Cube Midcap Report (17 Mar 2020) – A better day? #CPG #FERG #SCT #AV

Cube Midcap Report (17 Mar 2020) – A better day? #CPG #FERG #SCT #AV


Markets are a little happier today. The FTSE is up 5% at 5350.

In normal times, the FTSE jumping 5% in a single day would be remarkable. In a bear market, however, a 5% jump is often preceded by another lurch down. Living with this sort of volatility is one of the challenges of taking part!

Today I have noticed:

  • Compass Group (CPG)
  • Ferguson (FERG)
  • Softcat (SCT)
  • Aviva (AV.)

11:30 am update: the FTSE is now DOWN for the day. Just goes to show how much volatility we are dealing with presently!

New feature!

I’ve added a new feature to the website – a discussion forum!

As many of you will know, I tend to hang out in the chat room most days. That’s the place to go for casual chats with me during the day.

The discussion forum is a little different. Unlike the chat room, where messages disappear after 24 hours, threads in the forum will stay visible. So if you want to kick off a topic that could last for a few days, it’s the place to go.

Here it is!


Compass Group (CPG)

  • Share price: 903p (-19.5%)
  • Market cap: £14.3 billion

Trading update

This is the largest component, by some distance, of the FTSE 350 Travel and Leisure Index (Stockopedia link). It provides food and on-the-ground support services around the world.

As recently as Feb 6th, its share price was £19.40 as it issued unchanged expectations for the current year.

Organic revenue growth through the end of February was 6%.

But the anti-virus measures since the beginning of March have radically altered the picture. In Continental Europe and North America, the “vast majority” of sports, leisure and education activities have stopped. Operating profit in H1 will be £125 – £225 million lower than expected.

H1 ends in March, so this hit to profit reflects the results of the shutdown for a single month.

If we annualise that range estimate, for a rough view of the possible impact, we get a hit to annual operating profit of £1.5 billion – £2.7 billion. Operating profit for all of FY 2019 was £1.75 billion.

Cost-cutting and other mitigation activities should prevent the losses getting out of hand, but this is clearly a dangerous situation for Compass. It says today that it is “pro-actively managing our capital expenditure and working capital”.

We have significant headroom against a 4x net debt/ EBITDA covenant in our US Private Placement Agreements and we have substantial liquidity with a £2 billion committed Revolving Credit Facility3 maturing in 2024.  Stable outlooks have recently been reconfirmed on our A/A3 credit ratings. 

Checking the most recent annual report, the net debt at Compass was £3.3 billion.

EBITDA in excess of £800 million is needed to satisfy the covenant. I’m afraid that there is a small chance of this covenant becoming a problem. If the reduction in operating profit mentioned above were to persist for six months, for example, then I think there could be question marks over it.

Unfortunately, I think the market might be pricing Compass correctly at the moment, with the potential for even more downside if activities don’t restart in the next couple of months.


Ferguson (FERG)

  • Share price: £45.10 (-13%)
  • Market cap: £10.1 billion

Results for the half year ended 31 January 2020

This is “the world’s leading specialist distributor of plumbing and heating products”. It was known as Wolseley (WOS) until it changed its name in 2017.

Later this year, Ferguson’s UK operations will demerge and emerge once again as a standalone business, Wolseley.

Today, Ferguson reports a 6% reduction in PBT on slightly improved revenues.

On an adjusted basis, excluding the amortisation of acquired intangibles, and some other factors, H1 “trading profit” is up 9.5% to £782 million. (I don’t automatically accept this treatment of intangibles.)

The CEO comment withdraws guidance for the full year.

…due to the dynamic situation unfolding with COVID-19 it is too early to understand its impact on current trading. Recent government actions to contain the spread of COVID-19 and societal reactions, alongside any potential actions we will take to mitigate them are not reflected in existing market forecasts and it is too early to quantify them. Ferguson remains well positioned for long-term success operating in attractive and fragmented markets with a robust business model and backed by a strong balance sheet and liquidity position.”

Ferguson’s net debt amounts to $1.9 billion. Trailing net debt/EBITDA is 1.1x, at the low end of its target range 1x – 2x.

Covenants aren’t given but the Going Concern statement says that the impact of “a severe short term revenue reduction” has been assessed. The directors think Ferguson has enough resources for its operational needs and to comply with its covenants even considering these downside scenarious.

My view – Checking 2008-2009, I am reminded that the drawdown in the share price for this one was horrific (from £60 to £9). It was loss-making for two years. When trading is bad, it’s really bad.

So I’d be cautious about dipping my toe in here.


Softcat (SCT)

  • Share price: 968.25p (+3%)
  • Market cap: £1,920 million

Half-year Results

The crash doesn’t look too bad at Softcat. The shares are “only” down 23% since their peak last month.

The company provides a range of IT solutions, and they look very relevant to organisations who wish to have a remote workforce.

Today’s H1 results shows revenues up 21% for the period ending January 2020 – long before the virus took hold of our economies.

As far as financial safety is concerned, I like this snippet from the highlights:

 The Company retains its simple balance sheet philosophy with no external bank borrowings and a cash balance of £49.4m

Outlook is dreamy:

The second half has started well and to date we have not seen a material impact from the ongoing Covid-19 outbreak, although this does create uncertainty for the remainder of our financial year.  Given the strength of our business model, lack of any bank debt and a strong cash position, we will continue to invest in our business and are confident in our ability to continue to build market share and drive profitable growth over the longer-term.

Softcat’s customers may suffer but the need for IT services is a positive secular trend which the Covid-19 crisis is accelerating. Maybe Softcat is a winner in this economic environment?


Aviva (AV.)

  • Share price: 237.9p (-5%)
  • Market cap: £9.3 billion

Update on solvency position ahead of conference

Large financial stocks have been crushed in this sell-off. Aviva is a prime example.

According to (pre-downgrage) consensus forecasts, it’s at a P/E multiple of 4.5x and a yield of c. 13%.

Why? I can’t say that I fully understand it. If we are about to enter the mother of all recessions, then of course there is pain ahead for lenders and investors.

Life insurers are a little different. Changing mortality and critical illness statistics do make it more difficult to plan. But in the long run, if they remain solvent, has the world really changed for them?

On a pre-Covid 19 basis, Aviva says it has no solvency issues:

Aviva remains well capitalised, near the top of its working range. Based on the closing market position on 13 March 2020, our Solvency cover ratio is estimated at approximately 175%, after allowing for payment of our proposed final dividend (c.7 percentage points). The estimate does not allow for any increase in insurance claims or changes in experience or assumptions that may arise from Covid-19. We have expanded our hedging and ALM activity on equities, interest rates and credit spreads. As disclosed at our recent full year results, our centre cash position at the end of February was £2.4 billion.

My view – I think large UK financials are dirt cheap, as a basket, and this is one of the reasons I am happy to be long the index.



That will do it for today, folks. Thanks for dropping by!

And don’t forget that the chat room and message board are now open.

Good luck and as always, stay safe out there!





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