Numis Securities – latest increase has left NLW at 60% of sector wages: Numis Securities leisure analyst Tim Barrett has said the latest increase in the National Living Wage has left it at 60% of average sector wages. Issuing a note on the NLW one year after it was introduced, Barrett said: “A recent acceleration in cost of living expenses means discretionary disposable income is increasing at its lowest level for three years (currently +3%). As essential item inflation heads towards 3%, we expect discretionary income to start to decline in the second half of the year, putting pressure on sector trading. Notably, households in the bottom two quintiles are already experiencing declines (-15% and -6% respectively) perhaps evidenced by slower retail sales and the weak Peach tracker over Easter (-3.8%). Following the introduction of the NLW in April 2016, pub/restaurant companies have been adjusting to the reality of 5% wage inflation. April 2017’s increase leaves the NLW at 60% of average sector wages, increasing the ‘bite’ of each successive increase. Furthermore, labour market data for 2016 shows average wages in the sector grew by more than 6% even for those workers already earning above the minimum. This confirms that differentials play an important part in setting sector wages. Updating our cost model, we expect the NLW to reach 865p by 2020, compounding at a compound annual growth rate of 4.9% over four years. Most operators have responded by increasing labour efficiency, automating scheduling and looking for offsetting cost savings elsewhere. Most acknowledge such savings will become incrementally more difficult, meaning price rises could be the only way to protect profits and margins in the medium term. There is some evidence of success on this front – consumer prices in the restaurants/cafes category are running at +2.8% (versus 1.7% one year ago). However, the Peach sector index is moving oppositely (1% in the first quarter, from 3% last year) suggesting footfall is relatively volatile for the sector in aggregate. Our top picks in the space benefit from self help (The Restaurant Group) or are niche/regional operators with below-average exposure to inflation in wages and better prospects as a result (Revolution Bars Group, Marston’s). Recent industry data suggests caution on managed operators, hence our ‘Reduce’ recommendations on JD Wetherspoon and Mitchells & Butlers. The latter will also need to conclude its triennial pension negotiations, with a risk that all free cash flow is needed to recover the deficit. Our only recommendation change is to move Greene King from ‘Add’ to ‘Hold’ following strong performance (+10%) over the last month. The business now makes 76% of Ebit from managed pubs and has the largest managed estate in the UK, which leaves it exposed to the inflationary pressures highlighted above. The stock trades on an EV/Ebitda of 9.2 times, adjusted price-to-earnings of 12.2 times (excluding provision) and dividend yield of 4.4%.”

 

Elegant Hotels completes deal for Treasure Beach site in Barbados: Elegant Hotels Group, the owner and operator of six upscale freehold hotels and a beachfront restaurant on the island of Barbados in which sector investor Luke Johnson holds a sizeable stake, has completed its acquisition of the Treasure Beach Hotel in Barbados. The consideration and renovation costs are about US $10.5m in aggregate. Treasure Beach is a four-star, 35-room hotel in Paynes Bay, in the parish of St James in Barbados. It is the adjoining property to Elegant Hotels’ Tamarind hotel, which in turn is situated next to Daphne’s and The House, which are also owned by the group. As a result, the acquisition means four of Elegant Hotels’ properties account for a continuous 300-metre stretch of the west coast, or “Platinum Coast”, of Barbados. Treasure Beach occupies about 1.18 acres of land, and its amenities include a swimming pool, spa, and restaurant. The hotel will be operated under the existing brand until the end of July whereupon it will be closed. It will be refurbished, repositioned and repriced before being rebranded as “Treasure Beach by Elegant Hotels”, and it is expected to reopen at the start of November. The group plans to operate Treasure Beach as an adults-only European Plan hotel with an emphasis on a high-quality food offering. Guests of Treasure Beach will also be able to make use of the facilities of the neighbouring Tamarind hotel.