Cube Midcap Report (20 Aug 2020) – AO gets bigger, no word on profits

Cube Midcap Report (20 Aug 2020) – AO gets bigger, no word on profits

Morning folks,

Getting back into the swing of providing midcap updates for you, I’m going to briefly look at:

  • AO World
  • Frasers
  • CRH
  • John Laing

The FTSE is lower by around 80 points, blamed on US Federal Reserve minutes from July 28-29, released yesterday.

A key paragraph from these minutes (and I’ve added the bold):

[Meeting participants] noted that the path of the economy would depend significantly on the course of the virus and that the on-going public health crisis would weigh heavily on economic activity, employment, and inflation in the near term and posed considerable risks to the economic out-look over the medium term. In light of this assessment, all participants considered it appropriate to maintain the target range for the federal funds rate at 0 to ¼ percent. Furthermore, participants continued to judge that it would be appropriate to maintain this target range until they were confident that the economy had weathered recent events and was on track to achieve the Committee’s maximum employment and price stability goals.

I’m in the camp which says that rates will never go back up – in the US, UK or Europe – until central banks feel forced to raise them by rising consumer price inflation and/or collapsing exchange rates. I can’t possibly predict when that might happen, but clearly we aren’t there yet. Until then, governments and other borrowers can enjoy rock-bottom interest rates.


AO World

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

I last covered this one at the end of July (“AO tries not to create an awful VCP” – value creation plan).

The value creation plan was not the worst. I gave it at C, using my proprietary grading algorithm.

Now let’s have an update on trading. Momentum has continued and the shift of the entire white goods market online has been maintained:

As a result, in the four months ended 31 July 2020 we have recorded strong year-on-year revenue growth in the UK of 58.9% to £401.3m and of 91.5% to €74.3m in Germany1.

Profits? Who knows!


The demand for AO’s products and services has been sustained since competitor stores started to re-open at the beginning of July.  This reaffirms our belief that this is a structural shift in demand where customers have found a better way to shop the electricals category.

Good news, for sure.

Having recently fitted out a new house with a complete set of white goods and appliances, I certainly appreciated being able to visit stores and see what I was buying first.

But for the majority of buyers who are merely upgrading the occasional item, perhaps it is more appealing to go online?

My view

My concern with AO is not really about whether or not the white goods market goes online. My concern is around whether it will ever become very profitable for the box-shifter who is delivering these goods.

AO prides itself on the customer experience it provides and the corporate culture it has created. These are good things, for sure. But is it possible to make money this way? If it was possible to make money as a mass market supplier simply by upgrading customer service, why didn’t Currys PC World think of it? And what’s to stop Currys PC World from doing it in future?

Again, I must acknowledge that the AO share price has more than trebled since May – so well done if you have participated in that rise.

Shorters have intelligently left the building:

Personally, I wouldn’t want to be short this one, as the debt load is not too burdensome (net debt £23 million as of March) and it should have little difficulty raising funds, if necessary.

And raising funds might be completely unnecessary. Sell-side analysts expect it to make large free cash flow of £40 million+. I will believe it when I see it!


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Market cap £1,830 million
RNS Preliminary Results
Writer disclosure No position

Mike Ashley’s empire put in an ok performance for FY April 2020:

  • revenue +7% including the effect of acquisitions. Excluding acquisitions and at constant FX, revenue down 12.6%.
  • gross margin down 80bps to 42%.
  • underlying PBT minus 18% to £117.4 million.

The actual reported after-tax net income, for the record, was £101 million.

Net debt remains material at £366 million. There are another £600 million+ in lease liabilities.

Let’s get straight into the outlook:

The Group now intends to invest in excess of £100 million in its digital elevation strategy. With a particular focus on Flannels and an enhanced customer experience, this investment will be integral in supporting the continued growth of our online channels. This commitment will support the Group’s wider ongoing elevation strategy.

With digital transformation now at the forefront, the successful reopening of our stores after the Covid-19 lockdown and continuing strong web performance, we are confident in achieving between a 10% and 30% improvement in underlying EBITDA(1) during FY21

No problem with having a wide range of forecasts, given the broader uncertainty.

Note however that underlying EBITDA is a bad metric – it excludes lease costs and many other items. So I wouldn’t focus on it much at all.

Strategic Report

Some important comments here on how FY 2020 progressed and the impact of Covid:

As of the end of February we were on track to hit our underlying EBITDA growth target of between 5-15% (pre IFRS 16 adjustments) for the period ending 26 April 2020. The Covid-19 situation had a significant impact on our business performance across the Group in March and April (and continued to do so in the post year end period) due to the shutdown of retail stores.

Thankfully, as at the date of release of these financial statements, there is a semblance of normality returning with virtually all retail stores now fully open across the Group, albeit subject to strict social distancing measures. However the future, at least in the near term, is unclear as we and indeed the world come to terms with living under the threat of Covid-19 and what its short, medium and long term effects may be. There is currently a risk of a second wave which could lead to reinstatement of lockdown restrictions and there will be economic consequences which we do not yet fully understand.

Given my recent online antics, it won’t surprise you to learn that I personally don’t expect a “second wave” – I expect seasonal variations in infection, but not a second wave which would rival the first one.

However, that doesn’t help me to predict government actions very easily. Up until this point, I have only very occasionally been able to predict what governments might do, and that is usually just in the short-term. I have not been able to predict what will happen beyond a few weeks.

So, for example: when will social distancing, masks, etc. become voluntary rather than compulsory? I have no idea.

Debenhams – this gets its customary mention. It’s described as “scandalous” that it went into administration twice. FRAS acknowledges that it wants an investigation into the events surrounding the first administration, but says that its efforts to make this happen in a liquidation are being opposed.

Acquisitions – we are reminded that FRAS has bought GAME Digital, Jack Wills, and Cheshunt Retail Park, and more recently has invested in Hugo Boss.

And an interesting reference to the brands it sells:

To achieve our objectives with the elevation strategy we will rely heavily on our third party brands partnerships, particularly Nike and adidas. At times these relationships can be challenging but we aim to work with our partners as we have done so for many years in delivering the right product to our customers at the right time and at the right price.

My view

This is not my favourite sector – I’m always very selective about my participation in retail, and am even more cautious in a world of social distancing and other regulations on shoppers, with no visibility on when these regulations will end.

For these reasons, I have no strong desire to add FRAS to my portfolio. All credit to it, though – it has pulled through the Covid crisis reasonably well, so far. For their bravery, shareholders deserve the reward of seeing the share price nearly double compared to the March lows.


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Market cap £23.2 billion
RNS 2020 Interim Results
Writer disclosure No position

Let’s see how is life in the world of building materials:

  • H1 revenue down 3%
  • EBITDA up slightly on a like-for-like basis, EBITDA margin up 70bps to 13%
  • Operating cash flow + $0.7 billion to $1.0 billion

Q3 is expected to be in line with last year, and visibility is “limited” after that.

Overview – “The global COVID-19 pandemic had a material impact across the construction markets in which we operate.”

As you’ll know, builders everywhere downed tools for a short while. When they came back, they did so gingerly.

Of the three major divisions, Building Products came out the best – like-for-like sales up 2%, despite the impact of Covid-19:

Strong residential repair, maintenance & improvement (RMI) demand in North America resulted in positive volumes together with pricing progress across most platforms.

Outlook – still no full-year guidance, due to the lack of visibility in Q4 and beyond.

The near-term outlook for economic and construction activity across our markets remains uncertain and is dependent on an improving health situation.   Based on recent trading trends we expect like-for-like sales in the third quarter to be slightly behind the same period in 2019, with Americas Materials slightly behind, Building Products broadly in line, while Europe Materials is expected to be behind prior year levels.

My view – quality metrics don’t jump out at me so I’m not inclined to study in any greater detail, but it might be a useful barometer of the construction industry.

John Laing

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Market cap £1,400 million
RNS Results for six months ended 30 June 2020
Writer disclosure No position

Let’s also quickly see how this infrastructure investor and manager has been doing.

  • Total return is minus 6%
  • Dividend per share increases modestly to 1.88p
  • NAV £1.525 billion (observe that market cap is a discount to this).

This is not my sector but I do want to understand why JLG has seen a negative return.

Public-private partnerships – positive contribution to NAV return. This is 74% of the portfolio. Most contracts not determined by revenue and so are unaffected by Covid-19 impacts.

Renewable Energy – this is where the difficulties were seen. There were “declining power price forecasts and changes in macro-economic assumptions“. It must be harder to compete with hydrocarbons when they are being almost given away!

Balance sheet – headroom of £311 million as of the end of June.

My view – not my sector so I won’t express a view. But it’s interesting to note the impact on renewables. Not offering much protection from the wider commodity market, evidently!



Thanks for your patience as I get back into the swing of things here. I’m back tomorrow morning – see you then!





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