Cube Midcap Report (20 March 2020) – Forward buying juices Ocado’s result #OCDO #AUTO #PTEC

Cube Midcap Report (20 March 2020) – Forward buying juices Ocado’s result #OCDO #AUTO #PTEC

Good morning!

I wrote this on Thursday night, to catch up on some of the announcements I failed to cover during the day.

  • Ocado (OCDO)
  • Auto Trader (AUTO)
  • Playtech (PTEC)

Ocado (OCDO)

  • Share price: £14.35 (-3%)
  • Market cap: £10.2 billion

Trading statement

There was “no significant impact” from the Coronavirus on Ocado in Q1 (to 1st March).

The collapse in economic activity has only taken place in the last few weeks, however, i.e. since the beginning of March.

If you look at the chart published by Next which I copied into yesterday’s report, the serious drop only took place in the week beginning 8th March.

Q1 revenue growth for Ocado was 10.3%, in line with guidance.

This bit is of greater importance:

With customers’ concerns over the Coronavirus, since the quarter end, we are seeing higher value baskets with an increase in mix of ambient goods, as well as an increased demand for orders

I note that the Ocado share price has surged by around 40% over the past week. Home delivery of groceries is one of the few winners of this crisis.

You can see from the chart above that after Ocado posted its final results, its shares were vulnerable to the downside. I reiterated my own doubts about its value at the time.

But the coronavirus is changing behaviours. As I keep saying, trends are being accelerated. This goes for working from home, online shopping and home delivery.

Comments by the CEO of Ocado Retail (the joint venture with M&S)

According to Melanie Smith, growth so far in Q2 is double that of Q1. “We expect the impact of forward buying, however, to unwind at some point“.

That makes sense. People can’t eat much more every day than they normally do!

Ocado’s reaction to the coronavirus:

  • no new customer registrations
  • queuing system on website to handle the online traffic
  • closed the app “while we scale ability to serve the unprecedented use of our customer interfaces”

I’ve been having a go at IG Group (IGG) this week for having its systems fail. Maybe I’m too harsh on companies, but I expect their online systems to have the capacity to serve far more customers than they expect on a normal day. Is capacity really so expensive?

Other measures: plastic bags no longer taken back from customers for recycling, and delivery only to the doorstep.

Ocado had taken as many orders as it could deliver by Wednesday night, and temporarily stopped taking new orders.

Guidance is unchanged, since it expects that there was “a large element of forward buying”, and “there may be further disruptions ahead” (to its own systems, I think it means).

My view

There is no reason for me to change my overall view on Ocado. I still don’t know if it has the proprietary technology to earn good ROCE for investors in future years. If I was a shareholder in recent years, I would be impatience that profits still haven’t materialised.

The panic buying of Ocado shares therefore looks as illogical to me as the panic buying of bottled water during this episode.


Auto Trader (AUTO)

  • Share price: 427.5p (+16%)
  • Market cap: £3.9 billion

Current trading and impact of COVID-19

This 16% gain was impressive. Amazingly, all it served to do was recoup some of the losses of the prior week.

I am a fan of online marketplaces and aspire to own Auto Trader at some point in the future – I like its economic characteristics.

On Thursday, it went further and provided evidence of a benign corporate culture and philosophy:

  • voluntarily decided not to charge customers for advertising in April.
  • voluntarily allowed customers to defer March payments by 30 days.

Gestures like this, in any industry, can generate enormous goodwill and pay themselves back in spades in future years.

And I like the fact that Auto Trader is able to do this. Only strong companies can voluntarily relinquish revenues like this!


Our Board has chosen this approach not in response to immediate pressures on our business, but rather to continue to support an industry that we have supported for the past 40 years, and one which has supported us. We have chosen to do this because we are able to: our low cost base, the strength of our balance sheet and our access to credit

The company will suffer an operating loss in April of £6 – £7 million. It doesn’t sound like a big deal when there is over £100 million undrawn on its revolving credit facility, and operating very far within the covenant on this facility. Share buybacks are temporarily cancelled.

My view

This company is on my watchlist to buy and is justifiably more expensive than the market at 19x forecast earnings (before any downgrade arising from Thursday’s decision).


Playtech (PTEC)

  • Share price: 140.3p (-0.7%)
  • Market cap: £420 million

Coronavirus (COVID-19) update

In late February, I was still comparing the Coronavirus to the flu and saying that Playtech shares looked a reasonable bet.

A few short weeks later and the company’s share price has pretty much halved.

I’ve share in this pain, as my shares in 888 (888) have collapsed, too. The cancellation of so many sports events (especially the Premier League and Euro 2020) is a devastating blow to everyone connected with bookmaking.

Let’s hear what this gambling technology company has to say.

Core B2B Gambling

  • The Casino business is seeing limited impact so far. Poker and Bingo have seen increases in activity, since people are being forced to stay at home and pass the time! (my own words)
  • The Live Casino needs employees in the same location (can’t work from home). Riga and other locations are still operational (except Philippines), but there is a risk that they will be forced to close. Contingency plans are said to be in place (GN note: I can’t imagine how a serious blow to this business could be avoided if the facilities were closed).
  • B2B Sport is “significantly impacted by the postponement of most major sporting events and competitions globally“. Instead of generating 10% of Playtech’s adjusted EBITDA this year, it will make an adjusted EBITDA loss of €4 per month, before mitigating actions.

Asia – March revenue is the same as February’s.

Core B2C Gambling

Snaitech, the Italian subsidiary, is going to make an adjusted EBITDA loss of €3 million per month, before mitigating actions. It was expected to earn an adjusted EBITDA profit of €13 million per month, before the COVID-19 crisis.

The retail B2C sport business in Austra and Germany, HPYBET, is also loss-making while its shops are closed and sports events aren’t taking place.

Tradetech – this is a financial trading subsidiary which I thought Playtech was selling off. Thankfully, it hasn’t been sold off yet because business is booming. It has already exceeded its full-year 2020 expectationsafter less than three months! Adjusted EBITDA > €30 million so far. This further bolsters my confidence in the spread bet companies.

Balance sheet

Shareholder distributions are suspended. I have no problem with that, if there is any question mark at all around the company’s ability to fund itself. This saves €65 million in dividends and buybacks which were ongoing or had been announced, but won’t happen.

Financial situation:

Playtech has a 3x net debt / Adjusted EBITDA covenant and a 4x Adjusted EBITDA / interest cover covenant in its revolving credit facility, alongside a 2x Adjusted EBITDA / interest cover covenant in its bonds. As at 31 December 2019, Playtech had €672 million of gross cash on its balance sheet and €333 million when adjusted for client funds and progressive jackpots. In addition, Playtech has a further €250 million available under its revolving credit facility, with another €50 million cash expected in Q2 2020 from the previously agreed sale of surplus Snaitech land in Italy.

According to the final results, gross debt at the end of 2019 was €936 million and net debt was €602 million.

So it needs c. €200 million of adjusted EBITDA to satisfy the RCF’s first covenant.

Interest paid in 2019 was €30 million. That sort of interest expense, if 2020 was similar, would require adjusted EBITDA of €120 million for the RCF’s second covenant. The first covenant would override the second one, in this case, since it’s more strict.

So €200 million might be in the ballpark of the relevant number needed for adjusted EBITDA (though I note that net debt is forecast to increase to €750 million this year, according to financial software).

My view

Playtech’s adjusted EBITDA was €383 million in FY 2019. Could this halve in the current year, and trip the covenant?

I can’t rule it out. But my initial impression is that Poker, Bingo and Casino (including Live Casino) will continue to do ok. Those are three of the four elements of “Core B2B”. Asia B2B seems to be doing ok, too.

Most of the B2B elements therefore, excluding Sport, aren’t doing too badly.

B2C sounds much more worrying, with losses at a number of divisions and several of them effectively closed due to the lack of sport.

The bright spot, funnily enough, is the unwanted TradeTech subsidiary, which is doing great.

Without having studied Playtech in any greater detail, I would be a bit surprised if Playtech tripped its covenants this year. On an initial glance, it looks to me as if  the company has some wiggle room and might be able to take mitigating actions, to avoid an awkward situation.

I find it difficult to analyse all of its moving parts and am more comfortable with B2C companies in this space, so I’m not in a huge rush to buy shares in it. But it does have an excellent track record of rewarding its shareholders, for what that’s worth. By my calculations, it has paid out more per share in dividends since late 2016 than its current share price!



That’s it for this report. I hope you don’t mind it being a review of Thursday’s news, rather than a look at Friday’s updates. I suppose you can always vote with your thumbs up or thumbs down!

Have a good weekend and try to stay sane in these extraordinary circumstances.

Best wishes,



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