Cube Midcap Report (11 March 2020) – BoE gets to work #NMC #ERM

Cube Midcap Report (11 March 2020) – BoE gets to work #NMC #ERM

Good morning!

Macro news flow is to the fore today, with a surprise rate cut by the Bank of England to be followed this afternoon by the budget.

There is also some midcap news I want to cover, including the latest horror show by NMC Healthcare.

I only have a couple of hours to devote to this today, but will cover what I can.

  • Emergency rate cut
  • NMC Health (NMC)
  • Euromoney Institutional Investor (ERM)


Emergency Rate Cut

Courtesy of Ben Chu, here is a chart showing Bank of England rate decisions during and since the financial crisis:

The Bank of England has just pre-emptively cut rates, not waiting for definitive proof of economic contraction in the UK from the Coronavirus. This 50bps cut is the largest since 2009.

The decision takes us back to the pitiful base rate of 0.25%, the all-time low. In one foul swoop, it wipes out the small rate hikes made in 2017-2018.

The FTSE is currently at 6025, up 1% compared to yesterday’s close. German, French and Italian indexes are all up around 2%.

My view – Mark Carney is the world’s most overpaid central banker in the world, earning nearly £900,000 in pay and benefits annually. He has been paid enormously in exchange for doing very little – this is the first major rate cut he has implemented, and all it serves to do is eliminate the previous rate hikes.

The Bank of England, under his tenure, has been one of the least interesting and least adventurous central banks. It has passively accepted near-zero interest rates and waited for other central banks to guide its actions – the small increases in 2017-2018 were little more than an acknowledgement of more aggressive action by the US Federal Reserve.

But now that the Federal Reserve is under pressure to cut rates, and the public is scared of the Coronavirus, he is happy to reverse course again.

Surely it can’t be necessary to pay someone nearly £1 million per annum to do almost nothing?

Budget – on top of the monetary stimulus, there is huge fiscal stimulus expected from today’s UK budget in the form of infrastructure spending.

Investment implications

Winners from today’s news flow:

  • Long-term, this is another reason to be long gold and other precious metals vs. the pound. Protecting the value of the pound is low on the government’s priorities.
  • Engineering and construction firms – government infrastructure spending is set for a big boost.
  • Borrowers more generally – leveraged businesses and consumers who pay floating interest rates get another lifeline.

The losers are anyone who depends on the value of the pound. In the long run, this is likely to be nearly everybody.

As Keynes said:

There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose….

Equity markets – near-zero interest rates and fiscal stimulus are a big support for nominal equity prices. And I note that Carney said today that there is scope for another interest rate reduction, to go even closer to zero than the current 0.25pc rate.

While my long trade on the FTSE a few weeks ago was not made on the basis of rate cuts saving the day, I did think that equities were terrific value in the prevailing interest rate environment. Now that interest rates are being suppressed even more, this argument for the relative cheapness of equities is even stronger. I will be an even more enthusiastic buyer of equities, when funds allow.


NMC Health (NMC)

Update on financial position

This has been suspended for a while, and won’t be back, so I don’t see merit in posting the old share price here. When it was suspended, the market cap was £1,960 million.

Well done to Muddy Waters for spotting the stench around this one. You can see our notes on the scandal in the archives.

The latest news is shocking:

In addition to $2.1 billion Group debt reported at 30 June 2019, the Company has identified over $2.7 billion in facilities that had previously not been disclosed to or approved by the Board.

NMC is continuing to work with its advisers to understand the exact nature and quantum of the undisclosed facilities. The Board believes that some proceeds may have been utilised for non-Group purposes.

Group facilities used for non-Group purposes? I’m not a lawyer, but wouldn’t that be theft?

NMC helpfully reports that it managed to pay its February payroll.

But with another $2.7 billion in debt having suddently appeared out of nowhere – bigger than NMC’s market cap at the time of suspension! – it’s hard to imagine that this ends anywhere except with a zero for the unlucky shareholders.

This story is likely to do a lot of damage for foreign companies wishing to join the FTSE-350 in future, particularly from the UAE. Besides the likelihood that investors might apply more caution, the authorities might wonder whether they should have done more to prevent this charade from joining the blue-chip index.

The mysterious Finablr (FIN), Dr Shetty’s other FTSE vehicle, is still listed. Its share price has been tumbling for weeks, as investors weigh up the likelihood that it offers them a similar outcome to NMC. Anything set up by Dr Shetty is now worthy of bargepole treatment, I’m afraid.

Here he is in better times:


Euromoney Institutional Investor (ERM)

  • Share price: 936.5p (-3.5%)
  • Market cap: £1,023 million

Statement regarding Coronavirus COVID-19

ERM makes money primarily from subscriptions to its analysis and data services. Events are important, too: 31% (£124 million) of last year’s revenues.

In FY September 2020, events revenue will be down £6 million, and operating profit down £5 million, from the following changes:

Euromoney has now made the decision to cancel a number of events, and to postpone some until later in the year. So far, we have cancelled 25 events with a revenue impact of £3m and postponed 55 events, with nine moving into FY21, with an additional FY20 revenue impact of £3m

That’s not all. There are big events still due to run in the next few months, especially in June. The gross margin impact of cancelling or postponing the rest of the events through June would be £30 million (lost gross profits of £23 million, plus committed costs of £7 million). No firm decision has been made.

Gross profit is not the same as operating profit, of course, but we can pencil in an approx hit to profitability of £35 million (£5 million from decisions already made, and £30 million from possible decisions for the remaining events through June).

The financial year ends in September, and ERM has made no changes yet to Q4 events (July to September).

There is plenty of cash headroom, thanks to the very likely support of lenders:

Euromoney’s financial position remains strong with net cash at the end of February 2020 of £12.2m and unused committed facilities of £240m.

My view

I have familiarity with some of ERM’s products, and I regard them highly.

That’s the context in which I say that this stock looks way oversold to me, at a P/E multiple (before virus-related downgrades) of just 12.5x.

ERM’s prospects should return to their normal health, whenever the virus panic fades away. The timing of this is, of couse, unknown.



The emergency rate cut only provided a temporary boost. The FTSE is now marginally lower.

We live in interesting times!

See you tomorrow.




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Wordpress (4)
  • comment-avatar

    Morning Graham.

    From your description, I could definitely cope with the demands and would be more than happy to take on the role for, let’s say, half of Mark Carney’s salary. I’d even be prepared to wear a suit for all official engagements (he probably gets an allowance for that anyway).

    The problem is that his replacement, if his tenure at the FCA is anything to go by, is likely to be even more useless, and he has less charisma.

  • comment-avatar

    Hi Graham,

    Thanks for your analysis, I’m very much with you on Mark Carney! I was wondering if you have had a look at Morses Club? I’d love to get your views on this. Many thanks,


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