Langton Capital – 2021-03-23 – PREMIUM – DPEU (finals), Deliveroo (IPO tailwinds), first (and hopefully last) year of Covid, shop closures (mostly chains), overseas holiday (don’t bank on ‘em) etc.
DPEU (finals), Deliveroo (IPO tailwinds), first (and hopefully last) year of Covid, shop closures (mostly chains), overseas holiday (don’t bank on ‘em) etc.
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
If you leave stuff lying around on your desk, nasty little bills, random Post It notes and reminders of jobs to do etc., how long is it, on average, before they get either consigned to your two-foot high in-tray purgatory to be studiously ignored for another few months or, to cut out the middleman, have coffee spilled on them and get filed straight into the bin without passing Go and without collecting £200?
Because, I would say, at normal rates of attrition and coffee spillage, it’s about three weeks.
However, whilst this can help if it’s a clean, albeit coffee-stained, desk that you’re after, it would appear that Stalin’s phrase, ‘no man, no problem,’ hasn’t been adopted by the VAT authorities when it comes to small businesses paying their bills.
Hence, ignoring reminders isn’t always without consequence and, just in case the FCA is reading this, and we have definitely seen some of their letters swimming around in coffee somewhere, to do so does not constitute financial advice. On to the news:
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DELIVEROO – MORE DETAIL RE IPO.
Deliveroo yesterday gave further details re its upcoming IPO and our comments thereon are set out below:
• Deliveroo says the price range for the Offer has been set at £3.90 to £4.60 per Share, implying an estimated market capitalisation at Admission of between £7.6 billion and £8.8 billion (exc. any over-allotment shares).
• This is presumably inclusive of the c£1bn of new money that is to be raised. The offer will comprise the above, plus ‘existing Shares to be sold by certain existing shareholders.’
• Deliveroo says ‘we intend to use the net proceeds from the issue of the New Shares to continue to invest in the growth opportunities available’
• Founder Will Shu says ‘becoming a public company will enable us to continue to invest in innovation’ etc.
• He says the mission is ‘to become the definitive food company.’
• The CEO says ‘we have seen a strong start to 2021 and we are only at the start of an exciting journey in a large, fast-growing online food delivery market, with a huge opportunity ahead.’
• Deliveroo also updates on trading for the 2 month period January and February 2021 versus the comparable period in 2020.
• It says the gross value of transactions on its platform has grown +121% year on year at the group level in January and February 2021.
• In the UK and Ireland gross value has grown +130% year on year and GTV in the Group’s other markets has grown +112% year-on-year.
• The company says gross value (not revenue) was running at an annualised figure of over £5bn in Q4.
• Gross profit margin (as a % of gross transaction value) rose ‘from 5.8% in 2018 to 8.8%, demonstrating fast growth underpinned by strong unit economics.’
• The selling shareholders have agreed to a 180 day lock up, while Directors have agreed to a 365 day lock up. The lock ups are subject to certain exceptions. For example, sellers could sell more ‘if the price of the Shares is trading at 30% or more above the Offer Price.’
• Interestingly, the company reiterates that it has the great and the good on its side saying it has ‘engaged Goldman Sachs International and J.P. Morgan Securities plc…as Joint Global Co-ordinators, and Merrill Lynch International, Citigroup Global Markets Limited, Jefferies International Limited and Numis Securities Limited as Joint Bookrunners for the Offer.’ Finsbury is covering PR.
• The new issue divides opinion between those who see the company as overpriced and unprofitable and others who believe that it represents the future.
• Either way, would-be investors are being asked to ‘buy tomorrow’ because the company is loss making (other than on a very short time-period) today and it nearly went bust prior to the investment by Amazon.
• But, as bulls (and the legions of paid advisors) will be keen to point out, if you don’t buy loss-making companies, you don’t own the Amazons of this world and, to be fair, that is correct.
• The bull case: Everything goes right, new territories open up, competitors and suppliers (restaurants) are compliant and delivery volumes do not return to pre-pandemic levels.
• The bear case: Delivery volumes slip, restaurants become competitors (via dark kitchens) as well as suppliers, Deliveroo has competition when it tries to vertically integrate and profitability is elusive.
• We may well miss out hugely but do not feel optimistic enough to invest. The sellers of the shares know more than the buyers. It is unfair to expect individuals (and even VCs) to leave all of their money on the table – but they are taking millions, perhaps billions, off it and we would remain cautious.
PUBS & RESTAURANTS:
Covid – the first (and hopefully last) full year:
• Trade journal The Morning Advertiser has conducted a survey of readers finding that 28% of respondents had not traded for more than 12wks in the last 12mths. This is the perhaps inevitable result of three national lockdowns alongside a raft of Tiers and other restrictions that made trading, even when out of lockdown sometimes unprofitable and often illegal. The MA says that 3.5% of readers had opened for less than four weeks whilst 18% had only traded for between 8wks and 12wks.
• The MA reports that more than half of respondents said that their takings for the 12mths were down by more than three quarters on the prior year. A further 30% of respondents stated that revenues during the Covid-19 pandemic were down by between 50% and 75% on the prior year. Sales at several times were clearly down by 100% with December, an ‘open’ month, registering trade down by 84% per UKH’s CEO Kate Nicholls.
• Pragma Consulting also looks at the first year of lockdown saying that ‘the extent of the multiple lockdowns of 2020/2021 has not yet been fully felt by the F&B sector but its impact on casual dining has already been severe, proving near fatal to a business model already struggling for survival amidst mounting CVAs.’ Pragma says home delivery has been ‘the clear beneficiary of lockdown’. Just Eat has referenced tailwinds and Deliveroo shareholders are looking for the exit via the company’s IPO.
• Pragma says that ‘hybrid kitchens’ may have a future. It says that these have ‘kitchen facilities largely standardised’ but offer multiple brand cuisines from the same unit. Pragma says ‘whilst no single format will exclusively dominate the future F&B sector, if town and city centres provide the much-needed investment in public realm required to regain relevance with consumers, then the hybrid kitchen would appear well-placed as a format to appeal to consumers, occupiers and investors.’
• Langton comment. A crystal ball would be useful. What, looking back from two years in the future may appear obvious, isn’t obvious now. Foodservice analyst Peter Backman attempts to step into 2022 and look back at the year currently ahead of us. He suggests there will be a post lockdown surge in demand saying, from his standpoint in the future, that ‘not even the decidedly average weather was able to dampen demand which was driven by two major factors. The first was the spirit of breaking loose, of being able to get out, to meet friends, to return to the “old life”. And the second was the additional money that many people had been able to save during the year-long period when they were restricted to buying things online (or going shopping for food) and not spending money on commuting or holidays.’
• The risk is that some would-be consumers may have become ‘institutionalised’ by their year on the sofa. Hopefully, this contingent will be in the minority.
• Backman says that delivery ‘had grown, is growing and will continue to grow.’ He says, however, that the reopening of leisure retail, will lead to a slackening in the growth rate. He says that, just perhaps, too much capital is going into dark kitchens, where investment could show signs of being rather “frothy”.
• As regards working from home, Backman suggests that some of this, at least, is likely to stick. Workers will be reluctant to give up some of their freedoms and commuting, never a joy, may be avoided – at least in part. Some employers may sense the chance to cut costs. This will have an impact on city centre coffee and sandwich shops and, ultimately, on rents.
Calls for further liberalisation:
• UKH has called on the Government to allow people to be able to order at the bar from 17 May, the date on which restaurants and pubs can open indoors. At present, table service is planned. UKH says only a minority of units will be able to open for outdoor trade from 12 April adding that, if operators aren’t allowed to make the most of it from 17 May, they may not survive. UKH’s Kate Nicholls says ‘the last 12 months have been truly awful for our sector. That is why any controls that limit commercial activity upon reopening should be necessary and proportionate.’ She continues ‘while any restrictions remain in place, our pubs and restaurants can only break even and the viability of thousands remains at risk – we lost over 12,000 in the last year alone.’
Other Covid news:
• Langton comment: Pragma, above, suggests that the full impact of the year plus worth of disrupted trade has not yet been felt – but what does that mean? Good question. First, we would say that, intuitively, we tend to agree with Pragma. Nobody is counting casualties while the battle is raging but, as it abates, the butchers’ bill needs to be assessed and, in addition to those casualties that have simply been ignored, because there is too much going on to care for them, there will be a non-material number of operators, who have been fighting gamely on but who will succumb to their injuries some time after Covid has passed.
• This because, as the noise drops, operators may assess their own prospects differently. This could be very upsetting. Some may decide they are in a big enough hole and pull the plug. Others might be forced to face their problems by their banks, their landlords, their suppliers, the tax authorities or even their life partners and, on a practical level, the country doesn’t have enough insolvency experts to deal with everything at once. Arguably ‘not being dead’ isn’t quite the same as ‘being alive’.
• London Mayor Sadiq Khan has announced £6m will be used to directly support the reopening of London’s economy once Covid restrictions are lifted. That doesn’t seem like an altogether huge sum. The money will cover advertising and the organisation of events and the provision of alfresco dining spaces. The Mayor has published a report by Gerald Eve and the LSE amongst others, which suggests that Central London is well-placed to recover strongly. However, it suggests that if home working remains prevalent, some 86,000 jobs could be lost in the city centre. Mayor Khan says ‘Central London is the engine of the UK’s economy. There simply won’t be a national economic recovery from Covid unless all levels of government realise the crucial importance of protecting central London’s unique ecosystem of shops, hospitality and world-leading cultural venues.’
• Pubs will be allowed to set up marquees in beer gardens this summer without the need for permission from the unit’s council.
• SIBA members are to protest at midday today as the trade body claims that small brewers have not received the same level of support as some other businesses.
• LDC reports that ‘despite the COVID-19 pandemic causing mass closures across the GB retail and leisure landscape, there were still 31,405 openings of independent units in 2020.’ Good stuff? Better than zero openings but LDC says ‘openings were just outweighed by 32,847 closures and resulted in the independent market shrinking by -0.4% (-1,442 units). However, this loss was minimal compared to the chain market which declined by -4.5%, equating to a loss of -9,877 units.’
• The Resolution Foundation says that half of British workers had a real-terms pay cut in the year to autumn 2020. Andy Haldane at the Bank of England says there is a tsunami of spending coming. Perhaps Resolution and Mr Haldane move in different circles.
Companies & other news:
• DP Eurasia has reported full year numbers for the Year Ended 31 December 2020, saying that the number of stores rose from 765 to 771 with group system sales up by 14.6% to 1,570m TRY. Group revenue is up by 4% at 1,019m TRY. The net loss for the year is 107.6m TRY, up from a loss of 5.6m TRY in the prior year. DPEU says the group achieved Turkish systems sales growth of 26.4% and Russian system sales decrease of 6.3% (15.3% based on local currency). The company says that its adjusted EBITDA (excl. IFRS 16) was down 44.1% to TRY 69.6 million (2019: TRY 124.5 million).
• DPEU CEO Aslan Saranga says he is ‘pleased to report resilient results for the year in the face of unprecedented trading conditions, which saw operational constraints such as curfews and the suspension of dine-in service resulting from the Covid-19 pandemic. We were able to increase our system sales by 14.6% on the back of our strong Turkish performance. Despite 27 store closures in Turkey and Russia due to Covid-19, we were also able to increase our store portfolio by six during 2020, reaching a total of 771 stores across our four countries of operation.’
• DPEU says ‘the Turkish business performed very strongly from a top line point of view, especially with record-breaking like-for-like growth rates in the second half of the year.’ It says ‘there has also been a Covid-19 inspired shift to home delivery across all consumer sectors. The strong trading in Turkey is continuing in 2021 with like-for-like growth rate of 49.0% in January/February.’ In Russia, the group says ‘after a slow start to 2020 and further depressed sales performance due to 72 days’ curfew in Moscow during the second quarter, the Russian business saw an improving top line performance in the second half of the year.’
• DPEU says ‘2021 has seen the start of the vaccination programmes in Turkey and Russia, and whilst this brings some relief, the Covid-19 pandemic continues to create uncertainty in our markets. However, the resilience shown by the Group in 2020 and the trading momentum carried over to the first two months of 2021 give the Board confidence regarding our market positioning and the prospects for our business in the long term.’
• KFC franchisee, the Castlebarn group of companies, which has 13 restaurants in South East London and Kent area, has reportedly been sold to another KFC franchisee, the Caskade Group, for an undisclosed sum.
• Diageo has announced an $80 million investment into the expansion of its ready-to-drink operations in the US.
• Chipotle is to open a new restaurant on Chiswick High Rd. It has taken over the former Byron site.
HOTELS & LEISURE TRAVEL:
Will overseas holidays be possible this summer?
• Nobody wants to deliver bad news. The Defence Secretary drew the short straw over the weekend. We’ve all immediately forgotten his name. he’s now and forever just ‘that bloke who told us we couldn’t have a holiday.’ On a more serious, the ever-serious Guardian reports ‘Sage experts are worried about overseas breaks leading to rise in vaccine-resistant variants in UK.’ See our comments in the premium email yesterday. If vaccinated Brits cannot catch ‘ordinary’ Covid whilst abroad then, by definition a) they can only catch a new variety and b) also by definition, their compatriots when they return home would be similarly vulnerable to the returning holidaymakers spreading it.
• Travel company shares slid a little yesterday on consideration of the above news. Whilst On the Beach actually rose by 0.5%, shares in Carnival (a big, global player) were down 1.5% and Hostelworld was 3.1% lower. TUI shares were off by 4.4%, Saga (which has other businesses) was down 5.8% and Jet2 shares were some 6.9% lower.
• Langton comment: See premium email.
• PM Boris Johnson has been told lifting the ban on foreign holidays this summer could risk importing another variant and risk another lockdown next winter. But the logical question is, when will this ever not be the case? The implication is that, in order to travel safely, Brits need destination populations (and any other holidaymakers visiting) to be vaccinated – and this may be some time off. The shares of UK tour operators fell yesterday but, some might say, they didn’t perhaps fall as far as they might have done.
• Fresh doubts have been cast this morning after PM Johnson’s comment that any impact from a third wave of Covid-19 in Europe could “wash up on our shores”. The travel industry is demanding clarity. Draft laws published yesterday will make it illegal to take a foreign holiday before at least the end of June with sanctions up to a £5,000 fine. The draft legislation will be voted on in the House of Commons on Thursday. Sky points out that foreign travel for a holiday is already illegal, but the punishment is a new measure.
• Langton comment: Will tour operators need more financial support (including further equity share placings?). See premium email.
• Good question but, at this stage, not an easy one to answer. Restaurant Group, JD Wetherspoon and SSP Group have raised equity twice. Jet2 has also been to the equity market twice, once for £172m in May last year and then for £422m in February this year – and this may become the norm rather than the exception. All of the above fund raises will have been undertaken after some sort of estimate as to reopening schedules. However, whilst this is relatively clear for JDW and RTN, it is less clear for SSP, given the reluctance of its customers to use public transport – and it is even less clear for Jet2.
• An EU export ban would delay the UK’s Covid vaccine drive by two months, says The Guardian. This might would be a bit of a downer for the overseas holiday market. Travel Trade Gazette reports on Press comments that the UK government is exploring a traffic light system for the resumption of international travel. Hays Travel has told Travel Weekly that there is a ‘very mixed picture across the summer with uncertainty in some places running through into the autumn.’
• On the Beach CEO Simon Cooper has called for so-called “refund credit notes” to be scrapped and for consumers to be given cash refunds.
• Cineworld has reported that its Regal theatres will reopen this April, for the first time in six months. CEO Mooky Greidinger says ‘we have long-awaited this moment when we can welcome audiences back to our Regal theatres and restore our essential role within the communities we serve.’ He says ‘we will also be monitoring developments closely in the U.K. and across Europe as we set to gradually reopen across the world in line with local government guidance.’ Cineworld also announces it ‘has reached a multi-year agreement under which films from Warner Bros. Pictures Group will be exhibited in Cineworld’s cinemas in the U.S. as of their opening. Beginning in 2022, Warner Bros. Pictures Group theatrical releases will have a 45-day window of theatrical exclusivity, with certain provisions.’
• Everyman Media Group has announced that it ‘has agreed an increase in its debt facilities from £30m to £40m, to improve the Group’s liquidity position for growth going forward.’ The facilities’ increase is subject to an Ordinary Resolution being passed at the AGM.
• Warner Music has signed a deal with Tencent of China to help the former break into the Asian market. The companies have also launched a record label.
• Deliveroo price range, £7.6bn to £8.8bn valuation, will excite those who think it is a loss-making company without a clear path to profit. Others say that it will rocket on listing. Founder Will Shu said to be taking perhaps £50m off the table.
• Deliveroo IPO, price range edges up. Bull case. Everything goes as planned, delivery volumes do not backtrack, vertical integration leads to profits. Bear case. None or only some of the above happens, restaurants reopen as sulky competitors, they expand into dark kitchens etc.
FINANCE & MARKETS:
• Exports of fish and meat from the UK to the EU fell sharply in January. The Food and Drink Federation says salmon exports were down 98%, beef exports were 91.5% down and cheese sales were 85.1% lower. Total food exports were down by 75.5%. The FDF conceded that stockpiling ahead of the transition was responsible for some of the drop but. With fresh produce, this will not have been the case.
• The rate of unemployment in the UK fell to 5% in the three months to Jan, down from 5.1% in the 3mths to December. Economists had been expecting a small increase. The ONS says ‘for November 2020 to January 2021, an estimated 1.70 million people were unemployed, up 360,000 on the same period the previous year and up 11,000 on the quarter.’
• Sterling lower at $1.3833 and €1.1598. Oil lower at $63.97. UK 10yr gilt yield down 2bps at 0.82%. World markets better initially yesterday but Far East lower in Tuesday trade and London set to open down around 48pts.
RETAIL WITH NICK BUBB:
Today’s News: The convenience store chain McColl’s enjoyed strong top-line sales growth last year, but profits were a different story, as today’s finals (for y/e Nov) reveal that adjusted EBITDA fell 9% to £29m, despite 12% LFL sales growth. The main problem was a 200bp fall in the gross margin and that is still an issue, with the company flagging that although LFL sales growth has been 8.8% in the 15 weeks to 14 March, “despite the ongoing operational challenges of COVID-19, gross margin trends are consistent with those experienced in FY20, reflecting a shift in sales to lower-margin take-home products and multi-packs as a result of the third national lockdown”. The slightly sheepish headline of the McColl’s statement is “Foundations in place for growth”.
This Week’s News: Tomorrow brings the Pendragon finals, whilst the belated ONS Retail Sales for February are out first thing on Friday. Over in the US, the GameStop Q4 results are out after hours this evening.