Cube Midcap Report (20 July 2020) – Burberry asks for patience

Cube Midcap Report (20 July 2020) – Burberry asks for patience

Good morning!

Thank you for your kind reactions to my announcement on Saturday.

The FTSE is flat today, approaching 6300 and the Dow is off 0.5% at 26,500 – down around 9% compared to pre-Covid levels. I note the rumours that Berkshire Hathaway (in which I have a long position) has been buying back its own stock during the crisis.

This morning, I don’t see too many interesting announcements, so I’m going to focus on all of the most interesting stories that I missed last week.

I’m also going to chat to you live at 12 noon:

For Gold Members, we have today published a nice article by Joel, which includes a personal anecdote about a company which hasn’t been communicating with him properly.

This midcap report is provisionally looking at:

  • Burberry (in which I have a long position)
  • AO World
  • Experian
  • GVC
  • Royal Bank of Scotland
  • Ocado
  • Halma

Finished at 17.50.


Market cap £5.8 billion
Share price £14.435p (-1.3%)
RNS 1st Quarter Trading Update
Writer disclosure Long BRBY.

This one is still down around 33% year-to-date, which has impacted my performance as it’s one of my top holdings (more than 10% of the portfolio).

Despite an initially strong recovery from March to June, investors now seem to be pricing in a longer period for luxury demand to recover. Economic weakness and reduced tourism are big factors, and are obviously related – Burberry benefits in a huge way from the purchases of tourists in a place like London.

This Q1 update was greeted negatively by the market, as Burberry confirmed that patience would be needed.

Some key points:

  • Monthly improvements in sales following Covid, improving to -20% (year-on-year) in June.
  • Mainland China and Korea growing faster than pre-Covid, partly because buyers are shopping at home instead of abroad.
  • Autumn collection received well.

You can watch the extravagant Autumn-Winter 2020 show at this link. Marketing campaigns and product launches appear to be going well, in the circumstances.

Still, it is no surprise that Q1 on the whole was a disaster. These figures includes online sales:

EMEIA (Europe, Middle East, India, Africa) was down 75% and the Americas were down 70%, while Asia-Pac was only down 10%. The Asian economies are apparently much less impacted by Covid-related lockdowns than the rest of the world, and of course they are the home of so many Burberry customers.

Cost savings – Burberry’s huge margins have enabled it to spend rather excessively – it managed to rack up £1.4 billion in annual operating expenses, up until FY 2019.

Opex has been under the microscope since then, and it is now targeting a further £55 million in annualised savings (on top of £140 million which had already been announced).

Cost cuts don’t excite investors in the same way that revenue growth does, but maybe they should? After all, a dollar saved is a dollar earned!


This section is fairly grim. Burberry isn’t providing full-year guidance, only Q2 guidance.

We expect our second quarter (to end September 2020) to continue to be materially impacted by the pandemic. In retail, tourist flows are likely to remain negligible, and store operations are continuing to face significant headwinds, with some remaining closed and operating with reduced trading hours.

Based on our comp retail sales performance in June 2020 (-20%), we expect Q2 2021 (ended September 2020) to decline by 15% to 20%. In wholesale, we are collaborating with our partners to protect the brand and as a result anticipate H1 2021 sales declining around 40% to 50%.

Based on this trading assumption, we would expect H1 2021 gross margin to decline by around 200bps to 300bps year-on-year and operating expenses in H1 2021 to reduce by a mid-teens percentage compared to last year.

My view

This was a stock that I previously sold out of, and then bought back in at cheaper levels.

When I entered it most recently (which was 2016), I decided that this time, I would simply hold it. It has been tempting to sell out, when it reaches levels of (say) £22+. But I’ve held on, expecting that it will eventually be acquired by a global luxury group – LVMH or Kering. And I expect them to pay a hefty price for it, whenever that day comes.

And until they come knocking on Burberry’s door, I have been happy to own a unique brand earnings huge margins, excellent ROCE and good cash flow, even if growth is rather limited.

Then Covid came along and governments shut down the global economy.

My planned strategy is to continue holding. The company is not distressed – it had net cash of nearly £600 million as of March 2020, excluding lease liabilities. Its core assets – the brand, the reputation and the luxury positioning – are intact, and the current management team are doing a good job of stewardship.

So I’m holding this for a post-Covid recovery.


AO World

Market cap £767 million
Share price 160.5p (+0.7%)
RNS Final Results
Writer disclosure No position.

This is one that I’ve been sceptical of for years. No prizes for that – I think lots of other people are, too.

It has been one of the winners of the lockdowns, however. A clue in the name – “Appliances Online”! The share price has more than doubled over the last few months.

Let’s quickly review these results.

My apologies to John Roberts, who founded AO and has poured his heart and soul into it, to make it the large business that it is today. But his commentary always leaves me a bit cold:

“At the start of the financial year, we went back to basics, bringing clarity and leadership to the fundamentals of our business.  AO’s model and vertically integrated ecosystem is a structural advantage when properly leveraged.

A vertically integrated ecosystem that is a structural advantage when properly leveraged… is this a helpful description or is it word salad? I would say the latter.

And perhaps I’m way too cynical, but he also talks about operating as “One AO“. Maybe it’s just me, but I can’t embrace this sort of management-speak. There must be a better way of explaining the strategy?

Financial highlights for FY March 2020:

  • UK revenue +8.2% (like-for-like),  or +20.3% including the acquired mobile phones business.
  • Europe revenue down 4.6% as the Dutch website was shut down.

Adjusted EBITDA for the group was up strongly to £19.6 million. There’s still a statutory operating loss. I think that as a bear on this company for years, I can feel vindicated by the continued failure to generate a meaningful operating profit. AO listed six years ago – it has spent an awfully long time in “startup” mode.

I do note that net income and EPS were positive this year, thanks to some FX gains.

Maybe this will be the year that it finally goes into the black at an operating level? Analyst forecasts suggest that it will.

It insists that it is cash generative on a monthly basis, as of March 2020, if you are happy to use adjusted EBITDA as your starting point. For the record, I am not convinced by this – I want free cash flow, not adjusted EBITDA.

Net debt has increased to £23 million, due to investment in infrastructure – EBITDA doesn’t capture this cost.

Covid-19/trading update

Shutting down bricks and mortar stores resulted in a massive shift in AO’s direction:

…the electricals market migrated to nearly 100% online overnight.

We therefore experienced strong demand and made significant market share gains across many of our key categories from the start of lockdown on 23 March 2020, the impact of which saw sales above our expectations and an improvement to our working capital.

There were also some challenges – in the supply of white goods, in recycling goods while council recycling centres were closed, and in distribution/installation (made more complicated by social distancing). Things are gradually returning to normal.


AO thinks there has been a “seismic impact” on shopping and that many have been permanently converted to going online instead. AO wants to convert them to “the AO Way” (yuk!).

My view

I don’t doubt for one minute that AO World is popular with customers. It is justifiably proud of how it treats them.

Indeed, it sees its very purpose as treating its customers well, and it generally does:

The AO cultural DNA of treating customers like our grans and making mums proud is deeply ingrained throughout the business and is demonstrated by our 4.7 Star Trustpilot rating and consistently high NPS scores during the period.

My core scepticism all along has been whether it is possible to provide the buyers of white goods with excellent customer service, to not charge them more than other stores, and also to make a juicy economic profit. I just don’t see how it can be done, without some very clever innovation.

The financial track record here over the past 20 years says that it can’t be done. Maybe it will happen some day.



Market cap £767 million
Share price 160.5p (+0.7%)
RNS Final Results
Writer disclosure No position.

This is a super-high-quality company which I regret that I have never personally owned. I’ve been priced out of it for some time – P/E is currently at 37x.

Q2 (April to June) was characteristically resilient – revenue down 1% at constant FX despite the global economic disaster.

It was a bit tougher at actual exchange rates – down 5%, due to the weak Brazilian Real.

The measure I would focus on is organic growth at constant FX, which was down 2%.

EXPN breaks down its geographic segments differently to Burberry. The main takeaway is stability in North America/LatAm and retrenchment everywhere else:

Performance can be broken down in much more detail than this.

Looking at its various divisions, the “Consumer Information”/”Business Information” services performed the best. These are the traditional credit bureaux at the heart of the company.

Full-year guidance – none, though I think the range of possible outcomes for Experian is unlikely to be very wide.

Near-term guidance – like Burberry, Experian decides to focus only on Q2 for its guidance:

We currently expect that organic revenue for Q2 FY21 will be in the range of flat to (5)%, with no change in our assumption of costs held broadly flat, as we continue to finely balance near-term mitigating actions with investments in organisational capacity, technology and new propositions to position ourselves for future growth.

There should be another 2% of revenue growth from acquisitions.

Against that, there’s an FX headwind of 4%.

My view

I would like to study this one in more detail, but I feel priced out of it right now and so it is just going to have to sit on the watchlist. An amazingly good company, I think.



Market cap £5.1 billion
Share price 868.7p (-1%)
RNS H1 Post Close Trading Update
Writer disclosure No position in GVC. Long 888.

I continue to observe the gaming sector with interest – not least because of my position in 888, which has helped my portfolio performance.

GVC owns a big chunk of the most important gaming technology and powers many of the big names.

H1 bullet points:

  • net gaming revenue down 10% at constant FX
  • within this, online net gaming revenue was up 21% at constant FX, with Q2 stronger than Q1.
  • Retail revenues down over 50% in H1, after reductions of nearly 90% in Q2.

Of course there is a huge disparity between online and offline gamling right now – betting shops and casinos have been closed!

Financial performance – cash breakeven was achieved by GVC during lockdown. H1 EBITDA is £340 million – £350 million. Note the huge difference

Tax residence – moves onshore from the Isle of Man.

CEO retires and is replaced by COO after “a long-term succession process”.

My view

I’m more comfortable investing the retail-facing brands who use GVC technology, rather than GVC itself, but it’s a useful stock to keep an eye on. The stock price has recovered remarkably well since the depths of depression in March – well done to anyone who has been holding it thoughout.


Royal Bank of Scotland

Market cap £14.5 billion
Share price 119.45p (-1%)
RNS Intention to Change Name on 22 July 2020
Writer disclosure No position.

This has been in the works for a while. It is now confirmed that Royal Bank of Scotland becomes “Natwest Group plc” on Wednesday.

The UK government still owns 62% of this:

Unfortunately, the RBS name has struggled to restore its reputation since 2008. Changing to “Natwest” (the name most customers interact with) is seen as a way of breaking its reputational link with the 2008 collapse and bailout.

Getting the government off the shareholder register would be an even better way, surely?



Market cap £15.7 billion
Share price £14.435p (-1.9%)
RNS Replacement – Half Year Report
Writer disclosure No position.

This is another one where I’ve been sceptical. Thankfully, I’ve not been shorting it.

It has crucified short-sellers, who have now mostly given up. Short interest from

This half-year report showed 27% retail revenue growth, and fees to international partners of £74 million, up 58%.

But the group EBITDA was only £20 million, down compared to the prior year, and there was a £40.6 million statutory pre-tax loss. This was chalked up to “investment” in the international business.

Like AO World, it had an extraordinary, perhaps once-in-a-lifetime tailwind from the Covid-19 crisis.

CEO Tim Steiner:

We are confident that accelerated growth in the online channel will continue, leading to a permanent redrawing of the landscape of the grocery industry worldwide. 

UK online grocery shopping has doubled in the space of a few months, while in the US it multipled six times in less than a year.

Given that backdrop, is it really all that impressive for UK revenues to be up just 27%?

Outlook – “no material change to our guidance”.

My view

I don’t invest in logistics – this is not my sector. Things always seem to go wrong, and I can’t figure out which logistics companies have a competitive advantage.

Ocado is one logistics company which the market has fallen in love with. I just don’t understand. Book value is £1.1 billion, and total assets are £3 billion – could another very similar company not be created if those sorts of sums were poured into it? Why pay nearly £16 billion for it?

I feel safe on the sidelines but I’d certainly consider shorting Ocado some day, if the balance sheet was creaky. For now, it’s a widowmaker to the short-selling community.



Market cap £8.6 billion
Share price £22.70p (+0.5%)
RNS Final Results
Writer disclosure No position.

The history at this one suggests its a genuine compounder, and it’s dangerous not to own it. Sadly, I’ve never owned it.

FY March 2020 was another success. Revenue climbed 11% and adjusted PBT climbed 9%.

The organic revenue growth, at constant FX, was 5% – not bad. Organic profits growth was modest, and not helped by Covid.

ROIC declined a little, but it’s still at an acceptable level (15.3%). Debt is manageable (net debt/EBITDA only 1.1x) and margins are good, too (19.9% “return on sales”). With 2020 metrics on the left-hand-side:

Halma produced “record revenue and profit for the 17th consecutive year“. A company that knows what it’s doing, then!

My view

I’m a big fan, but I’m priced out of this. It’s trading at a 42x PER and nearly 8x book value. I am looking for (hopefully) much bigger returns than this looks like it can generate, at the current valuation.


Calling it a day there – thanks for dropping by.

I really appreciated the more than 20 thumbs up on the previous midcap report, which was a record for this site so far. Please do keep them coming!!

Best regards




Wordpress (4)
  • comment-avatar

    The AO boss is deluded , and certainly does not understand what vertical integration means . White Goods ……dull dull dull .

  • comment-avatar

    Agreed. If they buy, sell and deliver fridges, there’s not much vertical integration.

    It’s not like they supply their own steel to their own fridge plant. As for Halma, I guess the trick is to spot the next Halma or Spirax Sarco. I spot a few small engineering businesses priced like they are a Halma, whilst not having made any money yet.

  • comment-avatar

    What?! All this and a webcast. Wow! I guess that’s what’s meant by “full time”.

  • comment-avatar

    Hi Graham

    If current sentiment between China and UK deteriorates, Burberry’s strong reliance on the China market puts itself in a very vulnerable position for possible social media revenge attacks for UK’s treatment of Huawei. UK’s disagreement with the national security law in Hong Kong has already lead to increased intensity with China.

    Burberry tartan pattern is distinctly British and is its hallmark branding. This also makes it easily recognisable as an easy target of attack should people in China seek for tic-for-tac.

    Although not a like for like case, a few years back Dolce and Gabbana made a big mistake and their sales have not recovered in China.

    Something to ponder….

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