Langton Capital – 2020-04-08 – PREMIUM – Everyman, AG Barr, Nichols, On the Beach, PPHE, ‘normality’ etc.:
Everyman, AG Barr, Nichols, On the Beach, PPHE, ‘normality’ etc.:
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THE SHAPE OF THE BOUNCEBACK: This is the $64,000 question. Will the bounce be as sharp as the fall? 8 April 2020.
• Recoveries are rarely triggered by an ‘event’ whilst downturns often are.
• 9/11 was caused by 9/11, the dotcom crash was a number of events and, in 2008, there was a dawning realisation that something was wrong.
• This time around, there has been an obvious trigger that has caused a downturn
• Recoveries tend to be slower. A vaccine, in this case, would be an ‘event’ but that may be some time off.
• And it is not certain (to be fair it never is) that consumer behaviour will revert to that seen prior to the Covid-19 crisis
The two opposing views:
• The optimistic view is that the vast majority of people survive, their jobs have been held for them, the have been getting by on 80% of their normal wages and they may even have saved some money by not spending on non-essentials
• Under this scenario, there may be a pent-up demand to spend. And, if the lockdown comes off soon enough, there will be much of the summer left, pubs & restaurants will be busy and even fashion retailers will have some opportunity to shift time-sensitive stock
• The opposing view would hold that this has been a shock to the system, both financially and psychologically
• We write today that tips will not be included in the 80% of salary covered and many employees will have been laid off without being furloughed
• And commuters that have been paying £20 a week for coffees may decide that they don’t need them. Habitual gamblers may have had the chance to kick the habit. People may feel they need to save more, they may have had to face their own mortality etc
• There are two issues at play here. One is the desire (or lack of it) to spend and the other is the financial ability to do so.
• At the moment there is an added problem in that the shops are shut and we may have the money and inclination to spend but, even if we desire a holiday on a beach somewhere more than anything else in the world, we can’t have one
There is no benchmark:
• And there is no playbook for us to go by
• If someone had the stats, they could see what happened to consumer spending after the War but there are dozens of problems with using that as a model.
• And it is impossible to come up with a sensible answer without acknowledging that one’s own attitude will influence one’s conclusion.
• If you have a bursting desire to spend, then you may assume that so does everyone else. If you feel you’ve saved money and you may never spend again, similarly, you may unconsciously believe that that is a widely held view
• This is like a map with a scale of 1:1. It is so real that we can’t see ahead of it (either at all or very easily)
• Forecasters will be making wild and often opposing forecasts, somebody will plonk for the ‘right’ answer and, with the benefit of hindsight, we’ll have tunnel vision looking backwards and think everyone should have had the answer.
• But it’s not so easy looking forward, is it.
• We have put a number of our thoughts, which would usually be in the Premium Email, in the general email today in order to sponsor feedback
PUBS & RESTAURANTS:
Job Retention Scheme:
• The government has confirmed that hospitality staff will not be entitled to include any tip payments in the salary that they can submit for support.
• This can make up a material proportion of some hospitality workers’ incomes but it will not be classed as ‘regular’ for furlough purposes.
• The subsidy will be only for contractually committed payments. Discretionary bonuses and tips will be excluded. UK Hospitality has asked the government to reconsider this exclusion. CEO Kate Nicholls says ‘it is incredibly disappointing that the Government has seen fit to exclude tronc payments from people’s earnings.’
• UKH continues ‘HMRC will have evidence that employees are paid tips through a tronc, so there seems no reason not to include it in the Job Retention Scheme. This is taxable income that team members have earned. Excluding it from the scheme means that furloughed employees will receive less money to see them through this crisis. Money they should be entitled to.’
• Excluding tips will make staff retention that bit harder to secure. Laid off staff may only be getting 80% of a half of their earnings. Their employers may choose to make up this shortfall – but this would incur a substantial cost.
• To the extent that earnings from tips would take an employees’ wages past £30,000, the point may be moot.
• UKH says ‘hospitality businesses are doing their best to support employees during extraordinarily difficult times. But with zero revenue and persistent demands on cash from landlords and others, there is only so much they can do. Including tronc payments in the Job Retention Scheme would give more people some much-needed support, and we hope the Government reconsiders.’
Other government aid, changes to legislation etc:
• The BBPA has called upon the UK Government to defer payment of the Beer Duty due on 25th April relating to beer produced in March.
• The BBPA says ‘with pubs now closed, 70% of the UK beer market is now cut-off to brewers and increased sales to supermarkets is not compensating for this loss.’
• BBPA CEO Emma McClarkin says ‘the UK Government has rightly announced various measures to help our sector, which we warmly welcome. However, with pubs being forced to close overnight, 70% of the UK’s beer market by value has been shut off – devastating breweries across the UK. Sales of beer in off licenses and supermarkets simply cannot make that gap up.’
• The Forum of Private Business has suggested that reducing beer duty could be used as an incentive to pubcos to induce them to cancel rents for their tenants. Some pubcos suggest that tenants, who should be entitled to helicopter money of either £10k or £25k alongside 80% of their regular income via the furlough scheme if they are self-employed, should be in a position to pay their rents.
• Solicitor Philip Ross has pointed out that ‘government changes to insolvency rules will allow UK companies who are going through a rescue or restructure process to continue trading, during the coronavirus pandemic.’
• Some operators may be digging themselves a bigger hole but others will welcome the flexibility provided by this suspension. They would otherwise have been risking legal action against them personally if they had attempted to keep their businesses going.
• To be covered by the eased legislation, the company in question should be able to demonstrate that there is a reasonable, probably better than 50% chance, of a financial rescue.
Potential changes to consumer behaviour (see also Premium Email):
• What will the ‘new normal’ look like?
• Some consumers my be suffering from cabin fever & wish to spend money freely post the lockdown.
• Of course, they will need the ability (as well as the desire) to do so.
• This ability will be dictated by the consumer’s personal circumstances and by just how adversely they have been financially impacted by the economic shutdown.
• Some other consumers may have adapted to the shut in. KAM Media says these people could ‘have become more connected to their homes: the home cooking, the family time, the slower pace. Many will be more cautious of time spent in the big wide world.’
• AG Barr has reported full year numbers to 25 January. They are, of course, extremely historic. Revenue fell by 8.4% to £255.7m. PBT (and before exceptional items) was down 17.3% at £37.4m. The company says ‘the circumstances resulting from COVID-19 are creating an unprecedented level of uncertainty for the UK and beyond. We have been following Government guidance since the outset of the COVID-19 outbreak and will continue to do so.’
• AG Barr says ‘following the Government’s ‘lock-down’ measures, introduced on 23 March, which initially saw the closure of pubs, bars and other hospitality venues across the UK, we are now understandably also seeing a significant impact on the “out of home” consumption of soft drinks in general.’ AG Barr reminds readers that it ‘has a strong financial base and our balance sheet is robust, with net cash in the bank of £10.9m at the financial year end, however given the highly unusual circumstances arising from COVID-19, we believe it is important to conserve cash at this time and maintain maximum balance sheet flexibility.’
• AG Barr’s board is ‘not proposing a final dividend at this time.’
• Nichols has updated on trading saying that its AGM will go ahead on 29 April but that shareholders are strongly encouraged to use their proxies rather than to turn up in person.
• London late night czar Amy Lamé has called on London councils to grant hospitality businesses a licence fee and late-night levy holiday.
• The International Labour Organisation reports that 81% of workers globally have seen their jobs impacted in one way or another by the coronavirus outbreak. Around 6.7% of working hours globally are expected to be lost this month. Retail is described as a ‘high risk sector’.
• Springboard has reported an uplift in visits to shops last weekend. Having fallen by 81% last weekend, shop visits apparently rose by 9.5% on that depressed figure this Saturday. Not surprising, really, as most people will have run out of milk, bread etc. at around the same time. Arithmetically, this would just trim the 81% drop to a fall of 79%. Springboard says ‘the increase on Sunday was particularly noticeable in London (+51.4%), in other large cities (+32%) and in coastal towns across the UK (29.6%) which are key locations for leisure trips but less significant for essential shopping.’
• Champagne sales are reported to have seen a ‘huge decrease’ per the Comité Champagne.
• A plan to convert a Wetherspoon pub in Wolverhampton into a museum for the company has been approved by planners
• McColl’s is to feature for grocery deliveries on the Deliveroo app.
• Some sharp upward movements in share prices yesterday. Cineworld up 49%, Carnival up 22% and Fulham Shore up 16%. Restaurant Group +15%, William Hill +13%, Mitchells & Butlers up 11%, TUI 10% higher & DART Group up 9%.
• ASOS has raised up to £240m in fresh equity as it looks to increase liquidity. SSP, Ten Entertainment, WH Smith, Carnival and others have also raised cash. Many, if not most, leisure (and retail) companies have said that they will not pay dividends or buy back shares in the current environment.
• Denny’s Corporation has said that same-store sales were down 19% in March. The company says ‘while the situation is evolving, the overwhelming majority of restaurants in the Denny’s system continue operating with take out or delivery only options, some with reduced menus and hours.’
• Indian food delivery start-up Swiggy has raised a further $43m. The company is now valued at around $3.6bn.
• BJ’s in the US has temporarily laid off 16,000 hourly restaurant workers but has kept all of its 209 restaurants with take-out and delivery options open.
HOLIDAYS & LEISURE TRAVEL:
• On the Beach has updated re its banking facilities saying that it has an ‘asset-light’ business model and adds ‘if demand falls away completely then the fixed cost base will drop to c.3% of aspirational sales (or one twentieth of the costs of a similar sized asset heavy operator).’ The company has been cutting costs and ‘is suspending full year guidance until such time that the overall impact of COVID-19 on the Group becomes clearer. The Board also announces that it will not be declaring an interim dividend in the current financial year to 30 September 2020. The Group’s CEO is forgoing his salary and the remainder of the Board have voluntarily agreed to a 20% reduction in salary and fees. This is alongside no bonuses being awarded across the Group in the current financial year.’
• OTB says ‘in 2019 the Group renewed its existing Revolving Credit Facility to provide up to £50m to manage seasonal working capital requirements. The Group has recently reached agreement with its Bank to: extend the £50m RCF to all months of each year; extend the term to December 2023; and reset covenant tests for all periods up to and including June 2021.’
• OTB CEO Simon Cooper says ‘the travel industry is prone to shocks: global recessions, natural disasters, terrorist attacks, and major airline failures to name a few. A closure of airspace was deemed inconceivable during contingency planning for a no-deal Brexit, but we now find ourselves in a position where airspace may be closed for a number of months due to the spread of COVID-19, and the travel industry needs to brace itself for a potentially prolonged period of significantly reduced, or even zero revenue.’ He says ‘whilst the coming months will continue to present a huge challenge, I look forward to the multitude of opportunities which lie ahead.’
• PPHE has updated on funding saying that it ‘has entered into a syndicated facility agreement arranged by Bank Hapoalim B.M. for a facility of up to £180 to fund the development of art’otel london Hoxton.’
• IATA has confirmed that members can substitute vouchers for cash when refunding holidays.
• Jet2.com and Jet2holdiays intend to recommence flights and holidays by June 17. This could slip. The decision is being kept “under constant review.”
• HVS points out that Spain benefits from 80m overseas visits per annum. This season, if there is on, could be off to a late start.
• Airbnb has taken off properties that were being listed by owners as “Covid-19 retreats.”
• IAT says 25 million jobs in the travel industry could be lost this year.
• Over 250 environmental organisations from 25 countries have published an open letter asking governments not to support airlines during the current crisis.
• Over half of the 217 people on board the Aurora Expeditions vessel Greg Mortimore, which is off the coast of Uruguay, have tested positive for Covid-19. It was only two or three weeks ago that the global cruise line body CLIA said that any regulatory moves to discourage cruising is ‘unwarranted.’ Perhaps they have a vested interest. VP Pence says old people should use ‘common sense and caution’ when deciding whether to take a cruise or not.
• Lufthansa is closing its Germanwings budget airline as part of a move to cut capacity.
• William Hill has released a ‘Supplemental Letter’ from the Chairman of the Board to shareholders saying that shareholders should use proxies where possible.
• Everyman Media Group has announced it is to place shares at 100p up to an aggregate value of £17.5 million via an accelerated book build. The company says ‘the Placing proceeds will be used to further strengthen the Group’s balance sheet and protect its sites against an extended closure period should the impact from COVID-19 continue into the Summer months, in addition to ensuring prudent levels of debt and allowing the Group to re-engage with its expansion and investment programme in due course.’
• The Everyman Placing represents a discount of 7.0 per cent. to the previous day closing share price of 107.5 pence per share on 7 April 2020.
FINANCE & ECONOMICS:
• The Halifax says house prices in March were level with February. This translates to a 3.0% year-on-year rise.
• The FT suggests that the UK is headed for a deeper recession than that seen in 2009. It says ‘business surveys have shown activity crashing faster in March than during the financial crisis. This is to perhaps be expected given the nature of the shock this time around rather than the creeping realisation in 2008 that all was not right.
• Sterling up vs dollar at $1.2317 but down vs Euro at €1.1332. Oil lower at $32.91. UK 10yr gilt yield up 7bps at 0.41%.
o Boris Johnson is stable after a second night in intensive care.
o The New York Times Post reports that US President Donald Trump has shares in a company that produces hydroxychloroquine, the anti-malaria drug he has said could be an effective coronavirus treatment. Experts say there is no evidence that the drug works.
START THE DAY WITH A SONG:
Yesterday’s song was Yellow Submarine. Today, if only we could get out of the house we could…
We cut the legs off of our pants,
Throw our shoes into the ocean
RETAIL WITH NICK BUBB:
Tesco: The Tesco final results statement begins today with a COVID-19 trading update and although there are no figures on recent sales growth…the first statement that stands out is that “Whilst we have already stepped up our capacity on Grocery Home Shopping by more than 20%, and will continue to increase this, there is simply not enough capacity to supply the whole market. Between 85% and 90% of all food bought will require a visit to a store”. And Tesco has firmly knocked on the head the idea that it has been coining it of late, by flagging that it has had to massively its UK operating costs and will suffer a loss-making year for the Tesco Bank (which made £193m in profit last year): “the estimated impact on our retail cost lines is between c£650m and c£925m including significant cost increases in payroll, distribution and store expenses. At this stage it would not be prudent to
ASOS: After an astonishing surge of over 40% in the ASOS share price yesterday afternoon, ahead of today’s interims, the company rushed out a statement just before 4pm to flag that, although the results would be strong and that it could weather the storm, it was considering an equity issue to prop up its balance sheet. And then just before 6pm, it released the full results (with sales up 21% in the six months to end Feb) and said that, after a 20%-25% slump in business in the last 3 weeks, it was looking to issue up to c19% of new shares “to protect against a prolonged downturn”…And first thing today it has announced that it has placed £247m worth of shares at the closing price of 1560p (including a pro rata allocation to ASOS’s largest shareholder, Bestseller, the Danish fashion group).