Langton Capital – 2023-09-07 – PREMIUM – RTN H1 meeting, Jet2, Playtech, food costs, veggie, experiential etc.:
RTN H1 meeting, Jet2, food costs, veggie, demographics, experiential etc.:PREMIUM EMAIL – PLEASE DO NOT FORWARD: A DAY IN THE LIFE: What kind of a job is ‘influencer’? I mean, really? I can just about get my head around the idea of somebody unboxing and reviewing tech products on YouTube and getting a name for themselves. But much of the other stuff just seems to be a sort of FOMO generating machine where virtually everyone ends up the poorer – financially or emotionally – except for the social media company, which ends up with a nice list of pliable viewers and access to many of their most personal details, and the ‘talent’. But I have to accept that it doesn’t really matter what I think. A ban isn’t coming any time soon and nor can I see there being a Chartered Institute of Influencers this century complete with crest, Royal Charter, EC2 offices and a series of exams. Anyway, the weather’s boiling out there, the kids must be back at school. On to the news: RESTAURANT GROUP H1 NUMBERS: The Restaurant Group has this morning held its H1 analysts’ meeting and our comments thereon are set out below: Headline numbers/comments: • Total revenue is up 10% YoY to £467.4m, with adjusted EBITDA up 15% to £36.3m and PBT flipping positive to £7.2m from -£0.1m in H1’22 (prior year VAT benefit adjusted out). • Management said the EBITDA growth was driven by RTN’s strong sales performance in its Wagamama, Pubs and Concessions businesses and tight cost management. • EBITDA margin increased to 7.8% from 7.4% and operating margin increased to 4.3% from 3.0%. • There has been a moderate increase in managements FY23 EBITDA expectations. • RTN said it continues to actively explore strategic options to further accelerate margin accretion and deleveraging. Wagamama: • Revenue was up 7% in the 26 weeks to 2 July to £222m, now representing 47% of total group revenue. • Divisional EBITDA up 25% to £28.8m, with the division implementing “one or two cost initiatives” which have “borne good fruit to date”. This gives a divisional EBITDA margin of 13.0%, up from 11.2% in the year prior. • LfL sales in the 21 weeks to 27 August (Q2 + Q3-to-date) were up 9%, which is outperforming the market by 2%. This outperformance increases to 5% in Dine-in. • Delivery & takeaway mix is stabilising at c20%. • RTN plans to open 6 Wagamamas this year, ending FY23 at 161 sites with the roll out to be accelerated to 8-10 sites per annum thereafter. • The long-term target for the size of the estate is 200-220 sites. • RTN states that the most successful new openings have been in towns where a Wagamama is ‘transformational’ for the town, such as Stoke & Southend. It stated that rental levels are typically 25-35% lower than pre-Covid in these kinds of locations. • The company said that it expects nearly all new Wagamama openings to be outside of central London. Pubs (Brunning & Price): • Revenue in this division was up by 13% to £80m, representing 17% of total group revenue. • Divisional EBITDA increased by 10% to £9.0m, giving a divisional EBITDA margin of 11.3%, a notable increase from the prior year’s margin of 4.7%. • LfL sales (Q2 + Q3-to-date) were up 10%, outperforming the market by 1%. • The company has opened one new site in FY23, planning to accelerate this to 1-3 new sites per annum going forwards. It said there is a long-term potential for between 120-140 sites. • RTN stated that approximately 50% of this division’s estate is freehold and is valued at £160m. Concessions: • Revenue significantly increased by 42% YoY to £81m in H1 as UK passenger volumes in TRG airports continued to recover, reaching 96% of 2019 levels in Q3. • Divisional EBITDA increased to £6.8m from £2.7m the year prior, with EBITDA margin significantly improving to 8.4% from 4.7% in H1’22. • The company hailed “exceptional” LfL sales in the 21 weeks to 27 August, up 27% and trading 12% ahead of UK air passenger volume growth in the same period. • The company plans for 2-4 renewals or new openings per year from 2024 onwards in this division. • RTN said that negotiations with airports can be “robust” but claimed that its ability to operate sites to a high level put the company in a “good space for negotiations”. Leisure: • The company has accelerated its rationalisation plan for this division, with “good progress” on exiting c40 sites in FY23, which would bring the divisional estate to c76 sites (excluding Barburrito sites). • Revenue fell by 5% to £84m and divisional EBITDA fell to a loss £0.8m from a profit of £5.1m the year before. • A strong cinema slate in Q3 (“Barbenheimer”) helped the division trade “more resiliently” with LfLs up 6% YoY in the quarter. Costs, Price & Profitability: • RTN expects FY23 labour costs to be +8-10% on FY22 levels, FY24 to be 6-7% on FY23 levels and FY25 to be 5-6% on FY24 levels. The company said that all brands have delivered good improvements in labour retention rates over the last 6-9 months. • General food and drink inflation is expected to be 10%+ YoY in FY23, 3-5% in FY24 and 2-4% in FY25. • Utilities are expected to be £7-8m higher YoY in FY23, then £3-4m lower in FY24 and £4-5m lower again in FY25. • The average cost of debt is predicted to be Libor/Sonia rate = average of 5.0% in FY23, increasing to 5.75-6.25% in FY24 and then moderating back down to 5.0-6.0% in FY25. • In terms of taking price, RTN said it has passed on “considerably less” price than the underlying input cost input inflation in the first half of the year. • It notes, however, that as cost inflation continues to moderate going forward price increases may no longer have to be below input inflation. • RTN plans to increase its FY22 VAT adjusted EBITDA margin of 8.3% by 250-350bp to 10.8-11.8% by FY25 year-end through a mix of cost opportunities, volume growth & pricing and portfolio mix. Balance sheet: • RTN reports net debt on a pre-IFRS 16 basis has increased from £186m (as at the Dec 22 year-end) to £196m as at the end of H1. • It reports this is due to the acceleration of capex on new openings and the accelerated rationalisation of the Leisure division. • RTN says ‘on a full year basis, we expect pre-IFRS 16 net debt to be between £180 to £190m.’ It says debt will be cut by higher EBITDA, proceeds from the sale of some freehold Leisure sites and a working capital inflow. • RTN says it will cut capex in H2 and expects lower exceptional costs – though, by their nature, these are hard to predict. • The company is targeting net debt/EBITDA to be below 1.5x before the end of FY25. Langton Comment: • At the time of its H1 update on 19 July, RTN highlighted the acceleration in sales in the last 4wks of that period. • It has today been able to comment on more of Q3 suggesting that Wagamama has accelerated sales, concessions growth continues apace, pubs have slowed down (poor weather) and the leisure business has swung from decline to growth (at least in nominal terms and admittedly over a short time period). • There is no headline split between volume and price at this stage. Delivery has edged back again and dine-in has been strong. • As mentioned before, the pandemic provided cover for RTN (as well as the incentive and need) to push several years’ restructuring into a much shorter period. Closures, CVAs, cash raises etc. • The company has continued with this restructuring, accelerating the process in its Leisure division with the divisional estate set to reduce significantly to 76 sites. • Management expects the accelerated rationalisation of the Leisure division paired with the accelerated roll-out of Wagamama to deliver EBITDA margin gains in the coming years. • Activists are sabre rattling. RTN referred at its July update to potential strategic disposals. In this presentation, the company holds its cards close to its chest, merely saying that it continues to actively explore strategic options to further accelerate margin accretion and deleveraging. • In common with much of the sector, trading remains challenging as customers feel the pinch. RTN acknowledged that the consumer outlook in the next 12-18 months looks uncertain as inflation remains relatively high and interest rates squeeze disposable incomes. • The group has moved past ‘surviving Covid’ but RTN – and the industry – will have to cater to a diminished customer. • The group’s shares have recovered a little recently but, spikes excepted, they remain close to 20yr lows. PUBS & RESTAURANTS: Food input costs: The CGA Prestige Foodservice Price Index has suggested that food inflation in hospitality slowed slightly in July as retail prices began to fall. It says that food inflation ‘fell marginally to 21.7% year-on-year in July’ but it adds that ‘despite the slight fall of 0.9 percentage points, inflation remains only just below the Index’s previous peak of 22.9% in December 2022.’ The Index adds that its numbers showed ‘a month-on-month increase of 0.7%—in contrast to supermarkets, where prices fell by 0.4% between June and July….’ • The CGA and Prestige Index nonetheless ‘reveals some signs that some foodservice prices are starting to ease.’ It says fish prices fell and dairy prices remained stable, and the month-on-month increase in the vegetables category slowed by half, from 3.2% in June to 1.6% in July. • The Index suggests that ‘inflation is falling more slowly in the category of food products, where processed items dominate and manufacturers remain exposed to high inflationary inputs including energy and labour. Many of these products are also imported and have accrued additional costs from post-Brexit trading arrangements.’ • Langton. Comments on the easing (albeit very marginal) of inflation support comments made on input price costs by Restaurant Group yesterday and other operators over the recent weeks. However, the comment that processed foods – where labour is a larger element of cost – were seeing inflation remaining high, suggests there has been some spread of inflation into the labour market and that may take longer to squeeze out. • Prestige’s Shaun Allen says ‘food and drink supply into hospitality has been slower to react to falling input costs than the retail sector.’ James Ashurst at CGA adds ‘businesses will be relieved to see a slight easing of inflation in July, and there are some welcome early signs of relief in key spending areas for both operators and consumers.’ • Mr Allen adds ‘however, with inflation still topping 20%, trading conditions remain extremely challenging. It is especially frustrating at a time when prices are easing in the retail sector, and reinforces the case for targeted government support for hospitality businesses.’ Trends: Interesting to note that, in the USA, Veggie Grill has closed nearly half its stores to protect its future on the back of shifting demographics post-pandemic. The company says that diners are still interested in plant-based fare but presumably not as much as they were or not as much as the company hoped they would be… • Veggie Grill seeks solace in company, saying ‘everybody from Starbucks on down has had times where they’ve had to take a step back and reassess their growth plans.’ The group’s CEO adds ‘that’s where we are now. We’re going to take these lessons and really create a sustainable growth plan.’ The economy: The British Chambers of Commerce has said that, whilst the UK could still dodge a technical recession, the economy was likely to ‘flatline’ against a backdrop of higher interest rates and the cost of living crisis… • The BCC is looking for GDP growth of 0.4pc this year, 0.3pc next year and a still-weak 0.7pc in 2025. It says ‘consistently low economic growth of this nature is comparable to previous periods of economic shocks and recessions such as the oil crises of the 1970s and financial crash of 2008.’ • If interest rates remain high and taxes have to rise, consumers may be worse off despite the fact that the economy as a whole has remained virtually unchanged. Government and some savers may benefit. • The BCC reports that interest rates, which could peak as soon as the end of this month, will remain high as inflation is stickier than had been expected. It says interest rates could still be around 4.5% in 2025. • In addition, the Resolution Foundation says that working-age household incomes will be 4pc lower in 2024-25 in real terms than they were in 2019-20. It says ‘never in living memory have families got so much poorer over the course of a parliament.’ It points to stealth tax raids and inflation, particularly in the prices of essential goods and services that need to be purchased. Cost of living crisis: The Resolution Foundation reports that mortgage holders will pay £3,000 more in repayments next year as rising interest rates deliver a £17bn blow to homeowners. The think tank estimates that hundreds of thousands of mortgage holders will be moving off old fixed-rate deals and onto higher ones over the next year. Every little hurts. The Royal Mail will increase the price of a first-class UK stamp by 15p in October, the third increase in 18 months. From 2 October a first-class stamp will cost £1.25 – 47% more than in March last year. Energy. Investec has warned that the ‘era of cheap energy is over.’ It says household bills are set to remain much higher than they were before the PUB (Pandemic / Ukraine / Brexit) era. Much the same could arguably be said of food prices, interest rates and labour availability and costs. Demographics: The Resolution Foundation reports that younger households, which tend to have mortgage debt and lower cash savings, will be negatively impacted by rises in interest rates. It says that, whilst savers as a group will receive £90bn in 2024-25, up from just £5bn in 2021-22, this will be predominantly taken by older consumers… • The Foundation reports that those aged under 35 were may be £700 a year better off because of interest received by 2024-25, those aged 65 to 74-year-olds will benefit from a £3,600 rise on average. This is six times more than the younger cohort. In addition, mortgage debt (and much non-secured debt as well) is concentrated across younger demographics. Elsewhere, ONS figures show some students are skipping meals, taking on debt or dipping into savings as the cost of living crisis impacted consumer behaviour…. • Students typically frequent the bar scene and the current hardship may be leading to fewer visits & more socialising via the off-trade instead. No matter how financially resilient they are under normal circumstances, hardships can cumulate and change behaviour over the medium term. Upcoming results: A busy month in October with either numbers or updates from, amongst others, JDW, MARS, RBG, WTB, MAB and Punch’s Bond Report. City Pub Group and Tortilla will report in September. Staff tipping: Research by payments company Dojo has suggested that the average value for tips across the country has fallen to £5.60 per transaction, down 7% on last year…. • Dojo says ‘tipping is a strong indicator to show your appreciation and it’s likely a consequence of the ongoing cost-of-living crisis that the average amount being passed on from diners is decreasing.’ • It adds ‘as high interest rates and inflation remain, the value consumers place on going out for a drink or a bite to eat is higher than ever – and along with the increased cost of going out, expectations have shifted upwards. It’s therefore important that businesses and consumers support each other – with venues offering the best experience possible and, where they can afford, customers showing their gratitude to the staff that provided it.’ COMPANY NEWS: Comptoir Group has announced that it has secured a location in Ealing, West London, to open a new Comptoir Libanais in early October… • Nick Ayerst, CEO, said ‘I am delighted to announce the opening of the first restaurant in four years. Ealing is a thriving hub and our new location will serve guests from across West London’. Naked Wines has announced that its delayed figures should be produced at the latest by 19 September. Pocket Planet has announced a new experiential attraction will be built on Oxford Street featuring small scale, but very large model landscapes of UK landmarks, London itself and a selection of scenes from around the world…. • Langton. The attraction will offer an ‘innovative’ visitor and retail experience with a passing footfall of over 150 million per year. That is, presumably, the annual total of people walking on Oxford Street rather than a projection of the number of people who may come through the door. • Whilst the above might not sound immediately appealing, there are attractions along similar lines elsewhere in the country and elsewhere in Europe. In The Netherlands, Madurodam is a miniature park and a major tourist attraction in The Hague. It features miniature 1:25 scale model replicas of the most famous Dutch castles, industrial projects and public buildings. Guests are treated to a trip through the history and, since it opened in July, 1952, the site has welcomed over 50 million visitors. AB InBev said in its Q2 earnings call that ‘approximately 80% are favourable or neutral’ towards its Bud Light brand after the brand saw a drop in sales when it became a victim of a culture skirmish…. • Anheuser-Busch CEO Michel Doukeris said ‘Our revenues declined by 10.5% and STR (sales to retailers) volumes [dropped] by 14% with performance impacted by the decline of the Bud Light brand.’ The MCA reports that North West brewer and pub operator Hydes will take a slow and steady approach to growth as it returns to the expansion trail with its first acquisition in five years. MD Adam Mayers has announced that the company will invest £3.6m into a new site in Heswall, on the Wirral, Merseyside, set to open later this year. B&M has acquired 51 Wilko shops for £13m, with the stores set to be rebranded as B&M. The retailer did not acquire Wilko’s brand name or any of its intellectual property. HOTELS & LEISURE TRAVEL: Jet2 trading update: Jet2 has updated on trading ahead of its AGM later today saying ‘summer 2023 on sale seat capacity at 15.26m seats, has remained largely consistent with that reported at our Preliminary Results…and is 7.3% higher than Summer 2022.’ It says there has been a ‘small reduction in capacity primarily a result of the recent Rhodes wildfires.’ Jet2 says ‘the months of July and August experienced strong late booking momentum with September currently showing a similar trend and average load factors now 0.5ppts behind Summer 2022 at the same point (at 6 July 2023: 0.8ppts behind). Pleasingly, the mix of higher margin Package Holiday customers represents 71.7% of total departing passengers at present and is 4.8ppts higher than Summer 2022….’ • Jet2 adds that ‘winter 2023/24 forward bookings are encouraging with average load factors 0.3ppts ahead of those of Winter 2022/23 at the same point, against a 20.4% seat capacity increase to 4.47m seats.’ It adds ‘for both seasons, average pricing to date for both package holidays and flight-only products has remained robust.’ • Jet2 says ‘we are on track to exceed current market expectations for Group profit before foreign exchange revaluations and taxation for the year ending 31 March 2024, with the outcome presently expected to be in the range of £480m to £520m. This guidance remains dependent on avoiding any material extraneous events in the balance of the year.’ • Re 2024, the company says summer is already on sale ‘with growth in seat capacity of approximately 11% and average load factors at this very early stage are slightly ahead of Summer 2023 at the same point.’ Venice will begin charging all day-trip visitors aged over 14 a €5 entry fee from next year as the city looks to tackle its over-tourism issues. The fee will be first applied on a trial basis for 30 days. New regulations in New York have led to a drop in Airbnb bookings. Under the new system, short rentals (under 30 days) are only allowed if hosts registers the property and remains physically in it while guests are present. France’s new taxe d’habitation, a residence tax, is set to hit Britons with second homes in the country as the French government ramps up property taxes for owners of holiday homes in popular tourist areas. The tax could see a surcharge of between 5-60% applied in 2024. WH Smith reports sales in its travel arm jumped 42% higher over the year to 31 August, up 27% on a LfL basis. The company welcomed the ongoing rebound in travel worldwide, with H2 comparable travel sales up 15% compared to high street sales which were up just 1%. IATA has reported that airline passenger traffic in July was back to 95.6% of pre-Covid levels with traffic up 26.2% compared to July 2022. OTHER LEISURE: Playtech has reported H1 numbers saying that revenue rose by 8% to €860m with adjusted EBITDA up 10% at €219.9m. The group reports adjusted diluted EPS of 27.5c vs 30.sc last year. CEO Mor Weizer says ‘our success in the period was driven by our diversified portfolio, spanning B2B and B2C.’ He says ‘we have started the second half of the year well and are on track to deliver FY23 Adjusted EBITDA slightly ahead of current expectations.’ Manchester United shares fell sharply (by around 18%) in New York as the suggestion that current owners the Glazer family had ceased marketing the company for sale continued to circulate. The Telegraph reports that Meta is ending its Community News project in the UK, France and Germany – a feature spearheaded by Sir Nick Clegg who is widely seen as Meta founder Mark Zuckerberg’s right-hand man. The company is instead said to be focusing on short-form video in a bid to compete with TikTok. Google celebrated the 25th anniversary of its launch this week, a period in which it has cemented itself as the go-to search engine of the internet. FINANCE & MARKETS: Bank of England governor Andrew Bailey has said that the Bank is close to the end of its monetary tightening cycle. The Bank is certainly nearer the end than it was a year ago. City AM, in its print edition, says that the governor’s comments are ‘as clear as mud’… • Mr Bailey says ‘there was a period when it was clear rates needed to rise going forwards, and the question for us was how much and over what time frame. We’re not, I think, in that phase anymore.’ He adds ‘we’re much nearer the top of the cycle… on the basis of current evidence.’ China’s exports have fallen in August for fourth month in a row. Exports were down by 8.8% in August compared with 2022 and imports dropped 7.3% per official figures. Halifax has reported that house prices fell in the year to August by 4.6%. Prices fell by 1.9% in the month of August… • The Halifax says ‘there is always a lag-effect where rate increases are concerned, and we may now be seeing a greater impact from higher mortgage costs flowing through to house prices.’ It says ‘market activity levels slowed during August, and while there is always a seasonality effect at this time of year, it also isn’t surprising given the pace of mortgage rate increases over June and July.’ Sterling weaker at $1.2496 and €1.1654. Oil up at $90.33. UK 10yr gilt yield up 3bps at 4.54%. World markets weaker yesterday and London set to open down around 21pts as at 6.30am. RETAIL WITH NICK BUBB: Nick is taking a short break. |
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