Langton Capital – 2022-06-10 – PREMIUM – Fuller’s meeting, debt, cost of living, flight chaos, Parkdean & other:
Fuller’s meeting, debt, cost of living, flight chaos, Parkdean & other:
A DAY IN THE LIFE:
In addition to fighting off the unwanted attentions of the local deer, rabbits, foxes, marauding birds and hordes of unnamed insects, we keep a couple of window boxes where, I have had to conclude, I’m less of a gardener and more a keeper of a few well-fed snails.
Because the slow-moving-but-insatiable beasts seem to have munched everything down to a stump before stopping for what looks either like a well-earned rest but could just as easily be them trying to procreate in order to eat more of the marigolds provided by that nice man with the permanent scowl.
So, it might be that plastic flowers and concrete are the answer. Have a good weekend and on to the news:
QUESTION OF THE WEEK?
Question of this week:
What will happen to the delivery market now that restaurants are open again, times are getting hard and there may be some discounting? This is a vitally important, real-world question, the answer to which may determine whether delivery – or more specifically some of the companies within it – have much of a future.
Answer of the week:
There does, it has to be said, appear to be some scepticism as to whether there is enough money in delivery to keep everyone happy. Whilst there is demand – and there is certainly supply – there isn’t currently much profit to share around, and that is putting it mildly. A test of investor appetite for and belief in delivery would come if any of the major players needed more funds. At that point, investors may suggest that, whilst they’ve got deep pockets, for delivery they have rather short arms.
PUBS & RESTAURANTS:
Cost of living crisis:
With the cost of filling up the average motor car now above £100 and higher fuel bills starting to land, many analysts are on the lookout for signs of belt-tightening elsewhere in the economy.
• Eyes are peeled. Surveys have pointed to cutbacks in spend on going out but that’s not (yet) what we’re hearing. Attention elsewhere is focused on big ticket items (versus affordable treats) and on the potential for ‘trading down’ elsewhere in the economy. There is little evidence (again, yet) of trading down in hospitality. In fact, if anything, operators continue to say that they are seeing some premiumisation.
• With that in mind, worth noting that DFS yesterday reported that it had seen weakening sales in recent months. It said it had seen ‘slowing market-wide demand observed in Quarter 4’ and commented that it was experiencing ‘lower order intake since April has led to lower levels of production and deliveries relative to our previous expectations.’ It guided down on profit expectations and the shares were down some 12% by 2pm.
• And the owner of discount retailer Poundland has warned that UK shoppers are cutting back. The operator, which has businesses in a number of countries, says ‘specifically in the UK, the cost of living crisis has impacted customers’ disposable income as they scale back even on essential purchases in the short term.’
Fuller’s yesterday said that it had overhauled its recruitment platform in order to be more inclusive and to foster a sense of belonging. In a tight labour market, this will be more and more necessary. Elsewhere, UK Hospitality CEO Kate Nicholls told UKH’s Summer Conference that easing immigration laws and lifting the apprenticeship levy would help tackle the sector’s staffing crisis.
• Ms Nicholls says this is ‘an economy-wide problem but particularly deeply felt in hospitality.’ She says ‘immigration could be a bridge to help us.’ This might not fly politically. The UKH CEO says ‘we’ll take anybody and train them up. There are simply not enough people who are available.’ She adds ‘we can upskill people rapidly and give them meaningful careers.’ In the meantime, the cost of labour is likely to move in one direction only even, at the moment, into the face of what may be an economic recession.
Train drivers look set to join other rail workers in striking later this month. Aslef has announced strikes at three train operating companies, Hull Trains, Greater Anglia and Croydon Tramlink. RMT workers are set to strike much more generally across the country on 21, 23 and 25 June.
• Sadly this will not do a lot to help either the return to work and nor will it encourage would-be consumers to travel to venues in city centres.
FULLER’S FULL YEAR NUMBERS – ANALYSTS’ MEETING:
Following the release of its full year numbers, Fuller’s hosted a meeting for analysts and our comments thereon are set out below:
Trading – sales, sales mix, costs:
• See also earlier email.
• Fuller’s commented that, given its heavy presence in Central London, it was perhaps the most directly impacted UK pub operator. Disruption continued through FY22.
• Slide 4 illustrates that the company recovered strongly post the full unlocking in July last year but were very badly knocked over Christmas by Omicron.
• Although current trading is up 4% (first 10wks, total sales rather than LfL), it’s clear that volumes are down. The co says they will not recover in FY23. The may recover for FY24.
• The tenanted business performed very solidly.
• Energy costs are partially hedged, labour costs are and industry-wide issue, food costs are similarly industry-wide but beer prices, courtesy of the 10yr Asahi contract.
• The company ‘has put prices up’ but no figures were given. The co is ‘mindful that it should try not to impact demand’.
Cash flow, debt & balance sheet:
• The directors have revalued FSTA’s property portfolio at £995.6m. The last official valuation was in 1999. The co is 92% freehold. The £400m valuation excess brings the asset value per share up to £13.80.
• Debt is down (see earlier email) due to profitable trading, some limited asset disposals and the £52m equity raise in 2021/22.
• Re capital allocation, the company intends to prioritise growth-focused investment, dividends, new asset investments and, possibly, share buybacks. The group would be comfortable with debt at 3x EBITDA
• Most assets are ‘where they should be’ but the group did sell 12 (mostly unlicensed) properties during the period and move four pubs from managed to tenanted
Outlook, current trading:
• Post covid, current trading challenges are labour issues, energy costs and wider inflation. A consumer recession could be further down the line.
• In the meantime, in the five weeks to the end of the financial year under review, sales were back to 97% of pre-Covid levels.
• The company aims to ‘nourish the soul’ of its customers. It’s customer base is evolving & is somewhat younger than it used to be. The co will focus on staff. Shortages here may continue for some time.
• The co will continue to target selective unit acquisitions. The corporate image will be moved further away from beer. More focus on retail, digital journeys, customer (and staff) attraction and retention etc.
• The group’s room sales have been strong & this will remain an area of focus.
• The younger clientele is doubly welcome as older customers are a little slower to come back.
• The company has compared with 2021. At some point it will become the norm to compare with prior year but, in this case, it does mean that the comps are not altogether meaningful.
• The company does not split out sales as to price and volume impacts. Given the heavy presence in London, volume is likely markedly down.
• As mentioned, however, nobody suggested this was an easy market and, as commented previously, Fuller’s has a wonderful, largely freehold, estate.
• We commented at the H1 stage that, though Fuller’s share price was beginning to look interesting, ‘would be buyers may decide to await further news before committing to the shares’.
• This has proved to be the case and the shares are a little lower now, despite having seen the back of Plan B and Omicron, than they were in mid-November.
HOLIDAYS & LEISURE TRAVEL:
Concerning ongoing airport chaos, the House of Commons Business, Energy and Industrial Strategy (BEIS) committee has launched a survey to canvas views on where the blame lies. The survey is only open until 12 June. MPs on the committee will then question airline bosses, unions and aviation industry bodies about the problems.
• Transport secretary Grant Shapps says that operators have oversold holidays. Jet2’s Steve Heapy says that is naïve and suggests a failure to understand the industry. Meanwhile, committee chairman Darren Jones MP comments ‘thousands of people have been affected by chaos at airports in recent weeks with the prospect of delays and cancellations continuing into the summer.’ He says he wants ‘answers about what is causing these issues, how it will be fixed and how consumer rights are being properly enforced with refunds and compensation being paid promptly.’ The industry has traditionally employed a large number of overseas nationals, many of whom are no longer available.
Research by All Clear Travel Insurance suggests that there is still significant demand for overseas holidays and it goes on to say that people are prepared to pay more. They may have little choice.
• The survey suggests there has been a “seismic shift” in attitude to price. Costs are rising, they are visible and the public understands this. Some 84% of British travellers intend to spend more than they did pre-pandemic. All Clear says ‘the fact that so many more people are starting to travel abroad again compared to before the pandemic is great news.’ It says ‘the pandemic has created a seismic shift in attitude: people are, despite the recent cost of living rises, still prepared to spend more on ensuring their safety, are conscious of the potential risks, and are taking the right action in advance to minimise risk.’ Maybe not a surprise to see that the travel insurance company also concludes that people want to buy more products from travel insurance companies.
Travel Weekly reports industry debt specialist Travlaw as saying that there has been a “huge increase” in moves to oblige travel companies to pay back some debt following the end of government protections against insolvency at the end of March. Travlaw reports ‘a number of our clients have received notice of winding up actions.
Sky reports that the sale of Parkdean Resorts has been called off. It says talks with prospective buyers have been suspended, despite the company and its Canadian owner Onex Corporation having taken part in an auction lasting more than six months.
• Parkdean comments ‘the staycation market remains very buoyant, the business is trading strongly and is well positioned for growth, having invested £110m into the business over the past six months, expanding the trading footprint, acquiring new land to develop, upgrading accommodation, and enhancing park facilities.’
• It tells Sky, however, that ‘given the current broader macro economic uncertainty, the board has decided to pause the process and will revisit when the macro economic backdrop has improved.’ Interestingly, Ted Baker also announced on Monday that its preferred buyer had called off talks to buy the company.
• Sky comments that tighter debt markets could stymie some transactions. It says ‘increasingly difficult debt financing conditions have cast doubt over a slate of potential deals, including auctions of Boots, Motor Fuel Group and Butlin’s. Some or all of those sale processes may yet b successfully completed.’
Eurocontrol forecasts that air traffic across the continent should reach 9.5 million flights this year, representing 85 per cent of 2019 levels. This is a slight downgrade on earlier forecasts of around 89 per cent of pre-Covid numbers.
The latest travel survey by Cheval Collection has suggested that serviced apartments have risen in popularity with lodging guests. Cheval finds that 68% of respondents were likely or very likely to book a serviced apartment, when staying in either London or Edinburgh. This was only two percentage points lower than during 2020, when demand for serviced apartments was at a peak.
• Cheval Collection says ‘investors have realised that serviced apartments are no passing fad and we are now talking to a number of owners and developers as we expand across dynamic cities around the world. Demand is building for serviced apartments with experienced operators who can deliver high-quality stays in luxury environments.’ It adds ‘the survey found that 90% of respondents said that positive online reviews from previous guests were very important or important; the most relevant of all the possible considerations for travellers.’
FINANCE & MARKETS:
The European Central Bank, in describing inflation as a ‘major challenge’, has said that it will raise its key ECB interest rates in July. It adds that if ‘the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate at the September meeting.’
The US Fed updates on inflation later today (Friday).
The RICS reports that UK estate agents saw seen a sharp drop-off in inquiries for new homes last month. The net balance of buyer inquiries was minus 7 per centage points in May compared with plus 8 the previous month. A net 73 per cent of respondents still said house prices increased in May.
Sterling mixed at $1.2494 and €1.1749. Oil lower at $122.39. UK10yr gilt yield sharply higher, up 9bps, at 2.33%. World markets lower yesterday & London set to open down around 57pts as at 6.30am.
A bit busier next week.
Vianet reports full year numbers on Tuesday with Everyman Media’s AGM to be held on the same day. Whitbread hosts its AGM on Wednesday, when it will update on Q1 trading. Tortilla’s AGM is also Wednesday and 888 Holdings also hosts its annual meeting.
RETAIL WITH NICK BUBB:
Today’s News: Following the profit warning from DFS yesterday, the kitchenware business ProCook has also rushed out a profit warning this morning, even though it only issued a year-end trading update on April 23rd and hasn’t issued its finals for y/e March yet: the message is that since its Q4 update, “trading has been impacted by increasingly challenging market conditions” and that it now expects that full-year turnover will only be “broadly” flat and that adjusted PBT will be only £4m-6m (down from the £10m expected for y/e March). Daniel O’Neill, ProCook’s CEO & Founder, says “There are clear and numerous pressures on consumers at present which are impacting discretionary spend across retail as a whole and kitchenware is no exception”, but the jeweller Signet (which trades as H Samuel and Ernest Jones in the UK) seems to be doing fine, as it flagged in its Q1 results yesterday (in
Next Week’s News: The JD Sports finals are due imminently, but the Games Workshop finals are definitely on Tuesday. Wednesday brings the WH Smith Q3 update, whilst the Halfords finals, the Boohoo trading update and the MPC interest rate decision are on Thursday. On Friday we then get the Tesco Q1 and the Boohoo AGM.