Langton Capital – 2020-11-06 – PREMIUM – Zombie companies, furlough, jobs, Rank, Sportech & other:
Zombie companies, furlough, jobs, Rank, Sportech & other:
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A DAY IN THE LIFE:
It’s hard not to fritter away a chunk of time watching the shenanigans in the US these days and, with that in mind, we might have to move straight on to the news:
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LOCKDOWN & IMPLICATIONS: Here a bit of a summary regarding the implications of the lockdown based on feedback received. 6 Nov 2020:
Are we creating more zombie companies?
• Spoiler alert. Yes.
• Because, if you turn the question around and ask: ‘are we creating fewer Zombie companies?’ then the answer is clearly ‘no’.
• Companies that, when open may have been able to break even at the cash level on turnover down 30% or 40%, will be loss-making.
• Some will be able to plug the gap with delivery, but many will not, and they will be back into an environment of ‘cash burn’.
• They may look for rent holidays. These may or may not be forthcoming. If the rent is accrued rather than forgiven, it represents an increased liability.
• Debt will accrue in the shape of accrued rent, plain vanilla bank debt, payments to government (VAT not paid etc) and potentially government backed loans in the shape of CBILs etc.
• At some point, the hole will be too big for some companies to climb out of.
• This critical line will most certainly be crossed by some companies during November. But we hope not too many.
• If some sort of reopening does in fact go ahead on 2 December, then most companies (hopefully) will commence (again) the exhausting process of dusting themselves of and trying to generate trade
Can restaurants & pubs rely on Christmas?
• Spoiler. No.
• December is (usually) the best month of the year.
• As we approach 2 December, we may have a bit more visibility on whether we will reopen or not.
• To stock up, to get their staff back and to prepare their pubs, bars & restaurants, operators will need some visibility.
• Hopefully, Christmas will happen. But this is not a given and it will not be normal, even if it goes ahead.
• This may prevent operators from ‘laying down some reserves.’
• January and February are two of the three least good months of they year but, in a normal year, operators would have their Christmas takings to fall back on.
• A potential danger from left field is that, if customers have an ‘online Christmas’, it may change their spending behaviour going forward. But it probably won’t.
Are banks going to be ‘there for us’?
• Spoiler alert. Sometimes.
• Banks are not charities. But they are being leaned on by government and they have bigger fires to fight than, perhaps, the local restaurant.
• However, they may not make heroic efforts to plug cash flow gaps, partly because they are not charities and they are occupied elsewhere.
Data from as recently as last week are now meaningless.
• A statement rather than a question.
• But it does to some extent demean the efforts made by operators to claw their way back to perhaps above 2019 in August, a shade below in September.
• Then 20% or more below last year when the 10pm rule was brought in, in October perhaps another 10pps lower when areas went into Tier 2 and less still when areas went into Tier 3.
Will closure trigger, well, closure?
• Hopefully not. But companies with bonds in issue, usually but not always these are as a part of a securitisation, may need to secure covenant waivers (again).
• Covenant waivers may also be necessary on some bank debt.
• But whether enforced closure leads to permanent closure will depend on cash burn and, to some extent, on the directors’ attitude to risk now that they could once again be personally liable if they continue to trade whilst insolvent
• On a practical level, administrators may be too busy to take on more work
PUBS & RESTAURANTS:
Furlough 2.0 (or is it 3.0 or 4.0 or 5.0):
• Chancellor Rishi Sunak has confirmed that the taxpayer funded furlough scheme will be extended across the UK until the end of March. The scheme, as it did earlier in the year, will pay up to 80% of a person’s wage up to £2,500 a month.
• The policy will be reviewed in January. It is another U-turn. Jim Pickard at the FT tweets ‘Rishi Sunak extending the entire 80% furlough to the spring is a huge U-turn – even by the standards of this, the ‘government of the U-turns’ – and a reminder of the grim winter prognosis.’
• When the furlough scheme (furlough 1.0) would down (only last week), the first idea was to pay 22% of the cost of furloughed jobs. That was then increased to 67% for companies forced to close under Tier 3. It then became 62% of hours not worked. Then it was 80% for the 1-month November lockdown and now it is 80% of wages for the next eight months.
• This does not supply certainty for business or for employees. Labour accused the chancellor of ignoring the inevitable ‘until the last possible moment’. Sunak had previously ridiculed a furlough extension and the government as a whole maintained that there would not be a second lockdown.
• Mr Sunak has said that he is ‘fast-moving’ rather than, presumably, an incompetent ditherer.
• UKH CEO Kate Nicholls tweets ‘this is good news and a welcome breathing space for hospitality businesses who were facing ongoing restrictions after national lockdown ends – thanks to Rishi Sunak for continuing to listen and evolve schemes in response to business concerns and changing circumstances.’
• The BBPA tweeted that the chancellor ‘has listened & delivered on some of the immediate support we need. The extension of the #furlough scheme until March 2021 will protect jobs. It also recognises that Tier 3 restrictions devastate our sector like a full lockdown.’
• In a fuller statement, the BBPA CEO Emma McClarkin says ‘the extension of the full furlough scheme until March 2021 will give businesses some certainty on the support they need for the difficult months ahead.’
• The BBPA says ‘we will need to use the time in lockdown to review the current restrictions within the tiering system to ensure they are effective, proportionate and fair. We also need a longer-term stimulus package for our sector that enables it to play a leading role in the social and economic recovery.’
• SIBA says ‘a united hospitality industry days ago called for a commitment to extending the furlough scheme. It is welcome then, that the Chancellor has extended full furlough at 80% of wages until March, which will help independent breweries through the incredibly difficult winter period.’
• Former Patisserie Valerie chairman Luke Johnson tweets ‘extending furlough until March is simply a Ponzi scheme – govt funding of millions of jobs is wholly unsustainable and creates perverse incentives and unintended consequences. They are buying compliance to stave off civil unrest to pursue their psychotic lockdown strategy.’
• He tweets ‘Britain is increasingly a National Health Service with an unravelling society attached, whose only role is to protect the NHS.’
• CGA has reported that ‘three quarters of people working in hospitality are concerned about their job security as the sector heads into a second lockdown in England.’ It says ‘72% of them now feel either very concerned (39%) or slightly concerned (33%) about their short-term job security.’
• CGA says ‘this survey illustrates how lockdowns and a steady stream of new trading restrictions have created widespread anxiety for hospitality professionals.’ It adds ‘frontline teams have worked very hard to bolster consumers’ confidence and support the sector’s recovery over the last few months, but November will now be a stressful month for many of them.’
• CGA says ‘by and large employers responded well to the challenge of keeping staff supported and valued earlier this year—but amid so much concern about jobs, they will need to double down on those efforts in November. If they can do so, frontline teams will be well motivated to help their businesses bounce back once this latest lockdown is over’.
• Job losses yesterday at Sainsbury, John Lewis, Clarks, Rolls Royce & Lloyds Bank.
• Trade bodies are pleased with the help that they are getting but they would like more. They welcome the review of business rates.
• SIBA says it would like to see an ‘extension of business rate cuts to breweries, a VAT cut on beer, compensation for beer destruction and big action on beer duty all being ignored.’
• It wants to see a coordinated, six month plan.
• Peter Borg Neal at Oakman Inns tweets ‘this [the move to reorganise business rates] is a massively important initiative that the whole of the hospitality industry needs to unite behind. Business rates have long been an unfair and onerous pre-profit tax that hinder investment in our sector.’
• UKH says ‘problems with the business rates system have been apparent for years. Nobody in the hospitality sector is unaware that our businesses face a disproportionate burden or that UK Hospitality, and our predecessor bodies, have spent years pushing for change. This review is a golden opportunity to reset the system and help us all to ‘build back better’ by incentivising green investment.’
• The BBPA says the industry ‘requires an extension of the VAT cut and the Business Rates holiday, as well as a significant beer duty cut. If such a stimulus package is forthcoming, we will begin to see the light is at the end of the tunnel for our sector in this immensely difficult period.’
Other Covid issues:
• Several operators are tweeting that they’re open for takeaway, Wasabi, Franco Manca, GBK and others amongst them.
• Various Eateries yesterday reported that it was closing its restaurants and said ‘all appropriate measures will be taken to minimise costs during this period.’ It says it hopes that losses will be covered by its Business Interruption Insurance and says ‘the opening of the new Coppa Club in Cobham will be delayed until there is certainty around the date of the end of lockdown restrictions.’
• The company says ‘while the Directors strongly disagree with the necessity or efficacy of a further lockdown and deeply regret the profound impact that it will have on the hospitality industry, on its employees and on its customers, the medium and long-term strategy of Various Eateries will not be affected.’
• A number of pub companies have tweeted along the lines of ‘goodbye for now and see you for Christmas’. Marston’s says ‘we’ll be back soon and until then, stay safe and look after each other.’ Fuller’s says ‘we are sorry to say that, due to the national lockdown, we are once again forced to temporarily close. But we will be back, and we are determined to remain optimistic that we will see you all in December.’ Greene King says ‘we’re sad to close our pubs in England but hopefully not for long…we hope to see you all soon for a freshly-poured drink and Christmas cheer.’
• Fourth says its ‘latest study indicates that the number of job leavers continues to significantly outweigh the number of new starters, a trend seen throughout August and September, since the industry began re-opening following the first lockdown. The study reveals [that] there have been 500,000 sector job losses since January.’
• Fourth says ‘there has been a 21% drop in overall staff headcount compared to October 2019’ and it adds ‘there were approximately three leavers for every one starter throughout October.’ It concludes ‘the total staff headcount across SMEs was down by 23.3% versus October 2019.’
• Fourth says ‘October was another incredibly challenging month for the hospitality sector, with further Government-imposed restrictions impacting trading and consumer confidence. Whilst entering a second lockdown is incredibly difficult for the sector, we hope that the extension of the furlough scheme will provide essential support to businesses to enable them to get through the coming weeks and months.’
• Real estate agent Avison Young looks at the recovery in footfall saying that ‘nationally, the Recovery Index has been resilient over the last week, rising from 73.1 on 24th October to 74.6 on 2nd November. This boost is mostly due to increased activity over half term. Of our sector indices, Mobility saw the sharpest rise, increasing from 68.6 on 23rd October to 73.2 on 1st November. Hotel & Leisure also increased, for the first time since the end of August, rising from 55.4 to 57.6.’
• Avison Young says ‘the impact of the second national lockdown will become clear over coming weeks and we expect noticeable changes across the Recovery Index. While the economic impact may be smaller than in the initial lockdown, as construction and manufacturing businesses will be allowed to continue and schools and universities will remain open, the possibility of entering a second recession seems increasingly likely.’
• Tasty comments this morning saying that its units are closed for sit-down but the co is ‘offering takeaway and delivery services, in most of its units, until such time as the Government announces that it is prohibited from doing so or the Company decides that it is not viable to continue the services. In addition, free takeaway meals will be offered by the Company to NHS workers and children on school holidays.’
• Tasty says ‘the Company will again be relying on Government support for employees’ pay and VAT and business rate holidays.’
• Rockfish has announced the opening of a new Retail Fish Market from today, Friday November 6th at Rockfish Brixham. Mitch Tonks says, “It feels like going back to the very beginning of my seafood journey .. we are opening our retail fish market earlier than planned in Brixham tomorrow, fresh seafood wed – sat , we buy on the market each day, portion it and make it ready for your kitchen.’
• Premier Foods has announced that it has agreed to the disposal of its interest in Hovis Holdings. It says the Group has held a 49% minority interest in Hovis since April 2014. The bread company has undergone major supply chain restructuring. Premier says ‘the transaction closed and completed late on 5 November 2020; proceeds of £37m due to the Group include the repayment of outstanding loan notes and accrued interest.’
• Premier adds ‘the Group’s investment in Hovis was fully written down in 2016. This transaction strengthens the Group’s financial position as it continues to improve its leverage profile.’
• S4 Labour says its analysis suggests ‘that sales in the hospitality sector this week, Monday to Wednesday, were up 3.1%, 35.3% and 39.1% respectively, on last week, with tier 1 sites up minus 9.1, 18.1% and 25.8% for each of the three days and tier 2&3 sites up even more at 25.1%, 63.4% and 59.3% respectively. This can only be described as a last rush to hospitality venues for a last visit before lockdown.’
• S4 Labour says ‘this seems to demonstrate a lack of public support for the government actions.’
• Feed It Back and KAM Media report that we may be ‘heading towards a “normal” level with regards to customer sentiment.’ Their latest report suggests that October saw a 42% drop in the volume of complaints compared with September ‘suggesting that customers were really beginning to settle into the ‘new normal’ of hospitality.’
• KAM says ‘the data is showing us that the atmosphere and hospitality experience still isn’t quite as customers expect it to be.’
• The Pub Governing Body has reported on compliance & says ‘the Board is pleased to see that the data in the fourth annual report once again shows there is a high level of compliance with both codes in England & Wales.’
• The governing body says ‘the disruption caused by the Covid-19 pandemic has caused immense commercial challenges for all pubs, leading the Board to agree a temporary suspension of rent reviews.’ It says ‘this pragmatic and sensible step is in addition to any agreements individual companies have put in place for their pubs and relieves all tenants of one possible worry during the coronavirus epidemic.’
• Sky reports that the first arrests have been made over alleged fraud linked to the Eat Out to Help Out discount scheme.’
• Some suggestions that the US restaurant industry, which took a serious tumble earlier in the year, is recovering more rapidly than that in Europe & the UK. This may be true but a) at significant social cost (there is no furlough etc) and b) if you view a lockdown as a pit-stop in an F1 race, Europe may have made two and the US so far only one.
• Former BHS owner Dominic Chappell has been jailed for six years for tax evasion.
HOTELS & LEISURE TRAVEL:
• Choice Hotels International reported Q3 numbers yesterday saying that REVPAR fell by 28.8%. The company says that it outperformed the industry by 20pps. CEO Patrick Pacious says ‘we believe that our strategy of growing our limited-service brands in the right segments and the right locations will allow us to continue to grow our share of travel demand over the long term.’
• Hyatt yesterday reported Q3 numbers saying that it made a loss in the quarter of $150m vs a profit of $39m in the same quarter last year. CEO Mark Hoplamazian said ‘third quarter results reflect Hyatt’s ability to adapt to a continuously changing and uneven demand environment.’ He says he is ‘encouraged that we opened 27 new hotels representing over 4,300 new rooms, a record number of hotel openings for any third quarter in our history, while sustaining our pipeline for future growth during this disrupted time.’
• STR reports that the US hotel industry saw occupancy down 29% on last year in the week to 31 October. Room rates were down 27% and REVPAR was some 48% lower.
• The travel trade ‘has welcomed news of an extension to the government’s furlough scheme as a “huge benefit” to travel retailers’ reports Travel Weekly.
• Travel Trade Gazette reports that ‘Jet2.com and Jet2holidays has suspended its Canary Islands flight and holiday programme as the country returned to a state of national lockdown on Thursday.’
• The UNWTO has called on governments to accelerate the safe return of the cruise sector.
• Lufthansa says that there should be a bounce back in corporate demand once Covid testing is in place.
• Rank Group yesterday confirmed that it was seeking to raise around £70m via the issue of 19.9% of the Company’s existing issued share capital. The company says ‘the proceeds of the Fundraise will strengthen the Company’s balance sheet, in order to maintain appropriate liquidity covenant headroom on its debt facilities under various trading scenarios, provide ample working capital to operate through this challenging trading environment, and enable the Company to continue to deliver on its transformation 2.0 programme.’
• Rank this morning says that a total of 76,736,762 Placing Shares have been conditionally placed at 90p per share. The company is raising around £90m gross.
• Sportech has confirmed that it received two approaches from Standard General about a possible cash offer for Sportech, initially at 25.0 pence and subsequently at 28.5 pence per Sportech share. It says ‘the Board unanimously rejected Standard General’s latest proposal, which it believes fundamentally undervalues Sportech’s businesses and prospects.’
FINANCE & MARKETS:
• The Bank of England has held interest rates at 0.1%.
• The Bank’s MPC ‘voted unanimously for the Bank of England to continue with the existing programme of £100 billion of UK government bond purchases, financed by the issuance of central bank reserves, and also for the Bank of England to increase the target stock of purchased UK government bonds by an additional £150 billion, financed by the issuance of central bank reserves, to take the total stock of government bond purchases to £875 billion.’
• The Bank reports ‘Covid continues to hit jobs, incomes and spending in the UK.’ It says ‘we put in place a package of measures that will help households and businesses’ but adds ‘spending in the economy remains well below normal levels.’
• The Bank says ‘we stand ready to take further actions if necessary to help the economy recover and ensure that inflation returns to our 2% target.’
• Sterling up at $1.312 and €1.1099. Oil lower at $40.03. UK 10yr gilt yield up 3bps at 0.24%. World markets better yesterday but London set to open down around 20pts.
RETAIL WITH NICK BUBB:
BDO High Street Sales Tracker: The BDO High Street Sales Tracker today for medium-sized Non-Food chains flags that things stayed positive again in w/e Sunday Nov 1st, helped perhaps by some pre-lockdown panic buying: BDO Fashion LFL sales were down, as usual, by c3% (with Store Fashion sales down c34%), but Total BDO LFL sales (including a handful of Homewares and Lifestyle retailers, as well as the Fashion retailers) were up by c6% (down c24% in Store sales, but up c79% in Online sales).
News Flow Next Week: The week ahead will see the US Election result drag on, but there is plenty going on the UK, kicking off on Monday with the Dignity Q3 update. The BRC-KPMG Retail Sales for October are out first thing on Tuesday, closely followed by the Land Secs interims and the latest monthly Kantar/Nielsen grocery sales figures. Thursday then brings the B&M interims, the Burberry interims and the WH Smith finals.
Today’s News: After the flurry of news yesterday, which also included a bullish trading update from the stationery and toys chain The Works, as well as an admission from DFS that it was having to close its stores as well during lockdown, today has gone quiet, although the high-flying Naked Wines has announced that its interim results will be on Nov 19th.