Langton Capital – 2021-06-09 – PREMIUM – SSP, Company Long Covid, rent overhangs, WFH, staycations etc.:
SSP, Company Long Covid, rent overhangs, WFH, staycations etc.:
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A DAY IN THE LIFE:
Holidaying in the UK is always an experience.
Good, usually. The pubs are predictable and they sell what you think they are going to sell – but there are some areas where the Lycra can get a bit visibly painful and the backpacks and walking sticks seem to be some kind of virtue signal rather than an aid to any serious walking.
Or, indeed, any serious pottering from pub to pub which, in our opinion, is much more virtuous in any case. Still, we’d better draw those type of comments to a close before we upset any walkers or cyclists out there. On to the news:
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SSP GROUP – H1 NUMBERS:
Good company but still bumping along the bottom:
The group says its ‘medium term outlook [is] unchanged, with like-for-like revenues expected to return to around pre-Covid levels by 2024.’
SSP Group has this morning reported H1 numbers to end-March and our comments thereon are set out below:
• SSP Group, which in March launched a fully underwritten Rights Issue to raise £475m on a 12 shares for 25 held at 184p per share basis, has this morning reported H1 numbers.
• The group says revenue of £256.7m was down 78.8% at constant currency; down 78.9% at actual exchange rates.
• It adds that like-for-like sales were down 79.0%. These were ‘heavily impacted by Covid-19, with material reductions in passenger numbers seen across all travel markets.’
• The group reports an operating loss of £219.9m on a reported basis. It adds that the underlying operating loss4 was £160.7m (2020: £1.3m profit).
• The reported loss before tax was £299.7m. On a pre-IFRS 16 basis3, the underlying loss before tax4 was £182.0m (2020: £10.7m loss).
• The basic loss per share is 48.6 pence on a reported basis. The underlying basic loss per share is 30.0 pence (2020: underlying basic loss per share of 4.0 pence).
• Net debt ‘was £2,033.9m, which includes lease liabilities of £1,194.8m. On a pre-IFRS 16 basis3, net debt was £839.6m, up from £692.0m at 30 September 2020.’
• The group adds ‘including the net proceeds of the recently completed Rights Issue, pro forma net debt would have been £388.8m, on a pre-IFRS 16 basis at the end of March 2021.’
More on trading:
• SSP says it has turned in a ‘resilient performance in a challenging market.’ It says the period has seen the group ‘materially strengthening its balance sheet and continuing to demonstrate tight control over its operating costs and cash usage.’
• The group says it ‘is in a strong position to benefit from the expected recovery of the travel market over the medium term.’
• The group adds that it has undertaken a ‘significant amount of business development activity, in addition to our substantial pipeline of contracts won but not yet opened.’
Current & near-term trading:
• The company is seeing a ‘gradual recovery of passenger numbers and demand, led by domestic and leisure travel, notably in the UK and USA.’ It says that, ‘in the first week of June, sales were down 70% versus 2019.’
• SSP says ‘a further 250 units re-opened since end of H1 taking total of trading outlets to c. 1,150 currently. If current trends continue, we expect to have 1,200-1,500 units open over the summer, in line with the recovery in demand.’
• In the quarter to December, passenger numbers were low and the group saw ‘revenues down approximately 79% year-on-year.’ It says ‘revenues during the second quarter continued at similarly low levels, approximately 81% below the equivalent quarter in 2019.’
• SSP says ‘since the end of March when sales were down approximately 78% compared to 2019, we have seen some improvement in trading.’
• This is particularly in the US but ‘we have seen the impact of renewed travel restrictions in our Rest of the World division, most notably in India and Thailand. Currently, sales are down approximately 70% against 2019 and for the third quarter as a whole, we expect them to be down approximately 75% against 2019.’
• SSP says ‘whilst the short-term outlook remains highly uncertain, we remain positive about a further upturn in both domestic and leisure travel across the remainder of the current financial year. We anticipate that the profit conversion on the lower sales, compared with pre-Covid levels, will continue to be in the region of 25% during the second half of the financial year.’
• It says ‘looking further out, we firmly believe that demand for travel will return and that the actions we have taken, the strength of our balance sheet, our long-standing client relationships and deep understanding of the industry, together with the evolving market backdrop, will enable us to continue to take advantage of new growth opportunities as the market recovers.’
• SSP says its ‘financial position [is] now strengthened significantly following the Rights Issue in April 2021, alongside the extension of our main bank facilities until January 2024 and the waiver and amendment of covenants for both the main bank facilities and US private placement notes.’
• The group says its ‘liquidity position [is] strong, with cash and undrawn committed facilities of approximately £854m on a pro-forma6 basis at the end of March 2021, following the completion of the Rights Issue in April.
• CEO Simon Smith says ‘despite the challenging trading conditions SSP has continued to deliver strong operational and cash control.’
• He says ‘the recovery in domestic and leisure travel has now begun in a number of our territories, and our teams are busy re-opening units in line with passenger demand.’
• Despite numbers not yet recovering materially, the CEO concludes ‘over the past year we’ve strengthened our competitive advantages and created a more flexible operating model. We have a strong balance sheet and can see many opportunities to accelerate growth as the market recovers and to deliver sustainable growth for the benefit of all our stakeholders.’
• SSP is a professional operator in a market that, sadly, has been badly hit.
• It operates across a number of geographies and, whilst some are currently improving, others are not.
• The March equity raise and debt restructuring give the group a) flexibility and b) a war chest.
• With regard to SSP, there is little doubt that travel is in a tougher spot than, say, suburban pubs and restaurants
• Travel probably remains a premium-to-GDP-growth market but, in the short and medium term, material uncertainties remain.
PUBS & RESTAURANTS:
Covid overhang fears:
• UKH has coined the “economic long covid” phrase in referring to the overhang of financial and other issues facing the sector. It says the crisis could have a lasting legacy if the government does not provide more support. UKH’s Kate Nicholls says ‘current government support is not sufficient to cover the sustained hit on revenues that businesses in the sector have suffered following months of lockdown and more than a year of tough trading restrictions. Average hospitality monthly costs are between £10,000 and £20,000, while the average government support is £3,000 per month.”’ UKH calls for the government to stick to its own roadmap towards lifting restrictions.
• Langton comment: Boring though it might be to repeat prior comments, Langton has suggested that debts to landlords and the HMRC along with increased Covid costs that could still be an issue when VAT and business rates rise. The term ‘long covid’ could well be appropriate. The government wants to keep businesses going, laudable enough, in order to protect jobs and GDP, but it is less interested in who owns the business going forward. Creditors, banks and landlords may have a piece of the action if, in the absence of a large number of CVAs, debt for equity swaps become a feature going forward.
• UKH has commented on the proposal to create a new watchdog to protect workers’ rights saying this ‘is a positive step and we look forward to working closely with officials, to help shape best practice guidance. The vast majority of hospitality businesses are good employers and treat their employees with respect, so any moves that prevent them being undercut by the few companies who aren’t treating their workers in the right manner is welcome.’
• The MA writes ‘UKH boss Kate Nicholls has defended pub bosses who have had to lay off staff since the start of the pandemic despite job support schemes.’ Ms Nicholls says ‘hospitality remains in a fragile state with a quarter of venues still closed and it will need time to recover fully.’
• No-shows and deposits. The BBC reports that no-shows are impacting hospitality businesses and says that deposits are in some cases being introduced in order to incentives bookers to actually turn up.
• The ONS reports that ‘pub landlords’ “high confidence” about their future business survival has peaked above 20% for the first time…since November 2020.’ It has to be said that that isn’t very long ago. The number is 24%. The ONS says that, in March 2020, ‘there were 38,870 pubs and bars in the UK employing 467,000 people.’ It points out that funding schemes have kept the industry alive but that establishments have had to shut up shop for months at a time. The ONS says ‘pub and bar business confidence has been weak compared with all other businesses but is starting to improve’ but it adds ‘caution should be taken when interpreting the results for pubs and bars because of a small sample size, sample variation and possible drop off because of some of the pubs closing down.’
• Some fear of 21 June postponement. The ONS says that the low confidence figure ‘dropped from 63% in November 2020 to 3% by April 2021, but by early May 2021, had risen significantly to 19%’ and adds ‘confidence among pub and bar owners has been both considerably lower and less stable, than that of other business owners.’
• The ONS reports that ‘by mid-December 2020, more than 80% of pubs and bars recorded that their profits were more than 50% below what they would normally expect for the time of year, with that number soaring to 100% by late December 2020.’ Unsurprising, at this point, as pubs were once again about to shut. Christmas profits were about a half of what they were the year before. On a less uplifting note, the ONS says that less than a quarter of pubs are confident that they will still be in business by the end of the summer.
• Re furlough, the ONS says ‘at its peak in the November 2020 lockdown, 91% of pub and bar staff were on furlough. This number has now decreased to 55%.’ It says ‘this compares with overall 8% to 15% of staff on furlough in all other businesses during the same period, indicating the heavier reliance of pubs and bars on the scheme’ and adds ‘we can increasingly see a downward trend of pub and bar staff on furlough since restrictions were lifted on beer gardens. Despite this, the percentage of staff that were on furlough has remained high. This suggests that where pubs and bars have been open, they have been operating with minimal staff.’
• 21 June relaxation. Sky reports ‘pub bosses have appealed for the easing of COVID restrictions across the UK, saying the delayed Euro 2020 football championship offers the perfect opportunity to help the industry and beyond recover.’ It quotes Greene King boss Nick Mackenzie as saying ‘there is a real risk that restrictions may remain in place, meaning that pubs will be unable to trade profitably as crucial financial support falls away. If that happens, the impact on pubs will be huge and it’s going to be a real struggle for many to survive.’ CEO of Young’s, Patrick Dardis, says ‘if the government continues to make decisions at very short notice and not engage properly with businesses, uncertainty will prevail and confidence will deteriorate.’ He says ‘having delivered against the four criteria for reopening, there is no reason that Freedom Day should be delayed beyond June 21. We need
Rents & debt:
• See Long Covid above. UKH has said that failure to oblige landlords to forgive some rental debts could lead to a long covid impact on hospitality.
• Langton comment: This is akin to pass the bad parcel. Rents may now be ‘inappropriate’ but they were freely entered into by consenting adults. Opinions are very divided as to the way forward. And they are heavily influenced by the financial interested of the parties involved. Not surprising. Some landlords are toughing it out. Others are calling the bluff of their tenants (e.g. where a lot of capex has taken place) and, in some cases, they are wishing that they hadn’t. The problems will ‘wash through’ but, such are the benefits and problems of the free market system, this may take some time and involve some dislocation (a polite word for huge problems at the individual operator – or landlord – level).
• Talking about the lifting of the moratorium on commercial evictions due to take place at the end of this month, UKH says ‘we have a very real problem on our hands if the moratorium is lifted without a resolution being put in place.’
Working from home:
• The debate as to what commuters could, should and will do continues to rage. The US is facing similar issues. There, Restaurant Dive days ‘Manhattan employers expect 29% of employees to return to the office by the end of July, a number that is expected to rise to 62% by the end of September.’
• Langton comment: This is better than nothing but, for sandwich and coffee shops and bars with bills to pay, is it enough? Possibly not. Again, talking about the US, Restaurant Dive says ‘over 70% of employers said they plan to adopt a hybrid model, and 63% of those employers will require their workers to be in the office three day a week. A quarter of employers said they will require employees to be in the office full time, and 4% won’t require workers to return to the office at all.’
• It’s fair to say that, in a pre-Covid environment when rents were often bid up by confident would-be tenants, the last 10% to 20% of revenue would have been what supplied all of the profits. The other sales would simply have covered marginal and fixed costs. Hence, a drop of perhaps 20% plus in demand is a very material hit. To the extent that this could persist over the medium term, landlords could have to get involved (via rent cuts) otherwise operators will either have to raise prices or (and potentially ‘and’) go bust.
• Interestingly, speaking of the US, where workers have, if anything, been quicker to return to the office, Live quotes Black Box Intelligence & says ‘while customers have been returning to restaurants nationwide and demand for dining out is up, many people still have yet to return to offices. This trend is causing many restaurants to see repressed lunchtime sales.’ It quotes the New York City Hospitality Alliance as saying ‘it’s quite concerning to restaurants and bars that rely on office workers if only 62% are expected to return to the office by September, and only a few times a week.’
• Re staffing, the ONS says that ‘not all pub and bar jobs will have been saved by the furlough scheme. In the weeks just after Christmas 2020, 12% of pubs and bars reported that it was likely they would make redundancies in the next three months. This number fell to approximately 4% by late February 2021. It is unclear whether this is because of increased certainty or because the redundancies had already gone through.’ Since this point, the problem seems to have swung through 180 degrees.
• The Telegraph reports the labour crisis is ‘deepening’ as retailers struggle to find enough staff. It adds ‘hospitality venues are rushing to hire staff at the fastest rate in years as re-openings happen around the UK.’ It reports ‘there is estimated to be a 70,000 shortfall of lorry drivers, principally fuelled by EU workers leaving the UK, which has seen wages shoot up by 20pc.’ This will doubtless lead to a build up of inflationary pressures as delivery costs impact most products. Looking at the retail sector, it says ‘42pc of smaller retailers have said that Brexit has made hiring harder, compared to more than a third (35pc) of larger retailers with over 5,000 employees.’
Company & other news:
• Move online. The covid pandemic, perhaps unsurprisingly, has led to a surge in online shopping, browsing and the like. Ofcom finds that Britons spent more time online than other Europeans during the pandemic. In 2020, Britons spent 3.5 hours a day online compared with 2hrs in France and Germany. Ofcom says ‘there’s no question in my mind that the pandemic has accelerated the trend we were already seeing. We were already embracing all sorts of online activities, but of course when restaurants are closed it’s no wonder we all started ordering takeaways online in our millions.’
• The Inn Collection Group has opened its first Wearside site, The Seaburn Inn on Sunderland seafront.
• Boparan Restaurant Group says it plans to launch 500 sites under its new Caffè Carluccio’s coffee shop concept in the next five years.
• Gordon Ramsay is reported set to open his biggest Street Burger restaurant to date in July at the O2.
• Waitrose is reportedly considering the sale of The Good Food Guide.
• Oakman Inns has updated on trading saying that it has seen strong trading and good staff retention. Talking about sales, CIO Steve Kenee says ‘without wanting to oversell it, [sales] have been nothing short of phenomenal.’
• Bloomberg’s Business Insider reports that the mighty Starbucks is to cut 25 menu items and ingredients due to supply issues.
HOTELS & LEISURE TRAVEL:
• Cabinet minister George Eustice has said Britons should “holiday at home” for a second successive summer. He told Sky “I will be staying at home. I have no intention of travelling or going on a holiday abroad this summer. Some people may, but they have to understand that there are obviously risks in doing so because it is a dynamic situation. I think most people will probably decide this year to stay at home, holiday at home.”
• Sky, which has warmed to its task, says that ‘Downing Street has not ruled out the prospect of the prime minister embarking on a foreign break this summer, as the travel industry reacted with dismay to a minister telling Britons to holiday at home this summer.’ George Eustice has said he will not holiday abroad but no10 says ‘we wouldn’t speculate on the PM’s plans and will set out any details in the normal manner.’ This could be read either way.
Other travel news:
• Travel Weekly research has suggested that ‘uncertainty about the restrictions on outbound travel had little impact on UK consumers’ intention to take overseas holidays this year.’ That seems rather counter intuitive.
• The BBC says that camp site rules should be relaxed to allow pop-up sites if the demand is there (as it may well be). It says ‘rural businesses and landowners are urging the government to further relax regulations to enable more temporary campsites to pop up this summer.’ It points out ‘from last year, as the pandemic hit, landowners could set up a temporary site for 56 days without planning permission, rather than the usual 28’ and adds ‘but the campaign group Carry on Camping argues this just isn’t enough to meet demand, nor the needs of rural businesses this year. They are after a full six months, to make it worthwhile for businesses, to make the most of camping now in June, all the way up to October.’
• Travel restrictions have been eased somewhat in the US for several countries but not for the UK. The US Centers for Disease Control and Prevention has lowered 61 countries from a Level 4 “avoid all travel” rating. France, Spain and Italy have moced to Level 3 but the UK has tighter restrictions on visiting the US.
• Matt Hancock has said there will be no significant additions to the green list of countries (returning from which you do not need to self-isolate) in the “medium term.”
• RBH Hospitality Management says that daycations could be a big thing this summer (rather than staycations) as capacity may run out. The comment was based on analysis of Google search terms such as ‘day trips near me’ and ‘day trips from London.’
• STR reports that the CEOs of global hotel brands expect hotel demand to come back ‘more quickly than outside observers would expect.’
FINANCE & MARKETS:
• Sterling slightly weaker at $1.4152 and €1.1616. Oil up at $72.60. UK 10yr gilt yield down 3bps at 0.78%. World markets mostly lower yesterday and London set to open down around 15pts.
RETAIL WITH NICK BUBB:
• Today’s News: There is no UK Retail company news today, but the Spanish fashion giant Inditex (of Zara fame etc) has released its Q1 results (for the period to 30 April), highlighting that “Inditex’s differentiation and strategic transformation towards a fully integrated, digital and sustainable business model continues to deliver” and that “the recovery continues to gain momentum”. Store and Online sales at Inditex in constant currency between 1 May and 6 June 2021 increased by 102% versus the same period in 2020 and by 5% versus the same period in 2019 (even though 10% of trading hours were unavailable in this period due to lockdowns and restrictions). The interims from the food and beverage travel retailer SSP are less happy, however, with sales c80% down in the latest quarter on 2019 levels…
• This Week’s News: Tomorrow brings the delayed Ted Baker finals, the delayed Card Factory finals, the Morrisons AGM and the Signet Q1 results (in the US). On Friday we get the Naked Wines finals and the start of the European Football Championship in the evening.