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Morning Briefing Strap Line
Thu 15th Nov 2018 - Update: Brexit, The Restaurant Group, Young’s, BigDish, Cineworld
Kate Nicholls outlines Brexit deal: UK Hospitality chief executive Kate Nicholls has outlined the major points of the Brexit deal agreed by the cabinet yesterday. She told members: “I have just come off a call with No 10 on the detail and the team and I have met with ministers from BEIS and DEFRA. The following is a summary. We will go through this with a fine tooth comb to provide a more detailed briefing in due course. Chancellor described today’s cabinet agreement as a ‘decisive step forward’ in agreeing in principle the terms of our orderly withdrawal from EU and the broad terms of our future trading arrangement. We understand that there was not full cabinet unanimity but there is collective agreement. Full legal text (585 pages) has been agreed with the European Commission and guarantees EU citizens rights for those working in the UK – as per previous briefing any EU citizen entering before the end of the transition period would have a right to remain to gain settled status. There are new right for tourists and visitors between the EU and UK to move without visa or additional checks. Time limited implementation period agreed and confirmed – initially set to end 31 December 2020. This means all existing rights to work and trade will continue after we exit in March 2019. The implementation period will be use to work out the detail of the future trading relationship. The UK has a sole and sovereign right to extend the transitional period if we are not ready to move to the next stage of the new trading relationship – this is new text and is an alternative to entering the backstop. Crucially the UK alone can trigger this. There is a legal commitment in the text that both sides will negotiate in good faith and use their best endeavours to deliver the principles of the future trading agreement which have been agreed today – namely a free trade agreement for goods with zero tariffs or quantitative restrictions; a level of alignment and degree of facilitation to secure as frictionless as possible trade between the EU and UK and ensure in particular the smooth transfer of goods at Dover; a close relationship on services and investment which are specifically named as areas to be covered in the future trading relationship; sectoral cooperation in key areas such as fisheries, energy and security; consensus on a number of other issues to be included in the detailed negotiations. The legal agreement on the future trading relationship can only be established once we have left, but the political declaration gives precise instructions to negotiators on what is to be included and covered and the UK will continue to negotiate further detail on the political declaration text over the next two weeks. Next steps – this is currently a deal between the UK and the European Commission negotiating team. It will now be presented to other EU leaders at a special European Council on 25th November when all 27 heads of state must endorse it and when the final political declaration on the future trading relationship and free trade agreement will be concluded. Negotiations and detail on this will continue right up until 25 November and if the EU Council approves the deal, Article 50 negotiations will be brought to an end and the deal presented to Parliament. Anticipation is that the Parliamentary debate will be held immediately after 25th November and a meaningful vote will take place in early December for MPs to back or reject the proposals. The PM has presented this choice as being this deal or no deal or no Brexit and ministers said they were confident of getting support, but the Parliamentary arithmetic still looks questionable and the deal could still be voted down in December. Should this happen we would be heading to no deal contingency planning. In light of the importance of a deal for securing a transitional period and underpinning business planning and investment as well as securing the supply chain, we will therefore be working with other business groups and stakeholders to support the government’s approach. The summary text of the withdrawal agreement and political declaration seem to address the majority of our immediate concerns and the trajectory towards a smooth and orderly Brexit is very welcome. This is inevitably a compromise but this is a positive and pragmatic set of proposals which protects jobs and the supply chain and as such is better than the alternative of a no deal or disorderly Brexit.”

Shareholders call on The Restaurant Group to walk away from Wagamama deal: Two US investors in The Restaurant Group have called on the company to pull the plug on the proposed £559 million acquisition of Wagamama, claiming that it is “overly risky and expensive”. Chicago-based Grizzly Rock Capital and Vivaldi Asset Management, which hold a combined 3.9 million shares or 1.9% of the company, called on management to pay a £6 million break fee and walk away from the deal, reports The Times. Kyle Mowery, who represents both Grizzly Rock and Vivaldi, said that the funds “unequivocally oppose the proposed Wagamama transaction. Management grossly miscalculated their cost of capital and shareholder willingness to participate in a transaction”. The portfolio manager said that the 30% fall in the share price since the deal had been announced showed that “many other shareholders apparently share our negative view of the transaction”. Mowery said: “At today’s share price, the £315 million rights offering that management is asking shareholders to provide for the transaction is nearly 70% of market capitalisation. This amount both in absolute size and especially percentage of the market capitalisation is far too large.” He claimed that shareholders would prefer Andy McCue, The Restaurant Group’s chief executive, to continue expanding the company’s airport concession and Brunning & Price gastropub businesses while focusing on the turnaround of the leisure division, arguing that the like-for-like sales increase of 1.4% in the period after the end of the World Cup is evidence of progress. Mowery added: “The current businesses are worth over £4.50 per share, which indicates upside of over 50% compared to the pre-transaction announcement share price and roughly 100% over the current price. Shareholder value would be maximised by management walking away from this destructive transaction.”

Young’s reports record Ebitda in First Half: London pub retailer Young’s has reported total revenue up 8.8% to £156.8 million in the 2 weeks ended 1 October, along with a 4.7% increase in adjusted Ebitda to a half-year record of £40.4 million. Profit before tax was 19.5% to £26.4m. The combination of a ‘well-invested, premium estate and the hottest English summer on record’ delivered 5.2% like-for-like sales increase in managed houses. It also reported strong trading in the first six weeks of the second half, with managed house revenue up 7.2% and up 3.9% on a like-for-like basis. The company stated: “Ram Pub Company (tenanted division) delivered an equally strong performance with like-for-like sales up 4.8% despite the hot summer having less impact due to a smaller proportion of outdoor space.” There was investment of £13.5 million during the period, a slight decrease on 2017 due to fewer acquisitions. Net debt was reduced by £15.1 million to £125.4 million. It reported a strong balance sheet with gearing of only 22.1% provides the financial capacity for further investment. Patrick Dardis, chief executive of Young’s, said: “I am very pleased to report another strong period of trading, driven by our well-invested managed house estate which has once again outperformed the wider market. Propelled by the hottest English summer on record, our beautiful riverside locations, stunning gardens and growing number of roof terraces helped to deliver 5.2% like-for-like sales growth in our managed houses, continuing our trend of exceptional summer performances with average like-for-like sales growth of 5.6% over the past seven years. Drink sales enjoyed a particularly strong summer with double digit growth of just over 10% in total and 7.4% on a like-for-like basis while recent investment in our hotel business saw accommodation sales rise by just over 18% during the period. Despite severe cost headwinds and ongoing political uncertainty, our expectations for the full year remain unchanged and, thanks to one of the lowest levels of gearing in the sector, we have significant financial capacity for future investment with a strong pipeline of acquisition opportunities.” Dardis added: “In the second half of the year, we will see further benefit from ‘SMITHS’ of Smithfield (Smithfield Market) and the Candlemaker (Cannon Street) as they continue to ramp up following their refurbishments although this will be partly offset by the closure of the Park (Teddington) and the Bridge (Chertsey) due to their planned redevelopments. We will soon be on site at Kidbrooke Village, where we will be opening a brand-new pub next spring, and we recently exchanged contracts on another freehold, the People’s Park Tavern (Victoria Park). Acquisitions remain an integral part of our strategy and our pipeline remains strong. Economic and political uncertainty remains unhelpful and recent statements from the Government have been contradictory in declaring support for businesses but at the same time promising to impose restrictions on immigration. Being based in London and Southern England, it is more than our cocktails that are cosmopolitan; 38% of our workforce are EU nationals and we will remain an inclusive business. Exceptional customer service is not something people are born with; it takes hundreds of hours of training and dedication, so I would never consider any of our employees to be “low-skilled”. The decision to freeze duty on beer, cider and spirits in the Chancellor’s recent budget announcement has been a timely relief to support our industry and our customers. Although we acknowledge the first positive steps taken by the Chancellor in modernising the business rates mechanism, our hope was for a complete overhaul. These are challenging times for the hospitality sector and the 3.2 million people employed within it. Our sector and the wider retail industry merit a rebalancing of the uneven playing field which sees property-based companies paying business rates which represent an additional tax burden not faced by the global online tech giants. The minor reduction in business rates for smaller operators and the proposed introduction of a digital services tax do not go far enough to redress the imbalance in the burden of taxation. In summary, we believe in long-term growth and the ability to deliver sustainable superior investor returns. We have a winning strategy of running a high-quality managed house estate with a small and profitable tenanted division, and we will continue to ensure that our offer taps in to current and future consumer trends.” 

BigDish provides strategy update: BigDish, the food technology company that operates a yield management platform for restaurants, has provided a strategy update for both its UK and Asian operations. It stated: “Since the IPO the Asian business has grown, seating three times more diners than 12 months ago. Furthermore, the directors have been approached by more than one Asian technology company on an informal basis regarding the potential acquisition of the Asian business. As such, the directors have decided to conduct a strategic review of BigDish’s Asian business to determine the path to achieving the most value for shareholders. The result of this review is expected in January. The company announced on 1 October 2018 the appointment of Sanj Naha. Mr Naha has made an immediate positive impact on the company. At present, both BigDish in beta and TablePouncer are operating. The initial beta phase has produced a variety of operational and technology recommendations, which are currently being implemented. One of the recommendations was to upgrade the branding for the UK market. Based on feedback it was decided to alter the branding within the UK app. This branding process has started with a change of logo in the UK and will be implemented over the next couple of months. Sanj Naha has developed a model for growing the UK business on a per territory basis, in accordance with his previous experience in restaurant reservation and yield management applications. The company has added a new territory manager to cover the south west and new restaurants are being added to both the TablePouncer and BigDish businesses. The initial focus is to sign up restaurants in Bristol. The UK business is expected to be fully rebranded and TablePouncer will be completely absorbed into BigDish by January, at which point the company plans to end the beta phase. As announced on 17 September 2018, the company is confident that there are a potential 6,000 restaurant partners in the UK. The prime focus of Q4 2018 is building a launch pad for growth in the UK in 2019 which will be the prime focus next year. The company expects to announce in early January its specific targets for the UK business in 2019 including various metric targets. Depending on the outcomes of the Asian business strategic review, BigDish may require substantially less capital for growth than previously anticipated, which the directors believe will benefit shareholder value. The company has increased the size of its technology team from seven to nine persons. The company intends to continue to grow this team, to 15, over the next year. This will improve product development and the speed at which new features and updates can be completed. Basing BigDish’s technology development team in the Philippines represents a significant cost saving compared to having it based in the UK.” Joost Boer, chief executive, said: “The addition of Sanj Naha has had a very positive impact on the company. Sanj’s experience in the restaurant tech space gained at tech giants such as TripAdvisor and The Fork is proving invaluable as we build the launch pad for aggressive growth in 2019. The UK business will continue to be the prime focus going into next year and will be the value driver for the share price. Given that the UK’s largest dining discount card, Tastecard, was acquired for over £100m a couple of years ago, it is clearly evident that the UK alone has the potential to deliver significant value for shareholders.”

Cineworld reports revenue growth: Cineworld has reported revenue grew by 11.6%, or 10.2% on a constant currency basis, in the period between 1 January 2018 and 1 November 2018. In a trading update confirming the company is in line to meet its curt profit expectations, the company stated: “On a pro-forma basis, group admissions increased by 5.9% compared to the same period in the prior year. The growth was driven by a strong film slate in the US for the year to date, improved performance in Europe in the second half of the year and development of the estate through refurbishments and additional premium offerings. The strength in the US market was supported by the success of “Black Panther” and “Avengers: Infinity War” in the first half and “Mission: Impossible Fallout”, “Ant-Man and the Wasp” and “Venom” in the second half. The growth in admissions in the US compared with the prior year has benefitted each of the group’s revenue streams. Our European markets saw an uplift in performance in the second half of the year. This was driven by “Mamma Mia! Here We Go Again”, “Incredibles 2” and “Bohemian Rhapsody” in the UK. Locally produced films performed well across the ROW, particularly in Poland where “Kler” became the highest grossing film of all time. During the second half of the year the group continued to expand with four new sites (31 screens) opened (two in the US and two in the UK), in addition to the six sites opened in the first half of the year. Five further new sites are expected to open before the year-end (three in the US and two in the UK). The total number of sites in the group at 11 November 2018 is 789 with 9,526 screens. Investment in the latest technology continues to be a key pillar of the group’s strategy. During the period, the group announced an agreement to install 100 ScreenX auditoriums. ScreenX is the world’s first multi-projection immersive cinema auditorium, which provides a panoramic 270-degree viewing experience. So far in 2018, ten ScreenX and seven 4DX screens have been opened across the estate. Our refurbishment programme in the US is underway and number of major refurbishments are currently on-going in the UK. The expected plans for Regal are progressing well with management continuing to review further opportunities for integration benefits. The group recently announced the rebranding of Regal and the launch of its new logo. As previously announced, Regal’s new brand is part of the wider strategy to commit significant investment to the group’s estate and operations in the US to ensure that Regal is ‘The Best Place to Watch a Movie!’.There are a number of exciting releases scheduled for the remainder of the year including, “Fantastic Beasts: The Crimes of Grindelwald” opening tomorrow, as well as “Aquaman” and “Mary Poppins Returns” in December. The group remains on track to deliver a performance for the year in line with our current expectations.”

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