Langton Capital – 2021-02-16 – PREMIUM – Deliveroo, reopening, nightclubs, cruise industry, Heavitree etc.:
Deliveroo, reopening, nightclubs, cruise industry, Heavitree etc.:
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A DAY IN THE LIFE:
Our dog may not suffer from a surfeit of brains.
In fact, there’s room in his head for an inflated football with just about as much content but, when it comes to conserving energy, he’s right up there with the best of them.
Because a) he won’t open his eyes if he can hear and smell enough to know what’s going on.
And b) he won’t move his head if he can just move his eyes.
Then c) he won’t move his body if he can just move his head.
And d), if he has to move his body, then he’ll do it as little as possible before flopping to the ground, often in the middle of a doorway, and reverting to a) which, in this time of Covid when getting from one end of the couch to the other can be built up into a major task, we can probably understand.
The markets, excepting M&B’s news yesterday, are fairly quiet at the moment due to what would have been the half-term holiday. But anyway, on to the news:
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See Deliveroo, below.
DELIVEROO – SPECULATION AS TO IPO TIMETABLE:
• Sky reports that Deliveroo is expected to publish an ‘intention to float’ announcement on 8 March. One would expect money to change hangs a few weeks later with the shares trading, perhaps, by the middle of April.
• It adds ‘insiders at Deliveroo cautioned that 8 March was not yet a definitive date and the timetable for one of the year’s most prominent listings remained subject to change.’ Sky speculations on a market cap of ‘up to £7.5bn’.
• Sky says it has ‘previously reported that the surge in revenues seen by Deliveroo since the start of the coronavirus pandemic would prompt a sharp upward revision in its advisers’ expectations of its valuation.’ That’s interesting as the valuation should reflect the net present value of future income streams. It is to be hoped that the Covid-19 pandemic, though far from over, will be something of a one-off rather than a permanent state of affairs.
• Langton Comment:
• Deliveroo is one of the major disruptors in our sector and it has the characteristics to match. Namely, it upsets incumbents and has lost a vast amount of money.
• However, that was then, and this is now.
• The company has undoubtedly benefited from the closure of the hospitality industry for long periods of time and by customers’ desire to eat ready-prepared meals at home as a result.
• Deliveroo recently raised top up funds (at a valuation of c£7bn and hence the valuation speculated above of around £7.5bn) and said that it was to expand into a further 100 towns and cities across the UK.
Losses stopped – for the moment:
• The group recently said that it had registered its first-ever profitable quarter. It had earlier told the Competition & Markets Authority that it was close to going bust and that it would not be able to continue in business if it were prevented from taking an investment from Amazon.
• Times have clearly changed.
How attractive a proposition is the company?
• Sky points out that ‘a bumper flotation will provide liquidity to many of Deliveroo’s longest-standing shareholders’ and it most certainly will. However, it takes two to make a market and the shares will need to attract buyers as well as generate sellers.
• Given the performance of Moonpig & Dr Marten’s, this is clearly possible. Sky says ‘Deliveroo declined to comment on the timetable for its IPO’ but the schedule looks very likely.
• As always with IPOs, the sellers know much more than the buyers. IPOs can work for both sides. But much depends on how much the founders wish to take off the table, what price the deal is done at, and what assumptions are made with regard to future income.
With delivery return to 2019 levels?
• The short answer is that no-one knows but the central assumption seems to be that it may not but that the shine may come off.
• We note suggestions from foodservice analyst Peter Backman and others that more growth will come from dark kitchens, which involve much more effort on the part of the delivery company and which also put Deliveroo and others into direct competition with the restaurants that they currently service.
• This isn’t particularly helpful for the casual diners as it will represent Deliveroo etc trying to capture more of the value chain themselves.
• Deliveroo itself quotes a report suggesting that 85% of consumers will order delivery more often or the same as they did before the pandemic. It finds that 65% are spending more on delivery food as ‘something to look forward to’ during the current crisis.
• Most operators seem to believe that delivery will have taken a step up and that not all delivery gains will be lost.
Are current charging levels sustainable?
• Deliveroo’s charges may be unsustainable in the medium term. We have previously covered a contributor’s view that Deliveroo & others ‘have hiked their commission up to 35% for small operators.’ This is surely only palatable when operators have no other choice. In addition to there being rival delivery companies, as restaurants are allowed to reopen, the above will no longer be the case.
• Our contributor says ‘Deliveroo will be hoping that their commissions will be “sticky” – I’m not so sure.’
• Some revenue may have been ‘bought’ in the past. That’s often what start-up losses are. A genuine question is, if the operator and delivery company behind lost money on the transaction, was there ever really a market there at all?
• The Telegraph recently pointed out that Deliveroo has ‘burnt through most of the $1.7bn (£1.25bn) in private capital it has raised since 2013.’ Some say the business could be worth 10x revenues. That does seem to be something of a stretch, particularly if revenues themselves could ultimately come under downward pressure.
Oversupply in the Dark Kitchen market?
• Foodservice analyst Peter Backman has commented on the continued expansion of Dark Kitchens. He acknowledges that the operation of such units is an attempt to grab more of the delivery value chain – but the skill set is completely different and there is an awful lot of capacity going on in this space.
• The facts aren’t yet clear so any conclusion would be based on speculation.
• However, Sky has reported that American businessman Will Shu, who founded Deliveroo in 2013, ‘could stand to gain a pay-out of more than $500m when the company completes its hotly anticipated IPO, expected as soon as April this year.’
• As Charlie Munger says, show me the incentives and I’ll make a good guess as to the outcome.
PUBS & RESTAURANTS:
• More speculation as to reopening dates. Easter seems to be to the front of people’s minds.
• JDW chairman Tim Martin has called on the government to open pubs at the same time as non-essential shops are allowed to reopen.
• Mr Martin says ‘the pub industry is “on its knees” and that pubs across the UK need to reopen in order to save the industry and the associated jobs.’
• The JDW chairman points out just how much tax the hospitality industry collects from its staff and customers and says ‘many people have correctly pointed out that the three lockdowns of the last year have been a disaster for the hospitality, retail, arts and entertainment industries, but our calculations show that they have been an even bigger disaster for public finances.’
• Sky reports Tim Martin as saying he aims to bring back all 37,000 staff currently on furlough leave once his pub chain gets the go-ahead to re-open.
• A number of industry bosses have suggested that allowing outside drinking from April would not be sufficient to stave off collapse. Customer demand would be very dependent on the weather, making labour scheduling and stock ordering particularly difficult.
• Young & Co Patrick Dardis says ‘there is talk about opening pub gardens but I’m afraid that is just nonsense. It is a ridiculous idea that you can just open up in outside spaces. This is the United Kingdom. Yes, of course, you occasionally get a half-decent spring and a good summer, but it is mostly wet and cold. So, what would be the point?’
• The Institute for Fiscal Studies has warned that the furlough scheme needs to be phased out in order to prevent a cliff-edge for employment. The IFS warns of a hit to lower-income households.
• Boris Johnson has suggested that fast coronavirus testing could allow nightclubs and theatres to reopen. He says “rapid” lateral flow tests could be used by “those parts of the economy we couldn’t get open last year”. A government source subsequently said ‘there is a long way to go before we can get people back at big events safely.’
• Heavitree Brewery yesterday reported full year numbers to end-October saying that revenues slipped from £7.5m to £5.0m with operating profit down from £1.839m to £0.539m and PBT down from £1.844m to £0.414m. EPS was down from 32p to 2.4p.
• Heavitree chairman, Nicholas Tucker, says that operating profit was down by 61% in H1 and adds ‘that impact has been felt over the second half of the year under review with a significant decrease in turnover, and obviously it will be felt moving into the next financial year as the Company continues to support all our tenants and leaseholders with rent concessions to help them to endure long periods of tier restrictions and full lockdowns.’
• Heavitree says ‘although the summer months allowed some level of trade the Board was under no illusions that a possible second wave of infection would inevitably bring further restrictions on the sector and we would need to do all that we could to support our pubs. At the time of writing, it is now obvious that our concerns during the summer have become the reality.’
• Heavitree says ‘the Directors do not recommend the payment of a dividend at the year-end. When trading is back on a more even keel after restrictions are eased, the Board will be able to review future dividends.’ The group sold ‘a small parcel of land in H1 and two more in H2 along with one pub.
• The group says ‘further properties are the subject of offers and/or are being marketed’ as it looks to bolster its finances. Heavitree says ‘we have cancelled rents during the lockdown periods and made fair concessions during the incredibly difficult trading environment that arose with the tier systems.’ The chairman concludes ‘we continue to conserve cash within the business and I feel the Company is as best placed as it can be to resume trading when permitted.’
• The Biden administration in the US is to leave in place tariffs imposed on European wine and spirits as part of a long-running aviation dispute.
• Pragma Consulting looks at retail demand saying that ‘post-lockdown, we are likely to see the degree of polarisation between retail destinations accelerate. With online share increasing, physical spend will increasingly be committed at either best-in-class major destinations or local convenience-driven centres which – as well as serving the needs of in store shoppers – can be used to facilitate online sales and returns.’
• Pragma says that retail parks should perform better than high streets and town centres.
HOTELS & LEISURE TRAVEL:
• PM Boris Johnson is reported to have ‘talked down’ the idea of vaccine certification in order to free up travel. See also talk re nightclubs above. Johnson said ‘we will look at everything – but what we are thinking of at the moment is more of a route that relies on mass vaccination plus… rapid tests.’ Foreign secretary Dominic Raab on the other hand has said that vaccine certificates have not been ruled out.
• The Times reports that government ministers are considering plans “that would allow people to go away for self-catering breaks as soon as the Easter holidays after Boris Johnson said he expected coronavirus rates to fall sharply in a matter of weeks”.
• An official announcement regarding a roadmap out of lockdown is expected next Monday (22 Feb).
• The UK’s mandatory quarantine system came into force in the early hours of Monday morning.
• The BBC reports Brian Salerno, VP of CLIA, the Cruise Line International Association, as saying that the cruise industry is now “in a very different place” than it was a year ago. He says ‘what we have discovered is, through working with experts and health officials, epidemiologists, what it actually takes to protect ourselves, protect our passengers, protect our crew and protect our destinations when we operate.’
• The ONS reports that air passenger numbers fell by 98% at the height of the first wave of the pandemic in April last year.
• Air Namibia is reported to have gone into voluntary administration.
• Playtech plc has announced that it has ‘signed strategic agreements with various subsidiaries of Greenwood Racing Inc…which own and operate the Parx Casino in Bensalem, Pennsylvania. The agreements include licensing of Playtech products to the Greenwood companies in the states of Michigan, Indiana, New Jersey and Pennsylvania, commencing with the launch of online casino in Michigan on Playtech’s IMS Platform and Player Account Management.’
• CEO Mor Weizer says ‘this strategic partnership with the Greenwood companies represents a major milestone for Playtech and I’m excited to work with them to help achieve their growth plans in the coming years. The US is a highly strategic market and this multi-state, multi-product agreement highlights the demand for the full breadth of our product offering. This is the next step for Playtech in the US and we are delighted to work with the Greenwood companies to capture this exciting long-term opportunity.’
FINANCE & MARKETS:
• Sterling is hitting 3yr highs on vaccine optimism. Pound trading at $1.393 and €1.1475. Oil little changed at $63.55. UK 10yr gilt yield up 4bps at 0.57%. World markets very strong yesterday with London set to open up another 20pts.
• The newly-appointed head of the WTO has warned against vaccine nationalism.
RETAIL WITH NICK BUBB:
Today’s News: After hours last night, Dunelm announced that Will Adderley, the Deputy Chairman, wanted to dump 15m shares and the company has confirmed this morning that the shares were placed overnight with institutions at 1280p, a surprisingly big 9% discount to the closing price of 1408p, meaning that the placing of c7% of the issued shares only raised £192m gross. Follow the bear perhaps, but even after the placing Will Adderley still controls nearly 38% of the shares, via various trusts etc and the Adderley family in total has just over 43% of Dunelm. In other news, the fast-growing Virgin Wines Online wine retailing business has announced that it wants to try and cash in on the success of its bigger rival Naked Wines (which has a market cap of nearly £600m) and float on AIM. In calendar 2020, Virgin Wines achieved revenue of £71m and EBITDA of £7.7m.