Cube Midcap Report (26 Nov 2019) – #PETS #CWK #CPG #ITRK

Cube Midcap Report (26 Nov 2019) – #PETS #CWK #CPG #ITRK

Good morning!

Sorry for the recent hiatus in coverage. For the rest of this week, you can look forward to Midcap Reports every day and we have an assortment of other articles which are currently in the works, too.

Finished at c. 2.30pm.

Pets at Home (PETS)

  • Share price: 233.6p (+9%)
  • Market cap: £1,168 million

Half-year Report

Super results from this petcare retailer. Profit is growing ahead of expectations and full-year profit will be towards top end of current market consensus.

The company-compiled consensus for full-year underlying PBT is £87 million – £93 million. So I’d be looking for at least £92 million.

Petcare is one of those sectors which perhaps doesn’t get the attention it deserves. If you subscribe to the “everything is gradually getting better and economies are gradually getting richer” economic outlook, then petcare is one of the sectors which perhaps might be worth a closer look. If disposable income is growing and people have a bit more to spend on their homes and familes, then petcare is one of the prime areas to enjoy this extra spending: who can resist buying an advent calendar for their dog, or a Nemo statue for their goldfish?

Anyway, let’s get back to the results.

Some of the highlights for me are:

  • retail like-for-like revenue growth of 7.8%

This growth figure includes both online and store sales. Stores delivered “positive LFL revenue growth”, and according to the presentation slides, store LFL growth was 5%.

Given the difficulties encountered by so many physical stores in current conditions, any positive result is encouraging.

Online sales grew at a much faster rate: 41%. The overall growth rate (“omnichannel”) was 32%.

  • Vet LFL revenue growth of 6.4%
  • Good growth in complete pet care: 22% increase in Very Important Pets getting both products and service
  • H1 PBT up 18.9% on a comparable pre-IFRS 16 basis.

Outlook – more growth in retail, offset by some changes in fee arrangements at veterinary joint ventures, and store pre-opening costs.

KPI progress – the key performance indicators used by PETS are specific to their strategy, are well-defined, and provide good clarity on what the company is trying to achieve:

  • number of customer transactions +4.4%
  • sales per colleague +5.6% to over £100k. I really like this indicator as a measure of labour efficiency! The H1 results have been achieved while using up fewer (6% less) staff hours.
  • pet services are now 35% of total sales, and the company is targeting 50%. This sounds like it should be more recurring in nature than product sales.
  • Very Important Pet sales +23% year-on-year.

Product Pricing – PETS is more expensive than its cheapest purely online competitor, but it reckons the price gap of less than 5% is “acceptable”. On the “most important products to customers” (not sure how this is defined), PETS says that it is “around the same price”. For customers who accept repeat delivery, products are cheaper than competitors.

This is a nice strategy: focus on recurring income, with cheaper price points for loyal customers.

Vet services – PETS acknowledges that its fee income from this side of the business is suppressed in the current financial year, but it is seeing benefits in terms of market share growth and a more sustainable financial performance at practices.

Non-underlying items – PETS records £7.6 million as a “non-underlying charge” relating to the buyout of veterinary practices. It also uses up £23.5 million in balance sheet provisions which had previously been recognised for this purpose. It is probably reasonable to treat these as exceptional.

My view

Overall, I find this to be an interesting company and would certainly consider it for a pure mid-cap portfolio.

The veterinary side of the group sounds problematic, and would be my primary area of concern. I acknowledge that it may bring certain strategic benefits. But like many other labour-intensive professional services, I have some  niggling doubts about whether they should be owned by a large PLC, or whether they are better off owned by the vets. For services like this, if a large PLC is involved, I prefer to see it being organised on a franchise basis.

If this was a pure-play online business, instead of a bricks-and-store retailer with an online channel, I imagine that it would be valued on a much higher multiple than the c. 15x multiple at which it currently trades. Lease liabilities brought onto the balance sheet under IFRS 16 have a present value of nearly £500 million.

While I admire the company’s H1 success, I’m going to give this one a pass, as I am extremely picky when it comes to bricks-and-store retailers and am wary of veterinary services.

Cranswick (CWK)

  • Share price: 3284p (+2%)
  • Market cap: £1,710 million

Interim Results

This has been a brilliant long-term investment – anyone who invested in it ten years ago has probably multiplied their money at least five times.

You can view the product set here. Cranswick is a food producer based in Yorkshire and having a particular strength in pork. It has sixteen production facilities around the country.

These are tasty results, including like-for-like growth of 5.4%. Exports have led the way: export revenue is up 65%.

Chinese meat demand hits the red zone

Investors need to be careful that the surge in export sales might not exactly be permanent. According to this article from the Guardian on Saturday, 40% of Chinese pigs have been killed as a result of African Swine Fever. Hundreds of millions of dead pigs has resulting in the price of pork more than doubling in China, and rise by a significant amount in many other parts of the world, too.

Cranswick acknowledges this factor and says that its Far Eastern export sales have been increased “on commercially favourable terms”. It thinks that these conditions could prevail “in the medium term, provided the UK remains ASF free”.

Still growing

Despite this, I think it’s fair to say that the bulk of Cranswick’s long-term success has been the consequence of its own good decisions and strategic wins, rather than the consequence of good fortune. And far from resting on  its laurels after many years of growth, Cranswick continues to push the boat out.

It acquired a Continental/Mediterranean non-meat food producer in July for £42 million (plus a £7 million bonus payment in 2021), and this has performed in line with expectations so far.

Also, H1 capex reached a high of £56 million. A new poultry factory will be finished by year-end.

Because of these investments, and the introduction of IFRS 16, the company has moved from a flat cash position to net debt of £114 million. This does not appear to be onerous when you consider the EBIT forecast for the current year of £89 million.

Outlook – the outlook statement is confident.

Pork Review – Cranswick says that the pig price in China was up 89% year-on-year, at the end of H1. And it confirms that this has had a knock-on effect on EU pork prices. African Swine Fever is also an issue on the ground in Eastern Europe. Keeping the UK free from ASF will be critical to Cranswick’s continued ability to export.

My view

The market rates this business highly, at a forward P/E multiple in the region of 21x. When you consider that ROCE tends to be around 16% – 18%, this might be a fair rating. It will be interesting to see whether these high returns can be maintained following the acquisition and larger investment capex.

The “culture” around this company appears to be very positive, and I’m a long-term fan of the business. I should probably own a few shares in it, but I do like to time my entry points. An outbreak of ASF in the UK or a similar temporary problem might create the sort of entry point which would make this a compelling buy.


Compass Group (CPG)

  • Share price: £19.50 (-6%)
  • Market cap: £30.9 billion

Full-year Results

This giant food-service business looks overpriced to me, given that earnings are in reverse and the company is in cost-cutting mode in Europe.

Earnings per share are up 6% on an underlying and heavily adjusted basis, but are down by 1.8% on a statutory basis. If you scroll down to note 10 in the accounts, you see that £190 million of restructuring costs have been treated as non-underlying.

Excerpt from management commentary:

Despite this good performance, we are not immune to the macro environment. Deteriorating business and consumer confidence in Europe has impacted our Business & Industry volumes, new business activity and margin. Given these trends, we are taking prompt action in Europe and certain Rest of World markets to adjust our cost base. As well as offsetting short-term margin pressures, by taking this action from a position of strength, we will be better placed to capitalise on future growth opportunities.

Compass is impressively large and has a fine track record in terms of dividends. Unfortunately, it doesn’t excite me – perhaps it can excite you!


Intertek (ITRK)

  • Share price: £55.10 (-0.6%)
  • Market cap: £8.9 billion

Trading Statement

This is another amazing long-term performer (to be fair to Compass Group, is has also been extremely good to shareholders over the long run).

In simple terms, Intertek is a “testing” business. In its own words:

We go beyond testing, inspecting and certifying products; we are a Total Quality Assurance provider to industries worldwide. Through our global network of state-of-the-art facilities and industry-leading technical expertise we provide innovative and bespoke Assurance, Testing, Inspection and Certification services to customers. 

What’s amazing about Intertek is that it hasn’t put a foot wrong for such an extraordinarily long period of time. Unlike oil companies with their spills or banks with their occasional balance sheet problems, Intertek has tended to stay out of the headlines over the years.

This is a typically solid trading update, showing organic revenue growth over the previous four months (July to October) of 3.6%, plus 1.4% revenue growth from acquisitions.

There is plenty of reassurance for investors:

2019 will mark another year of consistent progress on Revenue, Margin and Cash

FX has provided a boost. Reported revenue growth is 7.4%, thanks to this tailwind.

The CEO’s outlook remains positive:

The $250 billion global Quality Assurance industry has attractive structural growth prospects driven by an increased focus of corporations on risk management, global trade flows, global demand for energy, expanding regulations, more complex sourcing and distribution operations, technological innovations, government investments in large infrastructure projects, and increased consumer demand for higher quality and more sustainable products.

We are uniquely positioned to seize these exciting growth opportunities

My view – this bears many of the hallmarks of a super-high-quality business. As you might have guessed, I don’t own any shares in it! Which is thanks to the 25x P/E multiple attached to it. I hope it can get off the watchlist some day, when it is priced at a tantalising level. I have (possibly ill-founded) faith that my patience will be rewarded.



Done for today – see you tomorrow morning!





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