Cube Midcap Report (21 May 2020) – Whitbread asks shareholders for £1bn

Cube Midcap Report (21 May 2020) – Whitbread asks shareholders for £1bn

Good morning, it’s Roland here with today’s Midcap report.

There’s a slew of midcap news for me to choose from today – I won’t be able to cover everything, so requests are welcome for companies over £500m.

Your feedback (and likes) are invaluable to us in helping to shape our coverage. Any comments (good or bad) are gratefully received!

Here are the names on my shortlist at the moment:

  • Whitbread (WTB) – final results and rights issue
  • Dart Group (DTG) – placing
  • Aviva (AV) – trading update
  • AJ Bell (AJB) – interim results

This report is now finished (12.30).


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Market cap £3.2bn
RNS Preliminary results & rights issue
Writer disclosure No position

In business — as in life — it’s often better to jump before you’re pushed. Premier Inn owner Whitbread appears to have taken this view and decided to raise £1bn in fresh equity.

£1bn rights issue

The firm plans to issue one new share for every two existing shares, at a price of 1,500p. This represents a chunky 37.4% discount to the theoretical ex-rights price of 2,395p.

The FTSE 100 firm says it hopes to use the cash to “take advantage of its long-term structural growth opportunities and win market share in both the United Kingdom and Germany”. Whitbread wants to replicate its UK success in Germany. Management believe they have “line of sight” to 60,000 rooms in Germany through a mix of organic and acquisitive growth.

Of course, the rights issue cash will also provide an extra level of resilience if the pandemic lockdown continues for longer than expected.

I’m not surprised by the share price fall today, but I think the board is doing the right thing. I’d support this rights issue if I was a shareholder.

Strong cash position

Whitbread reminds shareholders that it has “high fixed and semi-variable costs” and warns that its balance sheet “will be impacted by material cash outflows” while its hotels and restaurants remain closed.

These cash outflows are expected to total £600m in H1 FY21. Happily, the company provides a detailed breakdown of these:

  • £80m per month of operational cash outflows
  • £100m working capital cash outflows from refunding customer deposits – on a personal note, I’ve been refunded for a June booking in Scotland and this happened automatically. A nice contrast to airlines.
  • £130m of capital payments, mostly on committed projects.
  • c.27k employees have been furloughed, saving £70m-£85m per month

Fortunately, the group’s balance sheet was in good shape going into this crisis. On 15 May, the group had £300m cash on hand and access to a £950m RCF, with only £50m drawn down.

Whitbread has also been approved for the government CCFF facility with an issuer limit of £600m.

Covenants on existing debt have been waived subject to various conditions, including the non-payment of dividends.

My sums suggest that Whitbread has up to £1.8bn of available liquidity, excluding the rights issue proceeds.

I think the group would have been able to cover the expected H1 outflow of £600m  and further outflows in H2 without issuing new shares. However, this approach would have left the group significantly indebted and with little flexibility to invest in its operations.


In the current situation, details of Whitbread’s performance during the year to 28 February seem largely irrelevant. But for what it’s worth, the firm’s adjusted figures show minimal growth and pressure on margins:

WTB FY20 highlights

Despite this, the UK business generated a fairly decent return on capital employed of 11.2% (FY19: 13.3%).

My view

I am a fan of Premier Inn as a customer and continue to have a favourable impression of Whitbread as a potential investment.

I respect the board’s caution and desire to maintain a strong balance sheet, which should stand shareholders in good stead in the coming years.

I think the shares could provide satisfactory returns from current levels for long-term investors.

Dart Group

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Market cap £994m
RNS Proposed placing & results of placing
Writer disclosure No position

The cash taps appear to be wide open for decent businesses at the moment. Savvy management are taking advantage of this to reduce the risk of emerging from the pandemic with overleveraged balance sheets.

The latest company to join the party is Jet2 owner Dart Group, which has raised £172m in an oversubscribed placing at 576.5p per share (last night’s closing price).

This placing equates to 20% of the group’s existing share capital — the maximum permitted under the pre-emption rules.

The shares have popped today and smaller shareholders may be sore at missing out. I think it’s a pity more companies aren’t following the example of Compass Group and using PrimaryBid to make placings available to private investors.

A tough place to be

Founder and executive chairman Philip Meeson has a 36% shareholding in this business, so perhaps it’s no surprise that Dart has been a superior investment to most other airline and travel companies in recent years.

Dart has always had a strong balance sheet, but the pressure on this sector is intense. As a pre-condition for the waiver of September’s covenant tests, its lenders required “a minimum gross equity raise of £100m”.

Last night, the group released detailed of modelling based on three possible scenarios for restarting flying. These assume the drawdown of £300m in government CCFF funding and a £170m equity raise:

DTG cash scenarios

Based on these numbers, I think it’s fair to say that Dart’s placing is a necessary step to protect the future of the business.

We could question the dates in Dart’s “restart flying scenarios”, as these appear pessimistic at first glance. After all, easyJet and Ryanair plan to start flying in June and July respectively. However, these are only partial restarts of these airlines’ normal schedules. And they may be aimed more at stimulating the market and protecting share than actually generating a profit.

Dart’s service is tied to its Jet2 package holiday business. I’d guess that restarting flights makes little sense until popular destinations are open and accessible to UK travellers.

My view

I continue to view Dart as a good business and potentially an attractive investment. But the shares look fairly valued to me at current levels. In my view, the time to buy was in March, when the stock could be had for half the current price.


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Market cap £9.4bn
RNS Operating update
Writer disclosure Long

There’s been a lot of uncertainty so far about the likely impact of the coronavirus pandemic on big insurers. Graham has covered Hiscox extensively recently. Today we have an update from FTSE 100 stalwart Aviva, with some interesting numbers.

Trading update

Aviva says the year has started strongly, with a surge in life insurance sales during the first quarter. “Life new business sales” rose by 28% to £12.3bn, driven by strong bulk annuity sales.

In general insurance (e.g. home and motor), net written premium rose by 3% to £2.4bn during Q1.

Naturally, most staff are working at home, including customer service.

In Q2, sales are said to be lower, which Aviva blames on the global lockdown. There are now signs of improvement, but full-year sales volumes are now likely to be below expectations.


Aviva says that the COVID-19 pandemic is expected to result in an additional £160m of general insurance claims, net of reinsurance. This comprises £200m of net claims from business interruption policies, presumably offset by lower claims in business lines such as motor insurance.

This level of claims looks very manageable to me.

However, like Hiscox, Aviva could face additional payouts on business interruption policies. The firm is facing possible legal claims from policyholders who have been refused payouts — more info here (FT paywall). Like Hiscox, the dispute seems to revolve around the definition of a notifiable disease.

Capital position/Solvency

Weaker conditions in debt markets and the stock market crash have hit the value of the insurer’s asset portfolio. Aviva’s Solvency II coverage ratio has fallen from 206% at the end of 2019, to 182% at the end of March 2020.

I think that coverage of 182% should still be very comfortable, but in my view this fall does add credibility to regulatory pressure for dividends to be paused. (Aviva’s dividend is suspended).

Note: Coverage is a measure of the amount of surplus capital held by an insurer. Aviva says it has a surplus of £12.6bn, with assets under management of £510bn.

Aviva says this equates to “estimated own funds per share” of 372p at the end of March, compared to 423p at the end of 2019. At a last-seen price of 240p, Aviva shares are trading well below this measure of book value.

Investment assumptions

Helpfully, the company has shared some of the assumptions it’s making about market conditions:

AV market assumptions May 2020

There are some useful updates on the group’s bond and mortgage portfolios, too:

  • Less than 5% of corporate bond portfolio is in sectors “most directly impacted by COVID-19”
  • No corporate bond defaults so far in 2020, less than £10m bonds downgraded below investment grade (i.e. to junk status)
  • Commercial mortgage performance holding up well, low LTV and strong interest cover. Pressure on borrowers’ covenants is expected, but no meaningful impact on debt service to date.

The overall picture looks promising and is what I’d hope for from a blue chip insurer. But I think it’s still too soon to draw reliable conclusions about the level of bad debt that could result from this crisis.

My view

As a long-term shareholder, I’m disappointed at the (temporary) loss of my dividends. But I’m pretty comfortable with this situation and do not see any cause for alarm.

I intend to continue to hold Aviva shares for income and believe the stock offers good value at current levels.

AJ Bell

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Market cap £1.8bn
RNS Interim results
Writer disclosure No position

It’s no secret that brokers and other financial trading businesses are having a good crisis. Volatile stock markets always result in high levels of trading, boosting commission income and attracting fresh cash.

Today’s results from broker AJ Bell illustrate this:

AJB 1H20 highlights

Note how revenue rose for every £1 of assets under administration (AUA). When you have £48bn of AUA, a 1.2 basis point (0.012%) increase makes a difference!

Net inflows of £2.1bn helped to offset the impact of the market crash, which caused AUA to fall by 8% to £48bn during the six months to 31 March.

Outlook: Like most businesses, AJ Bell doesn’t want to issue guidance at the moment. Founder Andy Bell believes the outlook remains positive and in general, I’d agree with this view. However, I note that according to Stockopedia, brokers are forecasting a slight reduction in earnings for the 2020/21 financial year.

My view

Graham and I have both commented favourably on this business before, but felt unable to pay the asking price.

My position hasn’t changed. I see AJ Bell as an excellent and highly profitable business, that’s a worthy adversary to market leader Hargreaves Lansdown.

But with the shares trading at 55x forecast earnings, the rating is far too rich for me to consider investing.

That’s all I’ve got time for today, thanks for reading.

Cheers, Roland



Wordpress (1)
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    Further re. #AJB – someone else appears to think the stock might be fully valued too. Invesco has just placed 31m shares @400p, collecting £123.9m. That’s equivalent to 7.6% of AJ Bell’s share capital and reduces Invesco’s holding (on behalf of “discretionary managed clients”) to just 0.3%.

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