Bids, food inflation, YO!, DAL, ENT, FDEV, CINE, GAW, GDP & other:

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A DAY IN THE LIFE:

Since being cajoled into walking the dog most mornings when I’m up North, I’ve taken to checking out the flora by the roadside and in people’s gardens.

And very interesting it is too.

It changes week by week, it gives you ideas and, let’s face it, where else am I going to look at that time of the morning.

However, I have to say that, in a move suggesting hypocrisy is a well-watered plant our neck of the woods, if some suspicious-looking bloke with an ill-disciplined dog stood gawping into my garden at the crack of dawn, I’d be reaching for the pepper spray.

On to the news:

ASSET PRICES – WHO HAS GOT IT RIGHT?

Snowfox (Yo Sushi) yesterday sold for $621m. Fulham Shore is also under offer and Hong Kong property interests are reported to be raising money to invest in UK assets, including pubs. Below highlights from a note that went out to clients on Monday.

Introduction:

• Valuation theory would often have it that the value of a share should be the net present value of its future dividends.

• And that theory certainly has a place – but what about companies that currently do not pay a dividend? And what discount rate do you use? And some companies have cash piles that could easily be distributed and, as we comment below, how do you then differentiate between asset-rich and purely leasehold companies?

Comment on the above:

• Of course, nobody said it was easy. And you might have to take a blended mix of different valuation methods to arrive at a conclusion.

• You may have to look at the sustainable level of dividends based on normal maintainable trade.

• That isn’t a simple process. But then you will have to factor in a growth rate (if any) and then decide whether growth is an option. It should be if not all cash earnings are paid out in dividends then the remainder should either be invested in earning assets or should mount up as a cash pile.

• And then you may need to credit or debit a valuation with some measure of the worth of its assets.

The pub industry – intro:

• Huge swathes of the pub industry, certainly the freehold-based pub industry, are currently trading at very material, 50% plus, discounts to assets.

• This implies that either the asset price is wrong or that the earnings outlook for the assets is so awful that the assets need to be massively discounted to make the maths work.

• Or it may mean that the share prices are wrong.

Comment:

• A market purist may say, of course, that the market is never wrong.

• Which is nonsense under most interpretations but, in one way at least, it is a reasonable statement in that the price is the price and, if it was ‘wrong’, it would move.

• But prices do move – particularly across bids or profit warnings when, in the former case, one person’s interpretation of value is very different from another’s.

Freehold-buyers:

• With the above in mind, it is interesting to note the South China Morning Post reporting that Hong Kong-based asset manager Panda Residential is seeking to raise as much as £1 billion from investors in the region ‘to bet on the recovery of the UK commercial property market.’

• The SCMP reports the fund ‘deems it opportune to pick up pubs, hotels and student housing amid “depressed moments” which could deliver an additional 15 to 20 per cent upside in an industry upturn.’

• Co-founder of the fund Timothy Li says ‘we are already negotiating with a few smaller landlords of pubs and hotels, pubs that have residential units, or a hotel with a master lease and some retail component.’

• Mr Li says that the fund has a 6yr time horizon.

• The SCMP highlights a number of recent Chinese investments in the UK. Greene King was bought by Hong Kong investor Li Ka Shing in 2019.

• Panda says ‘interest rates are the key driver of the sort of mild depression that many landlords are going through.’ Mr Li says ‘this means the yield will have to be higher, which is a little bit impossible in London.’

Conclusion:

• Panda may put money into residential property or it may do smaller commercial deals.

• But it could become active in the UK pubs market and, where one investor leads, others may follow.

• Whilst nothing is certain, this is the stuff that bids are made of. Comments welcome.

PUBS & RESTAURANTS:

Foodservice price inflation:

CGA and Prestige Purchasing have reported that foodservice price inflation jumped back above 20%, actually to 21.4%, in April. The report says ‘inflation dipped below 20% in March for the first time since mid-2022. However, the rebound in April underlines the severe cost pressures facing businesses throughout the foodservice sector at the moment…’

• These numbers compare very unfavourably with numbers for foodservice included in the US CPI numbers detailed below. CGA & Prestige report that ‘the rise was driven by pressure in the vegetables, fish and sugar, jams & syrups categories, each of which saw prices increase by between 3% and 4% month-on-month.’

• The report says ‘this supply/demand imbalance looks set to continue for much of the rest of 2023.’

• CGA and Prestige say the ‘three major upstream influencers on the price of food—oil, exchange rates and commodity markets—are now relatively benign compared to the volatility of 2022.’ Prestige says ‘we expect to see inflation ease slowly over the course of 2023 as commodity pricing and prior year impacts kick in.’

• CGA says ‘it was disappointing to see inflation surge above 20% again in April’ and says this ‘leaves hospitality businesses facing some seismic challenges.’ Jam tomorrow. CGA says ‘the long-term outlook for this sector remains good, but trading remains exceptionally difficult.’

• The above may be another piece of evidence suggesting that a Bank of England rate rise next Thursday (with all of its implications for mortgage costs and consumer spending) may be pretty much nailed on.

Cost of living crisis:

Tenants’ squeeze. Savills claims that landlords are making their lowest profits for 16 years as interest rates rise, with many smaller buy-to-let investors near or at retirement age….

• The squeeze could lead to some of them deciding to hike rents or to sell up, leading to rents increasing in any case as supply leaves the market.

Potential:

UK Hospitality has said that the sector ‘could increase its direct contribution to the economy by £29 billion and create half a million new jobs by 20271, according to a new economic report’ produced by Ignite Economics. It says ‘employment in the sector has risen to 3.5 million, making hospitality the third largest employer in the country….’

• UKH CEO Kate Nicholls says the ‘figures show just how much of an economic powerhouse hospitality is.’ She adds that ‘despite going through a pandemic and a cost-of-living crisis over the past six years, as a sector we have continued to overcome challenges to increase our value to the economy and cement our position as a major employer.’

• Ms Nicholls says ‘I urge the Government to work even more closely with us, to seize the opportunities available and unleash the incredible potential of hospitality. This means tackling short-term issues that are stifling further growth, like enormous energy costs, food and drink inflation and damaging labour shortages, and really looking at the long-term structural issues holding businesses back, across business rates, licensing and planning.’

• Langton. Certainly, hospitality is a vibrant and optimistic sector. Demand for its services should grow in excess of GDP but, as GDP isn’t growing, that’s not saying much at the moment. However, even within a currently sluggish sector, the winners will continue to win.

Other news:

UKH chair. Managing Director of Hilton UK & Ireland, Steve Cassidy, will become the chair of UKHospitality…

• …taking over from Parkdean CEO Steve Richards. Hospitality CEO Kate Nicholls said ‘UKHospitality is continuing to build on its success – bringing in new members from across the sector and further extending our work across hospitality, tourism and leisure – and I’m looking forward to working with Steve to develop our offering even further.’

Sustainability. Research from Nutritics and hospitality data and insights consultancy CGA by NIQ shows that 34% of UK pub and restaurant goers are willing to spend more than usual in venues with strong sustainability credentials….

• The research also found that 70% of consumers are actively trying to live a more sustainable lifestyle and 44% say sustainability is important in their choice of venue to visit.

Costs. Whilst inflation in the US eased back from 4.9% in the year to April to 4.0% in the year to May (with a 0.1% increase month-on-month in May), the index for the price of food eaten out of the home rose by 0.5% in May alone…

• Food at home inflation in the US was 5.8% in the year to May – much lower than that in the UK – and food costs away from home rose by 8.3% in the year. Whilst US inflation as a whole has now recorded 11 straight months of decline, March was the first time food-at-home inflation rates fell since September 2020.

• Restaurant Dive says the ‘stubbornly high menu prices may be starting to impact consumer habits. Recent data from Circana, for instance, finds that consumer use of deals at restaurants grew by 8% year-over-year in Q1. Further, April marked the restaurant industry’s weakest performance since July 2022 and its second-softest month of growth in over two years, according to Black Box Intelligence.’

COMPANY NEWS:

Yo! Sushi: The Snowfox Group, operator of YO! Sushi has been acquired by Japanese foodservice company Zensho Holdings, in a deal which values Snowfox at $621m….

• Mayfair Equity Partners – the backers of Snowfox – will fully exit the business. The group operates approximately 3,000 chef-operated sushi kiosks and restaurants in North America and the UK, as well as manufacturing and wholesaling sushi.

• Richard Hodgson, CEO at Snowfox, said ‘Zensho recognises the value of the Snowfox Group’s highly attractive brands, our customer relationships, and our diversified international presence. Above all – it is testament to the quality, authenticity, and breadth of our Japanese food offer that a Japanese food business of Zensho’s calibre wants us to join them.’

The Food Hygiene Rating Scheme (FHRS) has awarded Wetherspoons with an average rating of 4.99 out of 5 for its 763 pubs in England, Wales and Northern Ireland….

• The maths suggests that JDW dropped only 8pts out of a possible 3,815 across its 763 pubs, which is truly remarkable. Only 8 units scored a four. Or two units scored one point each, which is very unlikely.

Mitchells & Butlers has  launched its new flexible working app M&B Flexible, allowing employees to work more convenient shifts by offering potential new team members the chance to pick their working hours, the type of role they would like to work in and the venue that they would like to work from.

Grubhub is to lay off 15% of its workforce, or about 400 people….

• Grubhub says in an email to staff that ‘rightsizing the business for where we are now — which includes ensuring we have the right resources and organizational structure focused on the right priorities — will allow us to be more agile, make bolder bets and take advantage of all of the opportunities on our doorstep.’

Brasserie Bar Co will rebrand as the Heartwood Collection  as it shifts its focus to becoming a freehold pub company, underpinned by a premium brasserie division. Heartwood Collection currently operates 20 premium pubs and 14 Brasserie Blanc restaurants. The group will focus on the acquisition of atmospheric freehold properties.

Pernod Ricard has taken a 14.2% stake in Auckland non-alcoholic drinks firm AF Drinks, for an undisclosed sum. The company creates drinks that mimic the taste of gin and vodka and expects the US to be its largest market by the end of the year.

World Coffee Portal reports that 200 Degrees managing director Stephen Fern said the business would open another three shops in the current financial year and already had two sites planned to open in 2025. The Nottingham-based coffee shop and roastery will open its 20th site in West Bridgford at the end of July.

HOLIDAYS & LEISURE TRAVEL:

Dalata Hotels has updated on Q2 trading saying ‘the Group has continued to trade strongly and expects Adjusted EBITDA to be in excess of €100 million for the six months ending 30th June 2023….’

• Dalata says ‘this reflects a very strong first half trading performance across the Group’s existing hotels and the continued impact of new hotels as they ramp up.’ it adds that its ‘margin performance has continued to improve, and Dalata’s decentralised hotel teams are successfully managing the inflationary environment through the use of dynamic pricing, cost management and an increase in sustainability initiatives delivering a reduction in utility consumption.’

• CEO Dermot Crowley says ‘we continue to deliver on our growth strategy with the exciting addition of two new hotels in London since the start of the year. The excellence of our people, the ongoing strength of demand across our markets and the quality of our portfolio gives me great confidence for the remainder of the year.

Air travel disruption is said to be behind a 174% increase in searches for caravan and lodge holidays in Cornwall on the same time last year…

• Xavier Vallee, Chief Customer Officer, at Parkdean Resorts, the UK’s largest caravan park operator says ‘the stories about airport strikes are the last thing any family wants to hear before their summer holiday – people want control, not a holiday that might be cancelled at the last minute, so it’s no surprise that they’re looking for UK breaks. The British weather is amazing at the moment.’

Israel’s Central Bureau of Statistics reports that there were 376,400 tourist arrivals in May 2023, up from 262,000 in May 2022 – but still behind the 465,000 seen in May 2019. From January to May 2023, there were 1.76 million tourist arrivals, compared to just over two million between January and May 2019.

OTHER LEISURE:

Entain plc yesterday announced that it is launching a tender offer to acquire 100% of STS Holding S.A., the leading sports-betting operator in Poland, which is listed on the Warsaw Stock Exchange, for around £750m….

• Entain said that ‘STS’s CEO Mateusz Juroszek and his father Zbigniew Juroszek, who through their respective family foundations collectively hold approximately 70% of STS’s share capital, have entered into a binding agreement to irrevocably accept the Offer.’ As these vendors will reinvest some of their proceeds in Entain shares, The latter says ‘the net cash consideration of the Acquisition payable by Entain will be approximately £450m.

• Entain’s cash component of the consideration is to be funded through a non-pre-emptive equity placing of new ordinary shares conducted through an accelerated bookbuild. This should ‘raise gross proceeds of approximately £600m (representing c.7.9% of Entain’s issued share capital) to primarily finance the Acquisition (£450m), as well as to fund further near term acquisitions.’

• CEO Jette Nygaard-Anderson says ‘we are delighted to be acquiring the leading sports-betting operator in Poland, which is a hugely exciting and fast-growing market. STS is an exceptional business with a great brand, a compelling omnichannel offering, and an outstanding CEO and management team. The transaction is perfectly aligned with our Entain CEE strategy and our wider M&A strategy of acquiring high quality businesses with leading positions in attractive, growing and regulated markets.’

• The company announces this morning that its ABB raised gross proceeds of around £600m at a price of £12.30 per share.

Frontier Developments has this morning updated on full year trading saying that revenue should be ‘around £104 million, in-line with guidance provided in January 2023….’

• It adds it has seen a ‘solid performance from [its] existing portfolio of games, generating 72% of revenue’ and says ‘Jurassic World Evolution 2 was the strongest performer in the period.’ The company says it has completed its strategic review of Frontier Foundry.’

• FDEV has announce that, after its review, it has decided to ‘cease all activity relating to acquiring new third-party titles and instead re-focus on internal titles.’ It says ‘the business has not delivered Frontier’s expectations of a positive return on investment within the first year of each title.’ It says ‘as part of the financial review process for Foundry, the Board has assessed the value of the intangible game assets for Foundry as at the financial year end date of 31 May 2023, against the future cash generation expected from each title. After taking an appropriately prudent approach to future cash flow forecasts, an incremental Foundry amortisation charge of around £13 million is expected to be taken in FY23, subject to audit.’

• Re the outlook, FDEV says FY May 2024 ‘will benefit from two major new game releases: F1 Manager 2023 and Frontier’s first real-time strategy game, Warhammer Age of Sigmar: Realms of Ruin, with both games on-track for release as planned.’

• It says ‘alongside these two new major game releases, Frontier’s existing game portfolio is expected to continue to deliver substantial on-going revenue contributions in FY24, supported by new content’ and adds ‘the Board is therefore comfortable with current analyst forecasts for FY24, with consensus revenue at around £108 million and the majority of analysts projecting an Adjusted EBITDA loss in the range of £5-10 million.’

• It says it is ‘confident that the Company can return to attractive levels of financial performance over the medium term, based on the strength of its existing portfolio and planned new releases. An update on trading for FY24 will be provided alongside the final FY23 financial results announcement in September 2023.’

• CEO Jonny Watts says ‘our renewed focus is to select, develop, launch and nurture genre-leading games which delight our players and deliver strong financial performance for our investors. I am confident that we will return to growth and profitability through the achievements of our world class team, the performance of our existing game portfolio and the delivery of our exciting pipeline of future releases.’

Cineworld’s London-listed holding company is reported to be preparing to file for administration as part of its financial restructuring. Shareholders are likely to be wiped out.

Games Workshop has updated on trading for its year to 28 May saying ‘we estimate the Group’s core revenue to be not less than £440 million (2021/22: £387 million) and licensing income of £25 million (2021/22: £28 million). The Group’s profit before tax is estimated to be not less than £170 million (2021/22: £157 million)….’

• GAW says ‘as in the prior year, in recognition of our staff’s contribution to these results, we have paid during the year profit share cash payments, amounting in total to £11 million (2020/21: £10 million). These are paid in cash on an equal basis to each member of staff. Dividends declared and paid in the year were £136 million, 415 pence per share (2021/22: declared £77 million, 235 pence per share; paid £93 million, 285 pence per share).’

• The company adds ‘we intend to announce our 2023 Annual Report for the 52 weeks ended 28 May 2023 on 25 July 2023.’

FINANCE & MARKETS:

The ONS has updated on UK GDP saying that ‘monthly real gross domestic product (GDP) is estimated to have grown by 0.2% in April 2023, after a fall of 0.3% in March 2023….’

• It says ‘looking at the broader picture, GDP grew by 0.1% in the three months to April 2023.’ It adds that the services sector grew by 0.3% in April 2023, following a 0.5% fall in March 2023, and was the main contributor to the growth in monthly GDP in April.

• The ONS says ‘output in consumer-facing services grew by 1.0% in April 2023, following a fall of 0.8% in March 2023.’ It adds that ‘production output fell by 0.3% in April 2023, after growth of 0.7% in March 2023’ and says ‘the construction sector fell by 0.6% in April 2023, following growth of 0.2% in March 2023.’

Stats from the ONS yesterday showed that UK wages are rising at their fastest rate in 20 years. Regular pay excluding bonuses rose by 7.2% in the 3mths to April, almost guaranteeing a 25bp hike in UK base rates next week….

• Some commentators are suggesting that UK rates will have to move higher and stay high for longer than previously thought. A terminal rate of 5.75% is possible.

The ONS has reported that the British economy has lost nearly 4 million working days to strikes since the start of last year.

Referring to ONS numbers on the jobs market, the CBI yesterday said ‘while the number of people in work is rising and unfilled vacancies are slowly falling, the difficulties companies face when hiring is still a hard brake on growth….’

• It says that ‘signs that stubbornly high inactivity is starting to fall are encouraging, but a new record high number of people unable to work because of long-term sickness is a real cause for concern.’

• The CBI says ‘business and government have identified getting people back into work as a top priority. A laser-like focus on delivering the promised expansions to childcare and occupational health services, and businesses increasing flexible working can quicken the pace of easing shortages.’

The US yesterday reported its 11th straight reduction in inflation with prices rising in the 12mths to May by only 4.0%. This compares with estimates of 4.1% and an April number of 4.9%….

• The Fed will update on bank rates today. It is likely that, with inflation cooling, the US will ‘skip’ a rise.

The United Nations Conference on Trade and Development shows that Britain’s export record is the worst in the G7 barring Japan as a result of trade barriers and red-tape. Stats show exports up only 6% between 2012 and 2021 compared with EU exports up over 29%.

Housing market. Builder Bellway yesterday reported a 25% drop in reservations in the four months to the start of June.

Bank of England Governor Andrew Bailey said yesterday that the UK labour market was ‘very tight’. He said that inflation was stickier than he had imagined and said that the Bank should learn from these mistakes….

• Mr Bailey said ‘as I’m afraid this morning’s numbers illustrated, we’ve got a very tight labour market in this country.’ He said ‘we’ve had a fall in the supply of labour, which is showing signs of recovering, but very slowly, frankly.’

Sterling up at $1.2611 and €1.1687.Oil price up at $74.45. UK 10yr gilt yield now 4.43%, up 9bps overnight. Markets mixed yesterday and London set to open down around 11pts.

The cost of UK government debt has now risen above Truss-era levels as the scale of the inflation problem facing the UK has become more apparent. The pound rose yesterday on hopes / fears of higher UK interest rates relative to most other developed countries.

RETAIL WITH NICK BUBB:

• Today’s News: The Motorpoint finals (for y/e March) reveal that the second-hand car business made no money on sales of £1.44bn and it says that as “we expect that conditions will remain challenging… we will pause our new store rollout programme”. The Marks Electricals finals, however, report a different story: “Continued revenue growth, robust profitability and positive trading outlook”.

• Today’s Press: According to the invaluable Guardian morning email briefing, “Students among victims stabbed to death in Nottingham rampage” is the Guardian’s lead story this morning. “Murdered 5 minutes from home” says the Daily Mirror about the “killing rampage” in Nottingham. “Students killed in dawn knife attacks” – that’s the Daily Telegraph while the Times has “Knifeman kills three in rampage through city”. The Daily Express says “Killed at random … just five minutes from home” while the Daily Mail’s headline is “Horror in Nottingham / Killed as they walked home from night out” and the Sun says “Knifed to death in rampage”. “Students die in white van knife horror” – that’s the Metro. The Nottingham story gets a puff on the front of the i (the report is inside) but its splash is “Mortgage stress to hit levels last seen in 1980s – as interest rate heads for 5.75%”. The top story in
the Financial Times is “Bailey highlights stubborn inflation as wage growth triggers rate rise bets”.

• News Flow This Week: Tomorrow brings the Halfords finals and an ASOS update, whilst Friday brings the Tesco Q1/AGM. Over in the US, the supermarket giant Kroger (which is Ocado’s main Overseas client and which is planning to merge with its big US rival, Albertsons) is due to release its Q1 results tomorrow.