Cube Midcap Report (16 Jan 2020) – Cider insider walks away #CCR #INCH #RNK #PSON

Cube Midcap Report (16 Jan 2020) – Cider insider walks away #CCR #INCH #RNK #PSON

Good morning!

Today, I’ve taken a look at:

  • C&C Group (CCR)
  • Inchcape (INCH)
  • Rank (RNK)
  • Pearson (PSON)

2pm: I’ll be back tomorrow and may look at:

  • Whitbread (WTB)
  • Associated British Foods (ABF)



  • Share price: 392p (-2.6%)
  • Market cap: £1,216 million

Directorate Change and Trading Update

Please note that I have a long position in CCR.

This drinks company has been very good to me, since I bought it at 281p less than a year ago. I wrote my rationale at the time right here, on Cube.Investments (“Shares neglected as ghost of Conviviality returns to life”).

Let’s get the boring bit out of the way first: trading in H2 has been in line with expectations so far. The company is on track for “double-digit EPS growth”.

Basic EPS was 26.6 cents (€) last year, on an adjusted basis.

The forecast is 29.2 cents (presumably on an adjusted basis), representing 10% growth.

So that’s all well and good. At current exchange rates, the P/E multiple is 16x for the financial year that’s about to finish.

Now let’s move on to the more interesting bit: CEO retirement.

The Company announces that, following discussion with the Board, Chief Executive Officer, Stephen Glancey, has informed the Board that he wishes to retire. He will step down as CEO with immediate effect and will be leaving the Company at the end of February. Stephen will, however, continue to be available to assist with effecting a smooth handover.

I consider this news to be of material negative importance and am surprised that the shares are only down by 2.6%.

Why this news is so negative:

  • Stepping down with immediate effect leaves the company temporarily without a leader and means that succession planning can’t happen at a relaxed pace.
  • He is only 59 years old. Granted that he has been in charge of C&C for 8 years, but he is still quite young to retire. Did he have a disagreement with the Board? Or did he sense that bad news was coming down the tracks for C&C, and decide to get out early?

Don’t misunderstand me: I’m not jumping to the worst possible interpretation of this news. But I do think that when a CEO leaves in an abrupt manner, it leaves a bad taste in the mouth. I much prefer when a CEO provides a long notice period (6-12 months), giving the Board lots of time to plan for life afterwards.

Conclusion – I will hold on to my shares, because I still admire many things about this company. But I will be watching carefully for the next announcement about who exactly is replacing Stephen Glancey.


Inchcape (INCH)

  • Share price: 695p (+0.3%)
  • Market cap: £2.8 billion

Distribution acquisition and update on disposals

This is a mammoth-sized automotive distributer and retailer.

One of the reasons I’ve been so sceptical of Tesla ($TSLA) is that it integrated the distribution and sales function. It thought that it didn’t need a distributor like Inchcape or 3rd-party retailers to do anything for it. This has led to hilariously poor customer service, at least according to the tweets that I see every day from a very wide range of dissatisfied customers.

Normal car companies allow Inchcape to make a profit margin in exchange for managing their value chains. It simplifies the job of the car manufacturer after a vehicle leaves the factory gate, and ensures that customers are treated in a professional and responsible way. It’s a normal business practice that works.

Buying and selling

Today’s news is that Inchcape is buying the Mercedes distribution business in Colombia from Daimler:

Inchcape plc… has agreed to acquire Daimler’s Mercedes-Benz passenger car and private vans distribution operations in Colombia, currently operated by Daimler Colombia S.A. 

This follows similar deals with Daimler in Uruguay and Ecuador:

Together these acquisitions have enabled us to create a scale regional platform with Daimler.

Alongside the acquisition of distribution businesses, Inchcape has also been strategically selling off non-core retail businesses outside the UK.

It’s a good strategy: to decide where it wants to focus (distribution), and then becoming the biggest player in this field, while also raising cash by selling the businesses it doesn’t need any more.

Some companies fall into the trap of only making acquisitions, while failing to make appropriate disposals. Empire-building is a great temptation for management teams, even when it’s unlikely to work. Credit to Inchcap for buying and selling, as appropriate!

It’s forecast to make over £200 million in annual net income for the foreseeable future – and might be worth a second look as a value play.


Rank (RNK)

  • Share price: 279p (+4.5%)
  • Market cap: £1,090 million

Trading Update

I provided this company a little bit of business last year, dropping into the Grosvenor on Edgeware Road a couple of times.

Strangely enough, they failed to thank me in this update:

Following further positive trading in Digital and the Grosvenor and International venues businesses, underpinned by cost savings from the Transformation Programme, The Rank Group Plc (“Rank”) now expects underlying operating profit* pre IFRS16 for the year ending 30 June 2020 to be above current market expectations (analyst range of £93m to £103m) and, based on the trends experienced to date, to be in the range of £105m to £115m.

Wow! That’s an excellent earnings beat.

It’s not all doom and gloom, then. It’s still possible to make money (and beat your earnings estimates) in the gambling sector, after all.

Rank is a good business, in my view, but I prefer to focus on the online-only operators.


Pearson (PSON)

  • Share price: 574.7p (-7%)
  • Market cap: £4.5 billion

Trading statement

North America has been a little unfriendly to this publishing company:

Within North America, the Higher Education Courseware segment (responsible for 24% of Pearson’s total revenues) is down by almost 12%.

There are both macro and micro reasons for this.

The macro reason is that the demand for traditional printed books (as opposed to eBooks) is falling off a cliff. Pearson talks about “good eBook growth” and “modest growth in digital revenue”, hoping that we will focus on the growth in digital rather than the collapse in demand for printed books.

There was also a company-specific failure. This won’t win any awards for plain English:

Modest adoption share loss caused by the delivery issues due to the implementation of the new Enterprise Resource Planning (ERP) system in H2 2018, as well as sales force re-organisation.

The company evidently believes that it is undervalued, commencing a £350 million share buyback in the aftermath of selling its stake in book publisher Penguin.


Excluding US Higher Education Courseware, Pearson expects low-single digit growth. Total adjusted operating profit this year should be somewhere between £500 million – £580 million (an unusually wide range, but I guess it’s better to admit that the outcome is uncertain).

Heavy declines in printed US Higher Eduction Courseware will continue, offset by some growth in digital.

CEO comment

“Pearson is now a simpler, more efficient company, with strong financial foundations. This enables us to continue to invest in digital innovation and platform-based products. The future of learning will be increasingly digital and consumer defined. Experience, outcomes and affordability will all matter and while there is still much to do we are well placed to benefit from these trends to achieve future, sustainable growth.”

My view

Educational publishing is an important service but does it make for an interesting investment? Are there network effects? Are there economies of scale? Is there brand royalty?

If Pearson was purely digital, then at least we wouldn’t have to worry about the decline of the traditional printed segment.

I fail to see the attractions here.


I’ve run out of time for today’s report but will try to make up for it tomorrow – cheers!





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