Langton Capital – 2020-04-30 – PREMIUM – JDW fund raise, C&C, Q1 trade, re-openings & other:
JDW fund raise, C&C, Q1 trade, re-openings & other:PREMIUM EMAIL – PLEASE DO NOT FORWARD: A DAY IN THE LIFE: Well, as we spent a chunk of yesterday doing it, we can confirm that the joys of filling in your VAT return have been undiminished by the global pandemic. This because the satisfaction to be had from doing a few hours unpaid work for the government just in order to be able to pay them a few bob, is on a level of its own. Always has been and always will be because, though HMRC has been gracious enough to say that it won’t push to collect the tax for a few months (it just wants to know what it is owed), as Benjamin Franklin said, there are nothing as certain as death and taxes. Anyway, we left it unfinished as the deadline is hours away yet. On to the news: ADVERTISE WITH US: Langton’s free email now carries adverts. See front page of website for today’s copy & contact us for further details. SEE PREMIUM EMAIL. • More on JD Wetherspoon • UKH sales tracker JD WETHERSPOON – UPDATE ON COSTS, SHARE PLACING ETC.: JDW updates on costs, opines on reopening, assures shareholders it is cashflow neutral at -50% LfL and raises c£141m. Busy day… JD Wetherspoon yesterday evening updated on trading and announced that it was to place new shares to the value of £141m into the market. JDW has updated this morning, saying that it has successfully placed 15.7m shares at 900p (a c6% discount) to raise £141m gross. Our comments thereon are set out below: Introduction: • The announcement comprises an update on trading, a couple of worked scenarios as to what the ‘new normal’ might look like and the notice regarding the fund raising. March trading: • JDW reiterates that H1 sales were up 5.0% in LfL terms and that LfL sales in the six weeks to 8 March were up by 3.2%. • They were down by 4.5% in the week to 15 March and, on 20 March, pubs across the country were ordered to shut. The company’s pubs, in common with those across the whole industry, have been closed since. Management action – costs: • Costs have been cut, 99% of the workforce has been furloughed and the directors have reduced their salaries by between 38% and 50%. Top up payments to staff amount to £0.6 million per month. • Most rents have been deferred, rates are no longer payable and other costs have been reduced. The group has cut capex, it will open no new pubs until FY22, after which, it should open around five a year. • Taxes are being deferred and the group will pay no dividend for the current year. Management action – cash and debt: • Cash burn is around £3 million per month. This will rise to £11 million per month if the closure persists over the medium term as rents will become payable etc. • The company may apply for a loan of up to £50 million under the new Coronavirus Large Business Interruption Loan Scheme. It does not believe it is eligible for the COVID Corporate Financing Facility since it is not ‘investment grade’. It has drawn down its revolving credit facility and intends to raise c£141 million via an equity placing – see below. • JDW says it ‘believes that no covenants are expected to be breached in the short term, with certain costs being treated as exceptional during the Covid-19 pandemic.’ However, it has received signed covenant waivers for the quarters ending April and July 2020. Financial outlook: • Everything depends on the duration of the lockdown and the regulations for operators and behaviour of consumers thereafter. • JDW says its ‘current assumptions are that its pubs will remain closed until late June 2020.’ The group says it ‘estimates that it has sufficient liquidity until the end of November 2020.’ • When pubs reopen, there will be a working capital inflow provided suppliers are happy to return to historic contract terms. Modelled scenarios: • JDW models two scenarios. In Scenario One, LfL sales are minus 10% in the first re-opened month (they were +5% so this represents -15% from trend) with a 2pp per month improvement thereafter to level off at +3%. • Sales on this basis would be down 26% (including the period of closure) with PBT of £12m against PBT of £103m last year. Profits would recover to £94m in 2021 and £100m in 2022. • Debt would rise from £737m in FY19 to £914m this year before falling back once more. This does not include any share placing proceeds. • Scenario Two sees LfL sales 25% down in the first reopened month (down 30% from trend) with an improvement of 3pp per month thereafter. • This would result in sales dropping by 27% this FY (as the company is a July year end and most of the damage will have been done) with a 13% bounce-back in FY21 and a further 27% rise in FY22. • Debt rises to £955m this financial year with consequently higher numbers in FY21 and FY22. Under Scenario Two, the group would take more drastic action re costs. • Reassuringly, the group says it ‘believes it would be cash flow neutral at minus 50% like-for-like sales.’ The Equity Placing: • JDW is to issue 15% new equity to raise around £141 million. Directors will take £0.3 million worth and the issue is not being underwritten. The group has been consulting with shareholders. • JDW says ‘the net proceeds of the equity placing will be used to strengthen the company’s balance sheet, working capital and liquidity position during the period of disruption.’ Company comment: • Chairman Tim Martin says ‘we’ve had to take significant action to reduce costs, decisions which have not been taken lightly.’ • He adds ‘we look forward to re‐opening our pubs and hotels and welcoming back our teams in the near future.’ • Mr Martin says ‘as a result of the actions taken, the cooperation of many stakeholders, and the equity placing announced today, we will be well positioned to reopen our pubs and to return to growth, as the market recovers.’ Reaction: • JDW shares have risen materially since their lows around the time that pubs were ordered to shut. • The BBC, FT and others have focused on the group’s ‘plans’ to reopen in June. This date, though reasonable, is the group’s central working assumption rather than a plan as such. • The FT quotes the company as saying ‘we have no insight whatsoever as to when pubs might reopen and no information from, or hotline to, the government.’ • As with other operators that have raised money, Carnival, SSP, Restaurant Group and many others, observers may be split between those that see the company securing its future (albeit at the cost of some dilution) and those that believe an equity-raise is a sign of concern. • An issue of this size, 15% of the existing equity base, will cause some, modest dilution but, if as JDW says its fully costed cash burn is around £11m per month, it will secure the group’s future for as far as any of us are able to see in these uncertain times. Langton comment: • There are still many more questions than there are answers regarding how the lockdown will end and how consumers will behave for the remainder of this calendar year and into 2021. • Nonetheless, it often pays to take a view and JDW is taking decisive action to shore up its balance sheet. • Its shares have recovered markedly from their mid-March lows but there will be a degree of dilution for those not taking part in the issue. • JDW has a portfolio of large pubs and should be able to distance customers if this is required. However, a cap on numbers (50 patrons is being suggested in Spain) could be an issue. • It has also significantly increased the proportion of freehold pubs within its estate (this now stands at 64%, up from 41% a decade ago). This should prove to be an advantage in a post-Covid-19 environment where landlords may be twitchy and potentially troublesome. • Although JDW benefits from a loyal customer base, much of which will be suffering from cabin fever, its assumptions under both Scenarios One and Two may be rather optimistic. • There are no certainties either way and, it is fair to say, some operators talking about 60%, 70% or 80% reductions in footfall may have specific issues or be angling for an extension to the furlough scheme or for help in other areas. • We commented six weeks ago that ‘braking when you approach a car accident is important but steering is arguably more important still.’ Getting your cash sorted out is of primary importance. UK HOSPITALITY QUARTERLY TRACKER: Headlines: • UKH reports that sales across the companies that it has data for fell by 21.3% in Q1 this year compared with last. • Pubs, restaurants and bars were obliged to close on 20 March and consumers were told to stay in their houses from 23 March. • But material damage had been done during the second week of March as the news became worse and in the third week when PM Boris Johnson advised customers not to go to pubs. Detail: • UKH’s data comes from all sub-segments of the hospitality industry. • It says ‘the drop in trading across the nation’s pubs, hotels, restaurants, bars, clubs and attractions in the first three months of the year is concentrated in March as figures show total annualised sales across the hospitality sector at £126.8bn, down 2.7% on the previous 12 months.’ • UKH CEO Kate Nicholls says ‘the scale of the fall underlines the severe impact the COVID-19 crisis and the lockdown imposed by the Government from March 23 has already had on the sector.’ • Ms Nicholls continues ‘at the end of December, the industry had seen year-on-year growth running at +3.9% – the turnaround has been dramatic and will only get worse in the coming quarter.’ • She can certainly say that again. Sales for many operators are currently running down around 100%. UKH says ‘a continuation of business support is the only way to avoid a bloodbath of job losses and company failures in the hospitality sector, one of the UK economy’s jewels in the crown.’ CGA, which has helped in the provision of data, says ‘the new UKHospitality Quarterly Tracker is the first time the industry has been able to produce a comprehensive picture of trading right across the UK’s hospitality sector, including food, drink and accommodation and attraction sales.’ PUB & RESTAURANT NEWS: Government help: • Sky says a number of ‘the biggest names in British restaurants’ are asking that the lockdown is not taken off too soon. At least not if it is accompanied by a removal of financial support from government. • An industry-wide letter will say ‘we are concerned that opening the restaurant sector too early could lead to a substantial number of businesses failing, given the discrepancy between the costs they will incur and the revenues they will be able to achieve.’ • A phased removal of the lockdown should, perhaps, be associated with a phased removal of financial support. Unsurprisingly, the industry letter says that it will be necessary for restaurants to ‘ensure a critical mass of customer visits.’ • Sky quotes UKH as suggesting it could take at six months after the lockdown ends for restaurants to return to 70% of normal trading levels. • The government is being pressed to extend its Coronavirus Job Retention Scheme. At some point, this may have to morph into employment support rather than a payment not to work. • Some 80% of hospitality workers are currently thought to have been furloughed. Without the scheme, it should be said, a huge proportion of that number would have likely been made redundant. • The Morning Advertiser says health secretary Matt Hancock ‘has said he will ask Chancellor Rishi Sunak about the possibility of extending the hospitality grant scheme to businesses with high rateable values.’ • The CIPD has called on the government to make its Job Retention Scheme more flexible to allow furloughed staff to work reduced hours. The get-back-to-work period could need some sort of smoothing mechanism. The employment organisation says that 46% of companies have furloughed staff. The new normal? • Wireless Social has reported that footfall numbers, though down by around 68% to 80% on normal, have picked up a little in recent weeks. It says that Sunday footfall in London was down 69% whilst it had been down c74% in each of the preceding four weeks. • Next boss Lord Wolfson has added his voice to those in the hospitality industry saying that, if the furlough scheme is ended too soon, there could be hundreds of thousands of redundancies. • BA (see yesterday) has said yes, thanks for the help, but we’re still having to make 12,000 staff redundant. This number would be dwarfed if the hospitality industry had to go the same way. • Nielsen says that there have been a number of marked changes in consumption patterns in the US. NS Sherlock? • NPD has reported that the breakfast segment could be the fastest to bounce back after lockdown. In the last 5yrs, it has accounted for around 50% of total Quick Service Restaurant growth. Company news: • C&C has updated on its position saying that it ‘continues to implement a series of measures to reduce operating costs, maximise available cash flow, and maintain and strengthen the Group’s liquidity position.’ It has cut capex and is paring back working capital. There has been, on average, a 20% pay cut across the company with around 70% of the company’s staff on furlough. • C&C has issued approximately €140 million of new US Private Placement notes and says that its liquidity position is around €570 million ‘of which €430 million (unaudited) is cash.’ There will be no final dividend for 2020. C&C says ‘the process to appoint a new CEO remains on-going.’ • Deliveroo has confirmed it is to cut around 367 staff — or around 15% of its global headcount. The delivery company has blamed the redundancies on the coronavirus crisis. It says ‘the extraordinary global health crisis we are living through has impacted nearly all businesses. As a result, like so many others, Deliveroo has had to examine how to overcome the challenges we all face, as well as ensure we are in the strongest position possible following the crisis.’ • Deliveroo says ‘this requires us to look at how we operate in order to reduce long-term costs, which sadly means some roles are at risk of redundancy and others will be put on furlough.’ • D&D London CEO Des Gunewardena has written to chancellor Rishi Sunak calling for tronc tips schemes to be included in the CJRS. • KFC is opening more stores for delivery. It has already reopened 20 restaurants and says it will open c80 next week. • Sky reports that the administrators to Carluccio are in exclusive sale talks with Boparan Restaurants, the owner of the Giraffe chain • Yum Brands has reported Q1 numbers in the US saying that LfL sales fell 7% globally. The company says ‘we began the year with momentum across many of our businesses, however as the quarter progressed we were heavily impacted by the unfortunate spread of COVID-19.’ A familiar story, that one. • Thai restaurant group Busaba is reported to be working with KPMG to examine its financial options Other news: • The British Property Federation, a lobby group for property owners, has said that it needs help if mass non-payments of rent persist • The NRA in the US has issued a document giving guidance to members reopening restaurants. Cleaning, social distancing, food hygiene etc all feature. • Nielsen reports that US take-home sales of beer are up 17.7% in the four-week period to 28 April. Nielsen also says that online sales of alcohol have boomed. They are reportedly up almost five-fold. • Tesco has written to customers saying that it has increased the number of online orders every week from 590,000 in the first week of the crisis, to over 1 million this week. • A blue day for the sector yesterday. Cineworld up 8%, DART Group, Intercontinental Hotels & Marston’s up 9%, JD Wetherspoon & William Hill up 10%, TUI up 11% and Carnival 16% better. HOLIDAYS & LEISURE TRAVEL: • Travel Weekly has said that international travel, once it is permitted again, may involve four-hour check-in for flights with medical checks. There is talk of incoming visitors into the UK having to go into quarantine for 14dys. • These measures, particularly the latter, will surely dampen demand. If destination markets were to introduce a 14dy quarantine as well, then holidaymakers could find themselves banged up for a month, 14dys in Spain and then another 14dys back in the UK, for every 1wk holiday that they embark upon. • TW also suggests that air fares may rise and flight schedules be cut back. • The UNWTO says all of the destinations that it monitors worldwide have now imposed travel restrictions. • US hotel profitability per available room was down by 101.7% in March per STR. That is, the industry has moved from profit to loss. • TUI has extended its suspension of its holidays and cruises to 30 June at the earliest. • Union Unite has called on BA to withdraw its plan to cut 12,000 jobs and strike a deal with the government. • Princess Cruises, a part of Carnival Corporation, is cutting prices by £100 per week according to reports. OTHER LEISURE: • Cineworld will not show Universal Studios films when it is allowed to reopen. This comes after the Hollywood film-maker released Trolls On Tour direct to streaming. Cineworld says ‘there is a certain system of windows which are a custom in the market and this sets the time difference between the theatrical market and other ancillary markets, among them streaming. Any movie that will not respect this window will not be shown in Cineworld Group.’ • Flutter has updated on its acquisition of The Stars Group saying that the deal will complete on 5 May. CEO Peter Jackson says ‘the enlarged Group brings together exceptional brands, products and businesses, a hugely talented and experienced team, and a diverse global presence. The strength of our combined portfolio of assets means that we approach the future with confidence in these uncertain times.’ • Facebook has reported a spike in user activity but warns that this ‘increased engagement’ may not last. FINANCE & ECONOMICS: • Official figures in the US show that the economy there shrank by an annualised 4.8% in Q1 this year. Q2 will be sharply worse. • The UN’s Labour Organisation has said that up to half the workers in the world could see their livelihoods damaged as a result of Covid-19. • The NIESR has said that the Covid crisis could cost the UK £800bn in lost income. • Sterling a shade lower at $1.2468 and €1.1479. Oil sharply up at $24.63. UK 10yr gilt yield unchanged at 0.29%. World markets higher yesterday on vaccine hopes with the UK set to open up around 40pts (correct at 7.15am). START THE DAY WITH A SONG: The song has been furloughed. See you on the other side. RETAIL WITH NICK BUBB:
• Sainsbury: The much-awaited Sainsbury finals today begin with a highly detailed review of recent trading and the impact of the pandemic, culminating in the base case scenario that underlying profit before tax for the year to March 2021 is expected to be broadly unchanged year on year: “this includes a profit impact of over £500m due to significant costs associated with protecting customers and colleagues, weaker fuel, general merchandise and clothing sales and lower financial services profitability, broadly offset by stronger grocery sales and approximately £450m business rates relief”. Full year underlying profits of £586m were slightly ahead of consensus, thanks to a strong end to the year (which ended on March 7th). Fuel sales have been c75% down in the last few weeks, but over the last 7 weeks total Retail sales are up by 8%, with Grocery growth of 12% (there is no split of Online
• Coronavirus Watch: We flagged yesterday that Retail Economics noted in their March Retail Sales report that many consumers will have different priorities post-lockdown and here’s their latest consumer tracking: On Thursday 16 April, the Government announced a further three-week extension to the lockdown and Retail Economics conducted a consumer panel survey between 20-22 April across 2,000 nationally representative households to assess sentiment around the lockdown, its impact and whether consumers felt sufficiently confident to return to their everyday lives as restrictions begin to ease. RE’s key findings suggest: 49% of consumers expect the lockdown to be extended by a further three weeks when the Government conducts its next review on 7 May. If restrictions were lifted on 7 May, just 10% suggested that they would return to normality, 40% said that they would remain “extremely • News Flow This Week: The Apple Q2 and the Amazon Q1 are out in the US this evening. In the UK, tomorrow brings the AGM from the Covent Garden landlord, Capital & Counties. |
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