Cube Midcap Report (10 June 2020) – The Big One

Cube Midcap Report (10 June 2020) – The Big One

Good morning!

I missed yesterday (apologies!), so this is going to have to be a big report to catch up.

Today’s stories:

  • Restaurant Group (TRG)
  • Shaftesbury (SHB)
  • Lancashire Holdings (LRE)
  • Whitbread (WTB)
  • Segro (SGRO)

From yesterday:

  • British American Tobacco (BATS)

Finished at 5pm.

If I get a chance later this week, I’ll try to look at OXID, BWY and AVV.



  • Stock data should display here.
Market cap £418 million
RNS Launch of CVA for the Leisure Estate
Writer disclosure No position.

I last covered this one in April, when it raised £57 million from shareholders at 58p.

Now its time for Frankie and Benny’s landlords to take a hit. Key points:

  • 210 sites are underperforming/unprofitable/paying rents that are too high.
  • Of these, 125 sites are to close.
  • The other 85 will see their rent reduced.

It’s purely aimed at landlords, who still need to vote on it.

The CVA will not seek to compromise claims of any creditors other than certain landlords, and inter-company liabilities.  The rights and entitlement of all trade suppliers, HMRC and employees will not be affected by the proposals.

RTN makes it clear that property owners have been included in the proposal discussions, with a quote from the CEO of the British Property Federation.

My view – I don’t even consider getting involved in situations like this, as it’s too high risk for me. If there are too many landlords who want a larger pound of flesh, they will have the power to force RTN (or more precisely, its operating subsidiary which manages all of these sites) into administration.

For those with a higher risk tolerance. The April update said that the company was only burning £3 million of cash in ever four-week period (although that was dependent on the Coronavirus Job Retention Scheme, whose future is unclear).

The threat of 2-metre “social distancing” is a great imponderable. Will it get slashed to 1 metre? I think so, but I can’t tell when.

The restaurant business is hard enough without forced closures and rules making it impossible to trade.

I don’t have the impression that the RTN balance sheet is totally fine yet, either. The placing in April was rather small, and prior to that, the company saw its liquidity headroom falling to a minimum of c. £60 million this year. The placing and CVA will be a big help, but it’s still not what I would call a robust balance sheet.

As you may have guessed, I am steering clear of this.



  • Stock data should display here.
Market cap £1,900 million
RNS Half-Year Report
Writer disclosure No position.

This REIT focused on London’s West End is down by about 33% from its pre-Covid levels.

You can view its portfolio here. A fine mix of shops, restaurants and apartments.

CEO Brian Bickell prepares us for the bad news in the first paragraph:

“…the measures to address the pandemic are having a material impact on normal patterns of life and commerce, both for our occupiers and on the near-term prospects for our business and financial performance.”


Have you heard of this new performance metric? It stands for “adjusted earnings before interest, taxes, depreciation, amortisation, coronavirus and riots”.

Shaftesbury does not using anything as ridiculous as that, but it does give us “Underlying net property income1, before Covid-19 related provisions“. This profit metric is up 2% to £49.6 million, for the six-month period.

Away from the adjusted numbers, there is a great big statutory loss of almost £290 million, due to declines in property values. The company’s wholly-owned properties are marked down by 8% to £3.5 billion.

The EPRA Net Asset Value per share falls by over 10% to £8.78. The current share price is then at a 30% discount to this level.

The company insists that long-term values aren’t so very different to what they were before:

Valuation: decline largely due to current economic uncertainty, more cautious investor sentiment and estimated near-term loss of rental income resulting from pandemic measures; long-term fundamentals unchanged

Trading update

Some shocking snippets of info in here:

  • SHB in discussions with 800 commercial tenants on rents and service charges.
  • “Aim to collect c. 50% of rents due from April to September 2020 over time.”
  • No more quarterly rents for commercial clients, monthly from now on.
  • Vacancy increases from 1.1% to 4.8%.

It sounds like any commercial tenant which cannot (or says it cannot) pay rent until September, will be able to negotiate its way to a lower rent bill for the period.

Balance sheet

It is not aggressively geared. Loan-to-value is only 26.7% (up from 23.9%, due to falling property values). The balance sheet shows borrowings of £1.1 billion.

Available liquidity is £205.7 million (in “uncommitted” facilities).

Debt is long-term: weighted average maturity 8.8 years. Next maturity is in 2022, giving time to prepare/recover. Covenant waiver agreed at SHB’s Covent Garden joint venture.


SHB says that social distancing presents particular challenges to the West End (but the same goes for most other places, of course):

  • footfall affected by the lower use of public transport
  • travel and tourism by air
  • more working from home means a smaller working population
  • visitor attractions (theatres, cinemas, etc)
  • smaller shops and other hospitality venues

My view

I’m open-minded as to whether this could be cheaply priced at current levels.

It is probably fair to assume property values will need to fall further. The question is whether the share price discount of 30% prices this in. What do you think?

Personally, I’m inclined to believe that social distancing will be consigned to the dustbin of history within a few months or a year (if not officially, then in practice). But that might be too optimistic.

In the absence of social distancing rules, the tourist economy will surely recover. Office workers are a different story: they might never fully return, if it turns out that productivity is nearly as high at home. But perhaps we can still assume that most of them will come back? E.g. to work three days in the office, and two days at home?

This could be worth researching in greater detail, in my view, for a post-Covid recovery.


Lancashire Holdings

  • Stock data should display here.
Market cap £1,580 million
RNS Proposed Placing of New Common Shares

Results of Placing

Writer disclosure No position.

Another insurer says that it wants more funds to exploit attractive pricing in the insurance/reinsurance markets.

It has raised £277 million at a placing price of 726p.

The new market cap, based on the total shares now outstanding, is c. £1.9 billion.

Dilution was 19.5% (it is standard to go for just below 20%, to avoid having to issue a prospectus).

Rationale is in line with what other specialist insurers have been saying:

Lancashire intends to use the proceeds of the Placing to fund organic growth and take advantage of rate rises that the Company is currently seeing across the majority of its business lines…

Since [2017], the market has faced three challenging years featuring a large number of catastrophe losses, following which the rating environment started to improve…

…the recent COVID-19 pandemic has generated (re)insurance market losses both in terms of the claims environment and the negative impact on the investment markets.  In the face of these challenges there has been a retrenchment in (re)insurance market risk capital and capacity. This in turn has led recently to continued rate increases in many of the Group’s core insurance segments and accelerated rating dislocation in the catastrophe exposed reinsurance lines. 

LRE says that there will be a traditional “hard” market in six-twelve months, i.e. an environment where rates are at their historically much higher levels, without the excess capital which had flooded into the industry until 2017.

Trading update

Since the Q1 update, LRE has traded “in line with, or better than (GN note: which is it?), its expectations“.

LRE reminds us that it doesn’t write these policies which might have to pay out during the pandemic:

  • travel insurance
  • trade credit
  • accident and health
  • Directors’ and Officers’ liability
  • medical malpractice
  • long-term life
  • “minimal exposure to mortgage business”
  • “a small number of event cancellation contracts”

Lancashire has pencilled in Covid-19 net losses of just $35 million. If it’s true that their exposure to Covid-19 is so low, then I don’t think anyone can accuse them of raising money simply to fund losses.

My view

I’ve liked this business for years, but never owned it personally (only on behalf of others). Maybe I should reconsider it?

It pays out huge special dividends when it is profitable, and when rates aren’t “hard” enough to justify expanding capacity. Some huge payouts should be on the cards again, whenever pricing softens up.



  • Stock data should display here.
Market cap £3.35 billion (based on prior share count)
RNS Results of Rights Issue
Writer disclosure No position.

Whitbread has raised £1 billion via a rights issue. It’s amazing how much cash there is on the sidelines, isn’t it?

I note that Premier Inn’s rival, Travelodge, is trying to do a CVA.

Owning the freehold of its sites makes a big difference for Premier Inn/Whitbread. Nevertheless, WTB still expects to suffer an overall cash outflow of £600 million in H1 of the current financial year (March to August). See the preliminary results announcement.

This rights issue replaces the cash burned by Covid-19, at the cost of 67.3 million new shares – very material dilution (share count at the end of FY Feb 2020 was 157 million).



  • Stock data should display here.
Market cap £9.4 billion (based on prior share count)
RNS Placing to fund continued expansion

Results of Placing

Writer disclosure No position.

Another very large placing for this warehouse/industrial REIT.

83 million new shares are issued to raise £680 million at 820p. Thanks to its existing size, dilution is moderate: 7%.

Last night’s RNS announcement made clear that this fundraise is happening from a position of strength. The moneys will be used for a range of acquisition of development activities:

Due to the continued occupier demand resulting from positive structural trends, the Board believes that SEGRO will be able to invest more than £1 billion of capital in 2020 and 2021 through development capital expenditure and the acquisition of land for future development. In addition, opportunistic acquisitions of standing assets may be possible…

It’s an important macro trend – warehouses are still needed, even if shops aren’t!

Emphasising the strong position in which Segro finds itself, continued dividend payments are on the cards this year.


British American Tobacco

  • Stock data should display here.
Market cap £71.5 billion
RNS First Half Pre-Close Trading Update
Writer disclosure Long BATS.

This was a profit warning which the market really didn’t like yesterday, although the shares are recovering today (Wednesday).

The main trend is that BAT is performing well in a shrinking market. Nothing new there.

Pricing is strong and BAT’s share of old and new categories continues to grow. Excellent trends.

But Covid-19 has created problems in emerging markets:

The impact of COVID-19 in emerging markets has been more pronounced, including in Bangladesh, Vietnam and Malaysia. In addition, closures and other lock-down measures in certain countries, in particular South Africa, Mexico and Argentina, have persisted longer than anticipated. In South Africa there are still no signs of the COVID-19 related tobacco sales ban being lifted.

Vietnam has reopened, so surely BAT’s difficulties there are finished?

South Africa is more understandable – I understand that some lockdown measures in that country have been quite extreme.

Sales warning – combined with reduced sales from Travel Retail (previously announced), BAT now expects adjusted revenue growth for the current financial year of just 1%-3% (at constant FX). The Covid-19 headwind is about 3%.

New categories – revenues from these categories are now targeted to reach £5 billion in 2025 (previously 2023/2024). For context, total group revenue last year was c. £26 billion.

New forecasts

  • Diluted EPS at constant FX is now forecast to grow by only mid single digits (previously high single digits).
  • Net debt to adjusted EBITDA will only reach 3x by the end of 2021 (previously targeting below 3x).
  • Dividend policy won’t change, still paying out 65% of adjusted diluted EPS.

The FX headwinds will be c. 2% for the full year.

My view

Owning BATS over the last couple of years has required extraordinary patience. It is now in the category of holdings where I never expect good news – I’m always braced for bad news, when there’s an RNS or a news headline.

Adjusted EPS is now forecast to come in around 329p this year, rising to 357p and rising again after that. The multiple is “cheap”, as usual.

I also note the good progress on the balance sheet.

When I wrote about BATS just 15 months ago, we were talking about a leverage multiple of 4x. Despite all of its difficulties, we should get something close to 3x by the end of next year.

The strong investment-grade credit metrics should help to calm investors’ nerves.

I continue to believe that the market might be underestimating the persistence of BAT’s earnings. In my view, it is also discounted simply because it is out of fashion (less interesting than tech shares in this environment) and of course for ethical reasons.

Value will out!



I’m out of time there, and I’m somewhat pleased with what I managed to cover today.

Roland will be here tomorrow.

Best regards



PS: Tony wrote an excellent article here, for our Gold Members. I hope you’ll consider signing up to read it! Cheers.





Wordpress (5)
  • comment-avatar

    WOW! 6 companies today. Well done Graham – now go and have a lie down.

  • comment-avatar

    No time for lying down ………he needs to water that lawn reseed and say nice things to it like Prince Charles .

  • comment-avatar

    Graham, Bravo! The mid cap report is proving to be an absolute must read.

  • comment-avatar

    I read for SHB (Shaftbury)  Samuel Lee is trying to buy this company and therefore there is Court case in 2021, not sure how that will impact the stock.

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