Langton Capital – 2021-05-17 – PREMIUM – Debts, indoor reopening, staff & stock, market recovery, BOWL & other:
Debts, indoor reopening, staff & stock, market recovery & other:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
Well, I finally got my hair cut professionally last week.
I’d done the last two cuts myself (with an enthusiastic, ‘mirror, who needs a mirror?’ approach) and, as you can’t stick it back on and have to average shorter with every sweep of the razor, I’d ended up with every hair on my head the same, very short, length and, as it grew out, I was increasingly looking like a cross between Bully Beef from the old Dandy comics and Lord Sumption.
And I finally had to admit that, though Lord Sumption can get away with the mad old man look better than most as he’s recognised as a legal heavyweight, I didn’t have the same gravitas and was beginning to look, well, just mad.
Still, that’s a few quid saved over the last fifteen months and, as the pubs are finally open again, I know just the place to spend it. 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.
CHANGED EMAIL FORMAT:
The Premium Email is unchanged. The Free Email is written and pre-sent the evening before. It may not include breaking stories nor Langton comment. See Twitter for in-day comment. Let us know if you would like an example of the Premium Email.
THE ELEPHANTS IN THE ROOM:
• In the UK, if not in large parts of the wider world, Covid may be past its worst (in the absence of malign variants, that is).
• There are justifiable caveats, but it makes sense to look to the future, ask what the new normal will look like, etc.
• On the balance of probabilities:
o There is some pent up demand.
o Supply (the number of outlets) will be reduced and,
o There will be limited overseas travel this year meaning that it should be a good year for staycations.
• Which is great. But there are some elephants in the room. We’ll consider over the next few days (and not in any particular order of importance):
a) Labour shortages,
b) Cost and price inflation
c) Accrued debt (banks, bonds, landlord, VAT, supplier etc) and,
d) Other issues (supply chain problems etc)
Debt comes in several forms, only some of them traditional in the sense that they are interest bearing. Liabilities that need to be paid can be viewed as ‘debt’. These will include accrued VAT, rental liabilities, amounts owing to suppliers and other ‘positive’ working capital shifts that are likely to reverse. This is a huge topic and here we can do little more than scratch the surface. Nonetheless, there are some key points worth making.
• The broom in question was famously was 20-odd years old but had had 17 new heads and 14 new handles. Hence, it was ‘a’ broom rather than ‘the’ broom.
• Based on Plutarch’s description of a ship in The Life of Theseus, this is a common theme.
• York Minster, where massive limestone blocks are forever being slid out and new ones being slid back in again, is similar and, if companies that used to be owned by their equity holders end up being owned by their banks, landlords and other creditors, we could have another example in the making.
The scale of the problem:
• Aggregation may be difficult but CGA reckoned, a couple of months ago, that perhaps £2bn in rent was outstanding (UKH now says £2.5bn), bonds amounted to £1.8bn, CBILs were worth £3bn and commercial paper some £0.4bn. That totals £7.2bn.
• In addition, equity has been issued by dozens of leisure companies (by some of them more than once) and bills to the inland revenue haven’t been paid. Most operators were allowed to delay a quarter’s VAT last year – and that is now due. There could, without trying hard, be over £10bn to pay.
How to deal with this:
• Reducing liabilities by accruing profits is the preferred option. This hasn’t been possible to date but, with units now open inside, it might be achievable.
• However, profitability could be low and, with VAT due to rise and Business Rates to be reintroduced, profits could come under pressure in Q3 and Q4.
• This could lead to operators putting prices up – see comments on inflation last week.
• Equity raises may be necessary (or at least desirable). The panic phase might be over but there is still plenty of repair work to be done.
• Early equity raises, in April last year, were struck at very low share prices which reflected the degree of worry. Those operators who raised money twice, did so for the second time at higher prices. Any doing so in the remainder of 2021, could be doing so at higher share prices still.
• At some point, however, there could be glut followed by indigestion.
• ‘Funding partners’ may need to be brought in. This, effectively, means selling a chunk of the business to private equity, business rivals, newly formed vulture companies or whomever. See Trigger’s broom, above.
What happens if we don’t (deal with this)?
• The moratorium on commercial evictions ends on 30 June. Although it has been already, it may be extended further but, at some point, landlords will have recourse to the courts.
• Stung by CVAs and arrears, they will, in all likelihood, cherry pick. They may move to evict operators from sites that can easily be re-let and, after months during which the boot has been on the other foot, they could be quite active.
• If they can’t relet the site and may be stuck with rates and repairs as well as zero rent, they may be more reticent.
• Government backed loans and the banks in general may have to dance to the government’s tune. But we don’t know what that is yet.
• Similarly VAT.
• Other creditors will be in a more powerful position once hospitality reopens. If you want to be supplied, you will have to pay last month’s bill etc.
• We’re operating in real time and formulating a conclusion isn’t easy. However, we will, at some point, enter a new phase.
• And it looks like one during which the Chancellor’s suggestion (way back in March last year) that the taxpayer couldn’t save every business and every job, will be put to the test
PUBS & RESTAURANTS – REOPEN FOR INDOOR TRADE:
• Despite last minute fears concerning the Indian variant, England entered stage three of its reopening today and there may now be some customers have been in the pub for seven hours already.
• The BBPA reported ahead of the date that 45,000 pubs would reopen ‘serving 3 million pints on Monday, but 2,000 pubs will remain closed.’ It says all restrictions must be removed on June 21st for all pubs to reopen and be given a chance of survival.’ The BBPA points out that ‘pubs and other parts of the hospitality sector will still face heavy restrictions compared to normal. They will be required to ensure 1 metre plus social distancing is in place, operate by table service only and ensure that face masks are worn other than when sat at a table inside or if outdoors.’ It estimates beer sales will be ‘65% – some 1.6 million pints – lower than a normal Monday pre-pandemic. This is below the break-even point for the majority of pubs, who cannot trade profitably whilst the current restrictions remain in place.’
The Indian variant:
• This caused some last-minute concerns but did not prevent reopening indoors. What it may do, however, is push back 21 June or lead to reduction in the number of restrictions being dropped from ‘all’ to ‘some more’. The variant is said to be more transmissible but no more harmful than the Kent variant. Covid had an initial R rate of 3.0, The Kent variant was markedly more transmissible and the Indian variant adds further to this. We might be looking at an R of 5 or so but, as always, changes in human behaviour (hopefully not including further lockdowns) will bring this down.
• Langton comment: We’re not scientists but, if a third of the population is unvaccinated, a third has had one jab and a third has had two, then 1) a large number of people are still susceptible but 2) these are largely in the less-high-risk groups.
• To put numbers on it, if you have had no jabs, you have 0% immunity, if you have had one, you have 70% immunity and if you have had two, you have 90%. This means that 46.6% of the population (a largely younger element) is still susceptible. Knock off say 10% who have had the illness and you get to 42%. This is still a big number – though, given the demographic, hospitalisations, serious illness and deaths, should still be lower than previously. We hope.
More help needed:
• The BBPA and others have said that more help is needed. UKH’s CEO Kate Nicholls tells the Telegraph ‘the vaccines seem to be doing their job and there is no evidence to suggest the Government should waver from its stated intent of removing all restrictions on 21st June.’ She says ‘the Government must be conscious that anything other than a full removal of restrictions on 21st June leaves our sector trading at a loss. With social distancing, enforced table service, face coverings, capacity caps on weddings and the like, we have dramatically reduced capacity and suppressed demand.’
• UKH adds ‘the decision to reintroduce business rates payments from 1st July already feels premature and must surely be revised if restrictions remain in place.’ It adds ‘it is now imperative that Government extends commercial rent protections to prevent evictions and the potentially irreversible scarring of Britain’s high streets. There may also be the need for a change to the future of furlough.’
• Langton comment: We have said before that we are uncomfortable with words such as ‘needs’ and ‘must’ when applied to the government. Because this is taxpayer money and it could be either a) left with the hard-pressed taxpayer or b) used for other things such as education and healthcare. UKH says ‘we will bring people together again – a basic human need that all of us have craved over the last year.’ This is true and adds a positive note.
• The BBC reports ‘leisure firms say they need more support after a year of “haemorrhaging cash” and mounting debts due to the pandemic.’ It points out that social distancing means reduced capacity. Business minister Kwasi Kwarteng told the BBC he did not want rent arrears to “cripple” firms. Right.
• Operators will need to get their staff back from furlough, plug gaps in staffing and secure product. Young’s Patrick Dardis told The Telegraph that he has lobbied major brewers, including Heineken and InBev, to step up beer production. Supply bottlenecks were evident in late April, despite the fact that only 40 percent of British pubs were open at the time.
• CGA and Alix Partners suggest that there are now 9.7% fewer restaurants in the UK compared to the number pre-pandemic. Sites may change hands and new tenants could bring some of this capacity back into the market.
PUBS & RESTAURANTS:
• CGA & Alix Partners have released their latest Market Recovery Monitor which ‘reveals a solid return for pubs, managed groups and big city centres ahead of hospitality’s indoor reopening.’ The monitor says only 33% of sites traded during the period of outdoor opening. It adds ‘operators will be hoping for a release of pent-up demand from consumers for pub, bar and restaurant experiences.’ The report says just over 35,000 sites traded outdoors (pubs & restaurants combined). It says 49% of all food pubs and more than a third of community pubs (38.7%) and high street pubs (36.0%) traded in the first phase of re-opening, compared to three in 10 (29.2%) casual dining restaurants and one in six (16.6%) other restaurants.’
• Karl Chessell, CGA’s director for hospitality operators and food, EMEA, said: “Pubs, bars and restaurants with the space to trade have returned confidently since mid-April. Consumers’ enthusiasm, decent April weather and the opening up of street-side space by some enlightened local authorities have all worked in their favour, and encouraged more venues to open up in the weeks since.’ He adds that most sites remained closed and says ‘as we enter the second phase of hospitality’s reboot, the landscape of eating and drinking out is going to be much changed from pre-COVID.” Alix Partners adds ‘the big test will be to see how many sites open their doors from Monday 17 May as we expect all those who will reopen to do so on that date, other than some city centre sites reliant on office workers. This may provide the best indication as to the level of permanent closures caused by the lockdown
• Working from home. The Bank of England is considering flexible working. The Telegraph smells either hypocrisy or a U-turn when it says ‘the Bank of England is testing ways to let staff spend more time at home after the pandemic despite its Governor, Andrew Bailey, telling MPs last summer that workers must get back to offices to support local businesses.’
Company and other news:
• Moody’s has reported that Diageo’s decision to restart its share repurchases scheme and pay out up to £1.0 billion to shareholders by the end of fiscal 2022, ending June 2022, is a credit negative. It says ‘although the trading update was strong because of good recovery across all regions and particularly in North America, its largest market, visibility for trading conditions remains limited given the possibility of further lockdowns in the second half of 2021.’ Moody’s adds ‘the planned share buybacks will be funded through available cash (£2.8 billion as at 31 December 2020) and free cash flow, and should therefore not prevent the company from repaying upcoming debt maturities of around £1.5 billion (sterling equivalent) by the end of fiscal 2022.’ Moody’s notes ‘Diageo also said in its trading update that it remains focused on acquisitions to strengthen its exposure to attractive
• ROKiT Drinks has signed an exclusive international distribution deal of Castle Eden Beers across both the UK and the US. It says ‘this deal sees ROKiT Drinks responsible for the on-trade, off-trade and online sales.’
• The Times reports that Rooney Anand is ‘said to be running the rule over a group of 700 pubs worth £200 million.’ These being the Hawthorn Leisure sites that New River has said it wishes to sell.
• Patisserie Valerie. The Times reports that ‘Grant Thornton has rejected responsibility for the collapse of Patisserie Valerie, arguing that the chain’s directors were reckless and that it did not have a duty to detect fraud.’ Grant Thornton is being sued by the firm’s liquidators.
• Wendy’s (in the US) has said that 30% of its new units will be ‘non-traditional.’ It means they will be ghost kitchens. The company says it thinks ‘customers are telling us that they like that convenience. And as customer behaviours change, we need to change and evolve our designs.’ It says ‘we want to enhance our drive-thru experience, but also importantly, how do we enhance our delivery experience?’
• Door Dash increased revenue in Q1 this year by 198% to $1.1bn compared with the same quarter last year.
• McDonald’s workers in 15 cities in the US are reported still set to strike over pay this week.
• Alibaba in the US has posted its first quarterly loss as a public company as a result of a massive anti-trust fine.
• Debenhams may have closed the last of its sites for good but Amazon is reported set to hire 10,000 staff in the UK.
HOTELS & LEISURE TRAVEL:
• Boris Johnson has suggested that the government is unlikely to add to the green list of travel destinations soon. He conceded the list was ‘tiny’.
• British tourists will be allowed to enter Portugal from today per the Portuguese authorities.
• The first package holiday flights are reported to have flights off to Portugal at around 6.30am this morning.
• Health Secretary Matt Hancock has advised against trips to amber list countries. He told Times Radio ‘people should not travel to amber or red list countries unless it’s absolutely necessary, and certainly not for holiday purposes.’
• Dubai airport, the busiest in the world, has said that Covid passports may be necessary to restart mass foreign travel.
• Airbnb has reported Q1 numbers and says ‘our business improved without the recovery of two of our strongest historical segments: urban travel and cross-border travel.’ It says ‘our urban travel growth rate has increased every month this year and continues to do so through April and early May.’
• Cinemas will be showing their first films for over a year later today. Meanwhile, Cineworld confirms ‘that judgement has been received in respect of the claim by dissenting shareholders of Regal Entertainment Group arising out of its acquisition by Cineworld in 2018.’ It says ‘the amount of the judgement is in the region of US$255m (subject to the final calculation of interest) and is broadly in line with the fair value of the original transaction plus interest as anticipated in Cineworld’s announcement on 25 March 2021 of its preliminary results for the year ended 31 December 2020.’ The company says ‘Cineworld is currently prohibited from making payments in respect of this liability by the terms of its US$450 million loan facility, except for any payments made from the proceeds of an equity raise or from permitted subordinated debt.’ It adds ‘in light of its current liquidity and
• Hollywood Bowl Group has reported H1 numbers to 31 March saying it expects strong consumer demand when it reopens and says it is ‘well positioned to recover to [its] pre-pandemic performance’. The company reports revenue down to £12m from over £69m in the same period last year. The loss before tax of £14.5m compares with a PBT of £15.2m last year. The company points out that it was closed for 75% of the period under review and says it saw ‘profitable trading after the first lockdown with [a] solid performance in October.’
• BOWL says its equity placing raised ‘gross proceeds of £30m to take advantage of new centre opportunities and restart organic investment programme.’ It adds that it has agreed covenant changes with its lending bank, Lloyds, ‘to ensure the Group could open with the ability to continue to invest, as well as providing additional headroom in the event of further prolonged closures.’ It says ‘negotiations with landlords resulted in reduced cash rent for H1FY21 to £3.6m, a decline of £4.6m compared to H1 FY2020.’
• BOWL CEO Stephen Burns says ‘we are excited to be reopening and welcoming our customers and team members back from today. We are emerging from this challenging year of continuous lockdowns in a strong position to capitalise on the opportunities to invest in and significantly grow our portfolio of ten-pin bowling and mini-golf centres in prime locations and are pleased to be starting construction on three new centres later this year. The considerable demand we saw from customers when we reopened after the first lockdown and the strength of our pre-bookings for May gives us confidence that we can recover to pre-pandemic performance levels as families flock back for fun, celebrations and affordable activities.’
• The Telegraph reports that video games publisher Devolver Digital is eying a £1bn London listing
• Disney last week reported a further drop in revenues as falls in its theme parks and travel businesses outweighed online sales growth. Q1 revenues were $15.61 billion, down from $18.03 billion in the prior year.
FINANCE & MARKETS:
• Inflation remains on the radar for many market watchers. Warren Buffett has said ‘it’s hard for me to see that if you toss money from helicopters, there isn’t inflation.’ He also said ‘every company that employs an economist has one employee too many.’
• Bank of England economist Andy Haldane has reiterated his view that the UK economy is set to grow at its fastest pace since the Second World War. This would be consistent with better employment levels and inflationary pressures. Interest rates could be pushed up.
• Sterling mixed at $1.4082 and €1.161. Oil higher at $68.74. UK 10yr gilt yield down 4bps at 0.87%. World markets better on Friday and London set to open around a couple of points higher.
RETAIL WITH NICK BUBB:
• Saturday’s Press and News (1): The front-page headlines of the Saturday papers were dominated by the worries about the spread of the new “Indian” COVID variant: eg “Indian variant threat to June freedom” in the Daily Mail, ”Lockdown easing at risk” in the Times, “Real risk of disruption to our plans, warns PM” in the Telegraph and ”PM: new variant threatens to delay end of lockdown” in the Guardian. The FT ran with “SFO probes Gupta metals empire” as its main story, but it also highlighted that the Covid variant puts the June reopening for England at risk and flagged up an interesting News article about how “Johnson levelling-up agenda stirs ‘southern discomfort’ among Tories”.
• Saturday’s Press and News (2): In terms of Retailing and other stories, the news that Amazon UK is to create 10,000 new “jobs” (mainly by opening 4 new distribution warehouses to cater for growing Online demand) got plenty of uncritical coverage, even in the Guardian, whilst the Business editorial in the Times highlighted the appearance of an Amazon fulfilment centre in the Oscar-winning film “Nomadland”…The Guardian went to town on the final closure of Debenhams stores this weekend, with a double-page spread on the worry in many town centres about the domino effect of the loss of Debenhams (“”When one goes”: Sheffield in shock and resignation as Debenhams finally shuts”) and although the focus was on the impact of the closure on Sheffield, the Guardian had “vox pop” from sad Debenhams shoppers from around the country. On a similar note, the FT had an article about the pressures on
• Sunday’s Press and News (1): The headlines on the front pages of the Sunday papers were pretty mixed: the Observer ran with the Covid variant worries (“Johnson “must think again on plans to relax Covid rules”) and the Sunday Telegraph went with ”Push for one million jabs a day to save summer”, but the Sunday Times flagged that “King Charles to open palaces for the people” and the Mail on Sunday highlighted that “Royal aides want Harry and Meghan to give up their titles”.
• Sunday’s Press and News (2): In terms of Retail stories, there was a snippet in the Mail on Sunday that the speculation about who will be the next Asda CEO has moved on to a couple of senior Tesco executives, whilst there was a feature in the Sunday Times on how the Japanese electronics giant Fujitsu has so far escaped scot-free over the role its faulty Horizon software played in the appalling Post Office sub-postmaster scandal. Otherwise, however, there wasn’t much of note, although the Sunday Times column by James Timpson was headlined “The apprenticeship levy is a load of old cobblers” and there were plenty of overviews of the impact of the opening up of indoor hospitality on the economic recovery: eg the Sunday Times had a double-page feature headlined “Can the “gangbusters” recovery keep rolling?” and the Observer had a similar feature on the risk of an inflationary
• Sunday’s Press and News (3): In terms of all the Economics comment columns in the Sunday papers, we would, as usual, highlight the column by the Sunday Times Economics correspondent David Smith (“Growth is back – and so is the great debate over inflation”), in which he noted that “the markets are not ready to stop fretting about inflation”. He also highlighted the latest White Paper by the prestigious KPMG-Ipsos Retail Think Tank on the growing importance of ESG issues in Retailing and quoted our view that the Deliveroo float was damaged by fund manager’s concerns over the company’s inadequate rights for its workers. We would also give the usual shout-out to the column by the veteran City commentator Jeremy Warner in the Sunday Telegraph (“We must not allow variant anxiety to derail Britain’s stonking recovery”) and the column by the veteran Economics correspondent of the Observer,
Today’s News: The Frasers Group share buyback programme continued on Friday, despite the recent rally in the share price, with the company picking up c112,000 shares at c584p. Otherwise, there is no Retail company news out this morning, but the Ryanair finals (for y/e March) are worth a look: the company notes that “Covid-19 saw customer traffic collapse, almost overnight, from 149m to just 27.5m” and says “It is impossible to provide meaningful FY22 guidance at this time. However, as recently announced, we think that FY22 traffic is likely to be towards the lower end of our previously guided range of 80m to 120m passengers”.
This Week’s News: The highlight of this week will be the reopening of pubs and indoor hospitality (including restaurants, cinemas and museums etc) today, so there will no doubt be lots of footfall figures from Springboard, trying to measure the revival of consumer interest post-lockdown. In terms of company news, tomorrow brings the Homeserve finals, the Topps Tiles interims, the Shoe Zone interims and the Land Secs finals. The Pendragon AGM is on Wednesday. On Thursday we then get the Kingfisher Q1 update, the Next AGM, the Watches of Switzerland Q4 update, the N Brown finals and the McColl’s AGM. Friday then brings the ONS Retail Sales figures for April and the monthly GFK Consumer Confidence Index.