Cube Midcap Report (26 Feb 2020) – Guinness consumption takes a hit #DGE #WMH #RTN #SRP

Cube Midcap Report (26 Feb 2020) – Guinness consumption takes a hit #DGE #WMH #RTN #SRP

Good evening!

I’m here with a late edition of the midcap report.

Finished at 7.15pm.


Some announcements I’m interested in:

  • Diageo (DGE)
  • William Hill (WMH)
  • Restaurant Group (RTN)
  • Serco (SRP)


Diageo (DGE)

  • Share price: £29.295 (-0.9%)
  • Market cap: £68.5 billion

Trading update – impact of COVID-19 outbreak

This alcoholic beverages giant issues an update on the range of possible outcomes for FY June 2020.

To give you context, Diageo’s sales in Asia last year were £2.7 billion (out of total sales £12.9 billion). It should be able to offer plenty of insights into conditions on the ground.

It confirms that China (and other countries) are suffering “restrictions on public gatherings, the postponement of events and the closure of many hospitality and retail outlets“, and some restrictions on travel.

(This has hit close to him for me, with the cancellation of the Ireland vs. Italy Six Nations rugby match, after Italy was struck by the Coronavirus and cancelled many of its own sporting events.

International rugby matches are huge days for the consumption of Guinness – which sponsors the Six Nations.)

As far as Greater China is concerned:

  • “Bars and restaurants have largely been closed” and “we have seen significant disruption since the end of January which we expect to last at least into March”.
  • “we expect a gradual improvement with consumption returning to normal levels towards the end of fiscal 2020

On-trade in other Asia Pacific nations:

  • Events postponed and a reduction in tourism in South Korea, Japan, Thailand.
  • Again, gradual improvement expected in Q4.

Travel retail in Asia Pacific:

  • “significant reduction in international passenger traffic, especially in Asia”
  • Expecting a gradual recovery.

In total, net sales for fiscal 2020 are expected to take a hit of £225 – £325 million (down by 1.7% – 2.4% compared to forecasts) and organic operating profit down by £140 million – £200 million (down by 3.3% – 4.7% compared to forecasts).

Notably, Diageo says that these ranges “exclude any impact of the COVID-19 situation on other markets beyond those mentioned above“.

Guinness consumption in Ireland alone is going to be down significantly in the first weekend of March. That single rugby match might not be so important for Diageo in the grand scheme of things, but it’s not difficult to imagine that major cancellations could be mandated in other European countries.

In the short-term, we must allow for the possibility that the virus shuts down economic activity on a much wider scale and in many more countries than Diageo is currently budgeting for. Similarly, if China stays in lockdown through the summer, then today’s estimates will prove far too optimistic.

Of course looking at things on a longer-term perspective, I’d still happily be an owner of Diageo stock. The shares are down 20% from their peak last year, back at a more “reasonable” P/E multiple of 22x (before taking earnings downgrades into account).

Diageo is a top-10 stock in the FTSE-100 and is one of my favourite reasons to have a position in this index.



William Hill (WMH)

  • Share price: 172p (-2.6%)
  • Market cap: £1.5 billion

Final Results

You can review this website’s previous coverage of this share in the archives.

I’ve backed a different horse in the gambling space, preferring 888 (888) (I have a long position in that share). But I like to keep an eye on the competition from traditional bookies.

The financial big picture at this company is decidedly mixed:

On the left-hand-side, i.e. the statutory results, the company reports a small profit for the year, before taxes and interest.

After taxes and interest, we have a small loss.

And the dividend gets cut by 33%.

On the right-hand-side, the adjusted results, we see that the company is moving backwards. Adjusted operating profit and adjusted profit are both significantly down compared to the previous financial year.

It was known that William Hill was going to have a bad year. Indeed, these results are actually an upgrade compared to the performance which had previously been pencilled in. William Hill has been forced to shut many hundreds of stores thanks to the £2 stake limit for betting machines.

The exceptional costs associated with store closures and redundancies have taken their toll, as expected. They are excluded from the adjusted numbers shown above.

As noted in my previous discussion of this share, WMH’s net debt is significant. It now stands at £535.7 million, giving rise to a net debt/EBITDA multiple of 2.4x. By my standards, this is somewhat high.

Some key points from the operational highlights:

  • UK like-for-like revenues down 13%.
  • Mr Green (acquired for net cost of c. £190 million) has performed in line with expectations.
  • Excellent growth in US where net revenue is up 38%. Sounds like a big opportunity here.


2020 is in line with expectations so far, these expectations depending on “normalised gross win margins and a stable regulatory landscape”.

My view

I’m not going to study this in much further detail, because I’m turned off by the lack of profitability, the legacy retail sites in the UK, and the company’s high leverage.

Putting those issues to one side, I do think that there is scope for WMH to be a strong digital performer (47% of group revenue is now generated online) and the opportunity in the US genuinely sounds exciting, even if it only accounts for 8% of Group revenue at the moment and is in its infancy in terms of profit generation. Sports betting market share of 32% in Nevada is significant, seeing as that is the gambling mecca for North America.

As a value play, it could be of interest on a 3-5 year timeframe for those willing to bet on further UK recovery and US expansion. Against that, any profits it makes ought to be ploughed into debt reduction.


Restaurant Group (RTN)

  • Share price: 109p (-7%)
  • Market cap: £535 million

Final Results

I have a distinct sense of déjà vu.

Last September, I wrote a midcap report dealing with RTN, with the headline “Acquisitions leave sour taste”. Despite a bullish opening statement in the press release, RTN’s interim results smashed the share price by 14%.

Today’s full-year results statement starts well, but the market was again unimpressed. And it marked the shares down accordingly.

Highlights given by the company:

  • like-for-likes +8.5% at Wagamama
  • total casual dining like-for-likes minus 2.8%, “representing an improvement on previous years”
  • concessions and pubs both +4.0%. total group LfLs are up 2.7%.

New CEO Andy Hornby identifies three priorities for the next two years:

  • grow Wagamama, Concessions and Pubs
  • rationalise the leisure business (i.e. shut down casual dining sites)
  • accelerate deleveraging

If you review my previous article on RTN, you’ll recall that the Wagamama acquisition was devastating for the RTN balance sheet.

RTN decided to pay a hefty price for a “good” dining brand, to offset the weaker performance at the likes of Frankie & Benny’s and Garfunkel’s.

While the price paid for that acquisition was highly questionable (£550 million, bigger than RTN’s current market cap), the new CEO is doing the right thing, in my view, by moving to a more defensive positioning.

The number of sites in the “Leisure” (casual dining) segment will reduce from 350 to 260-275 by the end of 2021. Watch out for exceptional charges associated with these closures.

The dividend is suspended and net debt/EBITDA will hopefully reduce from 2.1x to 1.6x over the same timeframe. Net bank debt currently stands at £287 million.

Current trading is “encouraging” with LfLs up 5.3% so far in 2020.

FY December 2020 Guidance

  • Single digit site openings in each category, except the Leisure segment.
  • Maintenance/refurbishment capex of £30 million – £35 million, and development capex of £40 – £45 million.
  • Cost inflation slightly higher than previous expectations, due to minimum wage legislation.

My view

Personally, I love a chicken katsu curry and it’s the main reason I visit Wagamama (twice a year, on average).

Frankie & Benny’s, on the other hand, was never somewhere I visited more than once a year. In an ultra-competitive dining environment, experiencing structural decline, it’s hard to imagine that these older brands will achieve much for RTN shareholders.

My preferred strategy is to avoid owning any shares in this sector.



Serco (SRP)

  • Share price: 157.8p (+5%)
  • Market cap: £1.9 billion

Final Results

This support services group turns in a solid performance for 2019, as operating profit grows from £80 million to £102.5 million.

It is paying a dividend for the first time since 2014, an annus horribilis which saw a giant profit warning and a £550 million rights issue.

Rupert Soames, grandson of Winston Churchill, says:

Free Cash Flow has increased significantly, and our leverage ratio is at the lower end of our target range.  All this indicates that we have finally achieved escape velocity, leaving behind the gravitational pull of past mis-steps, and gives the Board confidence to recommend paying a dividend for the first time since 2014, which is an important milestone.  

Some key points:

  • revenue +8.2% organically, up 14.5% in total.
  • underlying EPS +18%
  • adjusted net debt £215 million, leverage 1.17x (covenant purposes) or 1.3x (underlying).

The 2020 outlook is unchanged: revenue £3.45 – £3.5 billion (up from £3.25 billion in 2019) and underlying profit £145 million (up from £120 million).

My view – this must be at least fairly valued at the current level. Outsourcers should not trade at very high multiples, in my view, as there is too much that can (and does) go wrong!



All done for today. Sorry about the late showing. If you enjoyed it anyway, I’d appreciate it if you gave me a “thumbs up” (or if you hated it, then give me a “thumbs down”!)





Wordpress (4)
  • comment-avatar

    The announcement re the Irealand vs Italy rugby match made me wonder how much difference this will actually make. Are the airlines and hotels going to accept cancellations and give full refunds? If not are a lot of Italians simply going to say “well we’ve paid for it already so we may as well have a “free” weekend in Dublin”?

    No, they won’t all be concentrated in a stadium for a couple of hours but they’ll be in hotels and bars before and after. Hopefully the government, having effectively cancelled the event, will now pressurise hotels and airlines to give full refunds in this instance.

    • comment-avatar

      Interesting point. Wouldn’t the Italians prefer to come for the new match day, instead? I can’t imagine that many of them will still want to come for the 7th!

  • comment-avatar

    Who knows – ask yourself though, if you’ve already paid for a flight and hotel would you rather stay at home or have a weekend away?

    • comment-avatar

      If I was bringing my family I’d turn it into a normal city break. If I was going with my rugby buddies I think I’d wait until it’s rescheduled…

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