Cube Midcap Report (19 March 2020) – IG hits it out of the park #IGG #NXT #BRBY

Cube Midcap Report (19 March 2020) – IG hits it out of the park #IGG #NXT #BRBY

Good morning!

The FTSE has temporarily stabilised above the 5000 level.

Could there be some value in the US now, too? The median P/E ratio (trailing) for the S&P 500, according to Stockopedia, is at 15.8.

If you remember the wobble which occurred in late 2018, the S&P 500 is back around that level (the 2018 low was 2351, and it’s now at 2398). The previous time these levels were seen is early 2017.

In any case, we have plenty of midcaps to look at today.

  • IG Group (IGG)
  • Next (NXT)
  • Burberry (BRBY)
  • Halma (HLMA)
  • Ocado (OCDO)
  • Auto Trader (AUTO)
  • Playtech (PTEC)
  • National Express (NEX)

7.15pm: finished for today.



Currency movements – the pound has been crushed in recent days. Panic among financial participants has seen a rush for the dollar, with most other currencies being sold off.

The  result is Cable (GBPUSD) at the lowest level since 1985.

The Euro has held up well, and as a result EURGBP is at its highest level since 2008, the peak of the financial crisis.

Long-term chart of the pound against the dollar:

Once again, UK exporters will be feeling more comfortable than UK importers. The chart shows this is a long-term trend.

Personally, I own a few US stocks, and this helps to cushion the blow. While I suspect that USD is overvalued against its long-term purchasing power, it’s good to have some USD-denominated exposure, in case I am wrong!


IG Group (IGG)

  • Share price: 552.2p (-10%)
  • Market cap: £2.0 billion

Third Quarter Revenue Update

Please note that I have a long position in IGG.

Spread betting companies usually benefit from volatility. One of the reasons I hold IGG is because of its supposedly counter-cyclical qualities.

And there has been no shortage of volatility.

Options are now the most expensive they’ve ever been, according to the VIX Index. The VIX closed at an all-time high on Monday.

Unfortunately, the surge in market movements and trader activity led to IG’s systems failing on multiple occasions. I know, because I’m a customer and I was unable to log in or do anything with my account.

This is a disaster because:

  1. when systems fail, it’s an easy excuse to move to a competitor whose system didn’t fail
  2. people who can’t log in also can’t trade, which means less revenue for IG.

Thankfully, I didn’t get margin-called or miss out on any trading opportunities while IG was closed. I merely wanted to check my positions.

But those people who did get margin-called or wanted to trade will rightly have been fuming.

Let’s check IG’s latest update:

The business performed strongly in the third quarter driven by a significant increase in active clients and reflecting increased client trading activity, particularly in the last week of February when financial market volatility was exceptionally high.

Good! That’s the sort of good news I expect from IG, when markets get a bit messy. Revenue was up 29% versus the same quarter in the prior year. It’s the third-highest quarterly revenue that the company has ever achieved. Both the number of spread bet/CFD clients (21%) and their average revenue (9%) grew strongly.

Unlike CMC Markets (CMCX), who have been fiddling with their risk management and hedging strategy (possibly exposing them to more risk), IG says that its hedging strategy and market risk limits are unchanged. We are reassured that it remains a neutral broker of market risk: “The Group’s revenue does not benefit from client trading losses, nor is it exposed to client trading profits.”


IG’s year-to-date revenues (from June 2019 to February 2020) are up 9%, driven by core markets (excluding Europe) and various non-core growth initiatives (Japan, US, Emerging Markets and special trading facilities).

The core European market revenue is down 1% year-to-date.

However, that 1% decline includes the effect of European leverage restrictions kicking in, from August 2018.

If you exclude June to August 2018 from the comparison, then core European revenue is up 8%. That’s a fairer comparison, in my book. And it means the underlying year-to-date revenue growth rate is faster than the 9%.

Coronavirus – “all employees have the ability to work from home”. I can’t imagine that things will run so smoothly if everyone is at home, but that’s reassuring anyway! And of course we don’t want anybody getting sick.

Current trading

The high level of volatility in the last week of February has continued into March.  Revenue in the first 12 trading days of the 61 in Q4 FY20 is estimated to be around £52 million.

 Wow! If revenue continued at that pace, it would amount to £264 million for Q4. That would be almost double the revenue of Q3, and by far the biggest quarterly revenue result in IG’s history!

Putting it another way: in just under a fifth of Q4’s total trading days, they have already achieved 37% of the prior quarter’s revenue!

I do expect that revenue will die down soon (it always does). Even so, Q4 looks set up for a great result.

IG remains cautious, which I’m glad to see. It’s a very unpredictable period of time:

These are extraordinary times.  This sustained level of volatility and revenue is unprecedented, and it is not possible to determine how long it will persist or how clients will continue to respond.  In addition, the actions of governments and regulators are not predictable, and the Group may face circumstances and events it has not previously anticipated.  It therefore remains difficult to predict accurately the level of revenue in the final quarter of this financial year. 

My view

I’m a very happy holder here, and I’m glad that this is still one of my larger holdings (currently 10% of my portfolio).

It also looks like it’s good value at the moment, trading at 14x earnings estimates.

So I’d consider buying more of it at this level, if the cash was available.


Next (NXT)

  • Share price: £41.435 (+8%)
  • Market cap: £5.5 billion

Results for the year ending January 2020

Please note that I have a long position in NXT.

The numbers for FY January 2020 are fine: full price sales +4%, PBT +0.8%, EPS +5.6% (EPS is helped by share buybacks).

Breaking down where profit growth has come from shows the usual trends:

  • online profit +13% to £400 million
  • retail profit down 23% to £164 million
  • financing profit +15% to £147 million

It won’t be long before profit from lending to customers exceeds profits from physical retailing.

Nobody cares too much about last year, though. Next shareholders (including yours truly) have seen the shares plummet from £70 to their current level as the market prices in a terrible 2020.

The Chief Executive places the greatest emphasis on his analysis of the Coronavirus situation. He is honest enough to say “there is no way of predicting” what the virus will do to sales. “It is impossible to give meaningful guidance for profits in the year ahead”.

He makes the following points based on what has happened so far:

  • demand is a much bigger problem than supply or operations (I made the same point for Sosandar yesterday). “The threat posed to the supply of goods pales into insignificance when compared with the potential impact on demand“.
  • online will outperform retail, but “will also suffer significant losses”. “People do not buy a new outfit to stay at home“.
  • Homeware and childrenswear are less affected than adult clothing.

Later in the report, he says: “the pandemic may accelerate the transition to online shopping“.

I’ve been pushing the idea that the pandemic will accelerate the work-from-home revolution. It should also applies to online shopping. And the more we do online, the more robust we will be if a crisis like this ever happens again.

Can you imagine how we would have fared in this crisis if we didn’t already have so many online facilities?

Recent trading has been dire (see page 40 of the PDF):

The number for the week beginning 15 March only shows what happened on Sunday 15th, Monday 16th and Tuesday, i.e. just  three days. Online sales were down 25% and Retail sales were down 46%.

Stress testing

One of the reasons I’m invested in Next is my admiration for how they model future scenarios, especially negative scenarios. It’s the only physical retailer I’ve wanted to own shares in, because it’s one of the very few physical retailers which modelled closing all of its stores and going fully online.

Next has modelled the loss of sales from this crisis, and thinks it could lose more than 25% of its sales without exceeding its current lending facilities. It says it has levers to pull which would keep an additional £835 million of cash in the business by the end of the year. These measures include:

  • suspending buybacks, delaying or cancelling dividends
  • delaying discretionary capex
  • sale and leaseback of a warehouse (though will its value be the same as before?)
  • partly securitising (selling or possibly borrowing against) customer receivables
  • calling in a loan to its Employee Share Ownership Trust

Based on “gut feeling” (it admits that forecasting is impossible), Next thinks that a sales reduction of 25% for the entire year is overly pessimistic.

For comparison, total retail sales in China during January and February were down 20%. If China is starting to recover already, then clearly retail sales in China won’t be down by more than 20% for the entire year.

Next’s scenario of a 25% reduction in sales is based on the crisis dragging on for 24 weeks (nearly six months), with a total loss of sales at the start followed by a smooth recovery.

Travel – the product team won’t be able to go to factories and overseas retail markets, to develop the autumn/winter range. The product range will have to be developed without this face-to-face contact.

When it comes to supply, these are the most important countires:

  • China (27%)
  • Bangladesh (24%)
  • India (12%)

Other important countries are India, Sri Lanka, Cambodia, Turkey and Vietnam.

Thoughtfulness – the CEO shares his latest thoughts on the online shopping trend, and argues that the primary driver is choice, not home delivery. He demonstrates that not only is Next dealing with the current crisis, but it’s planning ahead for after the crisis.

I could read his analysis all day. Why can’t all CEOs be so open about what they are thinking and doing?

Next sees both opportunities and threats from the online trend.

Opportunities from online:

  • can sell 3rd-party labels on its own platform and become a large marketplace
  • can sell internationally and to destinations which are too small to have their own store

Threats from online:

  • consumers can easily access any competitor
  • online-only competitors are unencumbered by the fixed costs of physical retailing

Lease Renewals

Although physical retailing is a terribly industry to be in at present, the silver lining is the rent reduction enjoyed by firms which are still in business (and aren’t locked in to long leases).

Some great news on this front: in 2020, net rent reduction of 42% will be seen at 53 stores. The new average lease term at these stores will be 3.9 years.

Across the entire estate, 50% of leases (by value) expire within 4.8 years. It could be worse. Last year, the average remaining lease term was 6 years. So that’s a great improvement in flexibility.


Next has £1.125m billion in bonds outstanding, and a £450 million bank facility, i.e. total debts of £1.6 billion.

My view

I’m running out of time and have lots of other things to cover today. But my impression of Next has only been strengthened based on reading today’s management report.

This is an exceptional company in terms of how it plans for the future and how it explains itself to shareholders.

It will be cold comfort if the company fails during this crisis, but at least we (by which I mean shareholders) have been given a proper explanation around how Next plans to deal with the situation.

I’m happy to continue holding this one. I have no idea what EPS will be this year, but I think there is a good chance that Next will survive and go on to have a good 2021 and beyond.



Burberry (BRBY)

  • Share price: £11.385 (+3%)
  • Market cap: £4.6 billion

Update on the impact of Covid-19

Please note that I have a long position in BRBY.

I’m glad to see an update from Burberry, which last issued an RNS re: coronavirus in early February.

Mainland China has started to improve, but most stores in EMEIA (Europe, Middle East, India, Africa) and the Americas are closed. Those remaining are on reduced hours and are seeing “very weak footfall”. 40% of Burberry’s total stores are currently closed.

As a result, sales for the last few weeks of the current financial year (ending this month) will be down 70% to 80% compared to last year. Q4 sales will be down 30%.

In response, Burberry is “renegotiating rents, restricting travel and reducing discretionary spending“. Office-based teams are mostly working from home.

Balance sheet: Burberry says it has “significant financial headroom”:

  • £0.6 billion in cash
  • £0.3 billion revolving credit facility

At the end of H1, the company had net debt of £0.4 billion but critically this includes lease obligations. Burberry says it is operating within its targeted net debt/EBITDA ratio of 0.5x – 1.0x (where net debt includes lease obligations).

My view

This was not nearly as detailed as the Burberry update. And yet I feel similarly about this group: it’s professionally managed, has good underlying fundamentals (virus aside), and the balance sheet is about as good as you could reasonably hope for.

If the retailing armageddon lasts for a very long time (say 12 months) then I don’t know how Burberry or any other store with physical locations will survive. But if shops are allowed to open again within a few months, then those with headroom, such as Burberry, should pull through.

To put some context on the headroom numbers shown above, Burberry’s total administrative expenses in FY March 2019 were £1.9 billion. This number includes lease payments.

The existing headroom (£0.9 billion) therefore represents nearly six months of operating expenses (before considering the mitigating actions which Burberry would take in a period of extended closure).

I accept the possibility that a tidal wave of economic destruction could wipe away even those with strong balance sheets, such as Burberry. But I consider it unlucky that nations will choose to shut down economic activity for such a long period of time.

Shutting down economic activity costs lives, too: it affects our ability to spend on healthcare, and it causes suicide and depression. I could be wrong, but I think our economies will open for business again, before the likes of Burberry go under.


Halma (HLMA)

  • Share price: £18.65 (+5%)
  • Market cap: £7.1 billion

Trading Statement

This is a high-quality group that has been compounding gains for years. It acquires companies in four categories: Process Safety, Infrastructure Safety, Environmental & Analysis and Medical.

Today’s very helpful update informs us that adjusted PBT for FY March 2020 will be in a range of £265 – £270 million (versus the analyst consensus of £275.5 million).

Financial position – 60% (£450 million) of its total facilities (£750 million) are drawn. So there is £300 million in headroom.

Forgetting about the virus for one moment, total group performance since October (i.e. in H2 so far) has been good. Revenue growth is seen in all major regions and all sector. Ten acquisitions have been completed at a cost of £227 million.

My view – I like Halma because it doesn’t cause a fuss and has quietly created a huge amount of wealth for its shareholders. Its share count has barely changed in 25 years, but its earnings have soared. Well done.

The valuation reflects its historic success and I am probably too cheap to pay an earnings multiple of c. 30x, despite its attractions.



That’s it for today. I’m not sure if there will be a midcap report tomorrow, but I will publish something over the next few days to catch up on some of the stories I’ve missed.





Wordpress (11)
  • comment-avatar

    mmm… so the FTSE has crashed, but S&P only “wobbled”. The US economy is shutting down. Maybe the best trade is to short the S&P.

  • comment-avatar

    Graham, I suppose that one worry for IGG is the potential loss of business should financial markets be suspended for a period. It seems unlikely but possible I guess…

  • comment-avatar

    I think we should be paying more attention to the UK Bond market, if yields start rising we are in real trouble, because the cavalry (in the form of money from the government) will disappear.
    It will also be a major psychological change, for the past 20 odd years we have seen in time of emergency/upset a flight to bonds and yields fall allowing the government to borrow cheaply as much as it wanted. If this is no longer the case and the markets start thinking that they require a much higher return to lend then this will affect the governments ability to borrow and equity valuations and property valuations would go down. Possible dramatic falls in property prices would put swathes of people in negative equity and bankrupt lenders.

  • comment-avatar

    Graham you wrote (I made the same point for Sosandar yesterday) which I do not remember seeing and is not listed in Archives. Can you give a link to it?

  • comment-avatar

    re: Trading platform availability…

    From CMC Markets trading update today:

    “Business continuity 

    Particularly during periods of heightened volatility, our clients rely on our ability to support their trading activity on a real time basis. Building on our continuing investment in scalable, modular technology, the Group confirms that internal systems, external interfaces and the trading platform have remained robust during the heightened levels of trading activity, client support needs and new client applications. We are confident our technology will continue to serve our clients during these times.”

    Maybe Peter is reading Cube 🙂

  • comment-avatar

    Recent reviews support the view that IGG has disappointed it’s clients during the recent volatility:

  • comment-avatar

    IGG podcast from a few days ago:

    Interesting from 12 mins 30 secs

  • comment-avatar

    @shine600 also a specific question about technology resilience and performance at 5min 45secs.  They appear to feel everything is peachy – “good, consistent performance”.  I can’t see I agree with this as a daily user of their services (and shareholder)

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