Cube Midcap Report (13 Jan 2020) – Not betting on William Hill #WMH #SPT #SVS #XPP

Cube Midcap Report (13 Jan 2020) – Not betting on William Hill #WMH #SPT #SVS #XPP

Morning folks!

I’m a little short on time this morning, but will do a brief roundup of midcap news for you.

Finished at 1.20 PM.

William Hill (WMH)

  • Share price: 184.5p (unch.)
  • Market cap: £1,656 million

Trading Statement

It’s a full-year update from this major bookmaker.

Adjusted operating profit will be ahead of expectations, thanks to favourable sporting results through year end.

I wonder if punters were betting on upsets against Liverpool, only to be disappointed (I certainly am, as a Man Utd fan!).

Segment results:

  • Retail profits are above the £50 million – £70 million target, as sports results were “above the long term gross win margin range”. It’s correct for investors not to value this positive result too highly, since it’s unlikely to herald a change in long-term profitability.
  • Online UK grew in line with the broader market.
  • Online international performance “mixed”, net revenue “broadly flat”.
  • US saw “strong growth”, with the business reaching breakeven in 2019.

CEO comment:

“The Group has delivered a strong operating performance, ahead of our expectations and against a challenging regulatory backdrop. We made good progress on a number of fronts, including our Retail business, Online and in the US, enabling us to deliver on our long term strategic ambitions. We look forward to building on these efforts in 2020 with a strong focus on customer, team and execution.”

My view

I find it hard to get excited about this share, and the principal reason for this is the retail operation, which strikes me as rather old-fashioned in a digital age.

700 stores have been closed in the aftermath of the £2 stake limit on fixed odds betting terminals (games machines, to you and me). The company deserves credit for taking this decisive action, to “do it once and do it right”. But that still leaves 1,600 stores behind.

There is a new strategy and a new CEO, as William Hill strives to become a “digitally led” business. But its online business isn’t particularly impressive, in my view – its net revenues grew by 14% in H1, but that was only thanks to an acquisition.

UK online net revenues actually declined by 1%, not helped by a lower gross win margin and the closure of customer accounts under enhanced due diligence measures.

The online business improved in H2, and grew “in line with the market” in the UK for 2019 as a whole, as mentioned above. The overall performance is still very ordinary to me.

And there are two very important subjects which I would worry about, if I owned shares in this:

  • Balance sheet. The company had net debt of £566 million at H1. Rolling 12-month EBITDA for covenant purposes was just £287 million – and of course the actual bottom line for William Hill is much lower than this, after you take all of its exceptional costs into account.
  • Regulation. The company is trying to get ahead of this with its “Nobody Harmed” strategy, e.g. by taking part in the voluntary whistle-to-whistle ban on advertising during live sports. It is collaborating with Bet365, Flutter, GVC and Skybet to fund treatment for gambling addiction and other initiatives for safer gambling. But over the long-term, the threat of further measures which will impact on profitability is very real.

As you may know, I’m a shareholder in 888 (888), which I prefer due to its online-only presence, its wide geographical diversification and its strong balance sheet.

888 does have its own company-specific risks (e.g. being controlled outside the UK). Both 888 and William Hill are trading at around 15x forecast earnings – but my money’s on 888. I could easily be wrong!


Spirent Communications (SPT)

  • Share price: 238p (+16%)
  • Market cap: £1,455 million

Trading Statement

This company doesn’t attract a great deal of commentary, in my experience.

A description from its homepage:

Spirent is leading the way in testing, assurance, analytics, and security to assure the capabilities and performance of networks, network equipment, devices, and services.

There was good momentum in Q4 and contract wins were secured as Spirent’s customers invested in 5G infastructure:

For the full year, revenue grew by 5.5 per cent to $503 million and we now expect to deliver an adjusted operating profit1 in the range of $91 to $93 million, up from $77.1 million in 2018.

The CEO says that profits for 2019 will come in ahead of expectations:

We enter the new financial year with a strong orderbook and we are well positioned with leading technology to leverage more opportunities across our portfolio. Over the medium term we expect to continue to deliver mid-single digit revenue growth with a focus on increasing recurring revenue streams to enhance the Group’s visibility and effective investment in our technical platforms to drive ongoing performance.

My view

Spirent scores highly on quality metrics, and I appreciate that it wants to build a stream of recurring revenues – I like it when companies do this. Unfortunately, at this stage, I don’t feel qualified to judge its prospects.

As a general rule, I avoid B2B companies, no matter how large, whose success depends on their orderbook, contract wins, etc. Unless I have specific expertise in what they are doing (which is very rare), predicting contract wins is not something I try to do.

This is a risk-reduction technique that falls in line with Terry Smith’s view that low-risk, quality investing means finding companies whose revenues are generated by “everyday, repeat transactions” (such as an individual betting on the result of a football match). Lumpy contract wins do not fall into this category. Therefore, while my initial impressions of Spirent are positive, I’ll stay away from it for the time being


Savills (SVS)

  • Share price: £12.345p (+7%)
  • Market cap: 143 million

Year end trading update

Real estate advisory is far too labour-intensive for my investment strategy. But let’s see if Savills can tell us anything about property trends in this update.

Firstly, I note that unlike the building materials distributor SIG Plc, Savills did benefit from the political certainty achieved last month. Perhaps because agreeing to a transaction can happen much faster than ordering in building supplies?

In the UK, the effect of Brexit and political uncertainty suppressed market activity in both Commercial and Residential transactional markets until mid-December. The clear outcome of the General Election prompted a strong close to the year as confidence to transact returned to the market.

It’s less positive in Hong Kong, where the unrest “severely reduced the volume of trading activity”. As a result, Asia Pacific performed “slightly below expectations”.

Looking at it more positively, market share grew both in the UK and in turbulent Hong Kong. The core London residential market gets a mention in this regard – Savills shareholders have certainly been doing far better than shareholders in Foxtons (FOXT)!

Savills Investment Management is the type of business that I would invest in. It has performed ahead of expectations – new product launches, more capital deployed and strong performance fees all helping.

Expectations for 2020 are unchanged. The positive share price reaction suggests that investors feared the worst:

Looking to the year ahead, increased political stability in the UK should maintain improved sentiment in real estate markets. Global investor demand for secure income, restricted supply and expectations of continued low interest rates suggest that the medium and long term dynamics of the UK real estate market should remain largely positive. Nevertheless, some caution may remain until the full impact of Brexit is better understood. Certain other global markets continue to be overshadowed by macro-economic and political uncertainties. 

My view

I like the fund management sector, but don’t invest in advisory or consultancy businesses. Perhaps there could be a spin-off some day?


XP Power (XPP)

  • Share price: £34.00 (+6%)
  • Market cap: £653 million

Trading statement

This share illustrates another one of my favourite rules: that companies with higher share prices tend to be better quality. They don’t care about liquidity, do care about maintaing or reducing their share count, and probably generated excellent long-term returns!

XP Power has certainly done the latter.

Its current product set comprises: AC-DC power supplies, DC-DC converters, high voltage AC-DC power supplies, high voltage DC-DC converters, RF power systems, 3 phase power supplies, custom power solutions & EMI filters.

Ok, so what does today’s update say:

  • trading since mid-December is in line with expectations
  • Q4 order intake strong, including an “acceleration” of earlier trends
  • new ERP system is working well.

An acquisition has boosted the numbers. On a like-for-like organic basis, year-to-date orders are up 2% and year-to-date revenues are down 4%.

This may understate the company’s performance and prospects, since the book-to-bill ratio improved from 0.92 in 2018 to 1.23 in 2019. This means that in 2019, orders came in faster than the company could satisfy them.

Hopefully, future revenues will benefit from this flurry of order activity. Indeed, the outlook statement says:

Order intake for the fourth quarter was strong and we remain encouraged by the healthy order book and ongoing new design wins. On this basis we expect revenue growth in the 2020 financial year.

My view

I have the strong impression that this is a robust and high-quality business. I would need more familiarity with the detail of its operations before putting it into my own personal portfolio.



Sorry for the shorter report than usual. See you tomorrow!





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