Cube Midcap Report (15 Jan 2020) – Emerging opportunity #ASHM #DPLM #PFG #PSN #VTY

Cube Midcap Report (15 Jan 2020) – Emerging opportunity #ASHM #DPLM #PFG #PSN #VTY

Good morning!

These are the shares on the list today.

  • Ashmore (ASHM)
  • Diploma (DPLM)
  • Provident Financial (PFG)
  • Persimmon (PSN)
  • Vistry (VTY)

1.50pm: report is finished.

Ashmore (ASHM)

  • Share price: 550p (+0.5%)
  • Market cap: £3.9 billion

Trading statement

This is an emerging market asset manager, with a focus on fixed income. Its geographic specialism is the reason for today’s featured image, above.

I’ve had a positive view on this company for a long time. It has a wonderful track record of profitability (with ups and downs along the way, as you would expect – nothing goes up in a straight line!). The shares are currently at all-time highs.

Assets under Management are up 7% compared to just three months ago. Nearly half of the increase has happened in the Local Currency theme, i.e. investing in government bonds that are denominated in that country’s local currency.

The main alternative to “Local Currency” is “External Debt”, i.e. USD-denominated bonds.

In general, External Debt carries a higher risk of default (since an EM government can’t print dollars to pay off its debts), while Local Currency debt would typically bring more inflation risk.

The latest table shows that Local Currency and a combo strategy (“Blended Debt”) have had a terrific quarter, while External Debt is flat:

Of the $6.5 billion total increase in AUM, half is from inflows and half is from investment performance.

Ashmore discloses that local currency and blended debt experienced inflows, while external debt and corporate debt experienced outflows.

Additionally, investment performance was highest in local currency and blended debt. This explains the divergent performance in AUM growth.

CEO comment

Mark Coombs owns 37% of Ashmore. His presence and his alignment with external shareholders may go a long way towards explaining the great success of the company.

I’ve grown immune to his bullishness, since he is always positive on the prospects for fund flows. However, his bullishness has proven to be correct after the company’s AUM increased by 24% last year, including net inflows of $10.7 billion.

Anyway, here’s his latest comment:

“The outlook for capital flows to Emerging Markets in 2020 remains positive, based upon the continued availability of significant relative value and the diversity of investment opportunities across fixed income and equity asset classes, the lower growth and lack of yield in Developed Markets, and investors’ underweight positions. Ashmore remains well-positioned to capture its share of higher allocations to Emerging Markets.”

My view

I still like this company and regret not buying any for my own portfolio, despite knowing of its attractions.

Even at current levels (forward P/E c. 18x), I wouldn’t be strongly opposed to buying a few shares in this – because I agree that there is a long-term opportunity in emerging market bonds, and that institutional investors will want someone like Ashmore to manage their allocation.

Fixed income is a much bigger asset class than equities, and it’s harder to come up with a passive tracker fund in bonds than it is in equities.

For these reasons, and based on its super track record thus far, I expect that Ashmore’s prospects remain very good.


Diploma (DPLM)

  • Share price: £18.545p (-2.5%)
  • Market cap: £2.1 billion

Trading statement

This is a large, international manufacturing group – Roland took a look at them back in August.

They supply the healthcare sector, provide seals and components for machinery and equipment, and also provide wiring, cables, fasteners and control devices.

It’s been an absolute home run for investors, as profits have soared (and the share price has done even better).

Overall trading in Q1 (from October to December) was in line with expectations. Similarly, full-year expectations remain unchanged.

Organic revenue growth at constant currencies was just 2% – perhaps some of today’s sellers consider that to be unimpressive, versus an earnings multiple of 26x.

Acquisitions contributed a further 9% of organic revenue growth.

Here’s the breakdown by segment:

  • Life Sciences (Healthcare) – underlying revenues +3%, as the timing of product deliveries is blamed for slow growth.
  • Seals – underlying revenues “marginally ahead”, reflecting “challenging industrial markets in both North America and Europe”.
  • Controls – underlying revenues +4%.

My view

While I’m sure many of you enjoyed the stock market rally of recent months (I did, too!), it has a downside. Good companies such as Diploma, which were already expensive, are now even more expensive.

The market loves quality companies right now, and has a particular love for large, “safe”, FTSE-250 names. Diploma fits the bill perfectly.

In my view, being long this sort of thing is a crowded trade right now.


Provident Financial (PFG)

  • Share price: 447p (+6%)
  • Market cap: £1,130 million

Trading update

Checking some previous RNS announcements, I see that Link Fund Solutions, the administrator for Neil Woodford’s funds, has been selling down its large stake. Perhaps this might have created undue selling pressure on the shares?

Today’s update is in line with expectations.

Provident has many different parts to it. The Consumer Credit Division (CCD) includes the doorstep lending division, which is the bit that most people would be familiar with, and which caused it so much woe in recent years.

Back in 2017, the doorstep lending division fell into disarray as its army of self-employed salespeople were replaced by “Customer Experience Managers” (yuk!). Staff fled, the shares collapsed and the company has never been the same.

Today’s 6% share price rally is a sigh of relief that things are stable:

CCD (Consumer Credit Division) finished the year well and has delivered results in line with plan.

Profits for 2019 (before tax, amortisation and exceptional items) are going to come in at around £162 million. Let’s apply the new 18% tax rate (for the sake of argument) and we get an adjusted net income result of £133 million.

My view

The contrarian in me is strongly tempted to bet on this, seeing as the selling pressure from Woodford’s dead funds is artificial. Sufficient time has passed, arguably, for the company to reach a new base and start again, following the disaster of 2017. The company has been targeting for CCD to return to profitability in H2 2020.

H1 2019 results looked like this:

As you can see, Vanquis Bank is highly profitable, although it suffered in 2019 from the withdrawal of so-called “repayment option plans” (after getting into trouble) and moved to less risky (and less profitable) customers. Today’s update suggests that Vanquis had a good H2.

Balance sheet leverage was 4.4x, as of the H1 result. This doesn’t strike me as particularly high, given the nature of its activities.

Overall, therefore, I think this is worth a second look – especially for contrarians!


Persimmon (PSN)

  • Share price: £28.245 (+1%)
  • Market cap: £9.0 billion

Trading update

It’s not easy for a business to make me squirm when it comes to ethics.

For example, the £75 million bonus paid to Persimmon’s previous CEO caused an outcry in 2018. Given that the company’s market cap increased to £9 billion around that time, having multi-bagged over the prior decade, I can see some justification for the extremely generous bonus scheme (although I would probably still have voted against it, if I held Persimmon shares).

What bothers me more, actually, is Persimmon’s practice of selling leasehold houses. If a building company cared much about its customers, I don’t think it would do this sort of thing.

Unlike apartments, where there is at least some rationale, I don’t see any justification for selling leasehold houses – or at least, none that is for the benefit of the house buyer.

The counter-argument might be that leasehold houses are cheaper than their freehold equivalents (ceteris paribus), so the leasehold house might be more affordable for those struggling to get on the housing ladder.

CEO David Jenkinson says “they may not fully understand the implications of it, but they must have known it was leasehold”:

Having got that off my chest, here’s the contents of today’s update. Trading is stable:

Our regional housing markets across the UK continued to benefit from resilient consumer confidence throughout 2019, supported by low interest rates, a competitive mortgage market, and robust employment levels.

Revenues of £3.65 billion are in line, down 2.4% compared to last year as it “delivers improved levels of quality and service to its customers”. I interpret this to mean that it is building and selling homes in a slightly more thoughtful manner than it did before! Completions of new homes were 15,855 (versus 16,449 in 2018).

PBT will also be in line (c. £1,050 million).


Looking ahead to the 2020 spring season, Persimmon is in a strong market position. The Group has a nationwide outlet network and a range of attractive house types available at affordable prices across the UK regions, supported by high quality land holdings and a conservative balance sheet.

My view

From the point of view of shareholder returns, it’s hard to fault Persimmon. Over £7/share in dividends have been paid out to shareholders since 2016. Return metrics are excellent (>30% ROCE, ROE).

It’s obviously cyclical and subject to economic forces beyond its control. On the basis that nobody knows whether conditions will remain favourable, it might be fairly priced at a P/E multiple of 10x and P/Book Value of 3x.

My own long-term strategy when it comes to property and construction companies is to wait until times are bad, and they can be picked up at around book value (or perhaps at a discount). I could be waiting a very long time for that to happen again at Persimmon, but that’s ok!


Vistry (VTY)

  • Share price: £13.31p (-1%)
  • Market cap: £2.9 billion

Trading update

This is the combination of Bovis Homes (BVS) and the acquired housing business of Galliford Try (GFRD).

Profits will be “slightly ahead” of consensus.

It reports “increased pressure on pricing in the second half” – sales prices are down slightly (1% – 2%). Sales prices were flat at Persimmon.

Offsetting the reduction in pricing, sales volumes are up by 3%.


Whilst it is early in the year to comment on 2020 trading, we have a strong forward sales position and trading to date has been very positive, with consumer confidence returning and industry fundamentals remaining strong.  We are excited about the prospects for the enlarged business and expect to report much progress in the year ahead.

My view

Perhaps less controversial than Persimmon, this one trades at a similar valuation. It’s very bullish on prospects following the recent acquisition – let’s see how that plays out.



Calling it a day there – thanks for dropping by!




PS: Here’s a quick reminder that our new writer Vivek published a 2020 outlook yesterday, for our Gold Members. Worth a look!



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