Leisure on the Stock Market

This month, we will be looking at the Leisure Sector – a vast and varied sector that provides for most of the activities that we spend our free time on, regardless of whether we enjoy eating out, working out or just hanging out in the local pub.

The Leisure sector covers everything from football clubs to cinemas and pizza parlours to pubs. The market for leisure is vast – the Office for National Statistics (ONS) has recorded that the average UK household spent £46.90 on recreation and culture in 2004-05 (excluding package holidays abroad) – every single week!

These factors combine to make Leisure both an interesting sector to look at and potentially exciting to invest in.

 

The UK Leisure Sector

According to the FTSE’s Industry Classification Benchmark, Travel & Leisure includes Airlines, Gambling, Hotels, Recreational Services, Restaurants & Bars, Travel & Tourism. In this article, we are just going to focus on ‘Leisure’ and will concentrate on the following two sub-sectors:

·                Restaurants & Bars. Operators of restaurants, coffee shops and bars - including brewery and catering companies

·                Recreational Services. Providers of leisure facilities and services, including health clubs, cruise lines, cinemas and sports teams

We have excluded the other sub-sectors as they have been covered in previous articles.

 

Current Market Factors

This is clearly a hugely varied sector with a correspondingly vast range of influences. But some factors do cross the boundaries between sub-sectors:

·                The smoking ban – smoking is to be forbidden in pubs, clubs, restaurants and other public places in England and Wales from mid-2007. The likely effect on profits is unclear. The Scottish Licensed Trade Association reported a 10 percent drop in drinks sales since the implementation of a similar ban in Scotland last March and the Bingo Association reported that five Scottish bingo clubs closed in the three months following the ban (news release: 23/06/2006).

·                Changing consumption patterns – our spending patterns have changed over time. The ONS reports that between 1993 and 2004 the percentage of smokers dropped from 28 - 22% in men and from 26 – 23% in women. Over the same period, obesity has risen from 13 – 24% in men and 16 – 24% in women. Annual cinema attendances have risen from 139 million in 1998 to 165 million in 2005. And live football has become fashionable again – almost absent from our television screens until the 1990s, BSkyB now pays the Premiership over £1 billion for three years’ broadcasting rights.

·                Merger & acquisition activity – the 1990’s saw a period of global retrenchment with many diversified groups divesting their non-core businesses. And the same has applied to the Leisure industry. Hence, between 2000 – 2002 the brewing and hospitality conglomerate Bass PLC sold off its brewing interests and split the remaining business into the pub operator Mitchell & Butlers and InterContinental Hotels. Similarly, since 2001 Whitbread is no longer involved in brewing or pub ownership, whilst Rank has now retained Merrill Lynch International “to assess whether or not Hard Rock should remain part of The Rank Group” (news release: 04/07/06, 01/09/2006).

 

Leisure – a sector for the smaller company?

There are close to 70 Leisure companies with a primary listing on the LSE, with the emphasis very heavily skewed toward the smaller end of the scale. The FTSE 100 is represented by just 3 conglomerates – and even these blue-chips hardly rank as well known, high-street names.

Market	Capitalisation	No. of Listings
Main Market	Large cap shares (FTSE 100)	3
	Mid cap shares (FTSE 250)	10
	Small cap shares (FTSE All-share excl. FTSE 350 + Fledglings)	6 (4 SmallCap + 2 Fledglings)
AIM		48

 

The bulk of the listed Leisure companies are to be found on the AIM, which includes a wide range of well known football clubs, restaurants and coffee shop chains (such as Coffee Republic, Carluccio’s and Domino’s Pizza).

 

The Leisure Top 10

There are only 3 Leisure companies in the FTSE 100 index – Compass, Carnival and Enterprise Inns – the rest of the Top 10 is made up from the FTSE 250.

Top 10 Leisure Companies	Industry Sub-Sector	Market Cap £ mil
COMPASS GROUP	Restaurants & Bars	5,458.88
CARNIVAL	Recreational Services	4,523.89
ENTERPRISE INNS	Restaurants & Bars	3,135.49
WHITBREAD	Restaurants & Bars	2,702.70
MITCHELLS & BUTLERS	Restaurants & Bars	2,596.01
PUNCH TAVERNS	Restaurants & Bars	2,304.93
GREENE KING	Restaurants & Bars	1,255.33
RANK GROUP	Recreational Services	1,180.03
WOLVER & DUDLEY BREW.	Restaurants & Bars	985.67
JD WETHERSPOON	Restaurants & Bars	696.87

 

Founded as Factory Canteens Ltd in 1941 to feed the WW2 munitions workers, Compass is now listed on the FTSE 100 and provides catering for a range of schools, colleges & hospitals.

Compass share price has risen 16% in 2006 - despite continued accusations of corruption regarding contracts won to supply the United Nations (news release: 29/03/2006). The Group posted solid figures for the six months to 31 March 2006 – with revenues of £5.7 billion, up 8% over the previous year.

In addition, Compass recently undertook a £500 million share buyback programme and sold off its travel concessions for £1.8 billion to a consortium led by Australia’s ubiquitous Macquarie Bank (news releases: 16/05/2006, 15/06/2006).

Shares in cruise company Carnival fell 31% in the first eight months of 2006 as spiralling fuel prices and reduced demand for Caribbean cruises took their toll.

To add to Carnival’s worries, Alaska’s voters recently approved Ballot Initiative 2 – a measure designed to impose a $50 per head tax on passengers embarking on Alaskan cruises from 2007 onwards, as well as a tax on any gaming in state waters (news release: 24/08/2006).

Enterprise Inns is the largest pub company in the UK with an estate of some 7,700 pubs. The share price rose 5% last month after the Group announced that it had reached agreement to sell 769 pubs to Admiral Taverns for £318 million (news release: 14/08/2006).

Whitbread is another company in the process of rationalising its operations and focusing on its core holdings. The Group recently announced the sale of its 50% shareholding in Pizza Hut UK to Yum! Restaurants for £112 million and the sale of 239 pub restaurants to Mitchell & Butlers for £497 million (news releases: 28/07/2006, 31/07/2006).

Rank Group is a diversified recreational services company whose businesses include Mecca Bingo and the ‘Hard Rock’ chain of cafes, hotels, casinos and music venues. Rank’s share price has fallen 30% in 2006, which the Group blames on the Scottish smoking ban after their Scottish clubs experienced a 14% fall in revenues in the 13 weeks since its introduction (news release: 04/07/2006).

 

The beautiful game on the stock market

In 1983, Tottenham became the first football club to list on the LSE. In the 1990s, a slew of other clubs went public, confident that the infusion of broadcasting money from BSkyB would give the public the confidence to invest in football. Back in 2001, there were 18 clubs trading on the LSE – including Chelsea and Man Utd. Today, only 10 remain and this is set to fall further this year.

There are a number of factors to explain why so many clubs have struggled.

·                      Sporting success - clubs prioritise success on the pitch over commercial objectives and spiralling wage costs have hurt the investors.

·                      Stakeholders – the shareholders are not fully in control of their investments. Clubs have to answer to the football authorities, local authorities (which often own the stadium) and fans – the latter often organised in Supporters’ Trusts.

·                      Relegation – failure to achieve on the field brings massive financial consequences.

·                      Club loyalty - in other industries, companies can merge, acquire competitors, sell assets or relocate. This is not usually a possibility in the world of football.

·                      But it is not all doom and gloom:

·                      Newcastle United’s share price climbed 13% in August on the back of speculation that the investment firm Belgravia was considering a bid (news release: 21/08/2006).

·                      Aston Villa’s share price edged up 14% in 2006 in the run up to a bid from American entrepreneur Randy Lerner - Villa’s Board has now recommended that shareholders approve the £62.6 million cash offer (news release: 14/09/2006).

 

Coffee Time on the AIM

AIM is home to over 70% of the companies in the Leisure sector. And as we might expect there have been some spectacular risers and fallers.

Lo-Q is a supplier of ‘virtual queuing systems’ to theme parks, which ‘reserve’ guests’ places in the queues for the rides - allowing them to enjoy other attractions until called up. Lo-Q’s share price has risen 176% in 2006 after securing a contract to supply its queuing system to the Dollywood theme park in Tennessee (news release: 20/07/2006).

Honeycombe’s share price tumbled 54% over the same period. The Board of the pub company decided to sell the Group after posting poor results - operating profit for the half year to 30 October 2005 was £606,000 against £1.37 million in the equivalent period in 2004. There were no buyers by the end of the month (news releases: 16/06/2006, 01/09/2006).

Coffee Republic shares rose 34% in August on speculation that private equity group Surthurst would make a bid for the company. By September 1, Surthurst held 10% of Coffee Republic’s share capital - up from 5% on August 2 (news release: 01/09/2006).

Coffeeheaven’s share price climbed 13% last month after posting strong figures for the financial year ended 31 March 2006. Despite losses of £699,000, the Group reported a 68% rise in net sales to £6.4 million over the previous year (news release: 31/08/2006).