Cube Midcap Report (10 Dec 2019) #WOSG #CCC #JE

Cube Midcap Report (10 Dec 2019) #WOSG #CCC #JE

Good afternoon!

I’m doing a later version of the midcap report today, to look at:

  • Watches of Switzerland (WOSG)
  • Computacenter (CCC)
  • Just Eat (JE.)

Finished at 4.30pm. I will cover AHT tomorrow, if news is quiet.

Watches of Switzerland (WOSG)

  • Share price: 320.2p (-1%)
  • Market cap: £767 million

Half year results

This one has been listed for less than a year, and it hasn’t put a foot wrong yet.

It sells Rolex, Patek Philippe, and other luxury names at Heathrow and various other showrooms in prestigious locations.

These results show excellent (+10.3%) like-for-like growth, driven by a 21.6% increase in luxury watch revenues.

Adjusted EBIT follows suit, rising 23% to £31 million (before making IFRS 16 adjustments).

Net debt is now just £92 million, after the IPO proceeds were used to pay off a large bond. This current debt load is very light in comparison to potential profitability. Of course, it does not include lease liabilities.

Statutory results are poor. WOSG has swallowed £34 million in exceptional costs. After taking them into account, and the implementation of IFRS 16 (which hurts profitability in the short-term), WOSG ends up with a pre-tax loss of £9 million.

Let’s have a look at the exceptional costs, and see how many of them are truly exceptional:

  • £5.7 million in costs related to the IPO.

Of these, £1.8 million are the professional and legal fees – I guess it is ok to add these back in.

The rest are share-based payments for the CEO and bonuses paid to the employees on IPO.

It might be ok to add these back in, but listed companies have a habit of treating share-based payments and bonuses as exceptional every single year.

To be prudent, I would only treat about £4 million of these costs as exceptional.

  • £28.5 million exceptional finance costs.

Paying back its bonds early, using the IPO proceeds, resulted in premiums being paid to the bondholders. These were £21.7 million. I am happy to accept that this was an exceptional item.

Additionally, there were historic bond transaction costs which had been capitalised rather than expensed. Getting rid of the bond means that these costs need to be recognised straight away. I’m also happy to treat these as exceptional.

So in summary, I’m happy to accept nearly all of the “exceptional” costs as in fact being exceptional.

Cash flow is excellent: £79 million in cash generated from operations.

We need to be careful about this. It excludes the following items:

  • £6 million of interest on lease liabilities, included within finance costs (see note 5)
  • £17.6 million depreciation of right-of-use assets

The above two items represent the costs of leasing property and should definitely not be ignored!

Operational cash flow also excludes £1.9 million in share-based payments. And it includes an £18 million boost from working capital, which looks like a one-time thing.

So despite the excellent cash flow, I would be cautious about giving it too much weight. Instead I would focus on the income statement, where the pre-tax profit was c. £25 million before exceptional costs.


FY April 2020 pre-tax profit will be in line with expectations, which are higher than originally assumed at IPO.

CEO comment:

Trading in the first half of FY20 was positive and the markets for luxury watches remain robust in both the UK and US, as illustrated by demand in the first half generally exceeding supply.  Profitability is improved due to good gross margin management and the leverage of showroom overheads.

There is a strong pipeline of projects in both the UK and US, including the expansion and refurbishment of existing showrooms and the continued roll out of new showrooms, with returns on investment expected to be in line with recent history.

I can see forecasts in the market for EPS of 19.7p this year, rising to 22.7p in FY April 2021 (it sounds far away, but that financial year starts in five months!).

In a separate RNS, WOSG announces the acquisition of four watch and jewellery showrooms from Fraser Hart. Two of them will be rebranded under Watches of Switzerland, with the others becoming Mappin and Webb. The deal might increase total revenues by c. 3%, so is not hugely material.

My view

I very rarely buy retailers for my personal portfolio, so I won’t be investing in WOSG.

But I do have a fondness for the luxury segment – Burberry (BRBY) is still my second largest holding.

The much-criticised IFRS 16 brings WOSG’s lease liabilities onto the balance sheet, and they are considered to have a present value of £281 million. These liabilities should not be overly burdensome on the basis of present trading and cash flow.

As far as retailers go, I rate this one highly. It has strong partnerships with eternal brands and its customers are the internationally wealthy who I imagine will continue to travel through Heathrow and visit Oxford Street, regardless of Brexit and the UK economy.

On a forecast P/E multiple of 16x, it might be worthy of more detailed research.


  • Share price: 1609p (+5%)
  • Market cap: £1,836 million

Trading update

This provider of IT infrastructure services says that year-to-date 2019 performance is ahead of last year, before taking into account the positive impact of acquisitions.

Therefore, FY 2019 will be well ahead of current market expectations, which are helpfully given as £136.2 million of adjusted PBT.

There is still a lot to do in December, but things are looking good:

The strong 2019 performance is coming from Computacenter’s established businesses and, in the second half of the year, from the acquired business in the US which is now performing in line with our expectations following a difficult start to the year. 

My view: IT service providers, in general, look like poor investments – labour intensive and bereft of their own intellectual property.

But the scale of CCC is on another level. It’s a chicken-and-egg situation: did huge scale produce its success, or was it success that led to increased scale?

Despite a low operating margin of 2.3%, ROE and ROCE are excellent. This speaks to clued-in managers who have deployed very little equity, and no debt, to generate huge revenues (now >£5 billion p.a.) and plenty of returns for shareholders. This one fully deserves its FTSE-250 membership.


Just East (JE.)

  • Share price: 780.6p (-0.1%)
  • Market cap: £5.3 billion

Rejection of revised offer


“the Board unanimously recommends that shareholders reject the Prosus Offer of 740 pence per share and continues to believe that the Combination is based on a compelling strategic rationale that allows shareholders to participate in the upside potential of the enlarged group and, based on its own analysis, will deliver greater value creation to Just Eat Shareholders than the Prosus Offer of 740 pence per share in cash.”

This 740p bid is better than than the previous effort by Prosus (710p). But the prevailing share price of 780p tells us that investors expect a lot more value to emerge from the combo with, or a higher bid to emerge.



I’ll leave it there for now. See you tomorrow morning!






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