Cube Midcap Report (14 May 2020) – Watch buying goes online

Cube Midcap Report (14 May 2020) – Watch buying goes online


There’s a nasty fall in the FTSE this morning, 130 points as of typing.

Feels like a delayed reaction to the awful economic news.

I was watching BBC News at 10 last night, focused mostly on the economy, thinking “any regular punter who sees this might just get a bit nervous about their shares”.

Well done to anybody who hedged their bets – you must now be sitting on a very profitable short.

No change to my portfolio or positioning, as usual. Sitting still is what I do best.

Today I’m interested in:

  • Watches of Switzerland (WOSG)
  • WH Smith (SMWH)
  • Persimmon (PSN)
  • Hargreaves Lansdown (HL)

Finished at 17.30.

Watches of Switzerland

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Market cap £531 million
RNS FY20 Trading and Financing Update
Writer disclosure No position.

This company’s year-end is at the end of April.

The market likes this update and I think I can see why.

  • pre-lockdown, revenues were up 15.8% for the Group and up 36.4% in the US.
  • watches outperformed other jewellery and fashion. demand for watches continues to outstrip supply.
  • e-commerce sales helped to pick up some of the slack during lockdown, growing by 45.8%. This was ahead of expectations.
  • full-year result sees revenue +5.9%.

Playing with a spreadsheet, I think this means that the lockdown revenues were approximately minus 70%, year-on-year (a very rough estimate).

None of these numbers are “like-for-like”. LfLs will be a bit worse seeing as four stores were acquired in March. For the period up to lockdown, LfL sales growth is 9.3%.

  • Net debt at year-end is £131.4 million (only slightly higher than originally planned).
  • Full-year adjusted EBITDA (before IFRS 16) is £75 – £78 million.
  • An additional £45 million in borrowings is now available.

CEO comment – store openings are proceeding in Florida and Georgia (states not subject to heavy lockdowns).

Unfortunately, the key sales funnel of airport footfall is expected to be lower for a prolonged period. There is a greater focus on ecommerce, customer relationship management and “clienteling” (profiling existing customers).

Liquidity headroom is now £83 million, after the expansion of the debt facility to £265 million.

That doesn’t sound as comfortable as it could be, and indeed the belief that the company has enough cash depends on more cash preservation activity:

The Group is confident it has sufficient financial headroom at year-end to sustain operations under a scenario of continued store closures and dampened consumer sentiment for a prolonged period.  This assumes the impact to revenue continues to be partially offset by a series of mitigating actions to preserve cash.

My view

In December, I noted that it was on a P/E multiple of around 16x and might be worth looking into.

The share price is now 30% lower.

Am I more interested in it now? I still have an overall positive impression of the company and its positioning in luxury.

But for a retailer that does not own the intellectual property it sells, I do want a cheap multiple.

The significant debt burden also would make me want to pay a cheap price for the equity.

It IPO’d at 270p last year and I generally expect a big discount to the IPO price to materialise at some point (even before taking the effects of Covid-19 into account). I could easily be wrong, but I doubt that this has reached its post-IPO low yet.


WH Smith

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Market cap £1,130 million
RNS Interim Results
Writer disclosure No position.

This is one of the hardest-hit shares during the crisis. Without much footfall in airports and train stations, its prospects are poor.

The High Street is the other key element, and the picture there is hardly rosy, either.

These numbers confirm that even in a pre-Covid world, High Street was shrinking:

CEO comment:

Since March, we have seen a significant impact on our business as a result of Covid-19, with the majority of our stores closed around the world.  We were fast to react to the situation and issued new equity via a placing, raising c.£162m on 6 April 2020. We also secured an additional £120m of bank funding.

Funds were raised at £10.50 per share – and it’s interesting to see the price in the market has fallen back below that level.

Covid-19 impact:

  • vast majority of UK Travel stores have been temporarily closed.
  • internationally, all large airport stores closed.
  • there are still 203 High Street stores open with Post Offices.
  • April revenue down 85%

The mitigating actions are as you’d expect, e.g. capex cut as much as possible. All discretionary spending cut.

One of the main issues is clearly going to be rents. SMWH is “Working with landlords to significantly reduce or remove rent payments and ensuring rent is aligned with revenue“. I’ve heard it suggested that revenue-linked rents will feature more prominently in general, after the lockdown – perhaps this is a sign?

Balance sheet

Liquidity is approximately £400 million – very good.

This consists of:

  • undrawn £200 million RCF
  • new, undrawn £120 million facility
  • cash of over £80 million

Existing debt consists of £400 million in loans, repayable in October 2022.

My view

This is a company I’ve admired for a while. It has had its doubters, but as an international brand for travellers it seems to work well. ROCE has been superb for years, which I think reflects some real pricing power it enjoys in the Travel segment and to a lesser extent on the High Street.

At a nearly 70% discount to where it was at the start of the year, and having raised fresh funds, perhaps if offers value here?

There is a question mark in my mind about how the existing loans will be refinanced, if profitability is poor both this year and next year. It looks like there is still some balance sheet risk, albeit much reduced compared to before the £162 million placing.

I’ve seen enough to have some interest in researching this in greater detail.



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Market cap £6.5 billion
RNS Covid-19 Update
Writer disclosure No position in PSN. Long BRBY.

A further update from this housebuilder.

This is an interesting snippet:

The ability to recommence operations swiftly has been made possible by the Group’s decision not to furlough staff and to continue to pay all colleagues in full throughout the shutdown period, without recourse to Government assistance. This has retained talent directly within the business and ensured operational continuity at site level, supporting both the introduction of new safer working methods and restart activity.

I was asked recently why Burberry would choose not to accept UK government support for wages.

I think this from Persimmon might be the answer – if you don’t furlough staff, you don’t have to worry about getting staff back from furlough. They are still your employees and there is no negotiation or delay in getting them to perform their duties.

Sales offices will reopen tomorrow for pre-booked appointments.

Construction was already 65% back in England and Wales, as of the beginning of this month. Scotland is still shut down.

My view

There is no change to my previously expressed view. Persimmon is still quite expensive against NAV and I am cautious on house prices (since I’m very nervous about jobs and the mortgage market). So I don’t find this company’s shares very tempting.

If house prices hold up then it probably doesn’t have too much to worry about, and should continue to churn out impressive profits.


Hargreaves Lansdown

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Market cap £7.5 billion
RNS Trading Statement
Writer disclosure No position.

Unlike some other companies I’ve looked at today, this has traded through the crisis. The financial industry is a safe place to be compared to travel, retail, etc:

 We are not seeking government assistance, nor are we furloughing any employees or enacting any redundancy programmes. 

Net new business over the past four months has been good. The damage has been done by the falling FTSE, which leaves assets under administration down by 8%:

I see that cash management is now responsible for £2 billion of AUA – a nice addition.

Client numbers grew by 7% over the last four months – very good.

For the last ten months, revenue is up 13% compared to the previous financial year (the year-end is in June).

All of the trading activity has helped a lot, as customers frantically buy and sell their stocks during a period of heightened volatility. This is a familiar theme.

…at the start of March, the significant market falls caused by COVID-19 and the subsequent emergency cuts to the UK base rate of interest negatively impacted asset-related revenue streams. These impacts were more than offset by significantly higher stock broking revenues driven by record dealing activity. March and April both saw a series of new daily records and monthly dealing levels more than double the highs ever experienced before this period. Overall, this has resulted in year to date revenue of £448.1 million (2019: £395.9m), 13% higher than last year.

Dividend – planning to carry on with dividend payments, and why not?

My view – I continue to rate this company very highly, though not quite as highly as the market does. I would buy it at lower levels.

One final observation. Last time I wrote about HL, for its interims, it mentioned “Woodford” 14 times in that RNS.

In this RNS, it doesn’t mention Woodford at all.

Does it think that story is ancient history now?



Calling it a day there, thanks everyone.




Wordpress (5)
  • comment-avatar

    “Feels like a delayed reaction to the awful economic news.”

    Of course, we can never know (or can we) but isn’t it just as likley the lot over the pond sneezing yesterday and us catching a cold?

    If the US had marched higher yesterday would we have fallen today? US seems to be trying to crwal up from another big opening fall but too late for it to have much effect on FTSE.

  • comment-avatar

    Buit, you’re right – the economic news is truly awful and we SHOULD be (have been) falling.

  • comment-avatar

    Laughton, I finally answered your question about why companies would NOT want to furlough staff.

  • comment-avatar

    Graham, I’m not saying you’re wrong, only that I still don’t understand. Are furloughed staff not still your staff? And if the employer decides that work will start next Monday, is there any difference between telling a furloughed member of staff and a non furloughed member of staff?

    I can’t imagine there is any difference should the staff memebr decide it’s not safe, or they are in isolation.

    I can see that a non furloughed member who has been receiving 100% pay might feel more obligated.

    • comment-avatar

      This could be nonsense, but I’ve read on twitter people claiming to be business owners who state that some staff on the government furlough scheme are making excuses not to come back to work. I have no doubt that the staff will come back to work, but there seems to be more of a delay and negotiation involved when the staff member is currently getting paid by government, not the employer.

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