Cube Midcap Report (1 July 2020) – Hammering out debt & rent agreements

Cube Midcap Report (1 July 2020) – Hammering out debt & rent agreements

Good morning!

This is the first midcap report since last week – sorry about that!

The next live-streaming video is today at 12, in which I’ll be talking about the Volvere (VLE) AGM, answering your questions, and talking about any other things which strike me as interesting, including topics from today’s report:

In this report, I’m planning to look at:

  • Hammerson (HMSO)
  • B&M European (BME)
  • Sainsbury (SBRY)

Finished at 11.30am.


  • Loading stock data...
Market cap £633 million
RNS Debt, liquidity and rent collection update
Writer disclosure No position

The equity value at Hammerson has crashed in 2020 – from 309p per share all the way to 82p.

You could still have doubled your money, if you bought in at the low in May. Wow! REITs aren’t supposed to act like this.

Let’s see what the RNS has to tell us.

Negotiating with lenders

Unencumbered asset ratio covenant – this covenant applies to nearly £700 million of private placement notes (Hammerson’s total net debt was £2.4 billion, as of December 2019).

The covenant says “unencumbered assets should not be less than 150% of net unsecured borrowing“, i.e. that Hammerson’s assets which it has not borrowed against should be worth 50% more than Hammerson’s unsecured debt. A very sensible covenant.

As of December 2019, Hammerson’s unencumbered asset ratio was 189%, i.e. it passed the test with headroom of 39%. Not hugely comfortable, and the recent economic contraction will have made it far more uncomfortable.

Lenders have therefore agreed to reduce the test to 125% through June 2021 and then 140% in October 2021. It will go back to 150% after that, from December 2021.

New temporary covenant – I have seen these “liquidity covenants” at many companies in recent months. They are basically a way of ensuring that companies don’t run out of cash in the short-term. It’s a much lower grade of protection for lenders than earnings-based or asset-based covenants.

Hammerson agrees to ensure that it has £100 million in “12 months forward liquidity” (defined as cash minus debt maturities, committed capex and cash dividends).

Other covenants attached to the private placement notes have “significant headroom”, and so are unchanged.


Liquidity is still massive: £1.2 billion, including £0.5 billion cash and £0.7 billion in undrawn facilities.

This figure could be increased by a further £300 million, if Hammerson issued paper under the government’s Covid facility.

Negotiating with tenants

The Hammerson portfolio of shopping centres and retail parks is on the frontlines of the economic crisis.

The company has a huge job on its hands, trying to figure out how much of the contractual rent it will be able to negotiate from its occupiers.

Q1 was mostly fine. Q2 was a disaster. The overall H1 picture is therefore in the middle:

Let’s focus on the Q3 number for a second – 16%.

Of the rent due for 28 May and 25 June UK quarter days (Q3), we have received 16% as at the end of 29 June (3 days post quarter day).

It’s still too early to be able to come to any conclusions about how Q3 rent collection might go.

My view

This is in my “very complicated” tray.

Net asset value per share (using the EPRA methodology) was 601p as of December 2019. So we have a huge discount available, at the current share price.

There are, of course, many good reasons for the discount.

One of these is the debt load and the breach of covenants. I generally don’t get involved in companies which are breaching their covenants, if I can avoid it. I prefer low-risk, high-probability investments.

I could see Hammerson trying to raise equity, to reduce its debt load. Equity holders get diluted, while bondholders get certainty. Happens all the time.

If Hammerson did raise, I’d be slightly more inclined to invest in the equity, after the raise.

Another major reason for the discount (and you don’t need to be Warren Buffett to figure this one out) is that Hammerson’s asset values are likely to very significantly impaired.

There are so many forces conspiring against physical retail, including the new ones introduced in the last few months. Hygiene rituals, queues, and a general sense of doom – a trip to the shops is not very appealing.

In clothes retailing, there are no dressing rooms and no toilet facilities. The casual trip to the department store has been cancelled.

Will these measures be ended soon? I have no idea.

In the meanwhile, people have formed new shopping habits, which don’t involve going to stores.

So honestly, I have no idea what Hammerson’s portfolio is worth. I don’t know where rents will stabilise in the next few years. It depends to a large extent on government policies, which I can’t predict.

So I am not brave enough to bet on this one, currently.


B&M European

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Market cap £4.2 billion
RNS Trading Statement
Writer disclosure No position

I wrote cautiously about this stock in January, pre-Covid, arguing that it probably had “no pricing power at all”.

B&M stores aren’t somewhere I’d want to spend a Sunday afternoon.

The joke’s on me, however, as these shares are actually up since I wrote that January report.

As the company itself says, its strong trading in Q1 (April to June) may reflect its positioning in cheap goods and out-of-town locations. I guess that’s ideal in an economic crisis and while cities are deserted.

  • B&M UK like-for-like revenue growth of 26.9%
  • Heron Foods sees “double digit like-for-like sales growth
  • French discount stores Babou are showing 32% like-for-like growth since they reopened.

Customer numbers declined and then recovered during lockdown. What made the big difference to revenues was average transaction value. I wonder what people were buying – garden sheds, outdoor toys, and the like?

As customer count recovered during the quarter, the growth in transaction value declined:

The end result is that total sales are up 27.5% (at constant FX).

Outlook – the store opening plan is set to kick in again, having been suspended during lockdown.

Against a highly uncertain economic backdrop and continued impacts from Covid19, B&M is in a strong position to continue to grow profitably in the UK and work continues to develop and prove the proposition in France. 

My view

I failed to appreciate the strength of this company’s business model during lockdown, which is now apparent.

It’s not a stock that appeals to me as a long-term hold but credit where credit is due – these are stunningly good quarterly numbers.



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Market cap £4.5 billion
RNS Q1 Trading Statement
Writer disclosure No position

Another big performance, this time from Sainsbury’s. Although today’s muted share price reaction says that the good news was already priced in.

With restaurants closed and everybody eating at home, it has been a good time for supermarkets. And Argos seems to be doing well, too.

  • Grocery sales +10.5%, growing market share.
  • Very strong online growth, more than doubling.
  • General merchandise sales +7.2%, including Argos +10.7%
  • Total retail sales (excluding fuel) +8.5%, like-for-like +8.2%. Ahead of assumptions, helped by good weather.

Reflecting the fact that people don’t buy new clothes to sit at home in them, clothing sales are down 26.7%. Sales in city centre stores and sales of fuel have both collapsed, too. They are more than fully compensated by the growth in everything else.

Argos performed well despite store closures, as customers ordered online for delivery or for collection from Sainsbury’s. Should it be an online-only business?


Things get a bit more timid in the outlook statement.

“Operating costs remain high” – enhanced hygiene/social distancing aren’t cheap.

Sainsbury’s is not pencilling in any improvement in profitability this year:

We believe it is appropriate to remain cautious about the sales trajectory through the remainder of the year given the weather benefit to date and a likely further weakening of consumer spending. It remains impossible to predict the full nature, extent and duration of the impact of COVID-19 on sales and costs. Our base case scenario continues to underpin an expectation of broadly unchanged Group underlying profit before tax for the full year.

My view

Underlying PBT was £586 million last year (FY March 2020).

And the company ended the financial year with £1.2 billion in net debt. Enterprise value c. £5.7 billion.

Assuming flat earnings, the stock is priced at an average multiple, which I think is fair.

Hanging up my pen there for today, cheers!





Wordpress (8)
  • comment-avatar

    Thanks for the video Graham.

    I read the Volvere AGM RNS and didn’t see any reference to a Zoom meeting for shareholders. So I’m somewhat miffed to miss out on this.

    • comment-avatar

      Hi jaizan,

      You’re welcome. Yes, it was easy to miss because it wasn’t on the RNS. I missed it myself, except that a friend helped me. You had to read the AGM circular. It would be better if they put this info in the RNS.


  • comment-avatar

    My Local retail park had everything shut apart from Morrisons and B&M . Pets at home opened later on but the staff behaved like the Nazi . They would not let you in the shop and would not even serve me dog buscuits outside on a trestle table because “dog biscuits are a treat and not essential for your pet” I had to go home and tell my Cocker his Gravy bones were not essential . That caused mayhem at feeding time I can tell you . Bark for England or what ! Even now Halfords and PC world which flank B&M remain closed . The retail park is out of town so most folk just went into B&M because their destination shop was closed and rather than waste a religious experience that shopping in England has become they had no other alternative ! Hence the results of B&M do not suprise me at all !

  • comment-avatar

    Hi Graham
    Some interesting and useful comments re trading Picking up at Primark and retail parks. Does this not give a read across to landlords like New River that have been depressed by the news on retail?

    • comment-avatar

      Thank you Yusuf,

      Yes, I am sure there is read-across to other landlords, although I’m not an expert in NRR. It does appear to be the case that out-of-town retail parks look set to have a much brighter future than city centre stores.

      Best regards


  • comment-avatar

    Yes and 70% of their pubs have outsized areas that should fill up as britian drinks tomorrow.

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