Cube Midcap Report (10 Jan 2020) – Expensive worms #TM17 #JD #BME #ABC #LIO

Cube Midcap Report (10 Jan 2020) – Expensive worms #TM17 #JD #BME #ABC #LIO

Good morning!

We have some fresh updates to look at today.

And I’ve updated on something I skipped yesterday:

Finished at 2pm.


Team17 (TM17)

  • Share price: 419.5p (+10%)
  • Market cap: £551 million

Trading update

This is a game developer earning a nice mix of revenues from its back-catalogue along with newer titles.

Those of a certain age (such as yours truly) will remember when the popularity of the Worms franchise was at its peak. Modern versions of the game (see here) have been released by Team17 and continue to sell well.

Today’s update is very positive, without giving too much away:

The Company is pleased to report its growing portfolio has continued to perform well over the peak Christmas sales period with a specifically strong performance from the Company’s multiplayer games on Nintendo Switch.

Revenue and adjusted EBITDA will be ahead of expectations for FY December 2019.

And the company has a “solid portfolio of new original game IP launches in 2020, representing more than any previous year”.

My view

Taking a look at trailers for some of the games in the pipeline – Neon Abyss, Hammerting and The Survivalists, for example – it’s important to acknowledge that these are relatively simple games with 2d-style gameplay. They aren’t the next Fortnite.

Team17 does have a great track record of making money out of simple games, and I expect this to continue. The Survivalists, in particular, had its announcement trailer published on YouTube by Nintendo, and received over 200,000 views with lots of positive comments:

Where I struggle is with the valuation of shares in this sector.

Frontier Developments (FDEV), for example. Shareholders are banking on future success and earnings growth out to 2022 and beyond. The shares are currently trading at a forward multiple in the region of 40x – and I note that the CEO and his wife took some money off the table in November, selling £15 million worth (they still own 33% of the company).

Team17 (TM17): only a few months ago, I thought that this one was more than fully priced at 300p. Since then, it has roared ahead so that its own forward multiple is in the region of 30-35x, not far off that of FDEV.

Yes, video games are a growth sector. Yes, these are very good companies. And the release cycle for FDEV and TM17 means that upcoming game launches could propel their earnings to the next level.

A bit like film releases, however, this can’t be guaranteed.

In my view, valuation should price in the possibility that forthcoming launches are a flop. Even the best publishers will occasionally publish a dud. But instead, these companies are priced to perfection.

What am I missing? Perhaps some TM17/FDEV holders would be so kind as to set me straight?

In the meantime, I hope that TM17 investors are luckier than the worms in their most famous game!


JD Sports (JD.)

  • Share price: 821.3p (-1%)
  • Market cap: £8.0 billion

Trading update

We covered JD’s half-year results in this report last September.

At the time, the JD share price was a mere 670p. I was very impressed by the like-for-like sales performance (+10%) and the careful approach to corporate activity (in stark contrast to Frasers Group (FRAS)).

In today’s brief update, JD reports “positive like for like trends in the Group’s global Sports Fashion fascias, particularly overseas“.

JD’s year-end is at the beginning of February, and it warns investors that the full-year result will depend on the international post-Christmas sale performance. But the overall tone is still positive:

We remain confident that the full year Group headline profit before tax will be in the upper quartile of current market expectations which, after adjusting for the impact of the transition to IFRS 16, range from £403 million to £433 million.

My view – this company has done exceptionally well under Peter Cowgill. Cowgill’s less brash management style and more focused strategy serve as the perfect foil to Frasers/Sports Direct under Mike Ashley. On the basis of their respective managers, I’d be inclined to back JD rather than Frasers.


B&M European Value Retail (BME)

  • Share price: 364.25p (-8%)
  • Market cap: £3.6 billion

Q3 trading update

The market didn’t like the update from this value retailer very much.

The UK business saw like-for-like sales growth of just 0.3% for the quarter, against “a challenging broader retail market and our decision not to engage in any early discounting activity“.

If I wind back to the half-year report, UK like-for-likes were +3.7% at the time. So this is a considerable slowdown for Q3.

And UK expansion will slow down in Q4 to at most six stores (maybe less, depending on relocations), versus 12 in Q3. There are a total of 657 stores in this division.

The CEO points to a good year-to-date performance for this division in like-for-likes (+2.3%), but it’s inevitable that investors will focus on the most recent quarter, giving it more weight than H1, and extrapolate a negative trend. He acknowledges that sales in the run-up to Christmas were “slower than anticipated”:

Overall the business delivered a good quarter operationally. Costs were well controlled and, combined with our usual strong focus on cash gross margins, yielded a profitable outcome. We were also able to exit the period with normal seasonal inventory levels. 

The worst-performing categories were Toys and Seasonal Confectionary. Maybe this isn’t such a big surprise as far as Toys are concerned: Sainsbury (SBRY) reported a year-on-year decline in Toys and Games at Argos on Wednesday.

Scrolling down to the outlook section for B&M:

We have seen a positive start to January trading but the outlook for the rest of the quarter could, as always, be impacted by any adverse weather conditions which may occur over the remainder of the winter. We look forward to 2020 with confidence.

My view

I don’t see many attractions to this share. My caution towards retailers is amplified for those in the “value” category, and “value” is this company’s middle name! At an expensive earnings multiple, with flat like-for-like sales currently, and probably having no pricing power at all, I would steer clear.



  • Share price: £12.99 (-9%)
  • Market cap: £2.7 billion

Half-year trading update

Life science is not my speciality, so I’ll restrict myself to reporting what actually happened here, without expressing a view.

While revenues are up 11% (or 8% on a constant-currency basis), there is a warning on margins:

Reflecting a rapid start to the implementation of our multi-year strategic growth plans and associated investments detailed in our 2019 Full Year Results and recent Capital Market’s Event, Adjusted Operating Profit(4) margin is expected to be towards the lower end of our guidance of 25-28% for the full year.

ABCAM is the third most valuable AIM company. The top five are:

  • Boohoo
  • ASOS
  • Hutchison China
  • Dart

Multi-billion pound companies on AIM always make me wonder: why don’t you take a main market listing – the additional costs would surely be worth paying, in exchange for more liquidity and the prestige of FTSE-250 membership? I never quite understand it.


Liontrust Asset Management (LIO)

  • Share price: £11.925 (-2%)
  • Market cap:  £653 million

Trading statement

I had to skip this one yesterday. Let’s look at it now.

It’s an independent, active fund manager headquartered in London and having offices in Edinburgh and Luxembourg. The list of funds it offers can be browsed here.

Yesterday’s update was for Q3, October to December. Year-end is in March.

Key points:

  • net inflows of £836 million for the quarter, £2.3 billion for the financial year to date.
  • no problems with the acquisition of Neptune Investment Management (£2.7 billion AUM).
  • total AUM £19.1 billion, up 70% compared to a year earlier.
  • sustainable investing doing particularly well in terms of inflows. AUM > £5 billion.

Sustainable investing is now the second-largest “process” in terms of AUM at Liontrust. The largest category is “Economic Advantage“, whose funds focus on Growth, Special Situations and Smaller Companies. This process has £7.7 billion under management.

This table lays out the progress made in the first three quarters:

As you can see, there was a healthy mix of growth from flows, investment performance and acquisitions.

As a percentage of opening AUM, net flows were 17.4%. That’s a terrific growth rate in just nine months (and more valuable than growth through performance or acquisitions, since it represents organic growth and the popularity of the fund manager – not simply the movements of stock indexes).

Out of 34 Liontrust funds with 5-year track records, 18 of them are in the top quartile (top 25%) of performance, relative to their peers. Very good. (Please note that I haven’t checked this data for survivorship bias, which plagues fund return data as a general rule).

My view

Estimates are for EPS to almost double in the current financial year (to 59.5p) and then to hit 75p in FY March 2021. I dont’t see why these forecasts can’t be hit (although the timing of a stock market crash is not possible for mere mortals). On the basis that the forecast for next year will be hit, the forward P/E multiple at the current share price is 16x.

With very strong return metrics and popular funds, it’s hard to argue that the stock is overvalued at current levels.

Also, I appreciate the logic behind the Economic Advantage process used in several of their funds: they look for companies having durable competitive advantages and earning high ROIC (e.g. because of their unique intellectual property). This echoes the Terry Smith/Nick Train approach.

So I will maintain a positive view on this company (I first wrote about it in June 2018 here).

It will face many of the same risks as other fund managers, but I reckon it has a better-than-average chance of surviving a financial storm with most of its AUM intact.



That’s it for today, and for the week.

Thanks for your interest – I really appreciate your “thumbs up” and your comments!

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Have a great weekend.





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    Graham, it would be much appreciated if you have time for a look at Liontrust post AUM update

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