Cube Midcap Report (15 May 2020) – William Hill gets bailed out

Cube Midcap Report (15 May 2020) – William Hill gets bailed out

Good morning!

I’m going to look at an investment trust today – the large and illustrious Scottish Mortgage.

Also looking at:

  • William Hill (WMH)
  • Computacenter (CCC)
  • Signature Aviation (SIG)
  • Boohoo (BOO)

Timings: done at 12.15. Nice to be done early!

William Hill

  • Stock data should display here.
Market cap £990 million
RNS Trading Statement and Covenant Waiver
Writer disclosure No position in WMH. Long 888.

This share has “multi-bagged” since mid-March. Well done to anyone who has been going long of William Hill in recent weeks – it must have required nerves of steel!

I’d be richer if I could have ignored this, but I have an almost instinctive distaste for this company. The large portfolio of legacy retail betting shops is such a turn-off  that I wouldn’t want to own shares in this company at almost any price.

In hindsight, that was a silly stance to take at 40p!

Let’s see the key points from this trading statement:

  • Liquidity is £700 million and cash burn is only £15 million/month
  • Covenants waived for 2020 and reset for 2021 to lower leverage multiples

The pre-CV19 performance was “robust” – net revenue down 5% as online growth offset some of the reduction in retail.

The £2 betting limit for machines was only implemented in April last year, so comparatives are tough for the retail business.

International revenue grew strongly, with traction seen in Spain and Italy (again, before CV19).

29% of revenue is now from outside the UK, and organic revenue growth internationally was 11%.

CV19 impact

Retail like-for-like revenue fell 85%. US revenue fell 90%. All shop staff are furlough and William Hill is topping up their salaries to 100%. These businesses are closed.

Online revenue was the only part of the business not completely devastated, falling by 21%:

Online sports wagers declined although less than anticipated as our customers continued to place bets on alternative products such as table tennis and emerging market football;

I noted something similar with 888 in March. 888 said:

There is currently evidence of increased customer activity in the Group’s Casino and Poker products that might, in part, compensate for the sports betting disruption for a period of time.

Casino/gaming can’t completely replace sports betting but there is clearly some replacement happening for customers who still want to place a few bets.

Credit card ban – this was a worry for the industry. So far, it has not caused a “material drop off in deposits”. Longer-term impact unclear.

European gambling regulations are “fluid”:

We saw developments in Spain, Latvia and Sweden restricting advertising and proposing further consumer protection measures. We have also seen ongoing regulatory activity (both in licencing and payment processing) in Germany and The Netherlands.

Balance sheet – there is a £200 million loan coming due in June so this will eat up some of the liquidity.

Outlook (or as WMH calls it, “scenario analysis”)

This is very positive. WMH is performing “ahead of the initial scenario” despite now assuming 3 months instead of 1 month of shop closures.

The initial scenario envisaged a reduction in EBITDA of £100 – £110 million. For context, EBITDA last year was c. £220 million last year, according to my own calculations. So perhaps it will halve, give or take?

The monthly EBITDA impact of shop closures has turned out to be only half the initial estimate. This is thanks to and dependent on the government’s furlough scheme.

My view

Things are definitely looking up.

You might remember that William Hill’s recent CFO appointment changed his mind, in light of the CV19 crisis. That issue was resolved last month with a new hire from National Express (NEX).

Net debt at year-end was £536 million. With EBITDA not falling by as much as previously feared, and with the banks showing forbearance, the signs are positive.

The next covenant test is scheduled for June 2021, where William Hill will need to satisfy a leverage multiple of less than 4.5x.

So for example if we assume that net debt will be £550 million around then, trailing EBITDA will need to be at least c. £125 million.

If things are mostly back to normal in the Autumn/Winter, the test will include 6-9 months of somewhat normal trading.

Based on EBITDA last year, and continued online growth, passing the covenant in June 2021 should not be so hard.

The test will tighten up in December 2021 and June 2022, but shouldn’t things be almost completely back to normal by then?

I am therefore inclined to think that William Hill will pass its tests.

For those inclined to bet on recovery/turnaround situations, there could be more to play for with WMH. The shares were around 200p a few months ago, before all of this kicked off. The government furlough scheme has effectively bailed it out.

I will continue to steer clear simply because I have a preference for unleveraged, non-retail businesses.



  • Stock data should display here.
Market cap £1,700 million
RNS Trading Statement
Writer disclosure No position.

I highlighted back in mid-March that Computacenter should do well, regardless of CV19.

It went on to irrationally plunge to almost hit £9.00, before bouncing back to where it is today, just below £15.

As an IT service provider to large organisations, it is extremely busy helping them to stay operational during this crisis.

An April update confirmed that trading was “more robust” than it had originally anticipated.

It gets better:

Since that date business has accelerated further and we have managed to secure some substantial Technology Sourcing contracts due to our ability to scale our operations to meet the demand. These incremental volumes mean that we now believe that the first half of 2020 will be considerably ahead of the same period of last year

It’s only right that the share price today should be substantially higher than it was a year ago.

It still won’t provide guidance for the year, but who cares? If a company is doing brilliantly, do we really need a precise estimate of its results this year?

Well done to CCC and its shareholders. At merely 15x forward earnings (before today’s upgrade and share price movement), it might not be overpriced.



  • Stock data should display here.
Market cap £4.1 billion
RNS Confirmation of successful fundraising
Writer disclosure No position.

Worth a mention that Boohoo has raised £200 million from a position of strength.

Traditional competitors have been devastated by the CV19 crisis, while Boohoo’s own prospects and share price continue to shine.

I’ve never been willing to pay up for Boohoo’s shares, and agree with management that it is rational to raise money at this very high valuation (340p, versus forecast EPS of 5.9p in FY February 2021) .

58 million new shares are issued to raise £198 million.

Last night’s announcement gave the reasoning. It is reviewing M&A activities:

The Group intends to use the net proceeds of the Placing to take advantage of numerous opportunities that are likely to emerge in the global fashion industry over the coming months. 

Net cash at the end of February was £240.7 million, and the business has been generating cash, but management want even more cash to accelerate growth:

Boohoo has demonstrated that its platform is capable of integrating high-quality fashion brands. The recent acquisitions of the Karen Millen and Coast brands evidence its successful transition of brands to a pure online proposition on its scalable multi brand platform; plugging them into its test and repeat model, and leveraging the Group’s infrastructure and insight into the fashion e-commerce market. Moreover, the Group’s earlier acquisitions of the NastyGal and MissPap brands demonstrate its ability to develop and grow brands successfully. The Group sees significant opportunity to replicate this success globally.

There is no official financial guidance for the current year. Again, I don’t think this really matters. The company has informed us that there was year-on-year sales growth in April, and that trading in May was “robust”. That is enough to work with – we then need to decide for ourselves what we think the macro conditions might do to the business.

I note that Boohoo’s share price has more than doubled from its levels in mid-March – that was a wonderful buying opportunity in hindsight, but even at those much lower levels, you still did not get a “normal” P/E multiple.

Well done to management for taking advantage of the extraordinary valuation with this placing.


Signature Aviation

  • Stock data should display here.
Market cap £1,610 million
RNS Trading Statement
Writer disclosure No position.

This provides a range of services to the aviation industry.

Roland gave a very helpful summary at the end of March.

Key points from today’s update:

  • activity was in line with expectations until mid-March. SIG says that it outperformed a declining market in business and general aviation.
  • flying activity was down 77% year-on-year in April. SIG’s April revenue was down 72%.
  • flying activity is down 66% year-on-year in May so far.
  • liquidity headroom is $425 million, comprised of $74 million cash plus $351 million undrawn from an RCF.

The RCF covenants are tested twice annually. I guess the company must be confident that it will pass, if it’s not asking for a waiver?


Scottish Mortgage Investment Trust

  • Stock data should display here.
Market cap £10.1 billion
RNS Final Results
Writer disclosure No position in SMT. Long GOOGL.

I remain deeply sceptical of this trust’s due diligence on the companies it holds.

But, even if its due diligence is poor, it does provide a convenient way for UK investors to access some interesting foreign stocks.

Top holdings as of March:

I’ve highlighted some of the features that jump out at me.

Amazon (AMZN) and Tesla (TSLA) add up to an enormous 18% of the portfolio. Nearly a fifth of the portfolio in two companies.

That is of course in large part due to their outperformance. Well done to James Anderson for sticking to his guns (even if I think he’s mad when it comes to Tesla).

We’ve also got the bizarre Alibaba (BABA) and the ludicrously priced Netflix (NFLX). Plus the unprofitable Delivery Hero.

It’s all very strange. But NAV is up 13.7% for the year. So who am I to argue?

As this release points out, SMT’s share price has increased by another 25% since the end of March, pushing its market cap over £10 billion.

At the end of the day, it’s hard to argue against performance.

But I do think that SMT’s top two holdings, which account for so much of its overall value, are incredibly vulnerable.

Tesla’s equity is still fundamentally worthless and Amazon’s valuation reflects the extreme optimism in US markets.

Consider this chart (source):

In 2000, everyone thought that Microsoft, GE, Cisco, Intel and Walmart were going to take over the world.

They were partially right – Microsoft did continue to grow, but its share price made no progress between 1999 and 2016.

The others didn’t quite fulfil their promise to investors. For example, GE has been a complete disaster and Intel is still below its 1999 high.

And the market is now far more concentrated than it was back then. MAAAF are even more loved than the previous set.

When we see so much consensus optimism around a small number of shares, without whose value the equity markets would be trashed, I think it’s right to worry.

I do own shares in Alphabet, for example, because it’s the one company I am most sure has a monopolistic position and I think I achieved an attractive entry point and a reasonable valuation. Microsoft would be my second pick.

Well done to SMT for holding Amazon, the most successful company in recent history. But if the markets were less concentrated and less frothy, it might not have achieved a forward earnings multiple of 120x.

As for Tesla, the less said the better. SMT has entirely bought into Musk’s madcap vision (fraudulently called “Full Self Driving”):

Tesla’s autonomous driving functionality continues to improve as it gathers data from the sensors attached to its large and growing fleet of customer vehicles. The traditional industry will be unable to compete with this technology…

Change in investment strategy

This is worth a mention.

There is only one proposed change, which is to raise the current limit on all assets not listed on a public exchange by 5 per cent. to 30 per cent. at time of purchase of the next such asset.

On the day that Mark Barnett was sacked from Invesco for poor performance, it’s noteworthy that SMT wants to go down the same road of private investments that led to so much pain for Barnett and his mentor, Neil Woodford.

James Anderson‘s latest comments also include a diatribe against “value” strategies and the belief in reversion to the mean.

His words contain more than a nugget of truth – value strategies have underperformed as value managers have failed to allow sufficiently for growth and quality.

But his words also reflect the fact that his strategy has enormously benefited from very unusual market conditions. When these conditions change, which they surely will, we can expect his comments to have an added dose of humility.

He recognises the strangeness of valuing a few tech companies as if they are the only things that matter, but he thinks it might make sense:

At one point in April the US Nasdaq index, dominated by technology companies, enjoyed a market capitalisation greater than all the developed markets outside America. Or on a plaintive local note Amazon and Alphabet combined are more highly capitalised than all quoted British companies. It’s not clear that this is unjustified.

In time, I reckon that it will become more clear.



That’s it for this report, have a great weekend!




Wordpress (5)
  • comment-avatar

    “I’m going to look at an investment trust today – the large and illustrious Scottish Mortgage.”

    Excellent – big holding for me. But I’ll be reading your thoughts from behind the sofa as they hold a lot of Tesla 😉

  • comment-avatar

    You’re surpassing yourself Graham – BooHoo – now my largest holding by a long way. Have been in since Paul Scott flagged it up post price drop after IPO.

    Picking up names without the shops from distressed sellers – great. It’s worked for them so far. My only “worry” is that they use the proceeds to buy the 1/3rd of PLT they don’t already own at an over generous price (given that it belongs to the family).

  • comment-avatar

    Stonking report today ………never knew much about SMT before reading this today, but wow , its gonna be a massive train wreck at some point .
    I had some BOO once at about 25p and sold them at 45 p feeling pleased with myself . That was my missed “get rich quick opportunity of the decade ” …..never mind . Could not stomach the sweat shop rep for workers ( Rumour or fact I never established ) after that exit so never re entered the trade .

  • comment-avatar

    Thanks for another interesting report Graham.

    Regarding Investment Trusts, just over 10 years ago I started selecting them based on track record. (i) Must have a very good 10 year record wrt the index & (ii) Must have the same manager in charge. Anyhow, this has done very well, since almost all of them have trounced my selected benchmark etf (I selected relevant benchmark etfs for each trust, e.g. a Euro etf for a Euro trust, etc). Anyhow, of course I don’t own SMT, but it does make me wonder if I should look at what’s in these ITs, since outperforming by being in hot sectors is something I’m not quite sure would be enduring outperformance.

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