Mar 2021: J D Wetherspoon – Walton on Thames

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JD Wetherspoon – Walton on Thames

Mar 2021 (£13.20)


There is only one boss. The customer. And he can fire everybody in the company from the Chairman on down, simply by spending his money somewhere else.” Sam Walton, Wal Mart founder

True EDLP businesses, i.e. businesses that share the benefits of scale are a rarity for UK investors. Yet in JD Wetherspoon we have one whose owner manager treks to Omaha, writes an annual report cloned from Berkshire Hathaway and distributes Sam Walton’s biography to its top 100 executives. Oh, and its customers save an aggregate c.£500m in a typical year!

Like Sam Walton, Tim Martin is an obsessive owner manager who ‘gets’ that retail success is a result of a thousand cumulative details. Martin and his team are playing a long game, deferring today’s profitability in order to build market share, cement customer satisfaction and loyalty. Martin regularly admits he could double profits at the drop of a hat simply by raising prices. Few investors, we think, realise the inherent future growth that today’s 20-30% lower prices vs. peers almost guarantees. It seems customers love ‘Spoons’ far more than investors.

In January, at the time of the (second!) placing, we outlined a roadmap for assessing the earnings power of this business. Our work today suggests a plausible earnings power of £140m in Net Income looking out three years or so. Today’s market capitalisation of the business post new capital raised is a 12x multiple of those earnings.

Scale Economics shared

In today’s investing world there is a strong following of ‘Scale Economics shared’ business (or EDLP in old money). JDW is one such scale economics shared business we have studied now for a decade and it is one we feel is underappreciated. Few franchise or compounder investors own the shares and of the sector analysts that cover it, no less than 40% have been ‘sellers’ for the last 5 years.

This note is not about JDW’s COVID-19 recovery or its balance sheet; both of which we/others have discussed ad-nauseam. We will comment briefly on each at the end just to remind readers of our conclusions.

Back to the beginning – A 2012 snowball

We have written reams on JD Wetherspoon since we laid out our original thesis on the company in 2012 (Holland Views – Snowball On a really long hill – July 2012 – 426p). Since then, we opted to focus less on the underlying business model and more on the hidden sources of operating leverage within the business. Today, we get back to basics and refresh readers on why this is such an excellent business. As much as the threats and opportunities that arise from COVID-19 need to be considered by all, it is the core EDLP model at the heart of this business that first and foremost needs to be understood and recognised.

  1. We review our thoughts on JDW as a rare beast: a flywheel EDLP business. Most importantly, we think JDW’s current estate can support significant volume growth (50-100%) and thus we expect important sales density increases.
  2. We also address a long time retort from clients – that JDW’s low ROIC (9%) and declining margins calls into question the existence of a moat. But ask yourself how many competitors would survive at -25% lower prices vs. peers (and then pass on the recent VAT cut?). We counter that the last 5-10 years have been a period of extensive investment in JDW freeholds, staff and food preparation facilities. In short, a period of under-earning and what Jeff Bezos might call ‘deferred gratification for shareholders’.
  3. The crux of our view on JDW centres on the operating leverage pent-up or hidden within this excellent business. In the context of a business that has seen headline margins decline steadily for years, clearly this is an unconventional view. But it is not an uncomfortable one for us. 10% operating margins are not at all far-fetched. In fact we see them as an easy target.

In short, Wetherspoon is following a well-worn track led by Wal-Mart, Costco, Geico et al to try and delight its customers. What we are about to describe is a UK business that, as its owner-manager states, “tries to continually make customers feel a little bit better off”.

Shareholders of those aforementioned pioneering EDLP businesses needed to defer gratification and JDW shareholders need to do the same. Maybe, its not that so few understand that Wetherspoon is an EDLP business, perhaps its more that few have the patience to own it?

In this note

In this note, we focus on:

  1. Scale economics: one of our big ideas
  2. Returns, Moats and dividing the spoils
  3. A Mo Farah Stock

For those that seek a refresher on the business ‘from the horse’s mouth’, we highly recommend the following interview that Tim Martin gave in 2018. It offers excellent insight into the man and the business[1]

Scale economics/EDLP: what’s the big idea?

We have spoken in the past about the importance in investing of knowing what you are looking for.

For us, a good starting point means in the first instance looking for great businesses priced more like ‘OK’ businesses. Next step, we like many others, use our mental models and preferred business models arising from our experience and past successes. We have several of these to help identify great businesses. Big ideas such as ‘scale economics’, ‘rare birds’, ‘untapped pricing power’ etc. In fact our 2012 work on JD Wetherspoon and Ryanair was formative and heavily instructs our ongoing work today on many other companies.

Bezos’ two types of companies

Jeff Bezos tells us there are really just two types of companies in the world: those that constantly try to lower prices and those that constantly try to raise prices. Great examples of the former are Wal-Mart, Costco, Amazon, Geico, Aldi, Lidl and Ryanair – unarguably some of the best companies in the world.

Yet, all are very disparate businesses, some in unattractive, low return markets like groceries and airlines. Yet they all seem to dominate and/or have wide competitive moats that make them extremely hard to compete with. Why is that?

Simple, but far from easy

EDLP as a business strategy is so impressive and effective because it is simple but extremely hard and time-consuming to execute. It requires deep cultural attitudes built over decades – hence the most successful executors have been intertwined with family or owner manager oversight. It is a business strategy based on a big idea (everyday low prices) executed via a thousand small decisions. It is this unwavering attention to detail and low prices, getting little things right which cumulatively compound into customer delight that is impossible to mimic. As Tim Martin puts it, it is about “making the customer constantly feel a little bit better off.” Think how satisfied Geico, Wal-Mart and Costco customers are and thus how difficult it is for competitors to compete/displace them.

One of the reasons these companies are rare is that so few management teams have either the discipline or incentives to remain true to the model. Marginal pricing changes are always hugely impactful on P&L earnings and thus very tempting to play with. Costco’s rigid pricing model of cost-plus (allowing only a 14% gross margin) would not last long with most corporate/turnaround managers tempted to let price rise just a little this quarter. Tim Martin, we think, is cut from a similar cloth as Jim Senegal in this regard – stubborn as hell. In the aforementioned interview posted online two years ago, Martin talks extensively about how a 2018 profit warning could theoretically have been avoided by raising the price of a pint by just 5p. Think about that. Such a candid statement might shock some investors who might find such an attitude almost distasteful and prove that shareholders are being disenfranchised at the expense of customers and staff. To us, it’s the opposite: Martin’s disciplined adherence to the well-worn path of EDLP means that shareholders (including Martin who owns c.22%) will, in the long-run, be huge beneficiaries of the higher customer loyalty and volume and competitor erosion that will result. He also spoke about pub managers’ working hours now being more regular and shorter and the Living Wage commitment being met (but not at the expense of a previously agreed company bonus scheme). This multi-year commitment to arguably significant increases in staff costs reminds us of Schwab’s ‘no trade-offs’ policy. The shorter term costs they incur are visible but the longer term benefits less so (yet).

JDW fits the mould but does not model well

Reading Sam Walton describe Wal-Mart’s not-so-secret sauce will ring a bell for anyone familiar with JD Wetherspoon (quality, range, lowest prices, friendly staff, clean loos, etc.).

“The secret of successful retailing is to give your customers what they want. And really, if you think about it from the point of view of the customer, you want everything: a wide assortment of good quality merchandise; the lowest possible prices; guaranteed satisfaction with what you buy; friendly, knowledgeable service; convenient hours; free parking; a pleasant shopping experience.” – Sam Walton

With c.900 (very large) pubs, JD Wetherspoon certainly has scale in the UK on-trade alcohol market. But, it is also the largest seller of Lavazza coffee and could be considered the largest curry house in the UK by volumes of curries sold! As per Fig.1, Wetherspoon is the fourth most used (as in ‘most frequented’) eating brand in the UK after McDonalds, Costa and Greggs. So yes Wetherspoon’s heritage and brand is obviously a pub chain, but today it has evolved into a 900 unit low-priced, high quality hospitality business that goes head-head (at various times of the day) with fast food outlets, posh cafes, pasty shops and curry houses!

Fig.1: Interesting peers – I thought you said this was a pub company?

Source: JDW FY19 results presentations

Sometimes what you cannot measure matters more

But just because JDW’s volume model is obvious to us does not mean it is obvious to everyone. Contrast JDW with Ryanair: Ryanair is a thing of great beauty for city excel junkies. Lovely crisp lines of linear price deflation mirror volume growth through time, clearly confirming the scale/EDLP model at work. No such luck with pub company analysis. First we don’t get the neat disclosure of the airline industry nor do we have a homogenous business. Pub food is an increasingly important part of the revenue mix but the cost and margin profile of food is very different to beer sales. Nor is a pub fungible like an aircraft is. Michael O’Leary can move a low-return aircraft from one route to another overnight – Tim Martin has no such option to move his pubs (though he can and does close low return pubs). In short, pubs (and pubs analysis) is messy.

However, if it walks like an EDLP business and quacks like an EDLP business, then we suggest JDW is an EDLP business. It is very easy (as we have done many times) for any city analyst to walk into a ‘Spoons’ to confirm the tremendous price differential and value that JDW continually offers relative to its local peers. But such unit pricing and volume data is not formally disclosed by JDW management to the financial community. So there is no getting around it, it is just that bit harder for those that rely on quantitative models to get comfortable with Wetherspoon as an EDLP business. More complications arise in the spreadsheets when one begins to consider the impacts of freehold vs. leasehold estates – but more on this later!

“everyone has a ‘tell’” – Agent 007, James Bond

Sometimes you don’t need a spreadsheet for great insight. For example: how many UK hospitality businesses do you know that passed on the recent VAT relief to their customer in full? We only know of three: McDonalds, Greggs and JD Weatherspoon. Every other company we spoke to (including prominent JDW peers and small privately held niche restaurants) kept prices static and pocketed the difference.

The passing on of such tax savings is true EDLP in action.

Volume upside potential: the EDLP growth key

If our assertion that Wetherspoon is an EDLP business is correct, then volume must be the core driver of growth. More to the point, the business must have scope to meaningfully grow its volumes in the future to be an attractive investment from here.

This is perhaps a crucial point for those new to analysing JD Wetherspoon, as the whole point of EDLP business is driving consistent volume growth to compensate for low pricing. In simple terms to understand EDLP businesses, this shows itself in rising asset-turns (i.e. more sales per fixed amount of assets).

Fig.2. JDW Asset turns

 Source: Holland Advisors

A key assertion of ours is that Wetherspoon’s current estate is in fact materially under-utilised. The company does not disclose sales density per se. However last August upon reopening, whilst the effective allowed capacity was only 50% of the estate, yet, (wait for it), it still enjoyed record weekly sales across the group. Anyone who thinks Weatherspoon’s sales densities are maxed out needs to absorb that point: record sales on 50% capacity utilisation. As for flat lining asset/turn as the above chart seems to suggest…we will return to that data shortly.

In an ideal world, pub companies would disclose classic retail metrics like estate square footage, product volume and average pricing. That would make life far easier for us city scribblers to analyse each data point to its nth degree. All is not lost however, as we will show later, the disclosed LFL sales figures are in fact very instructive (for a business that rarely raises prices, Wetherspoons’ LFL sales predominantly reflect volume).

“A computer can tell you down the dime what you’ve sold. But it can never tell you how much you could have sold.– Sam Walton

To get a little more granular on volume trends, it is instructive to look at Wetherspoon’s LFL sales growth over time in the context of the number of its pubs. Fig.3 below shows this clearly. Given what we know about pricing (prices are typically flat), we can largely attribute LFL sales growth (the bars in the chart) to volume growth. One thus can determine that Wetherspoon has driven significant volume growth (notably in the face of fewer pubs in the last five years) through its estate. Such volume growth is EDLP in action.

Fig.3: LFL sales (a proxy for volume growth)

 Source: JDW results presentations

A common refrain – Why couldn’t competitors cut prices to match?

Client: “Wetherspoon’s has really low margins – the lowest in the sector.”

Us: “That’s the whole point!”

We highlighted Tim Martin’s comments that JDW could double profits today if it chose to. It would be exactly the same for almost any EDLP company, we suggest. Let us look at the opposite scenario: What would happen to say JDW’s London competitor Young’s financials were it to match Wetherspoon’s London prices? (Already >50% below Young’s) We happen to know Youngs’ business quite well so feel we have some credibility here.

  • Young’s had 2019 revenues of about £311m and operating margins of c.15% (this predominantly London based chain does not employ an EDLP model and quietly pocketed last year’s VAT cut). Young’s 2019 EBIT was c.£45m.
  • Now let’s assume Young’s decides it has to pivot and match JDW prices. So it cuts prices by – let’s say by 30% across the board. What happens next?
  • Well, revenues drop by -30% too! So, £311m of revenues becomes £220m (-£90m). More pressingly, unless Young’s can find some new volume to compensate, those lofty profits margins are decimated and go (£45m less £90m = -£45m)…swiftly negative! That’s the funny thing with marginal pricing.

This is a theoretical exercise of course. Yet there is insight to be had. Price adjustments are the easy part. The culture change required to withstand the shock of a -30% cut to your longstanding pricing practices (staff compensation, supplier relations etc.) is such that very few companies could manage it from a standing start. Especially when the guy whose prices you are matching has already been doing it for four decades!

But also, how would the average Young’s customer react? Well, there would likely be a South London drinking binge for a week (and not a great deal of work done in the insurance market!). But after the initial excitement would its existing customers structurally drink more, and could they drink enough to compensate for the price reduction? Furthermore, are Young’s pubs sized correctly to cope with such a necessary demand uplift? The answer to all three of those questions we think is: ‘no’. We also suspect that were any CEO of Young’s to try such a strategy he might find himself out of job within a month, maybe less.

Indeed going through this exact exercise explains why EDLP business like say Ryanair or Lidl prevail and keep growing. Because it is very very hard once they have any sort of scale for the incumbent competitors to change their model to directly compete with them without going out of business in the process! This is not a market that Silicon Valley has figured out how to disrupt either we might add.

OK, so we are being a bit sensationalist here – but you get the point. The comfy band of competitors with their higher prices and lofty profit margins would find their businesses decimated were they to try to match the pricing structure of the ingrained EDLP leader. This is as true for Wetherspoon’s peers as it is for Geico’s, Schwab, Ryanair or Lidl. The interesting point in the UK pub sector is that there is only one sizable EDLP player – JDW. This inability of competitors to match pricing, in the long run can give a long runway for volume growth. This grudging acceptance that someone else can do it cheaper than you – is evidence of EDLP in action.

Returns, Moats aka “dividing the spoils”

So Wetherspoon is an intentionally lower priced business. It tolerates a lower margin than peers and in recent years has tolerated a declining margin (i.e. the price gap with peers has widened but the margin gap has too). That’s the thing with EDLP businesses: their operating leverage is often not obvious from the outside as the benefits of scale (i.e. what would normally be rising margins) are instead reinvested in the customer on long time frames. It is for this reason that not all EDLP businesses are externally obvious from their financials all of the time. JDW is today one such business.

But let’s not forget, many low margin businesses can still enjoy decent returns. Indeed these businesses are interesting because they are low margin!

Before we go on to discuss returns and moats, we remind you that we have always seen in Weatherspoon’s untapped pricing power. In other words, there may be a time (and post COVID that time might be sooner than we thought) for JDW to allow prices to rise just a little to offset past cost inflation. We have addressed this point in previous notes and remind you that even a measly 2% uplift to 2019 prices would have lifted Wetherspoons’ 2019 pre-tax profits by a whopping 36%. (There’s that marginal pricing again!). To be clear we have never expected any sort of action by the company to step up pricing to recoup pasts cost burdens; only an expectation of a little gradual inflation or just greater volume throughput instead.

In thinking about returns, we might change tack and move from margins to asset turns. We should state up-front, this is clearly not an asset light business. Tim Martin, like Mike Ashley, is ‘long’ property and he has often shared publicly that his experience of past cycles showed him the value of owning freehold property and the avoidance of market-based or onerous rent clauses. At a deeper level the use of freehold property gives not just freedom but also permanence and we think this speaks to the way that Martin and his team think about the longevity of the Wetherspoon’s business.

Return on Capital 101

Investment returns are still derived from principally two factors whoever you are: Margins and asset turnover as summarised in Fig.4 (thanks to Mr Du Pont).

Fig.4: The Du Pont equation

Source: Holland Advisors

JDW as an investment has been a hard sell to some Franchise investors because both sides of this return equation have been under-pressure. JDW operating margins have fallen from c.12% in 2000 to today’s 8% for reasons we hope are clear from the earlier part of this note i.e. EDLP pricing and investment. (We will address the P&L in more detail in the next section). In many earlier pieces we have outlined the reasons why margins have fallen. These include greater investments in staff and that required for a better food offering. That the group is now poised to benefit from these multi-year investments we think is becoming self-evident. However, while asset turns rose consistently until c.2012 and thus the business looked like a classic EDLP retailer (low margin, rising asset turn) the last six or seven years of stagnating asset turns suggests it might not be such a company….?

Asset turn study

What we want to do in in this piece is look closer at asset turns, the normal life blood of every EDLP business.

Does the stagnation of asset-turns post 2012 show a business that is in decline? Those who see that stagnation and then look at falling EBIT margins often conclude it is. However, we think they are too quick to be assessing the company through their own financial eyes rather than the eyes of customers or employees. Look again at Fig.3 earlier. It shows excellent rates of LFL sales growth since 2012 suggesting customers have never been happier. We also know that the company has invested significantly in staff pay and conditions during this period.

So why is the key metric for an EDLP business (i.e. assets turns) not rising? Freehold property is the answer.

The chart in Fig.5 below clearly shows that the group has chosen to commit greater and greater amounts of its capital to a higher freehold property mix in the last decade. We hope that Fig.5 gives important context on why asset turns have stagnated – because of the marked increase in Freehold property investment.

It is our contention that had JDW’s freehold mix stayed at 2012 levels (i.e. 45%, not 65%), then asset turns would mechanically be a lot higher today as would overall return on capital.

Arguably, with the property estate also not having been revalued for 20 years, recent additions add to capital values in marked way, perhaps greater than their true effect on the intrinsic value of the business. It is interesting we think to understand these quirks for it is the reason why some global investors that should own JDW, we think, do not. Simply put they are not local enough to understand the value proposition the business offers and the asset turn and operating margin metrics does not illustrate the business model to them easily enough from a distance.

Fig.5: JD Wetherspoon Freehold %age of Estate vs. Asset turns

  Source: JD Wetherspoon, Holland Advisors

We could now spend a great deal of time adjusting JDW’s historical balance sheet to produce a neat rising asset turn trend line. In doing so we would better prove its EDLP credentials to those looking for (and not finding) confirmation of the JDW model in spreadsheet form. But in truth we see no need. After all what is asset turn? It is the amount of sales that is passing through the asset base of the company. A quick look again at Fig.3 shows that in 2012 (when asset turns plateaued) the company had c.900 pubs, the same number it has today. And yet (as per the sales per pub chart in the Appendix shows) sales per pub has increased +50% over this same period.

That this company has chosen a changed property model (i.e. more freehold) has, to our mind, actually made it a more robust business. That it might not screen so easily for those that know it less well, we say: tough luck!

Defining a moat aka ‘how to divide the spoils’

Whether we call it EDLP or Scale Economy Shared business – whatever you want to call it – what most investors really want to see is evidence of a moat.

A competitive moat is, at its most basic, derived from how customers are treated vs. the competition but proof of its existence can still be quite subjective.

The thought experiment of Young’s cutting prices is surely part of the puzzle but let’s pursue this a little further.

At the end of the day, what EDLP companies do best is share the benefits of scale. Most companies claim to seek economies of scale but in truth most have limited appetite (or fail to see the long term benefit) in actually sharing the benefits of scale with customers and staff. It is this long term, more holistic approach that feeds the EDLP flywheel. So let’s look for how JDW shares its benefits of scale.

A typical refrain from the city is that JDW is a low margin business because its business shares too much profit with customers (lower prices) and staff (wage increases). A glance at 2019 costs below in Fig.6 shows £623m staff costs vs. £350m of pub (gross) profit (as highlighted in yellow) and one can sympathise with this view. However, in our opinion, this is very short-sighted and ignores the long-term value that accrues to a company that looks after its staff and customers in such an honest and open way.

Let’s look at the numbers.

Fig.6: JDW 10-year financials

 Source: JDW, Holland Advisors

Sceptics will rub their hands and quickly point out that over 9 years:

  • Actual sales (aka volumes) have compounded at c.7% cagr from 2010-19
  • BUT, headcount has compounded at 4% and worse, staff costs (i.e. headcount + wages + bonuses) compounded at +10% per year a clear sign they might say of a weak model.
  • They might also ask “where are the shareholders yachts?!” (after all, EBIT compounded at only 4%).

Unfazed, we turn to Mr Buffett. Adopting a clever method he once employed in an analysis of Geico’s moat shared in the 2005 Berkshire letter. We can look at the value accruing to each of JDW’s stakeholders as a proxy for the moat that also gives context to JDW’s 2010-19 investment period.

Looking at each of the three constituents in turn:

  1. The Happy Customers. JDW’s customers save -20% (vs. competitor prices) i.e. circa £500m in FY19 (20% of 2.5bn gross sales) in savings. Or more pertinently over £3.5bn in savings from 2010-2019!!
  2. The Happy Employees. Employees now enjoy a premium working wage plus a £46m bonus scheme (c.10% of benefits) + job satisfaction (as per the 11y average tenure of pub manager) + growth opportunities as business grows.
  3. Happy Shareholders? They certainly used to be. The share price cagr was 19% from 2012-19. Actually there might have been a yacht or two bought!
  • Clearly what can aid shareholder returns is great allocation of capital and JDW as a serial cannibal (purchaser of its own shares) is enhancing investor returns at rates in excess of simple EBIT growth

This strikes us as a win-win-win situation that is reinforcing as each stakeholder group is aligned. Crucially, however the scale required to compete with the company or displace its competitive position increases as time goes on and these scale economics are reinvested. This is surely Buffett’s moat in action. We do also believe that we are assessing this business at an unfavourable snapshot in time when opex costs are elevated. Repeating this work in say five years from now if sales were 30% higher but EBIT margins were 10-12% would obviously give far better shareholder outcomes. However, staff and customers would likely still be delighted.

Mo Farah Recovery Stock

Tim Martin and his management team we assess as a prudent bunch. The scale of debt (3x EBITDA) that the group entered COVID-19 with was a function of the need to finance the group freehold estate rather than any attraction to leverage. The opposite we think is true. The scale of the assets supporting this debt are significant at £1,363m (freehold) but importantly not revalued since 1999 and the very low cost of borrowing secured (c.3.3% until 2023) gave us great comfort even in the depths of 2020 when the share price plunged.

Whilst the company does not publish its covenants it is obviously in technical breach of them (how would you not be when EBITDA is currently £0m). However, importantly, we think its bankers have a strong feel not just for the latent earnings power of this estate but also for the current true value of its freehold assets. Its low level of cash burn when closed and the ongoing government support measures for this sector brought further comfort as COVID unfolded.

During 2020 and specifically in our Mo Farah recovery piece, we talked to the outsized recovery potential a business like JDW had post COVID-19 particularly relative to smaller competitors in the sector. The more we look at the company and the surrounding industry the more convinced of the view we became. The opportunities we see are both operational (its pubs are low cost, well maintained and ready to open with capacity). But also strategic with opportunities for accretive additions to the business (London) as the recent placing alluded to.

Indeed in our Mo Farah piece (Oct 2020) we observed the following:

Might these be the crisis Tim Martin needed?

Readers know that we are admirers of the JDW pricing policy. Also, that we think one day a little operational gearing will show up in this business when they just cannot find any more staff to pay and any more beer to give away at silly low prices! A few years ago, we managed to get a few minutes with Tim at the back of the Crosse Keys. We asked about this point. I.e. when might the long awaited operational gearing arrive, and it be good to be a JDW shareholder rather than just an employee or customer? Tim answered by describing the competitive situation in the pub sector in the 1990/2000’s and the restaurant sector today. He pointed out that during past over-investments in the UK pub estate (via companies like Punch and Enterprise) JDW sales and profits were depressed. When that bubble burst, he noted JDW did really well. He went on to say that there had then been a huge over investment of capital in the restaurant sector (we were talking in c.2018). He cited new branches of Jamie’s and Carrluccio’s across London-all half empty. He observed that when that capacity left the restaurant sector, like it left the pub sector, JDW would do well.

At the time this was not the answer I wanted (rarely are they!) The Sam Walton in him knew that he just had to keep charging the low prices, build the brand and… wait. As Covid has decimated the restaurant sector this year Tim’s reflection on that day in 2018 has often returned to me. With the company in technical breach of its covenants, losing £14m a month and the pubs shut it feels a strange time to talk about their competitive strength. We will see. Source: Holland Views: Mo Farah Recovery Portfolio, Oct 2020

The future of JDW….+ Valuation (we repeat our view at the time of the recent placing)

Those wondering as to the future of Wetherspoon need look no further than it’s past. It will simply be a ‘more of the same’ strategy of great food, great breakfasts, great coffee and of course beer, at unbelievable prices. One thing that might just change…. the profits..? A read of our past pieces will tell a story of coming operational gearing that did not/has not yet arrived. We think it is only delayed, nothing more. The operational gearing the business possess is significant and powerful, but its focus on customer value is relentless, and year after year customers reward this price/value re-investment with their feet…. by coming back. Yesterday’s Wetherspoon’s (i.e. the one of the last 5-10 years) grew but it had to invest a lot; In kitchens, staff (70 hour week managers reduced down to a more humane 40 hours) and the minimum wage. Tomorrow’s Wetherspoon’s will grow too, likely by 50-100% through the same estate we estimate, but costs will not need to grow as fast this time. The result, the long-awaited operational gearing will arrive. When it turns up we don’t know, but turn up it will.

Whilst some may look at the companies published profit and free-cashflow scenarios in detail we might dream out a little further.

  • In the 12 months pre-COVID JDW turned over c.£1.9bn. At an 8% operating margin that would equate to an operating profit of £152m (margin was 8.6% in Jan 2020).
  • If LFL (predominantly volume) were to continue to compound at 5%, turnover would be £2.2bn in say 3 years’ time.
  • Now for the dreamy bit: per chance margins were 10%, not 8%, in 3 years’ time, thanks to increased scale, EBIT would be £220m.
  • With debt at say c.£1bn (with a fixed interest rate of c.3% BTW, but 4% assumed) this might produce PBT of £180m and PAT of £140m.
  • Will margins then rise many years into the future for this company? No of course not. As a serial price re-investor that would be suicide, but a look at its past margin structure seems to suggests that it might be under earning it recent years and could recover some ground without giving up anything in terms of competitive position (London JDW beer price per pint is half that of one in a Young’s pub).
Much uncertainty but….

That there is uncertainty looking forward in a business like JDW we cannot dismiss:

  • What will the competitive environment look like on re-opening?
  • Will the sector have a 1920’s like boom for a period?
  • Will VAT tax boost be lasting?
  • Will the group choose to run at a lower rate of leverage in future?
  • Why did Tim Martin sell stock recently?
  • Might the group buy significant London assets?

Analysing any one of these points can cause an investor uncertainty but a key question we think should be considered. One that was raised by an excellent investor many have been reading the letters lately:

“Does this event change the relationship between company and customer?” Nick Sleep

We have studied a great many companies that invest back in their customers in the way that JDW does and it is NEVER right to underestimate the longevity of their growth. There was a time when we used to ask Tim when he would put prices up to compensate for the cost inflation he was suffering in a recent year. We now realise we were missing the point. Like Wal-Mart, Costco, Amazon and so many other great businesses this company is not about ‘cost +’, it never was. Even if the company is having multi-year cost pressures. It was/is about scale economics shared. Its staff and customers see little change, only improvements in the company’s offering in the last 10 years, Mr Market is less sure. Therein lies the opportunity. When margins are higher but sales are still strong and maybe a little less cash is needed for freehold site purchases, more investors we think will admire the Spoon’s model. For now we are happy to have it all to ourselves.

We remain fans of J D Wetherspoon.

Andrew Hollingworth & Mark Power

The Directors and employees of Holland Advisors may have a beneficial interest in some of the companies mentioned in this report via holdings in a fund that they also act as manager to.


Source: JD Wetherspoon annual report, Oct 2020

Source: J D Wetherspoon annual report 2019


This document does not consist of investment research as it has not been prepared in accordance with UK legal requirements designed to promote the independence of investment research. Therefore even if it contains a research recommendation it should be treated as a marketing communication and as such will be fair, clear and not misleading in line with Financial Conduct Authority rules. Holland Advisors is authorised and regulated by the Financial Conduct Authority. This presentation is intended for institutional investors and high net worth experienced investors who understand the risks involved with the investment being promoted within this document. This communication should not be distributed to anyone other than the intended recipients and should not be relied upon by retail clients (as defined by Financial Conduct Authority). This communication is being supplied to you solely for your information and may not be reproduced, re-distributed or passed to any other person or published in whole or in part for any purpose. This communication is provided for information purposes only and should not be regarded as an offer or solicitation to buy or sell any security or other financial instrument. Any opinions cited in this communication are subject to change without notice. This communication is not a personal recommendation to you. Holland Advisors takes all reasonable care to ensure that the information is accurate and complete; however no warranty, representation, or undertaking is given that it is free from inaccuracies or omissions. This communication is based on and contains current public information, data, opinions, estimates and projections obtained from sources we believe to be reliable. Past performance is not necessarily a guide to future performance. The content of this communication may have been disclosed to the issuer(s) prior to dissemination in order to verify its factual accuracy. Investments in general involve some degree of risk therefore Prospective Investors should be aware that the value of any investment may rise and fall and you may get back less than you invested. Value and income may be adversely affected by exchange rates, interest rates and other factors. The investment discussed in this communication may not be eligible for sale in some states or countries and may not be suitable for all investors. If you are unsure about the suitability of this investment given your financial objectives, resources and risk appetite, please contact your financial advisor before taking any further action. This document is for informational purposes only and should not be regarded as an offer or solicitation to buy the securities or other instruments mentioned in it. Holland Advisors and/or its officers, directors and employees may have or take positions in securities or derivatives mentioned in this document (or in any related investment) and may from time to time dispose of any such securities (or instrument). Holland Advisors manage conflicts of interest in regard to this communication internally via their compliance procedures.

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Welcome to Holland Advisors

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Terms and Conditions
Privacy Notice


Please confirm the following

Please confirm that you have read and understood the following terms of use of this website


The content of this website has been prepared by Holland Advisors (London) Ltd on the basis of information and sources believed to be reliable.

Under no circumstances should any part of this website be construed as an offering or solicitation of an offer for any investment in the products on this site Holland Advisors (London) Limited is authorised and regulated by the Financial Conduct Authority (FRN 538932).

1. Not for U.S. Persons
The provision of the information in this web site does not constitute an offer of securities to any person in the United States or to any U.S. Person as such term is defined under the Securities Act of 1933, as amended. The information contained in this site about Holland Advisors (London) Ltd is not directed to any person in the United States. Funds referred to herein are neither registered under the Securities Act 1933 of the USA, nor are they registered under the Investment Company Act of 1940. Consequently, they cannot be offered for sale or be sold in the USA, its territories, possessions or protectorates under its jurisdiction, nor to nationals, citizens or residents in any of those areas.

No investments or services mentioned on this website are directed at US Persons who are not Eligible Counterparties as defined by the UK Financial Conduct Authority (FCA) Handbook or Qualified Purchasers as defined under the Investment Company Act of 1940. The information contained herein does not constitute a distribution, an offer to sell or the solicitation of an offer to buy any securities in any jurisdiction in which such distribution or offer is not authorised.

2. Terms and Conditions of Use



3. Information on the Website
Except where stated otherwise, the information, content and services on this Website (the “Information”) are provided by Holland Advisors (London) Ltd (referred to as “we” and “us”) as at the date indicated on the relevant material.

The Information is provided for personal use and information purposes only. The Information does not take account of the investment objectives, financial situation and particular needs of any particular person and is not general advice to any class of persons. Therefore, you should not rely on the Information and should obtain relevant and specific professional advice in making any investment decision.

Furthermore, nothing on this Website constitutes or should be construed to constitute
(i) an offer, advice, invitation or solicitation from us or our affiliates to buy or sell any investments or securities, futures, options or other financial instruments;
(ii) an invitation or inducement to engage in investment activity or a financial promotion of any kind; or
(iii) investment advice or recommendation.

4. Stock exchange prices and exchange rates
The prices/values shown on this Website in relation to different underlying securities are based on the prices notified to Holland Advisors (London) Ltd as the last sale price of the relevant securities on the stock exchange on which they are traded as at the time and date shown. Those figures may vary throughout the course of, and between, stock exchange trading days, market trading times and business days in general. Holland Advisors (London) Ltd has not verified the figures with the relevant stock exchange and you should verify the accuracy of those figures separately before relying on them.

5. Permitted users of the Website
The laws and regulations of the country from which you access this Website may include restrictions on the distribution of the Information. This Website is not directed at or intended for distribution to or use by any person or entity in any jurisdiction where (by reason of that jurisdiction’s applicable securities laws, person’s nationality, residence or otherwise) such distribution, publication, availability or use of this Website or any part of its contents would be contrary to applicable law or regulation or would subject Holland Advisors (London) Ltd to any registration or licensing requirement within such jurisdiction. If you are such a person or entity, you are not authorised to enter the Website. It is your responsibility to ensure that your use of this Website complies with any restrictions or any applicable local laws regarding use of the Information on this Website. Persons or entities in respect of whom such restrictions apply must not access the relevant pages on this Website.

The Information displayed on this Website contains material that may be interpreted by the relevant authorities in the country where you are viewing this Website as a financial promotion or an offer to purchase securities. Accordingly, if you reside in any such country or fall within the scope of any law that seeks to regulate financial promotions in the country of your residence or in the country in which you are viewing this Website, please cease accessing or using this Website immediately.

If you are uncertain about your position under the laws of the country in which you are viewing this Website, then you should seek clarification by obtaining legal advice from a lawyer practicing in the country of your residence or in the country in which you are viewing this Website before accessing this Website.

You may not use any part of the material or Information on this Website to establish, maintain or provide or assist in establishing, maintaining or providing a stock market for trading in securities.

6. Investment Performance and Accuracy of Information
The Site contains material about the past performance of our Funds. The value of an investment in a Fund may go up as well down so that an investor’s investment in a Fund, when redeemed, may be more or less than the original investment amount. By its nature, investment in a Fund managed by Holland Advisors (London) Ltd is only suitable for sophisticated investors who do not require immediate liquidity for their investment, for whom an investment in a Fund does not constitute a complete investment programme and who fully understand and are willing to assume the high risk involved in the investment programme of a Fund. THE PAST PERFORMANCE OF ANY INVESTMENT, INVESTMENT STRATEGY OR INVESTMENT STYLE IS NOT INDICATIVE OF FUTURE PERFORMANCE.

Whilst the information contained on the Website has been given in good faith and every effort has been made to ensure its accuracy, the Information may not be complete or accurate for your purposes. This Website and the Information is provided on an “as is” basis and Holland Advisors (London) Ltd may not, and has no obligation to, update the Information or correct any inaccuracy which subsequently becomes apparent. The Information and/or opinions and estimates comprised in the Information may be changed or withdrawn without notice and may become outdated. You, therefore, should verify any information or other material obtained from this Website before you use it.



The Information is assembled from material prepared by Holland Advisors (London Ltd) or its agents but may not include Information made known to Holland Advisors (London) Ltd officers (or agents) subsequent to the date of publication of the Information indicated on the Website. If you use the Information, you do so at your own risk. Please recognise that the previous performance of securities or other instruments does not guarantee or predict future performance.

7. Exclusion of liability



8. Third Party Websites
We may provide, on our Website, links to websites operated by third parties as a convenience to you. If you use these other sites, you will leave this Website. If you decide to visit any linked site, you do so at your own risk and it is your responsibility to take all protective measures to guard against viruses or other destructive elements.

Holland Advisors (London) Ltd makes no representations, warranties or guarantees of any kind about any of the content of any other website which you may access by hypertext link through this Website. When you access any other website by means of a link from this Website, you should understand that your access to that other website is independent of Holland Advisors (London) Ltd and Holland Advisors (London) Ltd has no control over the content of the website, nor does Holland Advisors (London) Ltd in any way endorse or approve the content of that website. In no event will Holland Advisors (London) Ltd in any way be liable to you or any other person(s) or organisation(s) for loss or damage (whether direct, indirect, consequential, special or other) for any use of any site linked to it by means of hypertext or otherwise.

9. Indemnity
You agree to indemnify Holland Advisors (London) Ltd and its officers from and against any claim brought by third parties against Holland Advisors (London) Ltd and its officers as a consequence of your breach of the Terms of Use. Furthermore, if your use of this Website results in the need for servicing, repair or correction of equipment, software or data, you assume all costs thereof.

10. Intellectual Property Rights and Licence
The copyright, trade mark or any other intellectual property rights in the Website and the Information are owned by or licensed to Holland Advisors (London) Ltd. You may download or print out a hard copy of individual pages and/or sections of this Website provided you do not remove any copyright or other proprietary notices. Any downloading or other copying from this Website will not transfer title to any software or material to you. You may not reproduce (in whole or in part), transmit (by electronic means or otherwise), modify, link to or use for any public or commercial purpose this Website without the prior written permission of Holland Advisors (London) Ltd. Any rights not expressly granted in the Terms of Use are reserved.

11. Operation of the Website
You should be aware that the internet, being an open network, is not secure. If you choose to send any electronic communications by means of this Website, you do so at your own risk. Holland Advisors (London) Ltd cannot guarantee that such communications will not be intercepted or changed or that they will reach the intended recipient safely.

12. Privacy
Any personal data relating to you will be collected, used and recorded by us in accordance with current data protection legislation, the Terms of Use and our Privacy Policy. You must read our Privacy Policy as it forms part of the Terms of Use.

13. Governing law
The Terms of Use are governed by the laws of England and Wales and the courts of England and Wales will have exclusive jurisdiction over any disputes arising under them.

14. Waiver
If you breach the Terms of Use and we take no action, we will still be entitled to use our rights and remedies in any other situation where you breach the Terms of Use.

15. Our details
This website is owned and operated by Holland Advisors London Ltd. You can contact us at: Holland Advisors London Ltd, The Granary, 1 Waverley Lane, Farnham, Surrey, GU9 8BB.

Updated and effective as of  31st March 2021


Please read the following conditions of use of this website.
This website is directed at high net worth experienced investors and institutional investors who understand the risks involved with the investments being promoted and it should not be relied upon by retail clients (as defined by Financial Conduct Authority).

The information on this website is issued by Holland Advisors (London) Limited (hereafter referred to as “Holland Advisors”), a limited liability company (7431314) incorporated in England and Wales, which is authorised and regulated by the Financial Conduct Authority (FRN: 538932).

This website is for information purposes only and does not constitute an offer or solicitation to buy or sell securities, funds or any other financial instrument. The information is directed inside the United Kingdom and is not directed at any persons in jurisdictions where it would be against local law or regulation.  In particular, information on this site is not directed at any person, partnership or corporation being resident in the United States of America. Holland Advisors disclaims all responsibility if you access or download any information in breach of any law or regulation of the country in which you reside.

Information on this site
The information provided does not constitute advice. Holland Advisors believes that the sources of the information in this website are reliable. However it cannot and does not guarantee, either expressly or implicitly, and accepts no liability for, the accuracy, validity, timeliness or completeness of any information or data (whether prepared by it or by any third party) for any particular purpose or use or that the information or data will be free from error. Holland Advisors does not undertake any responsibility for any reliance which is placed by any person on any statements or opinions which are expressed herein. Neither Holland Advisors nor any of its directors, officers or employees will be liable or have any responsibility of any kind for any loss or damage that any person may incur resulting from the use of this information. This does not exclude or restrict any duty of liability that Holland Advisors has to its customers under the regulatory system in the United Kingdom. All Information may be changed or amended without prior notice although Holland Advisors does not undertake to update this site regularly.

Marketing Communications
Documents on this site do not constitute investment research as they have not been prepared in accordance with UK legal requirements designed to promote the independence of investment research. Therefore, even if they contain research recommendations they should be treated as marketing communications and as such will be fair, clear and not misleading in line with Financial Conduct Authority rules. These communications are not personal recommendations to you and any opinions cited are subject to change without notice. Holland Advisors takes all reasonable care to ensure that the information on this site is accurate and complete; however no warranty, representation, or undertaking is given that it is free from inaccuracies or omissions. Documents on this site are based on, and contain, current public information, data, opinions, estimates and projections obtained from sources we believe to be reliable. Past performance is not necessarily a guide to future performance. The content of these documents may have been disclosed to the issuer(s) prior to dissemination in order to verify their factual accuracy.

Investments in general involve some degree of risk, therefore Prospective Investors should be aware that the value of any investment may rise and fall and you may get back less than you invested. Value and income may be adversely affected by exchange rates, interest rates and other factors. The investments discussed on this website may not be eligible for sale in some states or countries and may not be suitable for all investors. If you are unsure about the suitability of an investment given your financial objectives, resources and risk appetite, please contact your financial advisor before taking any further action.

Holland Advisors and/or its officers, directors and employees may have or take positions in securities, funds or derivatives mentioned on this site (or in any related investment) and may from time to time dispose of any such securities (or instrument). Holland Advisors manages these potential conflicts of interest internally via its compliance procedures.

Fund Information
Parts of this site may refer to Funds managed or advised by Holland Advisors. These are not solicitations to invest and any potential investors should refer to the “Our Funds” section of the website in order to learn more about these Funds and find out how and where to obtain the relevant full legal documentation.

Linked Websites
This site may be linked to third party websites or contain information provided by third parties. Holland Advisors does not make any representation as to the accuracy or completeness of such websites or information, has not and will not review or update such websites or information, and cautions browsers that any use made of such websites or information is at their own risk. Holland Advisors does not accept any liability arising out of the information contained on any linked website or Information provided by a third party and the use of such sites and information is at your own risk. This does not exclude or restrict any duty or liability that Holland Advisors has to its customers under the regulatory system in the United Kingdom.

You agree to indemnify and defend Holland Advisors, its affiliates and licensors, and the officers, directors, employees, and agents of Holland Advisors and its affiliates and licensors, from and against any and all claims, liabilities, damages, losses, or expenses, including legal fees and costs, arising out of or in any way connected with your access to or use of this website and the Information.

Use of Cookies
If you agree to these terms and conditions a “cookie” might be placed on your computer. A cookie is a packet of information that does not identify individual users of a website, but allows the collection of website activity (such as the number of users who visit our website, the date and time of visits, the number of pages viewed, navigation patterns, what country and what systems users have used to access the site). We can use this information for statistical purposes, which allows us to analyse and improve our website. The cookie will expire automatically after 6 months or you can manually remove cookies in your browser settings.

Copyright, Trademarks and Other Rights
Copyright, trademarks, database rights, patents and all similar rights in this site and the information contained in it are owned by Holland Advisors or relevant third party providers. You may use the Information and reproduce it in hard copy for your personal reference only. The information contained herein and any supplemental documentation provided is confidential and should not be copied, reproduced or redistributed without the prior consent of Holland Advisors.

Governing Law
You agree that your use of this site and any dispute arising from this use is subject to English law and you submit to the jurisdiction of the Courts of England & Wales.

Privacy Notice

This is the privacy notice of Holland Advisors London Ltd our company number is 07431314. Our registered office is at 7 York Road, Woking, Surrey, GU22 7XH.



This notice describes how we collect, store, transfer and use personal data. It tells you about your privacy rights and how the law protects you.

In the context of the law and this notice, ‘personal data’ is information that clearly identifies you as an individual or which could be used to identify you if combined with other information. Acting in any way on personal data is referred to as ‘processing’.

This notice applies to personal data collected through our website

Except as set out below, we do not share, or sell, or disclose to a third party, any information collected through our website.


Data Protection Officer

We have appointed a data protection officer (‘DPO’) who is responsible for ensuring that our privacy policy is followed. If you have any questions about how we process your personal data, including any requests to exercise your legal rights, please contact our DPO, Claire Brunt at


Personal data we process

1. How we obtain personal data

The information we process about you includes information:

  • you have directly provided to us
  • that we gather from third party databases and service providers
  • as a result of monitoring how you use our website or our services

2. Types of personal data we collect directly

When you use our website, you may provide personal data by submission of data by our Sign Up or Contact Us forms. This can be categorised into the following groups:

  • personal identifiers, such as your first and last names
  • contact information, such as your email address and your telephone number for communication
  • records of communication between us including messages sent through our website, email messages and telephone conversations
  • marketing preferences that tell us what types of marketing you would like to receive

3. Types of personal data we collect from your use of our services

By using our website and our services, we process:

  • technical information about the hardware and the software you use to access our website and use our services, including your Internet Protocol (IP) address, your browser type and version and your device’s operating system
  • usage information, including the frequency you use our services, the pages of our website that you visit, whether you receive messages from us and whether you reply to those messages
  • your preferences to receive marketing from us; how you wish to communicate with us; and responses and actions in relation to your use of our services.

4. Our use of aggregated information

We may aggregate anonymous information such as statistical or demographic data for any purpose. Anonymous information is that which does not identify you as an individual. Aggregated information may be derived from your personal data but is not considered as such in law because it does not reveal your identity.

For example, we may aggregate usage information to assess whether a feature of our website is useful.

However, if we combine or connect aggregated information with your personal data so that it can identify you in any way, we treat the combined information as personal data, and it will be used in accordance with this privacy notice.

5. The bases on which we process information about you

The law requires us to determine under which of six defined bases we process different categories of your personal data, and to notify you of the basis for each category.

If a basis on which we process your personal data is no longer relevant then we shall immediately stop processing your data.

If the basis changes then if required by law we shall notify you of the change and of any new basis under which we have determined that we can continue to process your information.

6. Information we process with your consent

Through certain actions when there is no contractual relationship between us, such as when you browse our website or ask us to provide you more information about our business, you provide your consent to us to process information that may be personal data.

Wherever possible, we aim to obtain your explicit consent to process this information, for example, we ask you to agree to our use of non-essential cookies when you access our website.

We continue to process your information on this basis until you withdraw your consent or it can be reasonably assumed that your consent no longer exists.

You may withdraw your consent at any time by instructing us

7. Information we process for the purposes of legitimate interests

We may process information on the basis there is a legitimate interest, either to you or to us, of doing so.

Where we process your information on this basis, we do after having given careful consideration to:

  • whether the same objective could be achieved through other means
  • whether processing (or not processing) might cause you harm
  • whether you would expect us to process your data, and whether you would, in the round, consider it reasonable to do so

For example, we may process your data on this basis for the purposes of:

  • improving our services
  • record-keeping for the proper and necessary administration of our business
  • responding to unsolicited communication from you to which we believe you would expect a response
  • preventing fraudulent use of our services
  • exercising our legal rights, including to detect and prevent fraud and to protect our intellectual property
  • insuring against or obtaining professional advice that is required to manage business risk
  • protecting your interests where we believe we have a duty to do so


How and when we process your personal data

8. Your personal data is not shared

We do not share or disclose to a third party, any information collected through our website.


Use of information we collect through automated systems

9. Cookies

Cookies are small text files that are placed on your computer’s hard drive by your web browser when you visit a website that uses them. They allow information gathered on one web page to be stored until it is needed for use at a later date.

They are commonly used to provide you with a personalised experience while you browse a website, for example, allowing your preferences to be remembered.

They can also provide core functionality such as security, network management, and accessibility; record how you interact with the website so that the owner can understand how to improve the experience of other visitors.

Some cookies may last for a defined period of time, such as one visit (known as a session), one day or until you close your browser. Others last indefinitely until you delete them.

Your web browser should allow you to delete any cookie you choose. It should also allow you to prevent or limit their use. Your web browser may support a plug-in or add-on that helps you manage which cookies you wish to allow to operate.

The law requires you to give explicit consent for use of any cookies that are not strictly necessary for the operation of a website.

10. Personal identifiers from your browsing activity

Requests by your web browser to our servers for web pages and other content on our website are recorded.

We record information such as your geographical location, your Internet service provider and your IP address. We also record information about the software you are using to browse our website, such as the type of computer or device and the screen resolution.

We use this information in aggregate to assess the popularity of the webpages on our website and how we perform in providing content to you.


Other matters

11. Your rights

The law requires us to tell you about your rights and our obligations to you in regard to the processing and control of your personal data.

We do this now, by requesting that you read the information provided at

12. Communicating with us

When you contact us, whether by telephone, through our website or by email, we collect the data you have given to us in order to reply with the information you need.

We record your request and our reply in order to increase the efficiency of our business. We may keep personally identifiable information associated with your message, such as your name and email address so as to be able to track our communications with you to provide a high quality service.

13. Complaining

If you are not happy with our privacy policy, or if you have any complaint, then you should tell us.

When we receive a complaint, we record the information you have given to us on the basis of consent. We use that information to resolve your complaint.

14. Retention period

Except as otherwise mentioned in this privacy notice, we keep your personal data only for as long as required by us to provide you with the services you have requested.

15. Compliance with the law

Our privacy policy complies with the law in the United Kingdom, specifically with the Data Protection Act 2018 (the ‘Act’) accordingly incorporating the EU General Data Protection Regulation (‘GDPR’) and the Privacy and Electronic Communications Regulations (‘PECR’).

16. Review of this privacy policy

We shall update this privacy notice from time to time as necessary.