Cube Midcap Report (19 June 2020) – Easy-going Friday

Cube Midcap Report (19 June 2020) – Easy-going Friday

Hi folks,

Not much on the RNS today, but I will briefly look at:

  • Learning Technologies (LTG)
  • Wood Group (WG)

All done. 


Learning Technologies

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Market cap £950 million
RNS AGM Statement
Writer disclosure No position

A reassuring AGM statement for investors in this successful online learning group:

LTG continues to see demand in line with management expectations.  It is in a strong and resilient position and is well-placed to further consolidate the digital learning and talent sector. 

It has a tendency to tap the equity markets for its acquisitions, and raised another £82 million in June.

Prior to that, it had a small net debt position of £4.5 million.

The medium-term goal is “c.£230 million revenues and c.£66 million adjusted EBIT on a run-rate basis by the end of 2022“.

The share issuance has been a bit heavy for my taste. I prefer simpler business stories with organic growth and a stable share count, so that I know exactly what I’m buying when I invest.

LTG has a big portfolio of businesses – feel free to study them at your leisure!

The latest estimates are for EPS of 4.1p in 2020, rising to 4.5p in 2021. It is a stretching valuation on current earnings, reflecting the market’s belief in the buy-and-build story and the attractiveness of e-learning as a growth investment theme.

That’s after a big fall (25%) compared to pre-Covid levels. LTG per se might not be badly affected by the economic crisis, but its corporate clients will be hurting.

 


Wood Group

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Market cap £1,600 million ($2.0 billion)
RNS Trading Update
Writer disclosure No position

This large engineering group has seen its share price decimated by 50% since mid-Fed, despite the large bounce since the March lows.

It has cut costs to the tune of $$200 million during the most recent quarter. As a labour intensive business, this is nearly all to do with employment-related costs – headcount reduced, staff furloughed, unpaid leave, salary reductions, lower travel costs, etc.

Key points from this update:

  • Like for like2 H1 revenues down c. 11% and adjusted EBITDA down c. 19%.
  • More focus on work related to renewables (oil and gas is a major sector exposure).
  • Net debt was $1.43 billion at Dec 2019, has reduced since then.
  • The order book reduced by 11% in the first five months of the year.

Outlook – “Remain focused on protecting our margin in line with our strategic objectives whilst prepared for a broad range of outcomes on activity.

Q2 revenue is expected to be $2 billion, and H1 revenue will be $4.1 billion. These numbers are in line with reduced revenue forecasts for the full year of $8.3 billion. So a flat H2 is currently pencilled in.

Adjusted operating profit for H1 will be $80m – $90 million.

Visibility isn’t great:

Typically, around 80% of our full year revenues are either delivered or secured at this point in the year. However, in 2020 the risk of further delays and postponements persists and we are prepared for a wider range of outcomes depending on activity across our broad end markets. Our completed actions to protect margin give us confidence in delivering significantly stronger margins in the second half.

Balance sheet – the company has saved and generated cash by making a $400 million disposal, not paying a $160 million dividend, and reducing capex.

Against that, there is a working capital outflow in H1 and upfront expenses from the cost-cutting programme (redundancy payments?).

WG doesn’t quantify the reduction in net debt, merely saying that there will be an “overall” reduction.

Total financing facilities are over $3 billion, implying lots of headroom.

My view

I don’t personally invest in companies that are as labour-intensive as this. But hopefully it can go ahead and deliver the better margin in H2.

It needs to do that, to justify the current market cap and enterprise value.

EV is c. $3.3 billion, depending on debt reduction, and a flat margin in H2 would result in only c. $170 million of adjusted operating profit for the year. Analyst forecasts predict H2 will be much stronger and EBIT for the year could be as high as $250 million.

 


 

That’s all for the midcap reports this week. See you next time!

Graham

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