Langton Capital – 2021-03-11 – PREMIUM – MARS, RTN, eviction ban, rental debt, Just Eat, overseas holidays etc.:
MARS, RTN, eviction ban, rental debt, Just Eat, overseas holidays etc.:
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A DAY IN THE LIFE:
Here’s a lockdown task for you: run your freezer down, cart it outside on a day when it isn’t chucking it down with rain, and defrost the sucker.
Sounds easy but it’s trickier to identify some of the contents than you might think.
I mean bread, milk, bought packets of peas, other veg and the like, I can recognise quite easily by just reading what’s written on the bags, packets or boxes but, if asked to differentiate between leftover and subsequently frozen stewed rhubarb, stewed plum, chicken curry and spaghetti Bolognese etc., it’s considerably more like a lottery.
So, it’s freezer-bag surprise and rice for tea tonight and, once defrosted, it’s got to be eaten though, admittedly, it might be by the dog who, though he’s yet to ever say thank-you, isn’t too fussed what he eats.
Anyway, another day with no heating or hot water has dawned so, without further ado, let’s move on to the news:
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RESTAURANT GROUP – FULL YEAR NUMBERS:
The Restaurant Group hosted a webinar yesterday to discuss its full year results our comments thereon are set out below:
• The group (and the industry) could only trade unencumbered for 4mths during the year
• In the 11wk period 4 July to 20 Sept, Wagamama LfL sales were +11%, pubs were +14% and leisure was up 4%. Concessions were down by around two thirds due to reduced travel volumes
• Pubs were up by around 20pps against the Coffer Peach food-led pubs total
• Delivery is up 2.5x in Wagamama and up 5x in Leisure
• The group is not giving financial guidance re future trading
The market & fundamental changes:
• RTN suggests that the number of branded casual dining outlets could contract by 30% to 35% by the end of this year
• Q – could you be more specific? Not really. There is a ‘dislocation in the rental market’. Mr Hornby says ‘at least 35% will have fallen out of the market before the end of this year.’ All of the excess capacity that went in since 2012 ‘has been removed’.
• Delivery, on the other hand, has grown to become a £9.8bn market, up 40% on 2yrs ago.
• RTN has reduced its capitalised lease liabilities from £933m in December 2019 to £484m
• In addition, some 50% of the group’s lease payments are now linked to revenues
The group’s brands
• The group’s Leisure division will drop from c350 units to c135. Average lease maturity has fallen from 6yrs to 2.3yrs.
• Concessions, formerly one of the jewels in RTN’s crown, will drop by ‘around half’ from 71 to between 30 & 35 sites. Concessions are now combined with Leisure for management purposes. The group will concentrate on core airports
• Around 50% of concession outlets drove c80% of 2019 concessions EBITDA. Volumes may not recover until 2022
• Wagamama is the UK’s leading, pan-Asian brand. The group is optimistic re growth
• Mr Hornby says he ‘genuinely underestimated’ the potential for the pubs division. This has benefited, not least, from increased work-from-home
Capital position, debt & balance sheet:
• The group has restructured its leisure division, organised its £500m debt restructuring & issued equity on two occasions, this time for £175m
• The equity raise announced today ‘increases flexibility.’ Proceeds 1) increase headroom, 2) accelerate deleveraging (to <1.5x pre IFRS16 EBITDA – this on a 2-3yr view), 3) take advantage of expansion opportunities in pubs & Wagamama
• Average debt coupon initially is around 7%. This should fall to c6% as leverage drops to less than 2x
• Q – will you actually need to draw down the short term debt (the RCF)? They ‘may not draw this’ in the short term – but it gives flexibility. The term loan is over 7%, the RCF is c3%.
The outlook – expansion (Wagamama & pubs), outlook & questions:
• Wagamama could grow from 144 sites to up to 200. Wagamama delivery sites should grow from 5 to up to 30 sites. The return on capital for delivery is ‘over 75%’
• Pubs could expand from 78 sites to between 140 and 160 sites
• Q – timing? Open 5-7 new Wagamama sites per year. Rents should be attractive. Will front-load if possible. Delivery kitchens should be quicker.
• Q – overseas opportunities? Still keen on the US.
• Q – delivery? Growth has been ‘extraordinary’. Wagamama was previously 17-18% of sales. This could rise to 30%. Will ‘certainly be north of 25%’. It is ‘here to stay’.
• Q – delivery margins? As long as delivery commissions are ‘right’ then the net margin will be ‘pretty similar’ to sales in-restaurant. (Langton – This doesn’t take into account lost drink sales & trading up etc. Loyalty may be lower.)
• Q – delivery information? The ‘data resides with the delivery company.’ RTN tries to get what insights it can.
• Q – extension of VAT relief? This is a ‘very major benefit’. Some will go to customers. It is ‘a sign that the government is committed to the reopening plan…’
• Q – would you consider new concepts? Right to ‘focus on Wagamama & pubs…’ This is ‘ahead of developing new concepts…’ Mr Hornby ‘doesn’t see RTN expanding Leisure.’
• Q – where do you ‘favour’ growth? Co is indifferent. Wants balanced expansion. Organic growth is the group’s priority. But ‘it could be worth us talking to potential sellers at some stage.’
• Q – expansion capex? Say £50m p.a. from 2022 to deliver growth plans. This should be consistent with debt reduction plans.
• Sales should return quickly, costs and competition are reduced.
• Q – government aid? Rates in H1 = £6m benefit, H2 = £2m benefit. Other grants c£6m. Furlough not given, VAT not given, will update at H1.
• The equity raise and debt restructuring give the group a) flexibility and b) a war chest.
• RTN says organic growth is its priority but, with perhaps 35% of the UK’s branded restaurants on the market and available at what should be attractive rents, there are expansion opportunities elsewhere.
• Some ‘failed’ operators will have been good at the operational level (though not so good when it came to balance sheet strength).
• RTN may face a number of choices – and it’s better to have choice than no choice.
• It could a) expand organically, b) buy good outlets at what might look like a full price (as it did with Wagamama) or c) buy less good outlets cheap.
• Perhaps c) (and maybe only c)) is better avoided.
PUBS & RESTAURANTS:
Covid-19 and other secular issues:
• Eviction ban extended.
• The Ministry of Housing, Communities & Local Government has tweeted ‘we are continuing to support businesses by extending the commercial eviction ban until the end of June. This will help those worst affected by the pandemic – like bars and restaurants – get back to business when doors reopen.’
• The Housing Secretary, Robert Jenrick, says ‘it is right that as we move through the roadmap, we ensure that businesses and renters continue to be supported.’ Kwasi Kwasi Kwarteng says ‘we’re doing everything we can to ensure businesses get the support they need to get through this pandemic and reopen when it is safe to do so.’
• He says ‘the government’s current position is to support commercial landlords and tenants to agree their own arrangements for paying or writing off rent debts by 30 June. This is supported by the code of conduct published by the government last year, setting out best practice for these negotiations. But, if these discussions do not happen and there remains a significant risk to jobs, the government is also prepared to take further steps.’
• Langton comment: Whilst prima facie good news, at least for struggling commercial tenants, it may mean that they will be left to face their mounting rental debt problems alone.
• True, the government cannot help every failing business, even if the failure is not the fault of the business itself, but the debt liabilities that are being accumulated are now very substantial and any repayment will be somewhat challenging.
• Whether there are legions of landlords out there, simply waiting to be allowed to change the locks, remains to be seen. Should they do so, they will have to face maintenance, repair, insurance and ultimately business rates liabilities themselves. If they have a new tenant waiting to move in, this will not be the case but, with RTN for example saying that over a third of branded restaurants across the country are unlikely to reopen, this may not often be the case.
• Changing face of the High Street. M&S’s flagship store near Marble Arch is to be demolished and redeveloped with reduced retail space and new offices located on the site.
• The unit was built and opened in 1930. With the move towards working from home likely to be either permanent in part or slow to ebb, more office space may not be top of most lists for what is needed on Oxford Street.
• Lumina Intelligence has suggested that ‘2021 will be the year that restaurants bounce-back with a vengeance, with our data suggesting a surge in demand expected upon the market full reopening.’
• Lumina says ‘with over half of UK adults very/extremely likely to dine-in at a restaurant by the end of June, we predict that the UK restaurant market could see over 26m visits in the first six weeks of opening, if the government’s roadmap goes to plan and dine-in operations open from May 17 2021.’
Company & other news:
• Marston’s has announced that CEO Ralph Findlay is to step down from the role of CEO at the end of the current financial year ending 30 September 2021. The company announces that the process to appoint his successor is underway and a further announcement will be made in due course.
• Mr Findlay has been with Marston’s for 25yrs and he has been CEO for an almost unprecedented 25yrs. Chairman William Rucker says ‘Ralph has been CEO of Marston’s since 2001 and is one of the longest serving business leaders in an industry which has seen significant change and challenges during that time. Ralph is widely respected and admired by all those in the hospitality industry and I have thoroughly enjoyed working with him over the last three years.’
• Rucker continues ‘he has overseen the development of Marston’s into one of the leading pub companies in the UK, through operational innovation to drive change and also transforming the business through strategic acquisition. Most recently, Ralph was instrumental in the formation of the joint venture with Carlsberg UK and the agreement to operate the SA Brain pub estate in Wales.’
• The move is amicable. Chairman William Rucker says Findlay ‘leaves Marston’s in excellent shape and well-positioned to rebuild trading and go from strength to strength when restrictions are lifted. Whilst he remains in his role for another six months, I would like to take this opportunity to thank him publicly on behalf of the Board, our people and our shareholders for his outstanding contribution to us, the Company and the industry.’
• Mr Findlay says ‘it has been a great privilege to lead Marston’s for 20 years. I joined the Board in 1996 and have been fortunate to work with many inspirational, talented and dedicated colleagues in an industry which is very close to my heart. Looking ahead to reopening and welcoming customers back into our wonderful pubs, I am confident that we have great people, a fantastic team in place and that my successor will enjoy working with them and the Board to take this great Company forward to the next phase of its development.’
• See Restaurant Group above. In brief, interesting to see it a) coming to the market for equity twice (as JDW has done but many others have not – but may yet) and b) raising a sum of money that has many observers asking if this might not be a war-chest by another name.
• Just Eat Takeaway mentioned Gregg’s by name yesterday as helping to power UK growth. Just how there can be enough money in a sausage roll for the manufacturer, the retailer, the delivery person and Just Eat is somewhat remarkable.
• JE says its UK business ‘processed 179 million orders in 2020, representing a growth rate of 35% compared with 2019, with strong growth in both marketplace and Delivery. Delivery orders more than doubled year-on-year.’
• It says ‘the growth was supported by our partnership with McDonald’s, as well as an exclusive partnership with Greggs, the UK’s leading bakery. In the second half of 2020, Delivery order growth reached 260% and the growth of marketplace business was 31% compared with the second half of 2019.’ The company adds ‘revenue grew by 42% year-on-year to €725 million in 2020 from €509 million in 2019.’
• Langton Comment: Gregg’s is both a food manufacturer and a food retailer. It is vertically integrated to some extent. If it is going to rely on Just Eat to tell it who to deliver product to (but it will presumably do the delivery itself), then someone is perhaps eating someone else’s lunch.
• We may see, sooner rather than later, restaurant companies trying to deliver themselves and delivery companies opening dark kitchens as both ends of the same transaction attempt to encroach on each other’s business.
• We are seeing this with Amazon, which is now opening its own shops and shops that have, in many cases for a couple of decades, built their own online presence. This is likely to continue pretty much forever but, at the end of the day, it is likely that the consumer will only have the money and the inclination to spend a certain amount on a certain product. And no more.
• M&B has announced that its open offer closed yesterday and that the Company has received acceptances in respect of 153,400,408 New Shares, representing approximately 91.9 per cent. of the 166,911,444 New Shares available pursuant to the Open Offer. The offer was fully underwritten, meaning that proceeds of £350.5m gross.
• Nando’s has reported that some 85% of the orders it is receiving are now placed digitally at its restaurants, compared to zero pre-pandemic. Head of Tech Reg Meyer says ‘we launched Order at Table quickly and tested and iterated in short cycles to refine the experience at an incredible speed. It’s remarkable that we were able to roll this out across all locations in such a short space of time without compromising on the quality of the experience.’
• Swingers has announced that it will launch in the US later this year, with two new venues in Washington D.C. and New York. This comes on the back of a reported additional investment in the company by PE house Cain International. The latter first invested in Swingers back in November 2017.
• Swingers’ CEO Matt Grech-Smith tells City AM that moving to the US was the “natural next chapter” for the brand. He says ‘we’re thrilled to put a stake in the ground in two of the U.S.’s most influential cities, known for their electric nightlife, diverse culture and prominent hospitality industries.’
• US operator Wendy’s has said that it thinks ‘the biggest thing that we’re seeing is the consumer expectation of how they leverage digital and how it connects to a more seamless experience.’ This may be a bit jargon-rich but it is likely that increased use of tech post Covid will be a feature in the hospitality industry going forward.
• Interestingly, Wendy’s said that Q4 breakfast sales had been particularly strong. It says ‘in the fourth quarter, breakfast remained solid at approximately 7% of sales and drove a meaningful increase to restaurant AUVs in 2020. We believe that breakfast has been and will be transformative to our overall restaurant economic model, giving us fuel for growth into the future.’
• Feed It Back has suggested that ‘post-lockdown expectations of ‘the perfect meal out’ have made guests more likely to complain about restaurants and bars.’ It says ‘new data has revealed that customer expectations post-lockdown focus on certain reassurances being met and the venues that thrive and celebrate returning trade will be those that consider the mindset of its visitors.’
HOTELS & LEISURE TRAVEL:
Air inclusive holidays (and cruises) vs staycations:
• The UK hospitality industry is conflicted here. The bulk of the industry (UK hotels, pubs, restaurants, holiday parks etc.) would like to see more UK consumers remain in the country. But this doesn’t work for the overseas holiday companies such as TUI, On the Beach, Jet2 etc and nor does it suit Carnival.
Positive air-inclusive comments:
• IATA has conducted a consumer poll & finds three is a growing confidence in a return to air travel. It says, however, that there is some frustration with current travel restrictions.
• Some 57% of respondents expect to be travelling within two months of the pandemic being contained (up from 49% in September 2020) with a further 81% saying they will be more likely to travel once they are vaccinated.
• IATA says ‘it is becoming clear that we will need to learn to live and travel in a world that has Covid-19.’ It says ‘people want to get back to travel, but quarantine is the showstopper [see below]. As testing capacity and technology improves and the vaccinated population grows, the conditions for removing quarantine measures are being created. And this points us again towards working with governments for a well-planned re-opening as soon as conditions allow.’
• EasyJet boss Johan Lundgren has told Travel Weekly that the outbound travel industry “can have a strong summer” but the restart of international travel could be ‘stop start’.
• YouGov reports around 50% of those surveyed are in favour of mandatory health passports for international travel. Older people were more keen on vaccine passports and the like than were younger would-be travellers.
Negative news for international travel:
• Transport secretary Grant Shapps has told the BBC it is still too early to book overseas summer holidays, despite some countries looking as though they are moving to open up.
• Under the current roadmap, 17 May is the earliest possible date for overseas holidays. Shapps says the Global Travel Taskforce report will be published on 12 April.
• The IATA report mentioned above found that 84% of would-be travellers said they will not travel if there is a chance of quarantine at destination. This is around the same level as six months ago.
• Heathrow has said that it is seeing queues of three hours and sometimes six hours at border control. The queues prior to recent restrictions had been between 25 and 45 minutes. Heathrow says ‘we are seeing significant pressure on the border and we are seeing very long queues, and that is a worry.’
• Carnival yesterday pushed out re-sail dates to end-June at the earliest.
• The consumer hopes they can have a summer holiday, but they fear that they may be stuck at both airports for six hours and in a quarantine hotel for the ten days in=between.
• And, sadly, there is a real risk (or certainly a non-negligible one) of the above happening.
• Money speaks louder than words and the price of domestic cottages is rising whilst capacity for flights and cruise for the summer has been reduced.
• Good news for some, less so for others.
• People don’t want to be on issues such as that above, but operators need to plan. Domestic hotels, cottage holiday companies, pubs & restaurants can perhaps quietly prepare for a very busy summer whilst overseas holiday companies might be better advised to take space on option rather than pay for it with no way out.
Other travel news:
• Jet2holidays and Jet2.com has reported a surge in bookings to Greece and Cyprus following news that the two Mediterranean destinations intend to welcome visitors back this summer. Jet2 CEO Steve Heapy says ‘the UK is the most advanced country in Europe when it comes to successfully rolling out a vaccine, so we applaud the Greek and Cypriot governments for their forward-thinking decisions.’ He says ‘this, on the back of the recent announcement by the UK government, gives customers great confidence that they can get away to enjoy the sunshine this summer and the numbers show that this confidence is increasing all the time.’
• STR has reported that major events could help the UK hotel industry later this year. It says bookings are rising in areas such as Glasgow, which will host the UN Climate Change Conference in November. STR says the bounces ‘indicate the optimism for vaccine distribution, better control of the pandemic and improved conditions for travel and events. Guest booking windows have shortened significantly during the pandemic, so there is plenty of potential for these levels to grow even higher as we get closer to the event dates.’
• Travel Weekly reports that bookings are rising for the summer peak holiday period ‘as confidence grows’. However, agents say the majority of sales are still being made for later in the year. The peak holiday period may be shifted slightly later in the year.
• Intrepid Travel is reported to have secured the largest investment in its 32-year history from French family investment firm Genairgy.
• STR reports that London hotels have picked up a little. It says occupancy for February was 23.3%, down 69.5% on last year with room rates down 56.9%. The resulting REVPAR, though horrible at minus 86.9%. is better than it was in January. STR says ‘the absolute occupancy and RevPAR levels were up slightly from January 2021, but the ADR level would be the lowest for any month on record in the market. Year-over-year percentage changes will soon turn positive due to comparison with the earliest pandemic-affected months from last year. STR forecasts more significant improvement in absolute levels during the second half of the year.’
• Playtech has reported full year numbers saying it has recorded ‘strategic progress’ and that EBITDA was €310m.
• Playtech reports revenue down 25% at €1.08bn with an adjusted profit after tax of €27.3m down some 77% on last year. Adjusted EPS is down 78% at 8.8c. The co says it has made a ‘good start to 2021 in January and February in context of ongoing lockdowns in certain markets.’
• Playtech CEO Mor Weizer says ‘Playtech also made significant strategic and operational progress by adding new brands, expanding existing relationships and entering new markets. We are particularly pleased with the excellent progress we have made in the US market, launching with bet365 and Entain in 2020, and signing milestone agreements with the Greenwood companies in 2021 to license our products in Michigan, Indiana, New Jersey and Pennsylvania.’
• The company says ‘as the leading technology company in the gambling industry, our licensees look to us to deliver innovation that changes the way players experience gambling entertainment.’ Mr Weizer says ‘the significant strategic and operational progress we achieved in 2020 has placed us in a strong position to capture the exciting market opportunities ahead.’
MORE LEISURE SNIPPETS:
• Highland Spring water sales are reported to have dropped by a quarter over the last year.
• Steak ’n Shake in the US is investing in self-service kiosks at which customers can place orders.
• Lego is reported set ready to recruit ‘hundreds of computer experts in the UK’ to cope with increased demand.
FINANCE & MARKETS:
• Sterling stronger at $1.3928 and €1.1681. Oil higher at $68.36. UK 10yr gilt yield up 1bp at 0.71%. World markets broadly better yesterday with London set to open up around 28pts as at 7.15am.
RETAIL WITH NICK BUBB:
Today’s News: Even though JLP has already said there will be no Partnership Bonus, there is no sign yet of the John Lewis Partnership finals (they are normally not published until about 9.15am and the analysts call is set for 12 o’clock), but the Morrisons finals are out and the headline is “Building on momentum”. Despite LFL sales growth ex-fuel of 8.6% (up 9.0% in Q4), total revenue in y/e Jan was only up 0.4% because of the slump in fuel sales and profit before tax and exceptionals was down c51% to £201m, after £290m of “direct COVID-19 costs to help feed the nation through the crisis”. However, profit before tax and exceptionals would have been up 5.6% to £431m before the payment of £230m of waived Government Business Rates relief, which is bang in the middle of the range guided in January. It remains to be seen if JLP will spell out the benefit to Waitrose of the