Cube Midcap Report (20 May 2020) – Experian is close to perfect

Cube Midcap Report (20 May 2020) – Experian is close to perfect

Good morning!

The FTSE is stable around 6000, and I’m still long, looking for a recovery to 6400 (breakeven price for the trade I placed earlier this year).

Lots of interesting announcements to look at today, let’s see how many I can cover:

  • Experian (EXPN)
  • Rolls-Royce (RR)
  • Playtech (PTEC)
  • Marks & Spencer (MKS)
  • Frontier Developments (FDEV)

Finished at 1.30pm.


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Market cap £24.3 billion
RNS Full-year financial report
Writer disclosure No position.

This is a very high quality company which I invested in previously on behalf of a fund.

Its share price is up year-to-date, reflecting its robustness and resilience in the face of poor economic conditions.

As you will no doubt be aware, it’s a critical part of the financial system and makes credit decisions possible for millions of individuals.

As an investment, it’s attractive because of the limited competition – it’s hard to compete against the rating agency or agencies who own the most data, so new entrants into the field are limited. The primary alternatives to Experian are Equifax and TransUnion.

Today’s report

Lots of nice numbers in this report:

  • organic revenue growth at top end of guidance.
  • Revenue +9% at constant FX.
  • vast majority of employees working home, business functioning smoothly
  • operating profit +5% at constant FX (+9% on an adjusted basis)
  • EPS +6% at constant FX (minus 3% at actual FX)

North America/LatAm grew quickly, while UK/Ireland and EAMA/Asia shrank by a few percentage points. A transformation programme is launched to improve performance in the UK/Ireland.

Adjusted EBIT margin is 26.8%, flat at constant FX. I forgot to mention that Experian earns very attractive margins and returns on capital – important signs of a quality business.

Strategic highlights – building up new products for businesses, e.g. Experian One and Ascend for fast lending decisions, and the anti-fraud service Crosscore.

$700 million was spent on acquisitions, including in South Africa, Malaysia and Peru. The decision has also been made to acquire a majority stake in a German credit bureau.

Dividend – unchanged.

Share buybacks – suspended for now.

Covid-19 – besides all the measures you would expect from a large and responsible organisation, Experian also has an important role to play in fraud protection and financial decision-making during a crisis. Fraudsters have a tendency to exploit times like this, and large numbers of people will want to access credit to get through this period of high unemployment.

I wouldn’t go so far as to say that Experian’s business will grow as a result of the crisis, but there is clearly a strong need for its services in a time of financial turmoil.

Net debt to adjusted EBITDA is 2.2x, within the 2.0 – 2.5x target range. Experian has good investment-grade credit ratings:

The next bond maturity is in October 2021 for £400 million. It should not be too challenging to deal with this, given annual adjusted EBIT of $1.4 billion (£1.15 billion).


No guidance this year, as the company doesn’t know how long lockdown will last.

The company confirms that reduced economic activity and declining exchange rates will hurt performance in the short-term. Q1 is April to May:

Q1 organic revenue will decline in a range of (5)% to (10)%. We have also seen significant volatility in foreign exchange rates during the current crisis and in particular a weakening of the Brazilian real. Based on recent average exchange rates persisting, the headwind to Q1 FY21 revenue and Benchmark EBIT would be around 5%.

My view

It’s hard for me to find any faults in this company. That’s why I invested in it before, on behalf of others. I’d like to own shares in it myself some day, but I’m currently priced out. P/E multiple in excess of 30x.



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Market cap £5.0 billion
RNS Rolls-Royce proposes major reorganisation
Writer disclosure No position.

I looked at Rolls two weeks ago, in this midcap report.

In that AGM statement, the CEO said:

“…we must also take the difficult but necessary decisions to ensure the Group emerges from this period with the appropriate cost base for what will be a smaller commercial aerospace market which may take several years to recover

4,000 employees had been furloughed.

Today we learn more about the “difficult but necessary” decisions being taken. They remain certain that a recovery will take years:

It is, however, increasingly clear that activity in the commercial aerospace market will take several years to return to the levels seen just a few months ago. We must now address these medium-term structural changes, as demand from customers reduces significantly for our civil aerospace engines and aftermarket services.

9,000 jobs are cut from the 52,000 workforce.

Capex and a wide range of other costs will be cut, to save £1.3 billion annualised, of which the headcount saving will represent more than half. But there will be one-off costs of £800 million to achieve this – so it wouldn’t be worth doing, if a recovery was expected in the short-term.

Facilities and central support services will have to be reviewed, now that Rolls is a smaller business.

Note that Civil Aerospace is mostly responsible for the pain. There has been no Covid-induced change to the outlook for Defence.

My view – if I invested in this sector, I would be reviewing whether there was recovery potential from these levels.

Excluding leases, net cash at December 2019 was £1.4 billion.

In the April trading update, total liquidity was given as £6.7 billion, and another £400 million has been secured since then. Assuming there are no covenant problems, this is a huge amount of cash for the company to work with.

2020 will be a disaster, that much is granted. On a three-year or five-year view, maybe it’s interesting at this much lower valuation?



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Market cap £751 million (€842 million)
RNS Trading and COVID-19 update
Writer disclosure No position in PTEC. Long 888.

This is interesting not just for Playtech shareholders but for anyone invested in the gambling industry – including yours truly.

The good news is that Q1 (January to March) was “extremely strong”- adjusted EBITDA of €117 million. For context, H1 last year saw adjusted EBITDA of 191 million. One of the main contributors to this success was its financial trading division (more on this below).

Things deteriorated in April: only €23 million in adj. EBITDA.

Cash available is an enormous €600 million – it continues to amaze me how much cash is available to large listed companies presently, often around the same as their market cap!

April trading

There is a switch to online casinos from physical sites, a theme I’ve been banging on about for a while:

…the retail elements of B2B have been severely impacted by retail closures in various countries. Playtech’s online Casino (including Live), Bingo and Poker businesses have seen significant increases in activity. Playtech’s largest Live Casino facility, which is in Riga, has remained open throughout the pandemic.

B2B Sport is loss-making at present (loss of €3 million adj. EBITDA per month) as UK betting shops are closed and even where betting shops have reopened (Greece), there are few competitions to wager on.

I note that B2B poker has seen “a significant increase in activity”, adding new operators . A fine achievement by Playtech and may also reflect some underlying growth in poker as people look for alternatives to sport.

The financial trading division TradeTech was previously a source of financial pain, but is trading superbly in the current year (we already know that CFD/spread bet providers are having a great year). It’s performance to mid-March was already sufficient to exceed its full-year expectations, and it generated adj. EBITDA of €45 million in the first four months of the year. TradeTech has now released cash back to its parent PLC.

My view

There’s a lot to like here.

I would appreciate an update on net cash but at December 2019 this was an impressive €333 million (excluding client funds, security deposits and jackpot prizes).

The company has also saved €65 million by not paying dividends or buying back shares since March.

The balance sheet appears secure and the shares look to me as if they might be too cheap at current levels, even if the outlook for the current year is anyone’s guess.


Marks & Spencer

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Market cap £1,820 million
RNS Final Results
Writer disclosure No position.

As expected, Marks had a tough year in FY March 2020.

Adjusted PBT is down 20% to £400 million and free cash flow reduces to just £225 million (versus £580 million in FY March 2019).

Adjusting items are again huge, running into the hundreds of millions of pounds.

Net debt figures are roughly unchanged: £1.5 billion exc. leases, or £4 billion including leases. Most existing debt is in the form of medium-term notes.

The dividend is slashed.

Divisional performance:

  • Food was positive. LfL revenue +1.9%, operating profit +11%, increased market share.
  • On track for launch of joint venture with Ocado.
  • Clothing was very poor. LfL revenue minus 6%, operating profit minus 37%. There was no online growth and product sourcing problems hurt margins. Some recovery was seen towards the end of the year until the Covid-19 lockdown.

One important positive piece of news is that the six weeks of Covid-trading have been better than planned – cash flow is £150 million better than anticipated. Related to the substitution of restaurant meals for M&S Food?

Covid-19 scenario planning

Marks is pencilling in a 70% revenue decline for Clothing & Home until July, and a gradual return by February.

It’s pencilling in a 20% decline in Food until July, staying level thereafter. Too pessimistic, maybe?

The good news is that it thinks the balance sheet survives:

This scenario has been stress tested and even in the event of a longer and deeper impact on trading, the group maintains sufficient liquidity.

Expected drawings against facilities are up to £350 million by the end of 2020/2021. The £1.1 billion RCF will have its covenants removed or relaxed through September 2021.

My view

Survival appears very likely, in the medium-term. As a lender, I wouldn’t be too worried.

For the equity, it’s at a level where speculating on a recovery will no doubt be tempting to some.

FY March 2020 saw adj. operating profit of £200m+ in both Food and Clothing/Home, and another £100m+ in “International”.

These adjusted earnings are superficially cheap against a £1.8 billion market cap.

But the adjusting items, as already mentioned, are very significant. When will Marks again produce a “clean” set of results, with real, non-adjusted earnings? Not this year anyway.

Looking at the various segments:

  • The trends in Clothing/Home are very poor and I would have no conviction in recovery or even a stable performance from this division.
  • Food is arguably the best division and has a promising development in Ocado Retail.
  • International makes a contribution (£110m adj. operating profit in FY 2020) but this also shows signs of decline in some markets. Will benefit from moving to a franchise/JV model.

Marks has an enterprise value of £3.3 billion, which is set to increase as a result of Covid-19. Is this such a cheap price to pay for future earnings?

When dealing with a legacy business that has structural headwinds, I want a dirt-cheap multiple against clean forward earnings. It’s not clear to me that Marks currently offers this.


Frontier Developments

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Market cap £723 million
RNS Trading Update
Writer disclosure No position.

Well done to FDEV shareholders, enjoying a 12% share price gain today.

I have no right to comment on this company, as I’ve been saying for some time that I don’t understand its valuation. The willingness of the market to pay up in advance for growth has baffled me – but the market has been right to bet on good news.

And the good news keeps on coming. People locked indoors have spent more time playing videogames:

In recent months demand for Frontier’s immersive and creative games has increased as a result of Covid-19 lockdowns around the world.  Demand during May has continued to be high, which is providing a strong finish to the financial year.  The Board now expects operating profit for FY20, as reported under IFRS, to be materially ahead of the top of the previous guidance range of £11-13 million, as a result of revenue being above the top of the previous guidance range of £65-73 million.

Sales of Planet Zoo for PC have crossed the 1 million mark – well done.

If net income hits £26 million in FY May 2022, as forecast, then the company’s valuation will start to look more normal. But I have to be honest – I don’t understand why the market is confident in the success of future game releases.



That’s all for this report. Cheers!






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