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Wed 11th Jul 2018 - Update: Wetherspoon trading, Ei Group, NewRiver acquisition, Diageo
JD Wetherspoon reports like-for-likes up 5.2%: JD Wetherspoon has reported like-for-like sales increased by 5.2% in the ten weeks to 8 July 2018 and total sales increased 5.6%. In the year to date (49 weeks to 8 July 2018) like-for-like sales increased by 5.2% and total sales were up 4.2%. The company has opened six pubs since the start of the financial year and has completed the sale of 23. No further openings are expected in the current year. The company stated: “About £9m of exceptional, non-cash losses are expected in this financial year, mainly a result of pub disposals, which were below the value in our balance sheet. The company has also spent £15.6m on buying the freehold ‘reversions’ of pubs of which we were previously tenants. The company remains in a sound financial position. Net debt at the end of this financial year is expected to be about £740m. The company spent £51.6m in respect of share buybacks in the first quarter of the year. As previously reported, the shareholding of (chairman) Tim Martin has risen above 30%, as a result of share buybacks in the past 12 years. A rule nine ‘whitewash’, under the relevant regulations, will again be put forward at the general meeting in November, which will allow the company to continue to undertake buybacks.” Martin said: “We are frequently asked about the effect of Brexit on the company and the economy. The main advantage of Brexit is that the EU is a protectionist system that imposes high tariffs on non-EU imports such as wine, rice, coffee, oranges, children’s shoes and clothes, and more than 12,000 other products. Leaving the EU allows the UK to adopt the approach of countries such as Singapore, Hong Kong, Switzerland and Australia by dismantling these tariff walls, which improves general living standards. As the retiring Australian high commissioner, Alexander Downer, has recently said: ‘You will do well if you open your markets and you embrace free trade; there was never a country that embraced free trade that was poor as a result.’ In this connection, Wetherspoon has started to review its product range and has exchanged French champagne for sparkling wine from the UK and Australia, and German wheat beer for UK and American alternatives. The new products are now available, at reduced prices, in our pubs. We plan further initiatives in this area in the coming months. Huge progress has been made in leaving the EU – the referendum has taken place; the manifestos of the main parties, respecting the result, were endorsed in the general election; Article 50 was triggered and the sensible decision was taken to allow legal EU migrants to stay post-Brexit. Unsurprisingly, the prime minister has run into difficulties by making the mistake of prioritising a ‘deal’ with the unelected EU representatives, which they have little incentive to accommodate, rather than a sensible implementation of Brexit in areas under the control of parliament. 99% of the benefits of leaving the EU, including the avoidance of vast financial contributions, the elimination of tariffs and the reacquisition of fishing rights, need no agreement from any third party. The prime minister can avoid most current problems by prioritising these areas. We continue to anticipate a trading outcome for this financial year in line with our previous expectations. As in the current year, we anticipate considerable cost increases next year, in areas including business rates, the sugar tax, utility taxes and wages. In addition, as a result of an increase in our ‘swaps’, our interest rates will rise by about £7m.”

Douglas Jack ­– Ei Group commercial division sale could add 50p per share of equity value: Peel Hunt leisure analyst Douglas Jack has said a sale of Ei Group’s commercial division could add 50p per share of equity value. Issuing a ‘Buy’ note on the shares with a target price of 175p, Jack said: “The commercial property division comprised 351 sites (pubs and shops) as at 31 March 2018, and is forecast to have 500 at the end of 2020E. In the first half of 2018, average annualised net income per property rose by 8.2% to £68,600 (first-half 2017: £63,400), equating to a total of £24.1m annualised on assets that were valued at £289m, equivalent to a yield of 8.3% (12 times Ebitda). We believe the timeframe for crystalising value has moved forward to 2019E. On this basis, the commercial property estate is likely to have 400 to 450 outlets when this transaction takes place. This is much lower than the original plan to have 1,000 at the end of 2020E, which was reduced due to fewer than expected lessees choosing to forego the security and benefits of the tied model. A transaction involving 400 to 450 outlets is more likely to be a disposal than a demerger into a real estate investment trust in our view. For this size of deal, we suspect a demerger would be disproportionately expensive and provide the shareholders, who appreciate the current strategy of share buybacks and debt reduction, with shares that would be predominantly dependent on dividends. In 2019E, we estimate the commercial property estate should generate £29m of rental income. Historic disposals from this estate have achieved 14 times Ebitda. If we assume 13 times, a clean disposal of these outlets could raise £380m. In comparison to last year’s 6.9% average cost of debt, this would not be particularly earnings dilutive, but of course management would reinvest much of these proceeds for higher returns. Using £175m of the proceeds to buy back equity would be double-digit earnings accretive, by our estimates, and leave net debt/Ebitda at close to six times (versus 7.4 times in 2017). If the company can sell the commercial property estate on 13 times Ebitda, we estimate the current EV/Ebitda rating would equate to 246p per share in 2020E versus our current estimate of 197p per share. The shares trade a material discount to the 326p per share net asset value. We believe a transaction involving the commercial property estate should help to close this gap, providing there is a clear strategy in relation to using the funds and continuing to reposition the business. We strongly believe in the long-term debt reduction story and are increasing our target price from 165p to 175p.”
 
NewRiver acquires Barrow-in-Furness retail and leisure park for £15.3m: NewRiver has acquired Hollywood Retail & Leisure Park, Barrow-in-Furness, from an institutional investor for £15.3m. The company stated: “The asset offers NewRiver a number of opportunities to extract further value, including the immediate conversion of two existing units to introduce a 20,000 square foot store let to Aldi on a 20-year lease with Retail Price Index rental increases. Including the Aldi store, the retail park has a weighted average unexpired lease term of 8.3 years, an affordable and sustainable average rent of £11.36 per square foot, and the pricing represents an attractive net initial yield of 8.7%. The acquisition comprises a ten-unit 124,400 square foot retail and leisure park providing 665 free parking spaces. Aldi will join an occupier line-up consisting of quality national retailers and leisure operators including TK Maxx, Currys PC World, Dunelm, Nuffield Health and a six-screen Vue cinema. The asset will be 100% occupied following the introduction of Aldi later this year. The asset is conveniently located in the main retail park concentration in Barrow-in-Furness, a town with a large catchment and limited retail competition, and will provide the primary discount food offer for the community following the introduction of Aldi. Barrow-in-Furness benefits from an employment level above national and regional averages, and BAE Systems, the dominant local employer with a workforce of more than 8,000 people, was awarded a major £2.4bn government contract in May  to build the next generation of Royal Navy submarines in the town, which will lead to further investment and job creation.” Chief executive Allan Lockhart said: “Hollywood Retail & Leisure Park is a high-quality asset acquired for a very attractive entry price, and presents some immediate asset management and development opportunities, including the introduction of a new 20,000 square foot Aldi, let on a long lease. Since the start of this financial year we have invested more than £140m across our core sectors of community shopping centres, retail parks and community pubs at a blended initial yield of 13% demonstrating our disciplined approach to capital allocation and our commitment to deliver growing and sustainable cash returns to shareholders.”
 
Diageo outlines £700m plans to increase stake in Chinese drink maker: Diageo has outlined plans to increase its stake in a Chinese drinks maker whose distillery dates more than 600 years. The company wants to raise its stake in Sichuan Shui Jing Fang (SJF) from 39.7% to 60% in a move expected to cost about £700m. SJF is thought to be the oldest and the most complete baijiu distillery in China. Baijiu, a clear liquor traditionally served neat in small cups at room temperature, is one of the most popular spirits in China. About £17bn of baijiu is sold every year. China represents a relatively small part of Diageo’s business. Its exposure is mostly through its Scotch brands, as well as its SJF investment.

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