss of the fast-growing Online furniture business Made.com (“Look out Ikea, we’re taking your place on the sofa!”).

• News Flow This Week:  Another busy week kicks off today at 10am with the Ocado EGM to approve the lucrative M&S deal. Tomorrow then brings the WH Smith trading update, the Halfords finals, the Topps Tiles interims and the Shoe Zone interims, as well as the Greggs AGM. On Wednesday we get the much-awaited Marks & Spencer finals, the Pets at Home finals, the French Connection AGM and the publication of the Watches of Switzerland IPO prospectus. Then Thursday brings the B&M finals, the Mothercare finals, the Inchcape Q1/AGM, theHotel Chocolat Capital Markets Day, the ONS Retail Sales figures for April and…the EU Elections.TRADING STATEMENTS & EVENTS: