Cube Midcap Report (24 April 2020) – IG still strong as volatility persists #IGG

Cube Midcap Report (24 April 2020) – IG still strong as volatility persists #IGG

Good morning!

The market has turned pessimistic on Gilead’s new coronavirus treatment, after a Chinese trial reportedly failed. The FTSE is nearly 100 points lower.

Plenty for me to look at today:

  • IG Group (IGG)
  • Frasers Group (FRAS)
  • Pearson(PSON)
  • Burberry (BRBY)
  • Persimmon (PSN)

IG Group

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Market cap £2.75 billion
RNS Trading Update
Writer disclosure Long IGG.

IG has received plenty of coverage lately.

As a shareholder, I’m looking forward to excellent results this year.

I accept they won’t be sustainable, since the level of market volatility we’ve seen in recent months can’t possibly last.

For now, though, IG is making hay:

The high levels of volatility have persisted through March and into April, and the Group has continued to see high levels of client trading activity and further increases in the number of active clients.  Revenue in the first 36 trading days of the 61 in Q4 FY20 is estimated to be around £173 million.  Revenue in Q3 FY20 was £139.8 million, and revenue in H1 FY20 was £249.9 million.

Revenue in H1 (which begins in December) is therefore £313 million so far, with another 25 trading days left.

Revenue for FY May 2020 is £563 million, again with about 5 weeks left to go.

Revenue for all of the previous financial year, FY May 2019, for context, was only £488 million.

IG tends to be pretty good at keeping its operating expenses mostly fixed. It guides today that opex (excluding bonuses) has increased in the current financial year by an unusually large 15% (£30 million) to £300 million, reflecting growth in client numbers and growth in bad debts – I guess some clients must have blown up during this quarter, and are unable to pay what they owe.

This means not all of the additional revenue will flow through to operating profit.

There should still be some operational leverage to enjoy, as the increase in revenue will be faster than 15%.

Even excluding the revenue to be achieved by the end of the financial year in May (which could be anything, it depends on volatility), the increase in operating profit based on revenue achieved so far would be £30 million (excluding increased staff bonuses).

  • Increase in revenue: £75 million already.
  • Increase in annual opex: £40 million total.
  • Increase in op. profit: £75 – £40 = £30 million already.

The revenue over the last five weeks of the financial year is additive to this calculation and could be huge, depending on how long current conditions persists.

Other news:

  • record numbers of client applications
  • £5 million charitable donation
  • dividend flat for now

My view

Did I mention I’m really looking forward to this year’s results?

It’s important to keep my feet on the ground – volatility simply can’t last here.

For those who are “long volatility”, these are wonderful times:

The latest VIX reading of 40 is still much higher than the historical average for this index.

Things will calm down, sooner or later.

The test for IG will be whether it can maintain market share and the quality of its client base even in less profitable, normal conditions.

The new CEO has been in position for 18 months now, and doesn’t seem to have made any major mis-steps. I’m looking forward to seeing what strategic gains she can achieve over a (hopefully) longer tenure.


Frasers (FRAS)

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Market cap £1.2 billion
RNS Trading Update
Writer disclosure No position.

I’m surprised that shares in Frasers (formerly Sports Direct) are only off by 3%.

Yes, this RNS includes some good news – the problems with the Belgian tax authorities are resolved, without any “material sums” (not defined) being paid as part of the settlement.

That is unquestionably good. The bad news is that the company’s access to liquidity is in question:

Frasers Group has taken the commercial decision to settle these matters now given the uncertainty is affecting Frasers Group’s banking lines and its suppliers’ credit insurance where, due to store closures as a result of the current Covid-19 crisis, Frasers Group understands the majority of new credit insurance cover has been withdrawn for the time being. Frasers Group would also note that it has currently not been accepted as eligible for the Covid Corporate Financing Facility (CCFF). 

Is the withdrawal of credit insurance affecting retailers in general? I’m not aware that it is.

Also, the reference to banking lines is worryingly vague. Did the banks order Frasers to settle the Belgian tax issue? Are the banks threatening to abandon the company?

At the half-year resultsnet debt (excluding leases) was £254 million. Gross borrowings were £580 million.

I’m sure that these amounts were manageable in the pre-Covid economy.

In the post-Covid economy, however, they start to look more burdensome.

And to be clear, the credit insurance is potentially an even bigger issue than the question mark over banking lines.

As of last October, Frasers had inventories of £1.2 billion which were funded by total payables of £750 million.

Within that payables figure, many of the suppliers will have been using credit insurance, to protect them again the risk of Frasers not paying.

Without that insurance, we would ordinarily expect most suppliers to refuse to do any more business, except on a cash basis.

So you see that the absence of cover is potentially a critical problem, requiring the group to be refinanced or otherwise “fixed” so that the credit insurance companies will get comfortable again.

My view

The market’s relaxed attitude today appears to price in the credit insurers extending cover, now that the Belgian tax issue has been resolved.

Personally, I wouldn’t want to own shares in this while credit insurance was withdrawn – that would be beyond my risk tolerance.



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Market cap £3.35 billion
RNS Trading Statement
Writer disclosure No position.

The Pearson share price tells a sad story over the past two years.

Let’s get up to date with this publisher/educational group:

  • trading in line with revised expectations. Q1 revenue down 5%.
  • the closure of exam testing centres and schools is offset by rise in digital products and services.
  • Discretionary spend is being reduced, but staff are not being furloughed – a good sign.

Pearson notes that there could be an extended closure of campuses and schools (due to “social distancing”).

Liquidity – plenty of this, apparently. Headroom was £0.8 billion at the end of Q1, and then £530 million was received from the sale of Penguin Random House.

Net debt – at the end of the quarter, was £1.4 billion. Let’s adjust this to c. £900 million, following the Penguin disposal.

My view

Doesn’t appear to be in much danger.

I find it hard to get excited about this company. Maybe that’s a good thing, if boring is good?



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Market cap £5.2 billion
RNS COVID-19: Protecting our People and Communities
Writer disclosure Long BRBY.

CEO Marco Gobetti makes a nice reference in the opening paragraph of this RNS to Thomas Burberry, founder of the company.

He has had some time to reflect on the correct strategy in response to CV-19, and has decided the following:

  • base pay will be maintained for all staff, even if their stores or sites are closed.
  • the company won’t take government support for UK jobs.

As a shareholder, I don’t have a problem with this, so long as the company can afford it (which I think it can). As discussed in my recent Diary article, Burberry has headroom of around £900 million, of which £600 million is cash.

The trench coat factory is now manufacturing non-surgical gowns for the NHS. Again, I trust that management wouldn’t do this if the company could not afford to do it. Surgical masks have also been sourced and donated to the NHS and charities.

My view

I’m relaxed about this stock, despite the (temporary) closure of so many stores. I am keenly awaiting the re-openings.



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Market cap £7.0 billion
RNS COVID-19 Update
Writer disclosure No position.

Wouldn’t it be nice if this traded its stock ticker with Pearson? It doesn’t make sense that Persimmon gets the shorter ticker!

We already had updates from two housebuilders yesterday, which I mentioned in this report.

Persimmon is still taking reservations, and suppliers are still getting paid on time.

Like Burberry, Persimmon is paying all staff, even those unable to work due to the lockdown. Persimmon is not using any of the government support schemes.

And like the other housebuilders, Persimmon has plans in place to start building again:

“…we have… developed and tested a range of new site protocols to enable work to recommence, while ensuring that the necessary social distancing restrictions are strictly enforced. These new measures are fully compliant with UK Government and Construction Leadership Council guidance.

The Group is therefore announcing today that it will begin a phased re-opening of its construction sites from the morning of Monday 27 April 2020 which will allow us to support our customers by completing the construction of the new homes they have purchased in a safe and responsible manner.”

My view

The outlook for house prices doesn’t look rosy to me, except to the extent inflation takes off.

Persimmon shares are down by a third since mid-February, which perhaps over-compensates for this, given that construction is starting again?



That will do it for this report, have a relaxing weekend.

Best wishes




Wordpress (3)
  • comment-avatar

    Hi, Graham. I just had a very quick skim of the IGG update. Their pro clients are exposed to unlimited losses and I see debt provision has been raised significantly – I’m not sure if these are related. Any thoughts? (Bucket shop Plus500 holder).

  • comment-avatar

    “the company won’t take government support for UK jobs.”

    Is this what you actually meant Graham? If so, why would they do that? Surely it makes more sens, from a company finances point of view, to furlough as many staff as possible, accept the 80% contribution from the government and make up staff wages to 100% if that’s what they want to do. I don’t understand, what’s the downside of accepting government’s support?

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