Langton Capital – 2020-01-23 – PREMIUM – JDW, Hot Choc, G4M, PPHE, Gfinity, kitchen tech etc.:
JDW, Hot Choc, G4M, PPHE, Gfinity, kitchen tech etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
It struck me the other day that, though I can remember the phone number we had when I was a child, I’m not sure of my own office number.
Admittedly we have moved offices fairly recently. We didn’t keep our number and I’m hoping this lack of knowledge is more a worry for the likes of BT than it is a comment on galloping senility because, at the end of the day, I have less incentive to remember it.
This is as a) it doesn’t get used much, b) even if it did, it would only rarely be me ringing in, c) if I did ring in, I would do it from my mobile and the office number is in its memory, d) I can easily recall that 07894 number if people want to ring me, so I can give them that one, e) people can use our email (or text or WhatsApp us) to get in touch, e) the office number is on our outgoing emails, on our website and is taped to the screen of my computer meaning that the tiny number of synapses that would be occupied in remembering the number might be best used elsewhere.
All of that said, I had better commit it to memory. I know there’s a 7 in there somewhere. On to the news:
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THE MEAT-FREE MEAL MARKET. Veganism and meat free alternatives are in the news. Is it a fashion, a trend or a permanent shift in the way we eat? 23 Jan 2020:
A growing market:
• It is clear there is a rising trend towards vegetarianism and veganism, the Vegan Society reports there are around 600,000 vegans in Great Britain, up from 150,000 in 2006.
• Events such as ‘Veganuary’ are catching the zeitgeist and being spread virally through social media.
• And for those who are not willing to go as far as veganism, a lot are willing to adopt a more ‘flexitarian’ approach, say with a few vegetarian or vegan meals a week.
• The consumer is focusing more on its health and its impact on the climate.
And there’s money in it:
• From Gregg’s success with its vegan sausage rolls through to the various meat-free breakfast offers, it’s clear that there’s money to be made in this space
• A report by Research on Global Markets claims the global meat substitutes market generated revenue of $4.2bn in 2018, and is expected to be worth $6.1bn by 2023.
A developing industry:
• As such, the plant-based meat industry has been attracting a lot of attention from investors recently.
• Perhaps the most notable example was Beyond Meat’s IPO in May last year.
• Beyond Meat, which counts Leonardo DiCaprio and Bill Gates among its investors, had an IPO price of $0.25 and today, 8 months later, sits at $1.29, giving it a market cap of $7.95bn.
• This success has stoked excitement in investors, and as such, a plethora of competitors have emerged.
• Impossible Foods, maker of the Impossible Burger, is aiming for a valuation of between $3-5bn in its latest raise of $300-400m.
• Smaller UK startups have also been active in the market, with THIS completing a £4.7m seed funding round earlier this month.
• Leeds-based The Meatless Farm Co is rolling its mince out in Sainsbury’s and Morrisons in the UK and Wholefoods in the US after raising around £10m from family offices and private investors.
• Additionally, established brands are making their own plant-based alternatives, such as Burger King’s Rebel Burger and the much talked about vegan sausage roll and steak bake at Greggs.
The potential of the market:
• The industry appears to be thronged with investors, with the big American companies leading the way.
• Obviously, people believe this will be a high growth area for years to come – but have we been here before with the biotech companies in the 90s, the Internet around the Millennium etc.?
• i.e. that this is basically a good idea but that the hype has got ahead of reality?
• Motor cars certainly ‘caught on’ 110yrs ago but most motor car companies around that time either lost money and went out of business or were absorbed, often at little profit, by the real winners
• And spotting the winners is always much easier with hindsight than it is at the time
• There may be something in the old adage that one should sell shovels rather than dig mines during a gold rush
• The operators that are incorporating meat-free meals into their menus may be onto a sustainable winner.
• Companies that focus 100% on the product (either as producers or as retailers) are playing a riskier game
This probably has legs:
• It’s hard for a Gen X or Baby Boomer to see the market through the eyes of a younger consumer
• But there is a demand for meat alternatives as more and more seek to alter their diets.
• The rise of events like ‘Veganuary’ seem here to stay, with social media fanning the popularity of such trends.
But there are major risks to be aware of:
• While meat-alternatives are steadily edging their way into the consumer’s diet, investors in the past have certainly had a tendency to bid themselves into a frenzy.
• Such markets can attract copycat operators that perhaps are just latching on to the latest high growth market.
• There is likely to be (indeed there already is) a lot of me-tooism in this market.
• Around the Millennium, sticking dot.com on your name was often deemed to be sufficient to participate in the Internet boom.
• It turned out that it wasn’t.
• And the delivery market may have attracted more money than could be good for it.
• We would simply question if there will be enough room in what is still a niche market for several large companies the size of Beyond Meat or larger to make money
• And 100% meat-free restaurants run the risk of alienating the meat-eater in any group of friends considering where to eat
• Watch out for the hype.
JD WETHERSPOON – Q2 CONFERENCE CALL:
Following its Q2 update this morning, JD Wetherspoon hosted a conference call for analysts and our comments thereon are set out below:
• Given the spend on reversions, shouldn’t the full year returns have been better?
o Says this will ‘build over time’. Says the short-term impact of new build pubs will hold back numbers in year one.
o The return targeted on freehold reversions is 5% plus. This is ‘getting more challenging’.
• Post IFRS16 guidance? Estimate debt at £1.35bn – this number hasn’t changed much as freehold reversions involve moving the liability from leases to debt.
• Impact of the hike in National Living Wage? They had been working on around 5%. The 6.2% is higher than expected. They pay above this already (to over-25s). They already pay younger staff in line with the o25s, so they have a little slack.
o Estimate impact ‘a little higher’ than earlier estimates.
o They will get some back through the till as customers also see their wages increase. Low single digit millions in the current year – more in the year after.
• Price cuts on European products. This has got some press. Calling it ‘let’s remain friends.’ Not a major promotion.
• Any general pick up in consumer confidence? Group not seen any evidence to date. Seen ‘broadly steady trading’ for the quarter.
Balance sheet & debt:
• Is the £80m of capex a total, including maintenance. No, this is new-builds (10-15) and extensions. The pubs should cost £2m to £3m. The rest will be extensions.
• Freehold reversions. Expect £85m in total – but this is not a target as such.
• Phasing of the £200m expansion plan? Say £80m this year. Then £30m to £40m in each of the next 3-4yrs.
• Sales of pubs vs book values? Not expecting much in the way of capital losses this year. The group is now most of the way through its disposal programme.
• New openings. Now mostly in smaller towns. Tends now to only be in towns where they are currently under-represented
• JD Wetherspoon has said that trading is in line with expectations, the quarter (and the H1) has been ‘broadly steady’ and that, though no sharp pick up has been detected in trading, it continues to take market share.
• There is no mention of margins today and, as a historically low-price, low-margin company, JDW is exposed to the 6.2% hike in the NLW due on April Fool’s Day.
• Here JDW has a little slack as it 1) pays its staff above the legal minimums and 2) pays its 18yr old staff in line with its o25s.
• It could cut differentials, but these will only compress so far. It may consider price rises, may try to pass the problem back to its suppliers or it may accept still lower margins. This will be a part-year effect in FY20 and, as it has guided to no-change to forecasts, the market has not factored in a change to the bottom line.
• JDW remains a great company that knows its market well. It’s new units are performing strongly and its top line is growing. Net returns to shareholders, however, have been a while in coming through and the EPS is now below where it was several years ago.
• The company has been ‘digging moats’ to keep its competitors out in terms of price and, over time, this should be a good thing.
• The group’s shares are not currently cheap. They are unchanged on today’s announcement but they could give ground if the market comes to the conclusion that either 1) the NLW increase will compress margins further or 2) JDW may have to ‘test price’ against its customers to see how much, if any, of its cost increases it can pass on to customers.
PUBS & RESTAURANTS:
• Hotel Chocolat – a degree of caution.
• Hotel Chocolat has updated on trading for its Q2 and H1 to 29 December saying that ‘total Group revenue for the 13-week period increased 11% compared to the prior year.’ For H1, total revenue was up 14%. The group opened nine new locations in the UK in H1.
• Hotel Chocolat says ‘trading for the 13-week period and since December continues to be in line with management’s expectations, though the cost to deliver this growth was modestly higher due to inefficiencies in the supply chain which are being addressed in 2020.’ CEO Angus Thirlwell says ‘this was another strong performance from Hotel Chocolat.’
• The Food Service Equipment Journal has reported that Synergy Grill Technology has appointed a production manager, Ady Gilbert to oversee the dramatic increase in the volume of grills demanded by restaurant operators. Justin Cadbury, chairman and CEO of Synergy Grill Technology, said: ‘We’re delighted to be welcoming Ady to the Synergy Grill Technology team in this exciting stage of the company’s life. With a natural flair for leadership and a thorough understanding of the production process for our equipment, he made for a natural choice for this new management position.’
• Synergy Grill used to shift 10 grills a week. It is now selling 10 per day as operators shift to lower-labour and more energy efficient kitchen solutions.
• McDonald’s has downplayed reports that the chain uses MSG in its new chicken sandwiches.
• Tom’s Kitchen, the restaurant group founded by chef Tom Aikens, has ceased trading following the closure of its single remaining UK location in London this month.
• The hospitality contractor Sanderson has ceased trading, with MD Ian Sanderson commenting: ‘The board of directors is devastated to be ceasing to trade after 20 years in business. In that time, we have developed long standing relationships with our customers and suppliers’.
• The Meal kit company Gousto has announced a partnership with plant-based food producer, The Meatless Farm Co to deliver meat-free meals in the UK.
• A resident of Brooklyn has registered a pint of beer as an emotional support animal with the USA Service Dog Registration in order to be able to drink on public transport.
• Starbucks has announced plans to reduce its carbon emissions, water use and waste by 2030. CEO Kevin Johnson commented: ‘This is an aspiration that we take on, recognizing it will come with challenges and will require transformational change. Like most things that are worthwhile, this will not be easy. It will require all of us to play a role, and so we invite you to join us’.
HOLIDAYS & LEISURE TRAVEL:
• Fosun is planning to apply to the CAA for an Atol licence as it prepares to relaunch Thomas Cook as an online travel agent. Travel Weekly believes 15 people are employed in the new venture, including former Cook group strategy and technology director Alan French as chief executive.
• PPHE has updated on full year trading saying that it has seen 6.3% LfL room revenue growth and it says it is ‘on-course to meet expectations.’ It says ‘the Group expects to deliver full year results in-line with Board expectations following a solid performance through the final quarter.’ CEO Boris Ivesha says ‘we are on-course to continue our track record of delivering growth and results in-line with expectations.’
• The UK will monitor flights arriving from Wuhan in China to Heathrow as part of a series of precautionary measures to manage any potential outbreak of the new Wuhan coronavirus. Aircraft will land in an isolated area of Heathrow Terminal 4 and a health team will be on standby to check for symptoms.
• The CDC confirmed the first US case of the new Wuhan coronavirus on Tuesday. CDC officials said the US will be more strict about health screenings of airplane passengers arriving from Wuhan.
• Helen Whately, the tourism minister, has sad the sector is entering ‘a much more certain time’ promising the launch of ‘a major European [marketing] campaign’ in April.
• More than 2,000 members of the Unite union working at Gatwick have rejected a pay offer, bringing the threat of a spring strike.
• North Star have put forward revised plans for a new 65-room hotel in York, after being amended to complement its historic surroundings.
• The Institute of Customer Service has found that the average service levels in the tourism sector have fallen 0.8% to 78.4%.
• Research from ForwardKeys has shown that tourism to the Caribbean has increased 4.4% in 2019, in line with worldwide growth.
• Gear4music has updated on trading for the 2mths to end-December saying that UK sales were up by 15.9% with total sales up by 7%. It says that the gross margin is higher at 26.5%. CEO Andrew Wass comments ‘I am very pleased to report a successful FY20 peak trading period, that reflects the commercial and operational progress we have made across the business during the last calendar year.’
• G4M says ‘we are pleased to report that as a result of our focused strategic and operational initiatives, profits for the current financial year are expected to be at least in line with the Board’s expectations. We remain confident in the medium to long term growth opportunity, whilst continuing our focus on improving gross margins and sustainable profitability.’
• Gfinity has updated on H1 trading to end-December saying that ‘trading through the first half of the financial year has continued broadly in line with management’s expectations.’ It says H1 revenues will be around £3.5 million ‘which is lower than the same period last year (H1 2019: £4.4m) primarily due to the transition away from low margin Elite Series revenues.’
• Gfinity says it should report a reduced H1 operating loss of around £2.4m. It says for the full year ‘the Board now expects revenue for the year to 30 June 2020 to be broadly in line with the 2019 financial year, but with significantly improved margins compared with current market expectations.’ Gaming remains a large market – but just who is going to make money out of it remains to be seen.
• YouGov’s BrandIndex Buzz Rankings has named Netflix as number one, knocking Aldi off its top spot for the first time since 2014.
• Tesla shares have reached a market cap of over $100bn for the first time, as the shares have increased 125% in the past three months.
FINANCE & ECONOMICS:
• Lloyds Banking Group has become the latest bank to say that it will charge customers overdraft rates of up to 49.9% from April. It says most will pay a rate of 39.9% to go into the red. The FCA has said that most customers will be better (or at least less badly) off.
• The ONS has reported that the government borrowed £4.8bn in December, around £0.2bn less than in the same month in the prior year. To date borrowing is £54.6bn, some £4.0bn more than in the prior tax year to date.
• Jaguar Land Rover is to cut 500 jobs at its Halewood factory on Merseyside.
• Sterling higher at $1.3121 and €1.1836. Oil lower at $62.16. UK 10yr gilt yield up 1bp at 0.64%. World markets broadly lower.
• Brexit & politics:
o US tells UK to back off re a digital tax. US also tells UK not to use Huawei in its 5G network.
o Sajid Javid has said an EU trade deal is a greater priority than is one with the US.
START THE DAY WITH A SONG:
Monday’s song was You Can’t Hurry Love by the Supremes, today who sang:
There isn’t much (isn’t much),
That I feel I need (that I feel I need)
A solid soul (a solid soul)
And the blood I bleed
RETAIL WITH NICK BUBB:
• ASOS: The City was expecting a minimum of 15% sales growth from today’s trading update from ASOS, so the bulls will be very encouraged to see the +20% figure, but the bears will note the gross margin pressure and the failure to upgrade full year profit guidance
• Hotel Chocolat: The 11% sales growth is much as expected but the mention of slight operating inefficiencies may dampen enthusiasm, given the strength of the share price at year-end (notwithstanding the Director share placing at 420p in early November)