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Morning Briefing for pub, restaurant and food wervice operators

Fri 16th Mar 2018 - Update: JD Wetherspoon results, Conviviality, Greene King, Domino’s, Cineworld
JD Wetherspoon reports like-for-likes up 3.8%: JD Wetherspoon has reported like-for-like sales have increased 3.8% in the six weeks to 11 March 2018, with total sales up 2.6%. It comes as the company reported sales for the 26 weeks to 28 January 2018 rose 3.6% to £830.4m – like-for-like sales were up 6.1%. Profit before tax before exceptional items was up 20.6% to £62.0m. Like-for-like bar sales increased by 5.7% (2017: 2.4%), food by 6.9% (2017: 5.1%) and fruit machines by 4.6% (2017: decreased by 2.1%). Like-for-like room sales at its hotels increased by 3.1% (2017: 14.8%). Bar sales were 61.0% of total sales, food 35.3%, fruit machines 2.5% and room sales 1.1%. During the period, the company opened three new pubs and closed 12, bringing the number open at the period end to 886. Following a review of its estate, in recent years, it has placed about 100 pubs on the market, 88 of which have now been sold, are under contract or have been closed. Exceptional items totalled £6.8m (2017: £7.3m). A total of 12 pubs were sold or closed in the period. There was a £5.9m (2017: £6.6m) loss on disposal and an impairment charge of £1.1m (2017: £5.2m) for closed pubs and pubs which are on the market. The cash effect of the exceptional charges was an inflow of £0.8m from the proceeds of pub disposals. Chairman Tim Martin said: “There has been a huge debate, since the referendum, about the economic effects of Brexit. In particular, trade organisations such as the CBI and the BRC, supported by the FT, the Sunday Times, the Guardian, the chairmen of Whitbread and Sainsbury’s and others, have misled the public by saying that food prices will automatically rise if we leave the EU without a deal. This is a fallacy – the EU is a protectionist organisation which imposes high taxes on food, clothing, wine and thousands of other items from non-EU countries, which comprise about 93% of the world’s population. In fact, MPs have the power to eliminate these import taxes in March 2019, thereby reducing prices for the public, just as their predecessors achieved the same objective by repealing the Corn Laws almost two centuries ago. Another frequently repeated Brexit concern is that the much bigger EU economy will be better able to withstand a Mexican standoff than the UK. This is also a fallacy. For example, Wetherspoon is one of the biggest customers, or possibly the biggest customer, of the excellent Swedish cider-maker Kopparberg. If trade barriers were imposed, so as to make Kopparberg uneconomic, then Wetherspoon could switch to UK suppliers or those from elsewhere in the world. In this case, the principal losers in a trade war would be the inhabitants of a small town in Sweden, where Kopparberg is produced, rather than the UK economy. Unfortunately for the Swedes, the EU negotiators, unlike those of the UK, are not subject to judgement at the ballot box, so Kopparberg’s influence on the outcome may be minimal. The same principle applies to thousands of EU imports including prosecco, Champagne and many wines and spirits – in almost all cases there are suitable, and often excellent, alternatives to EU products available elsewhere. In fact, the biggest danger for EU producers, whose wine industry, for example, has lost huge market share to the New World, in spite of import taxes, is that UK consumers take umbrage at what they see as the overbearing behaviour of EU negotiators, and decide to favour products which originate elsewhere. Provided that the UK parliament votes to eliminate tariffs, EU producers will, in any event, be faced with a far more competitive UK market – since New Zealand wine producers, for example, will be able to compete on an equal, import tax-free basis, for the first time. So, the antagonistic approach of EU negotiators, which risks alienating UK consumers, is extremely unhelpful to businesses within their own bloc. Most economists who criticise Brexit use hypothetical arguments, but, in the real world, the UK can eliminate import taxes, improving living standards and simplifying the Byzantine tax system – both of these factors will improve the outlook for consumers and businesses in the UK. In the six weeks to 11 March 2018, like-for-like sales increased by 3.8% and total sales increased by 2.6%. The company anticipates higher costs in the second half of the financial year, in areas including pay, taxes and utilities. In view of these additional costs, and our expectation that growth in like-for-like sales will be lower in the next six months, the company remains cautious about the second half of the year. Nevertheless, as a result of slightly better-than-expected year-to-date sales, we currently anticipate an unchanged trading outcome for the current financial year.”

Conviviality – funding talks ongoing: Conviviality, the UK alcohol wholesaler serving consumers through the on-trade and its franchise retail estate, has said talks are ongoing as it bids to make up a cash shortfall to pay an unexpected £30m tax bill by the end of the month. The company stated: “Further to the update announcement on 14 March 2018, the company has been actively engaging with its stakeholders while it continues to work through its funding requirements. Customers and suppliers remain supportive of the company and are working closely and constructively with the company at this time. We have had constructive discussions with our lenders which are on-going. PricewaterhouseCoopers is undertaking a review of the business and its future finding requirements and this work stream is progressing well. The company has engaged with HM Revenues and Customs (HMRC) regarding the £30.0m payment due on the 29 March 2018. HMRC has been receptive to our needs and these discussions continue; and the company is engaging with its advisers and broker regarding the possibility of an equity fundraise to effect a recapitalisation of the business. The board wishes to express its gratitude to all its stakeholders for their on-going support during this difficult period for the company. A further update will be provided in due course.” Earlier this week, Conviviality cancelled its interim dividend payment, freeing up £8.2m. Last week, Conviviality warned it expected adjusted Ebitda to come in 20% below market expectations. In a further update on Tuesday (13 March), the company said it would fall in a range of between £55.3m and £56.4m.

Jamie Rollo – Greene King’s like-for-like sale underperformance will start to narrow in FY19: Morgan Stanley leisure analyst Jamie Rollo has said he believes Greene King’s like-for-like sales underperformance will start to narrow in FY19. Issuing an ‘Overweight’ rating on the shares with a target price of 640p, Rollo said: “After a decade of like-for-like sales outperformance the company has underperformed peers in the last year. This reflects the Spirit acquisition bringing a mixed portfolio with a high exposure to the tough value food market, the deferral of some capex, and management distraction with the Spirit integration. However, its Locals division, constituting about half its managed estate, have seen continued like-for-like growth, aided by supply exiting the wet-led segment and a strong proposition. This implies mid-to high-single digit like-for-like sales declines in about 30% of its managed estate coming from value food (Fayre & Square, Hungry Horse, Flaming Grill). This should ameliorate given repositioning of these concepts, its investment, and easy comparables. Looked at another way, value food is about 20% of group Ebit, so about 80% of the group seems relatively resilient. To be conservative we still model declining like-for-like sales, margins and EPS in FY19, then see these stabilising in FY20. The majority of the company’s debt sits in two securitisations which control the amount of cash that can be upstreamed to the plc to fund the dividend. The Spirit securitisation has plenty of headroom after reprofiling and prepayments, and while we expect upstream headroom to get tight in 2020 when amortisation recommences, we see plenty of options for the company to refinance the expensive debt. The Greene King securitisation only needs a 9% free cash flow drop to be in ‘cash trap’ on our FY19 forecasts, but the company can inject some of the plc pubs to increase Ebitda if it came to that. Combining plc Ebitda with the upstreamed cash implies about £100m of free cash flow, sufficient to fund the dividend. Meanwhile, we expect the company to guide to more cash conservation in the next few years, with lower expansion and more disposals, and we now see the company deleveraging by 0.2 times annually. On a consolidated basis, which is how the company prefers to look at it, underlying free cash flow is sufficient to fund debt repayment and the dividend, with disposal proceeds easily covering expansion capex, on our forecasts. The company trades on a 6.8% dividend yield on our forecasts for a stable dividend, its highest yield since the 2009 financial crisis. It is trading on a 2018 price-to-earnings ratio of 7.9 times, not far from its yield, historically a good buying opportunity. The relative multiple has closed versus peers but Mitchells & Butlers does not pay a dividend and has a large pension deficit, and Marston’s has weaker free cash flow. Greene King’s net asset value is 850p using the latest valuations in the debt structures versus the 660p balance sheet valuation, so the shares are trading at a 40% discount to net asset value. Our bull case is 820p, assuming a return to modest like-for-like growth and rerating to historical averages. Recent trading has been tough, partly due to snow disruption, and we think the company’s fourth-quarter update will be weak. The company may need to alter its strategy and either invest more (including to widen its brand range) and/or make a large disposal (which could be dilutive). Industry pressures are arguably structural and may not ease, and an economic downturn (perhaps Brexit induced) could lead to further sales pressures – we estimate 1% on like-for-like sales is £10m to £12m to Ebit, which is about 5% to earnings per share and about 10% to free cash flow. Our bear case is 350p, which assumes about 4% like-for-likes and the dividend is halved.”

Domino’s Pizza starts £32m share repurchase programme: Domino’s Pizza Group has announced from today (Friday, 16 March) until 31 December 2018 it will commence a discretionary programme to purchase up to £32m of the company’s ordinary shares of 25/48 pence each. The company stated: “The £32m represents the balance remaining of the £50m, less the £18m purchased by the company in this year to date, as announced by the company on 8 March 2018. The purpose of the programme is to reduce the company’s share capital and accordingly the company intends to cancel the ordinary shares purchased under the programme. Any purchases will be conducted in compliance with the relevant conditions for trading, restrictions regarding time and volume, disclosure and reporting obligations, and price conditions. The company confirms that it currently has no unpublished inside information. The aggregate maximum consideration payable by the company in respect of the purchase of shares under the programme up to 31 December 2018 is £32m. The maximum number of shares that may be purchased under the programme is 49,196,705 (being the number of shares able to be purchased under the 2017 authority), less the 10,480,070 shares purchased to date under this authority.”

Douglas Jack – potential upside for Cineworld becoming clearer: Peel Hunt leisure analyst Douglas Jack has said the potential upside for Cineworld is becoming clearer, with the US being the main growth driver in all areas. Issuing a ‘Buy’ note on the shares with a target price of 270p following the company’s preliminary results presentation, Jack said: “In the US, Regal’s integration is ahead of schedule. The company is not planning to improve margins in film buying, or drive big headcount reductions. Nevertheless, management is comfortable with the target of $60m of central cost, capex and procurement savings. These should be achieved first, ahead of the revenue synergies. We believe the $40m revenue synergies target offers upside. In our view, this can be achieved from online sales penetration, which will be pushed more aggressively now, and directing more traffic through the company’s own website. In the US, the share of bookings that are online is half that of the UK. We believe introducing Unlimited in the US could provide further upside, but that is unlikely to be rolled out within the next year. Regal represents 70% of the group. We forecast Regal grows turnover per screen by circa 0.5% to 1% per annum (versus an estimated 0.5% compound annual growth rate between 2014 and 2017) before the benefit of upgrade project capex. We believe this is beatable (the US market was up 11% in January-February; and the film slate is improving). We estimate each extra 1% of US turnover boosts group earnings by 3%. Cineworld targets reducing net debt/Ebitda to three times, with debt falling from $4.0bn to $3.25bn, over the next two years. This pace of reduction is in line with our forecasts, and assumes that management does not hold back on expansion, refurbishments and dividends. If Cineworld can exploit what it describes as the ‘huge potential’ of the US, the combination of upgrades and a re-rating could drive attractive upside in the shares. We expect the US to have a good start – there could be at least four blockbusters in the first half of 2018, followed by an even stronger slate in 2019E (that includes Star Wars 9 and Bond 25). In addition, we believe the risks on US synergies and returns on refurbishments is on the upside.”

Diageo acquires ‘accelerator programme’ brand: Diageo has acquired the first drinks brand developed by Distill Ventures – its “accelerator programme” for entrepreneurs seeking to create innovative new drinks. The company has bought Belsazaar, an aperitif from Germany, which was launched in 2013 by Maximillian Wagner and Sebastian Brack and joined Distill a year later. The vermouth is made from grapes, infused with herbs and finished off with fruit brandy. The price was not disclosed, reports The Times.

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