Cube Midcap Report (23 June 2020) – Rightmove plans a route back to normal

Cube Midcap Report (23 June 2020) – Rightmove plans a route back to normal

Good morning!

Announcement – the live stream is back tomorrow. If you have suggestions for what you want me to cover, let me know in the comments – Gold Members have priority.

Today I’ve looked at:

  • Rightmove (RMV)
  • Cranswick (CWK)

Rightmove

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Market cap £4.9 billion
RNS Pre-Close Trading Statement and Covid-19 Update
Writer disclosure Long RMV.

This has been a successful investment so far, at least in terms of share price gains – my entry was 445p in November 2018. Despite Covid, I’m still up 25%+.

Indeed, it was all the way up at 700p before the crisis.

Over the last few months, I’ve been comparing Rightmove’s Covid-19 response to Auto Trader’s. Auto Trader gave away its service for free, in April and May, before returning to somewhat normal with only a 25% discount in June.

Rightmove gave a 75% discount from April to July, and is now trying to work its way back to normality. In my opinion, it gave (and continues to give) reasonable notice to customers about its planned pricing strategy.

The discount for England will be 60% in August and then 40% in September.

Things are re-opening a bit more slowly in Scotland and Wales, and their discount schedule looks to be a month behind.

Rightmove acknowledges that estate agents may have cash flow issues – housing transactions take 3 months to complete, and estate agents need to rebuild their pipeline of sales instructions.

To assist “social distancing”, the company is facilitating online viewing and providing a range of webinars and new house-hunting tips and tools.

Impact

The revenue impact of the August and September discounts will be £17-20 million, on top of the £65 – £70 million impact from April to july.

Let’s assume the worst-case scenario and we get a revenue hit of £90 million from April to September.

And then we need to think about October to December – will the discount then be 20%? How long will it take for pricing to return to the levels of 2019? Will Scotland and Wales catch up?

Prior to the pandemic, EBIT was forecast to be c. £230 million this year. Could the final outcome be only around half of this number? While the consensus forecasts in financial software packages are more bullish on this front, I’m going to conservatively assume that such an outcome is possible. It depends on the prices charged in Q4.

Housing market

This sounds very bullish. Is it pent-up demand or sustainably high activity?

…home hunter demand following the reopening of the housing market has been strong. We have seen all ten of our busiest days ever on the platform since 13 May. We have also seen the ten days with the most leads sent over the same period. 

in the last seven days the number of properties added to Rightmove in England is over 10% higher than the same period last year

It sounds like Rightmove is at full health. The issue is really the financial health of its customers – how long will it take estage agents to get back to normal health, and able to pay 2019 prices again?

Indeed, in the next few paragraphs, we learn that membership of the website is down by nearly 4%, mostly arising from the loss of Agencies (not New Homes).

Those who have left the website are principally “lower stock Agency customers experiencing cash flow issues, exacerbated by the severe financial shock of the Covid-19 pandemic, and a reduction in the stock-based-branch-equivalent-measure of hybrid agents“.

Hybrid agents are disproportionately represented in the numbers leaving – in times of difficulty, it seems like people prefer to use traditional estate agents? That hardly bodes well for the future of hybrids.

Market share in terms of time spent is unchanged at 85% (using a new method of calculation – it was only 75% under the old method).

Cost cuts – hopefully, a 50% cut in the EBIT forecast will urn out to be pessimistic. Rightmove has managed to cut the operating budget, which will help:

  • 20% salary reduction from the Board/Senior Leadership Team
  • A third of employees (mostly customer-facing) were furloughed from April 6. All planned to come back by July 31.

Liquidity – I have no concerns on this front, and RMV says it doesn’t plan to use the Government’s Covid Facility.

Outlook – no guidance.

My view

I don’t have a strong view on the outcome this year, and have a very wide range of possible outcomes in mind. But I remain confident in the extraordinary strength of the company’s competitive position, so am happy to continue holding.


Cranswick

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Market cap £1,945 million
RNS Preliminary Results
Writer disclosure No position.

This large Yorkshire-based food producer has been a tremendous long-term investment and pleased its investors again today.

FY March 2019 sees revenue +13% (like-for-like) and adjusted EPS +8.4%. Total revenue is +16% after some acquisitions.

Statutory profit grew even faster than the adjusted profit – and I consider this to be a beautiful green flag, since so many companies use their adjusted results to present a better picture of their results than reality.

Its “biological assets” changed in value, and Cranswick doesn’t believe that this valuation movement should make a difference to underlying profitability. So it subtracts this effect from its adjusted profit numbers.

ROCE – Cranswick’s calculation of its own ROCE comes in at 16.2%, down from last year (18.4%). This is attributed to growth capex at its new massive chicken factory. Note to self: check if CWK ROCE improves next year, after all the investment made in the current year.

Capex tends to hurt ROCE in the short-term, but boost it in the long-term (if it has been done wisely).

Export trading is strong with export revenue +92%.

Net debt excluding leases is £81 million. Including leases, it’s £147 million.

CEO comment is very positive on a number of fronts, and concludes as follows:

“There has been a positive start to trading in the new financial year, though we remain mindful of the uncertainty around the longer-term effects of the COVID-19 crisis and Brexit negotiations.  Nonetheless, our outlook for the current year is unchanged and we have a solid platform from which to continue Cranswick’s successful long-term development. 

Another beautiful green flag is when a company is able and willing to provide guidance despite the present economic conditions. Perhaps we need to start paying a premium for food businesses, relative to everything else? Since almost everything else can be shut down, but food producers can’t?

The outlook is excellent. After pointing out the uncertainties, it reassures investors:

…the business has a strong balance sheet, comfortable financial headroom and has made tremendous strategic and commercial progress over the past year.  The successful commissioning of the major poultry investment at Eye and the broadening customer base provides a solid platform from which to continue Cranswick’s successful long-term development.

Dividend – is increased by 9%. We now have 30 consecutive years of dividend growth at Cranswick. The good news at this company, particularly against the current economic backdrop, is mind-blowing!

My view

I’ll have to put this on my watchlist, to keep a closer eye on it in future. I’ve known for some time that it’s a quality company, and have previously owned it as part of a fund. It’s simply difficult for me to find any faults in it.


 

See you tomorrow for the live-stream at 12 noon!

Graham

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    In the eighteenth century the Irish parliament passed legislation that “graziers should not be butchers”. This was because they feared the emergence of monopolies, and manipulation of the meat supply in Dublin. Cranswick are now doing just this, and should be an extremely profitable as a result. Major chicken suppliers to the likes of M&S and Waitrose have been forced out of the market, and they are picking up the slack. They already dominate pork provision. This a cracking company that will only get better.

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    Apologies Graham, but I also meant to just say ‘thank you’ for all your invaluable work here and on the SCVR. I owe you may a pint.

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    Thank you for the nice historical insight, Mister!

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