Cube Midcap Report (18 Oct 2019) – The London Underdog #LSE #IHG #AVST

Cube Midcap Report (18 Oct 2019) – The London Underdog #LSE #IHG #AVST

Good morning!

In the aftermatch of all that Brexit news flow yesterday, the pound has remained firm against the euro (EURGBP is 86.5 at the time of writing). The FTSE is flat today.

We have some midcap news to keep us busy:

London Stock Exchange (LSE)

  • Share price: 7148p(+1.5%)
  • Market cap: £25.0 billion

3rd Quarter Trading Statement

It’s amazing that the company whose traditional function is merely to provide a venue for the share trading of other companies, can itself be so valuable.

LSE is now ranked #22, by market cap, in the FTSE-100.

Q3 Headlines:

  • Q3 total income up 12%
  • Year-to-date (9-month) total income up 9% to £1,727 million.
  • Acquisition of Refinitiv (from Thomson Reuters and Blackstone) is on track for H2 2020.

Summary of key revenue lines:

  • Information Services (data feeds and indices, including FTSE Russell) – revenues up 9% to £230 million
  • Post Trade Services – LCH income up 19% to £197 million.
  • Capital Markets (exchanges, platforms, order books) – revenues up 5% on a like-for-like basis, with “subdued equity markets trading”. Up 14% on a reported basis, to £102 million.

Financial Position – headroom of £750 million as of quarter-end.

Credit ratingmight be under pressure – Moody’s say “review for possible downgrade” and S&P say “credit-watch negative”.

Refinitiv had net debt of $12.5 billion (nearly £10 billion) as of June 2019. Bringing this debt onto the LSE balance sheet will make it a much more significantly leveraged organisation – as of June, LSE itself reported an operating net debt of just £1.9 billion.

CFO retirement – the group CFO wishes to step down by the end of 2020. There will be a “smooth transition”.

My view – I’ve been impressed for a long time by the earnings power of LSE, and have no excuse for not owning LSE shares in recent years (beyond the fact that it nearly always seems very expensive!).

Looking at some of the numbers around the acquisition, Refinitiv earned £1.2 billion of EBITDA in 2018, under US accounting rules. The trailing EV/EBITDA multiple for the takeover is therefore in the region of 16.5x.

According to Stockopedia, the current EV/EBITDA multiple for LSE is 24x.

So we have a more highly-rated PLC acquired a less highly-rated private company. Which is nothing out of the ordinary, when I put it that way.

I suppose the big question is whether Bloomberg might start to feel like it has some real competition. For decades, it has been making extraordinary profits from an almost monopolistic position as the pre-eminent provider of financial market terminals.

Now we have a true financial monopoly – LSE – joining forces with the only entity which has any hope of dethroning Bloomberg. Together, could they pose a serious challenge?

I suspect that there is space for at least one large competitor to Bloomberg. It will be fascinating to watch, and I’ll be rooting for the underdogs. But I’ll probably continue to hold off on purchasing LSE shares, until the valuation becomes more tempting.

Intercontinental Hotels (IHG)

  • Share price: 129.5p (-3%)
  • Market cap: £8.4 billion

3rd quarter trading update

This huge hotel group incorporates brands such as Crowne Plaza and Holiday Inn, in addition to its flagship brand.

RevPAR (revenue per available room) was soft in Q3, down 0.8%. The trend is flat for the year-to-date.

The reason given for the Q3 result is “tougher trading conditions in the US and China, and ongoing unrest in the Hong Kong SAR“.

Incidentally, I might add that the unrest in Hong Kong has taken some of the shine off my Burberry (BRBY) shares in recent months. They peaked at around £23.50 in July (which some might convincingly argue was overvalued anyway), and are now back below £19. If I was a more frequent trader, I might have “flipped” the stock a few months ago, looking to buy back in when the pessimism around Hong Kong was at its peak. But that sort of thing is beyond my pay grade!

Anyway, let’s get back to Intercontinental. While this might be less important to investors than the RevPAR performance, the company is proud of the fact that it continues to grow. Room count growth should exceeed 5% for 2019.

CEO comment – confident that the year will turn out ok:

Despite the weaker RevPAR environment, and the challenges some of our markets are currently experiencing, we remain confident in our financial outcome for the rest of the year. Our broad geographical spread combined with the resilience of our asset-light, cash generative model, our disciplined approach to cost management and the continued execution against our strategic initiatives, positions us well for the future.”

Where was the weakness?

Looking through the geographical analysis, the main points of weakness were:

  • Canada (RevPAR -2%)
  • Mexico (-2%)
  • Germany (-7%) “due to a less favourable trade fair calendar”.
  • Hong Kong (-36%) for obvious reasons.
  • China (-2%) “due to lower corporate and meetings business partly offset by domestic leisure demand”. Tier 2 and Tier 3 cities declined 3%.

Currency effects – IHG reports in USD, which strengthened during the quarter. This brings RevPAR from minus 0.8% (at constant FX) to minus 1.9% (at actual exchange rates).

For 2019 year-to-date, RevPAR is flat at constant FX, but down 1.8% at actual FX.

My view – while the current conditions are difficult, I maintain a positive view of Intercontinental. My personal experiences of its brands have only been positive, and it strikes me as a company which would be difficult to mess up, even if management were determined to do so.

Economic conditions (and occasionally political conditions) will fluctuate, but it’s hard to get away from this as an equity investor. I reckon that this is a reasonable long-term hold.


Avast (AVST)

  • Share price: 390.8p (+6%)
  • Market cap: £3.8 billion

3rd quarter trading update

This is a Czech cybersecurity company. It was covered on this website by Andy last month.

As described by Andy and as you can see on its own website, Avast provides free cyber security software to individuals, and makes money by upgrading them to premium plans.

This scheduled update sees adjusted revenue up 9%, quarter-on-quarter. This includes many adjustments, but they sound reasonable (excluding the effects of discontinued business lines, a disposal and currency movements). If you make fewer adjustments, revenue growth is only 5%.

Year-to-date revenue growth is similar: 9.1% if you make all of the adjustments, 5.5% if you don’t.

Net debt/adjusted EBITDA is 1.9x, using bank covenant calculations. Sounds ok.

CEO comment:

“I’m pleased to report that Avast has delivered good growth in the third quarter, consistent with our expectations at the time of the Half Year Results in August. We continue to successfully execute our growth strategy, underpinned by our platform distribution model and our global installed base of more than 435m users.”


The Group reaffirms its FY 2019 outlook for Adjusted Revenue to be at the upper end of high single digit growth, excluding FX, Discontinued Business and the sale of Managed Workplace, and broadly flat Adjusted EBITDA margin% (pre-IFRS 16 adoption).

My view:

I haven’t studied this one in detail and can’t claim to be an expert in cyber security. But so far, I like what I’ve read about it. From a top-level perspective (e.g. quality metrics and growth numbers), it looks impressive and potentially attractive on valuation grounds, too.

It has only been listed since last year, so there are probably lots of us who don’t know much about it yet! Andy’s article serves as a neat introduction.

Thanks for reading! Roland will be back on Thursday and Friday next week with more midcap reports.

Time to get the popcorn ready for tomorrow’s extraordinary parliament session. There might also be some rugby to watch.

Have a great weekend, win or lose.

Best wishes,




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