Cube Midcap Report (28 Jan 2020) – Aggressive competition for #PZC #VMUK #BAG #ERM

Cube Midcap Report (28 Jan 2020) – Aggressive competition for #PZC #VMUK #BAG #ERM

Good morning!

I’m back for the rest of this week with the Midcap Report, every day.

Some companies whose announcements I’ve noticed today:

  • PZ Cussons (PZC)
  • Virgin Money (VMUK)
  • Barr A.G. (BAG)
  • Euromoney Institutional Investor (ERM)

Timings: I’ll be here until 1pm.

PZ Cussons (PZC)

  • Share price: 196.3p (+1%)
  • Market cap: £842 million

Half-Year Report

This venerable old FMCG group is firmly on my radar, as its market cap has been under pressure for several years now.

Its portfolio includes Imperial Leather, Carex and Original Source – excellent labels, in my view. That said, it is undeniably true that the rise of retail supermarkets and “own brand” continues to weaken the pricing power of traditional customer brands.

In today’s H1 results, I consider this to be the most useful table:

It shows that the decline in profitability in the core Europe/Americas region was 4.3% at constant currencies (the corresponding revenue decline was 4.7%).

The UK was marked by “continuing consumer uncertainty, trading down to private label in hand wash and well-documented challenges in the UK high street”.

The macro situation is unavoidable and perhaps temporary, but the “trading down to private label” strikes me as more troubling – it’s an admission that Carex customers are being lost to cheaper alternatives. PZC talks about “aggressive low price private label competition”.

This is a serious, long-term loss of business. Imperial Leather and Original Source also saw “moderate decline”.

The other regions have their own specific problems. In Asia Pacific, there was “increased promotional activity and lower consumer confidence in Australia”, and “increased marketing investment and higher manufacturing costs in the supply chain”.

In Africa, the Nigerian economy is a big problem and more specifically, the ports in Lagos are badly congested. It’s hard to imagine this improving quickly.

In summary, all regions performed badly and the smaller scale of Asia Pacific & Africa led to much greater percentage declines for them. Profitability in Europe & the Americas was relatively stable, but there is a possible long-term loss of pricing power versus private labels (hand wash being the most recent category to experience this).


A stronger second half profit before tax is expected subject to no further worsening of the economic and trading environments across our key geographies… full year revenue and profit before tax from continuing operations is expected to be modestly below prior year.

I can see forecasts for revenue of £689 million and EBIT of £69.9 million this year (FY May 2020).

The forecasts will depend on improvement in the UK, including “recovery in hand wash driven by environmentally friendly range and marketing plans at trade level” – fingers crossed that the company can achieve this.

CEO – as previously announced the CEO, after 26 years with PZ Cussons, is leaving in a few days. “Plans to appoint his successor are well advanced”.

Exceptional costs/income – the company reports £6.7 million of net exceptional income, after the disposal of a Greek business.

Exceptional costs include £1.1 million in the “Group Strategy Project” (costs to dispose of noncore business units) and £0.5 million in the “Group Structure and System Project”, consisting of “initiatives underway to improve our operating efficiency across Head Office and all three Regions”.

This latter project is one of my bugbears. When companies have vague categories of costs included within their exceptional charges, my fear is that they include expenses which are inevitable whenever you run a large business – upgrading your computer systems, for example. I hope that the H2 charges associated with this aren’t too big!

Borrowings reduce to £178 million, with net debt of £136 million. Leverage seems light, compared to annual profitability (net debt/EBITDA of 1.5x is modest).

My view

I am less enthused now, than I was when I initially opened the RNS.

Don’t get me wrong: PZC is a quality company, and my view hasn’t changed on that. It’s diversified internationally and in terms of its brand portfolio, which helps to reduce the risk.

And the shares are more tempting to me than they usually are, based on the current valuation (forward P/E multiple of 16x).

The problem is that all of PZC’s main brands appear to be in decline in their main markets. And I don’t see the “aggressive” private labels going away any time soon. Their growth, at the expense of traditional brands, is a secular long-term trend. Marketing plans at the trade level might help, but I don’t see it changing the preference of consumers for cheaper versions of hand wash, for example.

As a result, I can’t avoid the conclusion that these shares, rather than being cheap at current levels, are more likely to be trading at fair value.


Virgin Money UK (VMUK)

  • Share price: £171.375p (+4%)
  • Market cap: £2.5 billion

First Quarter 2020 trading update

Trading at this challenger bank, one which explicitly seeks to “disrupt the status quo”, is in line with expectations.

When I studied its final results back in November, I thought it might be “seriously undervalued” relative to earnings and book value. The share price has barely moved then – maybe the opportunity is still there?

Summary of the quarter:

As shown above, customer deposits grew at a healthy pace, but overall lending declined. This was due to the company shying away from mortgage lending (“we remain disciplined in a competitive market”). It’s more ambitious in the other categories.

Net interest margin is flat at 160bps.

CET1 ratio (a safety measure) reduces from 13.3% to 13.1%. This is probably a good thing, in my book. One of the things dragging on bank returns at the moment is that they appear to be over-capitalised. Virgin’s CET1 ratio increased thanks to more risk being extended in the Business and Personal lending divisions.

PPI is falling away as an issue: “the Group assesses its remaining provision as sufficient to complete the outstanding volumes“. Fewer than 50,000 cases still require assessment, after 100,000 cases were dealt with in Q1.

Rebranding is underway as the classic Clydesdale Bank name is retired.

My view

I’m tempted to have a flutter on this, with a starter position that could increase over time.


Barr A.G (BAG)

  • Share price: 622.5p (+14%)
  • Market cap: £697 million

Trading update

Readers might remember that this maker of IRN-BRU has a permanent place on my watchlist. I was extolling its virtues and complaining about how expensive it shares were up at 791p, before its major profit warning in July. Weather variations, the sugar tax and a CO2 shortage all conspired to drag down revenues and profits in 2019.

Thankfully, the company appears to have stabilised:

Adjusted profit before tax1 performance is expected to be at the top end of current market expectations, just ahead of £37m.

Profitability is running at a lower level than previous years, but at least the reduced expectations are being met. And forecasts suggest that PBT will inch higher by 4% in the current year.

Like PZ Cussons, this is a company with challenges in pricing. Barr appears to be winning:

…across 2019 we adjusted our promotional and pricing position to align more closely with the market.  While this had an expected impact on volume, it has delivered an increase in average realised price, re-establishing our consumer pricing position. 

It gets a big green flag from me for buying back its shares at these lower levels (for £30 million).


The external landscape remains challenging, however we exit the year with encouraging trading momentum which we expect to continue into 2020.

My view

At a forward P/E of 20x, I think I find this more attractive than PZC. Unlike PZC, Barr reports that its primary brand (IRN-BRU) has now returned to growth. The company’s recovery plan is being implemented and is working. And it had a small net cash position as of the most recent interim results, unlike PZC.

Definitely worth keeping this one on the watchlist, in my view.



Elsewhere, Euromoney Institutional Investor (ERM) issued a Q1 update in line with expectations and left its full year outlook unchanged. Underlying revenue was flat year-on-year. The shares are currently down 4%.



That’s all for today – thanks for dropping by and see you tomorrow!





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