Cube Midcap Report (27 Feb 2020) – NMC unravels #NMC #BATS #AML #PTEC

Cube Midcap Report (27 Feb 2020) – NMC unravels #NMC #BATS #AML #PTEC

Good morning!

Today I’m going to look at the absolute mess at NMC Health (NMC), whose horror announcement last night mysteriously didn’t show on Investegate. NMC shares are now suspended.

I’m also going to look at the results from British American Tobacco (BATS) (where I have a long position).

Many other companies are reporting as this is “results day”, and I will only be able to cover a fraction of them. Please feel free to let me know which ones you’d like me to prioritise:

  • NMC Health (NMC)
  • British American Tobacco (BATS)
  • Aston Martin Lagonda (AML)
  • Playtech (PTEC)

Companies I won’t be able to cover today: Reckitt Benckiser (RB.) Flutter Entertainment (FLTR) Watches of Switzerland (WOSG) WPP (WPP) Persimmon (PSN) St. James’s Place (STJ) Howden Joinery (HWDN) Hastings (HSTG) Provident Financial (PFG) Grafton (GFTU) Vesuvius (VSVS) Genus (GNS) Vistry (VTY) Inchcape (INCH) Bakkavor (BAKK)

Roland will be here tomorrow – maybe he will be able to catch up with one or two of these! Or could revisit them next week.

Timings: I’ll be here until c. 2pm.




Personal Note

A quick trading update from me.

I’ve sold my tiny stake in Property Franchise (TPFG), to help fund my house purchase.

My portfolio hasn’t been immune from the huge slide in the FTSE, but I still see this as a buying opportunity for long-term investors.

As you may know, I opened a long position in the FTSE Index (by selling a put option) and will look to do this again, if/when I have the funds to do it and if the market stays at these levels.

But I doubt that pricing in the option market will remain as attractive for option sellers as it currently is. The VIX (which tracks the IV of the S&P Index) spiked to 28 yesterday according to SharePad, and is currently trading at 22 on IG.

For context, my track record is to sell FTSE options at an implied volatility greater than 16, and the option I sold at the start of this week had an implied volatility of 18. The FTSE is less volatile than the S&P, and in my experience it’s rare that I would have the opportunity to sell a FTSE option at an IV greater than 20 (unless I went very far out of the money).

The bottom line is that, like Warren Buffett, I remain an enthusiastic buyer of stocks for the long term, and I’d love to get positions in the FTSE Index at depressed levels. My positions to go outright long the FTSE are still around 6400 – 6600.



NMC Health (NMC)

  • Share price: 938.4p (suspended)
  • Market cap: £1.96 billion

Update regarding independent review, CEO removal and other matters


This bombshell announcement came out at 5pm last night. Mysteriously, it failed to appear on Investegate, but you can find it on

It appears that the accusations by Muddy Waters (i.e. Carson Block), who shorted NMC, were far from the full story.

This latest RNS tells us that NMC has the “contractual obligtion” to settle debts incurred by various companies owned by two individuals:

  • BR Shetty (founder and until recently the Chairman of NMC)
  • Khaleefa Butti (until recently the Executive Vice Chairman of NMC).

Shetty and Khaleefa Butti are both involved in the problem that NMC doesn’t know who owns its shares, as I reported last week. Shetty is supposed to own around 19% of NMC, and Khaleefi Butti is supposed to own around 12%, but nobody knows for sure. It’s a complete shambles.

Last night’s announcement says that Shetty/Butti companies are still “responsible” for settling the debts incurred by their companies, but that if they don’t, then NMC would have to settle them. The amounts drawn down on these facilities as of December 2019 were an astonishing $335 million (c. £260 million).

The Board (except for Shetty/Butti) knew nothing about these arrangement, and naturally has determined that they should come to an end.

Other updates

The rest of the RNS is not exactly pleasant reading, either.

  • The CFO gets “extended sick leave”. As financial detectives, we need to remember that there is no such thing as a coincidence.
  • There are “potential discrepancies and inconsistencies in the Company’s bank statements and ledger entries”. Under investigation.
  • A member of NMC’s treasury team has been suspended, on the belief that investigations have been obstructed.
  • The CEO is removed with immediate effect.
  • The company won’t be able to publish its annual report for 2019 before the end of April 2020.

Annual reports are required within four months of year-end, so NMC would be suspended from May.

The company has gone ahead and suspended its own shares. The announcement came out at 7.58 AM, preventing complete carnage from taking place in the stock.

Personally, I was checking whether it would be possible to sell short a few NMC shares this morning, as it now appears to me that it could wind up to be worthless, depending on how bad the misdeeds are at the heart of the company. If Shetty/Butti companies were to default, for example, the huge £260 million liability (as of December 2019) would fall on NMC.

As I said earlier this month, anyone with a moderate degree of risk aversion could reasonably avoid NMC shares. The exotic location, the red flags raised by Muddy Waters (including the fact that Shetty had pledged his shares for borrowing purposes), and the failure of Shetty et al to even count their own shareholdings, were massive red flags.

Valuing NMC shares based on current information now looks impossible. Commiserations to anyone holding this – hopefully, it does not turn out to be worthless.


British American Tobacco (BATS

  • Share price: £32.665 (+1.5%)
  • Market cap: £74.9 billion

Final Results

Please note that I have a long position in BATS.

This has been a difficult holding for me. I overpaid at an entry price of £45 in late 2017, and regulatory measures and threats since then have made it difficult to be a BATS shareholder. I thought it was attractive at a mid-teens P/E multiple, but news flow since then dragged the multiple down to a single-digits. More recently, it has been at 10x.

You’ll find regular coverage of this share in the archives.

Today’s results look very reasonable at first glance.

Despite the doom and gloom surrounding the tobacco space, revenue is up 5.7% and adjusted operating profit is up 7.6%, too (though reported operating profit is down 3.2%).

I’ve been very keen for BATS to deleverage. It makes some progress on this front – I wish it would move a lot faster! Net debt is down by 4% to £41.7 billion.

Adjusting items

BATS reports £2.1 billion of adjusting items, which are the reason for the fall in reported profits and the fall in reported operating margin to 34.8% (from 38%). If you are happy to exclude the adjusting items shown above, BATS says that its adjusted operating margin increased.

Let’s look at the adjusting items in more detail, and whether we are justified in ignoring them:

  • class action lawsuit in Quebec (£436 million) – this is not truly a once-off event.
  • amortisation/impairment of trademarks (£481 million) – this is arguably reasonable to ignore (a judgement call, in my view)
  • excise dispute in Russia (£202 million) – probably reasonable to ignore this as a once-off event
  • other litigation (£236 million) – not a once-off event, but relating to historical cases
  • Quantum restructuring programme (£264 million) – not truly once-off, since restructuring is needed from time to time.
  • impairment of goodwill (£172 million) – not truly once-off, since mistakes in acquisitions will be made from time to time.

As you can see, I am fairly strict when it comes to adjusting items. Out of £2.1 billion in total items, I would only be willing to “ignore” maybe £700 million of them. If I was feeling generous, maybe £1 billion of them could be left out for the purpose of forecasting future performance.

Here’s the table in which BATS presents all of these items:

As you can say, there are certain items which cropped us last year, too (restructuring/integration, amortisation/impairment, and some litigation costs and other miscellaneous items).

All told, the adjusting items last year added up to about £1 billion.

This gives me increased confidence that I was right to assume that around £1 billion of this year’s adjusting items weren’t truly exceptional, and that next year will have another £1 billion or so (at least) of adjusting items.

On that basis, I would put the real “underlying” operating profit at BATS at c. £10 billion (remember this is before tax and interest!)

The interest bill is £1.6 billion (including the effect of IFRS 16) and the tax rate is around 26%.

When all is said and done, net income for the year falls out at £5.8 billion (vs. £6.2 billion last year).

The effects of large currency swings aren’t measured in this number, but they have a tendency to balance out. If you’re interested in that, you can scroll down to the Statement of Comprehensive Income in the accounts.

Divisional Breakdown

  • Cigarette/tobacco heated productsanother good performance. Volume share +20bps.

BATS is holding its own in a shrinking market: cigarette volumes were down 4.7%. Certain tax (Egypt) and economic (Venezuala) issues affected performance in particular countries.

  • New categoriesrevenue +32.4% at constant FX, “strong growth in all categories”.

Growth from New Categories (Vapour, Tobacco Heated Products and Modern Oral) are more than fully offsetting the decline in traditional cigarettes. (For the uninitiated, “Modern Oral” includes the brands Epok, Lyft and Velo.)

Revenue from New Categories came in at £1.2 billion. For now, this is still dwarfed by the Combustibles category (£22.9 billion in revenues).

All in all, it’s a very solid revenue performance.


I’m very happy with this outlook statement:

We anticipate global industry cigarette and THP volume to be down c.4%, with US industry volume down c.5%, in 2020. We expect adjusted revenue growth in the 3-5% guidance range (at constant rates of exchange), together with continued operating margin improvement and further progress in New Categories towards our 2023/24 ambition of £5bn in revenue. Results, in particular New Category revenue growth, will be weighted to the second half of the year.

The business is performing well and we are confident of delivering another year of high single figure constant currency adjusted EPS growth, with strong operating cashflow conversion in excess of 90%. Extrapolating today’s foreign exchange spot rates for the full year, we would expect a headwind of around 4% on full year adjusted EPS growth.

My view

As noted above, I would prefer to see the company deleveraging faster, but the reduction in net debt/EBITDA to 3.5x offers some comfort.

Credit rating agencies continue to give it scores of Baa2 (Moody’s) and BBB+ (S&P). As the leverage multiple compresses further, hopefully Moody’s will agree that it is becoming safer, and give BATS the Baa1 rating it wants (it already has the target rating it wants from S&P).

I wouldn’t normally invest in a company with a leverage multiple of 3.5x, but I think that BATS is safe enough to pull this off, and get the multiple down (thanks to geographic and product diversification). If it does that without a major hiccup, I’m confident that the equity will turn out to be worth at least what I paid for it (though I may have to wait some time before the market agrees with me!)

For those who like dividends, the yield here is c. 7%.


Aston Martin Lagonda (AML)

  • Share price: 341.65p (-12.6%)
  • Market cap: £780 million

Final Results

Directorate Change

Announcement re rights issue

It’s a triple whammy for AML shareholders today.

I speculated last month in this report that in the short-term, AML could be a better short than Tesla ($TSLA) (which is saying something, since I have an emotional attachment to the Tesla short!)

My reasoning was simple: the AML balance sheet was weak, and it has gone bankrupt many times before (seven times).

Tesla’s balance sheet is not great either, but that company has proven capable of raising funds to bail itself out. It recently raised another $2 billion (despite Musk indicating a week prior that he wouldn’t do it). When sentiment around a stock is so incredible, and in the absence of any regulatory action, raising money becomes child’s play.

Since last month’s article, the AML share price is down by around 30%, while the Tesla share price is up 70%. As I said on Twitter, it would have been an incredible pairs trade!

Today, AML announces a full-year loss for 2019, net debt rising to £876 million, and its leverage multiple increasing to 7.3x.

The CFO steps down after five years in the position, and the company gives details for a £500 million capital raise, to include £317 million by way of an underwritten rights issue. The fundraising was first announced at the end of last month.

My view

I’ve run out of time for today but I retain the view that this share should be vigorously avoided. Without the £500 million fundraise, it would surely be heading for its eight bankruptcy. If you think there won’t be an eight bankruptcy at some point, then I have a bridge to sell you!


Playtech (PTEC)

  • Share price: 277.55p (-9.6%)
  • Market cap: £843 million

Final Results

This provider of gaming software has been looking cheap for a while, and it’s getting cheaper.

It clearly thinks that it’s cheap, too. It announces a €40 million share buyback. This is on top of €65 million in buybacks already done over the past year, plus dividends. It has paid out €1 billion to shareholders over the past decade.

It describes itself as “the gambling industry’s leading technology company delivering business intelligence driven gambling software, services, content and platform technology“.

The statutory profit numbers given today are rubbish, while the adjusted numbers are merely bad. This is despite very good top-line growth:

Today’s results also includes a profit warning for 2020, which is likely to be below existing market expectations.

This is because of “changes in normal customer patterns due to COVID-19 which is significantly affecting two of its largest markets”.

I continue to think that COVID-19 will either be contained or (more likely) we will learn to live with it, in the same way that we deal with the flu. Either way, I don’t believe that it means a long-term reduction in economic activity. It does mean that there is less activity in H1 2020.

The main problem for Playtech in 2019 was TradeTech, its CFD and financial trading division, which recognised a €90 million impairment. ESMA rules and low volatility are blamed (which affected the entire industry).

Playtech is looking at “strategic options” for this business. Sounds like it could be sold off.

My view

I think this is an interesting turnaround situation.

Playtech does have an undeniably good track record of shareholder returns, and looks to be continuing in the same vein with the latest buyback announcements.

If it is ruthless in dealing with TradeTech and other underperforming divisions, I suspect that it will return to form for shareholders.



Roland is here tomorrow.

By the way, I really appreciate all the “thumbs up” received yesterday (and every day!)

All feedback, good or bad, is invaluable to us. It helps to know what we are doing right, and what we need to improve.

See you again soon – and stay safe out there! Have a great evening.




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Wordpress (7)
  • comment-avatar

    Hi Graham, 

    Would you be able to cover Playtech (PTEC) ? They issued FY Results today, which contain a big (expected, probably, given previous updates) profit warning. However the company has some restructuring potential, for example divesting their tradetech business, focusing more on snaitech etc. 

  • comment-avatar

    Hello Graham
    I am interested in PSN, HWDN and VTY

    • comment-avatar

      Hi there, if Roland doesn’t cover any of them tomorrow, then I’ll see if I can fit them in next week. Hope that’s ok. G

  • comment-avatar

    Unrelated to the above I was wondering how your TSLA short is performing. I don’t have a position at the mo but it seems to me that this would be a great hedge against further corona virus jitters. An EV is very much a discretionary purchase particularly if petrol pump prices continue to fall. Also interesting to note that Tesla sales have slumped in Norway very recently following the intro of the new Audi etron. Not a big market admittedly and there maybe other reasons but EV penetration in Norway is v high but potentially a leading indicator for other parts of the world. I can’t make sense of the TSLA consensus EPS forecast in share pad either… 

    • comment-avatar

      Hey Merlotman. Totally agree re: the negative prospects for Tesla sales, but in general I don’t do “valuation shorts” – I only do shorts with a near-term catalyst, which ideally is insolvency.

      Eyes still on Tesla but they have successfully avoided insolvency for the time being.

      Glad you’re enjoying the midcap reports! Really appreciate your support. G

  • comment-avatar

    By the way thanks to you and Roland for your excellent madcap reports – keep it up!

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