Cube Midcap Report (24 March 2020) – Warhammer takes a break #GAW #888 #JD

Cube Midcap Report (24 March 2020) – Warhammer takes a break #GAW #888 #JD

Good afternoon!

Welcome to the evening edition of the Midcap Report.

The Midcap Report is scheduled to happen every day for the rest of this week, and every day next week.

Market movements

The FTSE is up 5.7% today.

Bear market rallies can be some of the fastest. Possible reasons for today’s gains:

  • even more extreme monetary policies on their way, notably from the Federal Reserve
  • Wuhan, the source of the crisis, starting to lift its restrictions already.
  • Clarity on the current thinking of governments (particularly for the UK & US). Having some idea about what is going to happen, even if it will be difficult, is better than not knowing!

Another explanation would be that market movements are nonsense at the moment – that they are moving without rhyme or reason.

Today’s updates

  • Games Workshop (GAW)
  • 888 (888)
  • JD Sports (JD.)

Games Workshop (GAW)

  • Share price: £39.84 (-7%)
  • Market cap: £1.3 billion

Trading statement

Please note that I have a long position in GAW.

I opened a very small position in this company last year (currently just 1% of my portfolio). My average entry was around £53.

My reasoning was simple enough: it was a super high-quality business, but the asking price was steep. I was paying c. 26x trailing earnings.

When there is a business I want to own but it’s expensive, I find that gradually buying it can make the whole process much more relaxing.

The other thing is that owning an initial stake, even if it’s very small, helps to focus the mind. It’s the same as the difference between paper trading and actually trading – the valuable experience doesn’t kick in until money is changing hands.

After I take a small stake, I like to gradually learn more about the business, while I decide if I’m sure about scaling in and “promoting” it to a bigger holding.

As for Games Workshop, I haven’t quite decided what to do. I’m more likely than not to scale in and buy more over time, but there is no rush.

Today’s update

I should probably talk about the contents of this update. The problem is, it doesn’t say much:

In response to official guidance announced today in both the UK and US, we will be temporarily closing globally all of our stores, headquarters, factory and warehouses with immediate effect. Where possible, our staff will continue to work from home.

More information is available on Warhammer’s own blog. In an entry posted today, we get further detail on the e-commerce side of the business:

…all our Warhammer and Games Workshop stores will be shut from the 24th March until an initial date of the 14th April. We’ll also be closing our factory and distribution centres – so our online stores (Games Workshop, Forge World and Black Library) won’t be selling or shipping any physical products during this period either.


Revenues will be approximately zero in the short-term, obviously.

Aside from product sales, the other source of revenue at GAW is licensing income – £10.7 million in H1, for example.

But the company warned in the H1 report that this income is highly unpredictable, and refused to make any promises or forecasts for it in future. And if the potential licensees are struggling at the moment, then perhaps royalty income will take a dive, too.

I would therefore be reluctant to pencil in any revenue for GAW, while the existing policies are in force.

Net funds were £33 million as of the end of November, while H1 operating expenses were £54.5 million.

Huge dividends have been paid out recently: £21 million in H1, and £26 million so far in H2. When it is open, the business is highly cash-generative.

My fear is that an extended period of closure would cause the £33 million in net funds to run dry, to cover ongoing operating expenses. This could force GAW to open a lending facility (perhaps not the easiest thing to do in current circumstances) or, in a worst-case scenario, to raise equity.

Raising equity would effectively mean asking for its recent dividends back from shareholders. But an issue price for the new equity would have to be named, and it would be a far cry from the £70 share price seen last month.


I won’t be selling out of this one, because I do expect that at least one of the following things will happen:

  • it will start selling product again before net funds run out
  • it will open a borrowing facility to get through this period
  • it will be well-supported by equity investors with an injection, if needs be.

As Tony Blair might say, I’m “intensely relaxed” about the situation at GAW. It helps that it’s just 1% of the portfolio!


888 (888)

  • Share price: 106.7p (+28%)
  • Market cap: £393 million

Covid-19 Trading Update

Please note that I have a long position in 888.

This is below our £500 million market cap limit, but that never stopped us before!

888 used to be in the FTSE-250 index, and perhaps it can make a return at some point? We’ve covered it at regular intervals in the archives, in better times.

It’s an Israeli company operating internationally, and has been my preferred pick in the gambling space. It is “online-only” and has one of the top poker sites – although it has found competition in poker very tough over the last year. “Casino” and “Sport” have been far more lucrative categories of revenue.

 Yesterday, following the strange request by the FCA, 888 delayed the publication of its 2019 results (which had been scheduled for today).

Instead, today it gives us some information about how the company is handling the Covid-19 crisis, which is all we really wanted to know.

Current trading – in line with expectations. Average daily revenue is up 18%.

Revenue in Casino and Sport is up 24% for both. Poker is probably still poor.

FY 2020 outlook

This is the juicy bit.

Prior to today, 888’s share price had approximately halved, versus its prior level.

I chalked this up to the market writing off the company’s Sports revenue completely, and writing down Casino revenue for this year, too.

888 notes today that Sport accounted for 16% of 2019 revenue, and brings us the good news:

There is currently evidence of increased customer activity in the Group’s Casino and Poker products that might, in part, compensate for the sports betting disruption for a period of time. However, in the event of a prolonged period of global macro-economic uncertainty, it is possible that consumer spending across the Group’s online gaming product verticals may also become impacted. Should severe disruption to global sporting events continue until September 2020, the Board estimates a potential impact on Group EBITDA in the current financial year of up to high single digit millions of dollars.

The theoretical loss has been quantified. And it’s not so scary after all.

Maybe the market over-reacted – I suppose I would say that! But 888’s market cap fell by £300 million, and the potential impact from the virus situation is potentially just “high single digit millions of dollars” on EBITDA. Sounds like an overreaction to me!

One other minor fact is that 888’s cash balance was $111 million (£95 million) at June 2019, offset by borrowings of just $33 million (£28 million). Call it net cash of £67 million.

My view

I think there’s an awful lot to like here:

  • The cash balance is probably still very large
  • the company is online-only, does not directly control any physical locations
  • customers are potentially switching from sports to other products, while sports are cancelled
  • the Board estimates for the potential EBITDA impact this year are extremely modest – hopefully they aren’t being too optimistic!

As with GAW, I’m very happy to continue holding 888 through this crisis. 888 is 3% of my portfolio.


JD Sports Fashion (JD.)

  • Share price: 426.3p (+17%)
  • Market cap: £4.15 billion

COVID-19 Update

The news that JD has closed its doors in the UK, United States and Europe comes as no surprise.

JD’s character, under the leadership of Peter Cowgill, is very different to that of Sports Direct and Mike Ashley’s Frasers Group (FRAS).

Frasers Group has made headlines in mainstream press for initially trying to keep its stores open. As usual, JD keeps a lower profile than its rival.

As with many other retailers (including Frasers), JD is still making website sales. But even this is controversial, since all “non-essential” contact is supposed to be banned.

Key excerpt from today’s update:

The Board is satisfied that the combination of a strong balance sheet, net cash resources and the substantial working capital facilities available to the Group in its various territories are more than adequate to meet the cash deficiencies which may reasonably be anticipated during the closure periods in our various territories.

Net cash was £118 million in August 2019, arising from gross cash of £323 million and borrowings of £205 million.

That’s a suitably large number for a company with 2,218 stores and concessions to manage.

As with other companies I’ve examined in recent days, it looks like JD has the financial headroom for (very roughly speaking) 3-4 months, assuming zero revenues. But I don’t have a reliable way of estimating its survival time, in the absence of a detailed breakdown of its operating expenses.



I’ll call it a day there. Thanks for dropping by!

The FTSE has closed for the day after gaining 9% – amazing.

See you tomorrow.




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