Cube Midcap Report (26 March 2020) – CFO Musical Chairs #WMH #SMDS #DC #SNR

Cube Midcap Report (26 March 2020) – CFO Musical Chairs #WMH #SMDS #DC #SNR

Good morning!

The FTSE is now at 5600 – what an extraordinary relief rally we’ve seen over the past few trading sessions.

Everyone is different, but I am glad that my policy is to avoid trading. Psychologically, it suits me to stay invested and let market prices do whatever they are going to do. So long as I have good companies which will survive tough economic times, I think I will be fine.

Someone else who has been doing fine is the hedge fund manager Bill Ackman.

I don’t follow him on Twitter, and there is rarely much activity on his Twitter feed. But he burst into life during the Covid-19 crisis:

He then went on CNBC on the same day, asking Trump to shut the US economy down. He said the mortality rate from the virus was 1%-2%, meaning that “friends and family are going to die”. The market was crashing that day, and his interview contributed to the panic. He said “assume it’s got a 1 in 50 chance of killing your child”.

It also turns out that he has made $2.6 billion from shorting corporate bonds this month. He has now closed his hedges, making 100x their cost, and gone long of the market.

Well done to him.

In the FTSE-350 today, I plan to look at:

  • William Hill (WMH) / DS Smith (SMDS)
  • Dixons Carphone (DS)
  • Senior (SNR)

William Hill (WMH) & DS Smith (SMDS)

This is highly unusual!

The CFO of DS Smith, Adrian Marsh, was supposed to be moving to William Hill.

DS Smith, the packaging group, has seen its share price fall by 27%, year-to-date. The bookmaker William Hill, on the other hand, has seen its share price fall by 63%.

As a result, the market cap of DS Smith is now six times larger than William Hill.

As you will be aware, betting shops are currently closed and are excluded from the government’s bailout of businesses (for reasons we can only guess at). Edit: Craig in the comments has corrected me. The government has changed its mind.

Mr. Marsh has changed his mind too:

DS Smith Plc (‘DS Smith’ or the ‘Group’), a leading global packaging company, today announces that Adrian Marsh has informed the Board he will not be joining William Hill PLC. Adrian and the Board have agreed that his prior resignation will be treated as withdrawn and accordingly Adrian will continue as Group Finance Director.

Now you see what I mean by unusual!

Does anybody else agree with me that this could create an akward situation in the office?

I’ve never had a C-suite position at a FTSE-350 company, but this isn’t something I would ever want to do. I never “threatened” to resign from a job, or resigned from a job and then changed my mind. If things weren’t working out, and my heart wasn’t in it, I simply resigned and that was that.

We can presume that Mr. Marsh never wanted it to turn out this way, either. But with betting shops closed, sports events cancelled and bookmakers in a nightmare scenario, it makes sense that he would prefer the safer world of packaging.

His decision reflects poorly on William Hill’s prospects, that’s for sure.

WMH also publishes an RNS.

Ruth Prior, who is currently serving out her notice period, will continue in role as William Hill’s Chief Financial Officer (“CFO”). The Company has immediately recommenced the search for a new CFO.

The SMDS share price is up slightly, to reflect the continuity which Mr. Marsh will provide the company. I hope his heart is still in it!


Dixons Carphone (DC)

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Market cap: £963 million

COVID-19 Trading Update

Dixons continues to trade online, and is doing well:

Online trading has been very strong in all countries over the last two weeks as people have been preparing to work from home and use essential technology to continue their lives during the Coronavirus outbreak. Early signs are that this strong trading has continued since stores closed and will help to compensate for lost store sales.

There must be other winners out of the “work from home” phenomenon. Skype sessions must be going through the roof (owned by $MSFT). Slack must have seen a big acceleration, too ($WORK).

I always set up my own office, and started working from home recently, so the virus hasn’t affected me too much. But I have had to make a few small investments, which I wouldn’t have to make in a normal year (e.g. extra cables and accessories).

Anyway, let’s see what else Dixons Carphone has to say.

  • “high customer demand for essential technology products and services” (I think Dixons is arguing that it doesn’t fall into the “non-essential” category of businesses).
  • “with the Government’s help, we expect to keep paying those who work in our stores during these temporary closures”

Electrical sales are up 23% in March (up to 21 March). This includes a 72% increase in online sales, in the UK & Ireland.

There is an inevitable profit warning:

The stores that are now closed were expected to contribute sales of c.£400m for the rest of the year. There will be some recovery through Online operations but overall the loss of sales will adversely impact our full year profitability and cash position, therefore we will not achieve our previous guidance for current year adjusted PBT of £210m or for net debt to be lower year-on-year.

Government support re: business rates and salary payments is expected to save £200 million (annualised). Other spending of a discretionary nature will be cut (e.g. marketing) and “the run rate of these items could total over £200m p.a.”

Capex plans of £200 million will be reduced, VAT payments of £50 million will be deferred, and the dividend might be cut.

All in all, it sounds like the lost sales can be fully offset by cost reductions.

Balance sheet – £700 million in unutilised facilities. Dixons “expects to comply” with its bank covenants next month:

We believe that we have sufficient funding capacity available to meet our obligations over the foreseeable future.  

My view

Today’s update reads very well. Let’s reflect on the balance sheet a little longer.

At the interim results, DC’s net debt (pre-IFRS 16 lease liabilities) was just £290 million.

Let’s round it up to £300 million (since it won’t reduce this year). To satisfy their leverage covenant, this would require EBITDA of £120 million.

Operating profit last year was £322 million – and that’s a much more challenging profit measurement than EBITDA.

On the basis that the stores will reopen in 2-3 months, and debt won’t increase very much thanks to government support and decisions made by management, the prospects for the survival of the existing equity look good. Perhaps this is why DC’s shares are down by “only” 38% over the past month, and bounced strongly from their recent lows?


Senior (SNR)

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Market cap: £320 million

Market update

I thought this one might have some value at 165p, when covering it in this report in January. It had previously traded well over 300p. The problems with 737 MAX production looked like a temporary issue from which Senior would soon bounce back.

I’m amazed to see the share price at the current level, back firmly in small-cap territory.

The reason is simple enough:

It is clear that the coronavirus (COVID-19) is causing macroeconomic disruptions to our end markets and their respective supply chains.

Like so many other companies, it is cancelling its dividend proposals, reducing capex and cutting costs. Guidance for the financial year is suspended, but I hardly need to say that, do I? Prior financial forecasts for pretty much all companies are now worthless.

Balance sheet

At 31 December 2019 our committed borrowing facilities were £305m with an average maturity of 4.4 years and the Group had headroom of £159m under these committed facilities.

That headroom is about one year’s worth of operating expenses.

My view

This company made tremendous progress in the years leading up to the 737 MAX problems and then the COVID-19 crisis. Surely if the balance sheet survives (which appears probable), then it is a bargain at the current levels for a long-term investor?



That will do it for today.

By the way, I hope you like the new stock tickers which you can see above! I installed them today, despite my lack of technical training.





Wordpress (4)
  • comment-avatar

    The CFO situation is a strong sell signal for WMH (I hold).  I will look again at the numbers.  As for his future longevity at SMDS (I also hold), you’d have to think that been terminally compromised.  Should he remain there beyond the short term, his commitment will be questioned.  Might be a good time for a Directors Deal RNS showing him putting his money where his ‘unresignation’ is 🙂

    • comment-avatar

      Absolutely! Whenever someone tries to quit, I think it hurts their credibility in the job. Everyone will remember that they wanted to be somewhere else.

  • comment-avatar

    re: “As you will be aware, betting shops are currently closed and are excluded from the government’s bailout of businesses (for reasons we can only guess at).”

    My understanding is the position changed yesterday as the chancellor announced that any high street business would be eligible for the previously announced business rates holiday.  Are you referring to a different part of the government business support package?

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