Cube Midcap Report (2 July 2020) – Avoiding restaurant shares, all bar none

Cube Midcap Report (2 July 2020) – Avoiding restaurant shares, all bar none

Good morning!

I’m back today with another live-streaming video, as I’m going to try to do them on consecutive days and see how it goes.

Here’s the link, or click on the video below at 12 noon (UK time):

In today’s midcap report, I’m going to briefly look at:

  • Mitchells & Butlers (MAB)
  • GVC (GVC)
  • Wizz Air (WIZZ)
  • Associated British Foods (ABF)
  • LondonMetric Property (LMP)

Mitchells & Butlers

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Market cap £858 million
RNS Half Year Results
Writer disclosure No position.

Let’s see how this operator of bars, restaurants and pubs is faring.

These results are for H1 ending in mid-April. So there are four weeks of enforced closure and perhaps a few weeks of deterioration prior to that.

There is a pre-tax loss of £121 million (last year: pre-tax profit £75 million).

The company still manages to produce a positive adjusted operating profit, after excluding:

  • £11 million of costs directly associated with Covid-19 (loss of inventory stocks).
  • £148 million of charges related to valuation and impairment of properties. Mostly the reduced value of freeholds and long leaseholds.

The majority of the downward valuations of properties are “a direct result of Covid-19 and the perceived trading environment”.

You could argue that the £148 million of property-related charges aren’t “real” costs in H1 2020, but it would be dangerous to ignore them. Somewhere down the line, these charges represent real shareholders’ cash that has now disappeared.

If you do ignore all of these Covid-19 charges, you get an adjusted operating profit of £108 million (vs. £151 million in H1 2019).

Net debt is £2.2 billion or, if you exclude leases, about £1.65 billion. Net borrowings are twice the market cap – never very reassuring.

Also note that covenant breaches would have occurred except for temporary terms agreed with bondholders. It looks like MAB will be spared any tests of performance in 2020.

83% of the estate is freehold, which does make a big difference to the safety of the company’s equity.

Liquidity has been improved by an additional £100 million in unsecured facilities. Headroom is currently £250 million.

There is a very long going concern statement (an amber flag in itself). In the end, the directors conclude they have a “reasonable expectation” to continue as a going concern, even if all sites were closed until October 2020 and it takes nine months to build sales back to their prior levels.

Guidance – none. The company cites uncertainty over “the re-opening profile of our sites, the social distancing measures which will need to be in place and the strength of consumer demand”.

Re-opening plans:

We are working to an early July date for English sites to re-open, with Wales and Scotland following over the next two weeks and have developed a detailed re-opening plan for the business.  

There will be a vast range of hygiene/social distancing measures in place.

The German business re-opened in May and it sounds like performance has been mixed there, so far. There is a familiar theme of city centre venues underperforming, while suburban venues do better.

A cut in the German VAT rate for the rest of the year will help. I wonder is there any chance of that happening in the UK?

My view

This doesn’t appeal to me as an investment, but I am nonetheless intrigued as to how MAB will fare in the months ahead. If they suffer, I think we can reasonably expect all city-based pubs and restaurants to suffer in a similar way. At the moment, with social distancing apparently here to stay, things are looking grim.


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Market cap £4.6 billion
RNS GVC Supports Call for Review of the Gambling Act
Writer disclosure No position in GVC. Long 888.

I take an interest in this via 888 (888), in which I have a long position.

The threat of regulation continues to hang over the entire gambling industry, even though the most recent legislation is still rather “young”.

The main point highlighted in this statement is that non-gamblers don’t seem to be aware that the industry has made changes in recent years.

CEO comment:

We have to do a better job of communicating that, because those who are implacably opposed to gambling as a matter of principle are actively seeking to damage the industry through onerous regulation, which will ultimately drive customers into the hands of the unregulated black market.

GVC argues that the way it does business already reflects the principles expressed by the House of Lords committee:

  • less advertising during football matches.
  • funding research into problem gambling.
  • youth education and minimum age of 18 to gamble.
  • algorithms to monitor customers and intervene with problem gamblers.

Because the general public doesn’t know about these measures, GVC perceives that there is “knee-jerk support in favour of more government regulation on every issue”. A bit like the tobacco industry, perhaps?

My view – I do think that investors in gambling need to keep an eye on this, but as I keep saying, government policies are highly unpredictable.

Given this uncertainty, it’s reasonable to expect gambling-related equities to trade at a discount.

Wizz Air

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Market cap £3.5 billion
RNS June 2020 Traffic and CO2 Emission Statistics
Writer disclosure No position.

Seems remarkable that Wizz has opened new bases, deployed new aircraft and launched 64 new routes in June. Maybe because Eastern Europe is more open than we are now, after Covid-19?

Nevertheless, capacity was down 75% compared to June 2019. Passengers were down 86% , and the load factor was an awful 52%.

You’ll see that the passenger count is based on “booked passengers”. I wonder how many of them actually flew?

Getting your temperature checked before flying and then wearing a mask will, I am sure, deter some fliers at the margin.

The enormous uncertainty created by Covid-19 measures makes forward planning impossible and is a huge reason not to book flights anywhere, in my view.

For example, it makes much more sense to run online events, instead of making elaborate plans for physical events which may or may not take place. And with staycations, you have a much higher degree of certainty that your holiday will actually go ahead.

I think it is now consensus opinion that it will take years for the airline industry to get back to where it was. But maybe I am too focused on the UK – the pricing of Wizz Air shares suggests that central and eastern Europe will be back to normal much sooner.

Anecdotally, I have found eastern Europeans much more relaxed about the virus than British and Irish people. So this could be a factor.


Associated British Foods

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Market cap £16.5 billion
RNS Trading Update
Writer disclosure No position in ABF. Long NXT.

Primark stores are a bit different now:

I covered the store re-opening plan and the huge excess inventory position at Primark last month.

Q3 has been very bad for retail, understandably:

Primark revenues for this quarter relate to the short period of trading before the stores closed in mid-March and the sales at the end of this quarter as stores have progressively reopened.

Thankfully, stores have reopened faster than expected. The Irish stores (trading as Penney’s) benefited from the acceleration of Ireland’s easing of lockdown restrictions.

As of today, 367 stores have reopened with only 8 stores (7 of which are in Scotland) left to do so. Trading at the reopened stores has been “reassuring and encouraging”. Perhaps this is another brand which benefits from its positioning at the cheaper end of the value spectrum?

Again, retail parks and regional stores are outperforming city-centre stores. Rent payments have “mostly” been made and the company is negotiating with its landlords around future payments.

Elsewhere, ABF’s food-oriented divisions did very well in Q3: Grocery, Agriculture and Ingredients all produced a higher operating profit than last year, and each of them was ahead of expectations.

Cash flow – £800 million left Primark during Q3 (of which a large element was the purchase of inventories), while the other divisions generated £300 million in cash inflows.

Outlook – everything except Primark will see “strong progress in the aggregate adjusted operating profit“.

Primark is expected to see adjusted operating profit of £300 – £350 million (excluding exceptional charges). Q4 will see cash generation, and net cash at year-end will be >£750 million.

My view

I am reassured and encouraged by this. An adjusted operating profit from Primark for this financial year will be a superb result.

The adjustments to achieve that might turn out to be enormous, of course.

And the other divisions are performing very well – the food sector has been a great place to be invested during this economic disaster.

The shares look priced about right to me, with the potential for them to outperform if you’re willing to bet that store-based shopping makes a decent recovery next year.

I see that Next (NXT) is outperforming the market today. Good news from Primark can’t hurt.


LondonMetric Property

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Market cap £1,970 million
RNS Rent collection update
Writer disclosure No position.

I mentioned this one in May, when it raised £100 million to fund acquisitions.

As a logistics-focused REIT, it hasn’t suffered the loss of rent experienced by landlords of retail outlets.

This is confirmed again today with 95% of rental payments due 24th June having been received or switched to monthly payments. Monthlies have presumably been received, since they are a much lighter burden on the tenant?

Of the remaining 5% unpaid, 3% is expected “imminently” and the final 2% are being negotiated, “less than half of which is expected to be forgiven”.

So there is expected to be less than 1% of rental default in one of the most extreme economic circumstances ever seen. Not bad!

Dividend – is increased.

This is a huge green flag, as mentioned in my video today.

My view

This one looks like a safe haven in an economic storm. The modest premium to NAV is probably justified, and may not even give it enough credit for its recent performance.


Calling it a day there, see you tomorrow!




Wordpress (2)
  • comment-avatar

    I am enjoying the live streaming feature Graham. I haven’t listened to one live yet, but the playback facility works well for me.
    Today you’ve selected well for the report, as they’re all interesting for one reason or another. I do hold a small position in LMP, although I’ve nearly sold it several times! 

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