Cube Midcap Report (29 April 2020) – Business, interrupted #HSX #NXT

Cube Midcap Report (29 April 2020) – Business, interrupted #HSX #NXT


The FTSE continues to gain strength and is now approaching 6000 in the futures.

Many of you will have seen at least a partial recovery taking place in your portfolios. I’m pleased to report that my portfolio has, in aggregate, mostly regained its losses from the Corona-shock – my top 5 holdings are all ok.

The broader optimism in the market is two-pronged:

  1. The global lockdowns can’t continue, and will be unrolled in stages in the coming weeks and months.
  2. There is so much monetary stimulus coming that investors have to buy something.

Both reasons are valid, in my view.

I also don’t want to understate the level of disruption – this is Armageddon for a number of sectors.

Even large, ostensibly well-capitalised companies such as British Airways, owned by IAG (IAG), are being forced to shrink. Last night, in a late announcement to the stock exchange, it said that up to a quarter of its workforce, or 12,000 people, might be made redundant. Unions aren’t taking this lying down (Sky, BBC).

Here are some of today’s announcements:

  • Hiscox (HSX)
  • Next (NXT)
  • Trainline (TRN)
  • Dixons Carphone (DC.)
  • Barclays (BARC)

I published a late edition of the midcap report last night. In case you missed it, here’s the link (covering HSBA, PLUS, GAW and MKS).

Timings: all done at 13.15pm.



  • Stock data should display here.
Market cap £2.0 billion ($2.5 billion)
RNS Response to press speculation
Writer disclosure No position.

I covered the insurer Hiscox a week ago, thinking that the share price was now back at levels where I could consider investing in it.

Its Covid-19 liabilities for “event cancellation and abandonment, media and entertainment and other segments including travelwas estimated at up to $175 million, if travel and mass gatherings are cancelled for over six months.

The more contentious potential liability is around business interruption policies.

BI Controversy

Hiscox and most other insurers believe that they are not liable for the closure of business premises due to government decree.

According to the insurance industry, standard policies covering infestation and other biological attacks only pay out when a particular location has been affected, not when all premises are forced to shut down by law.

I note that other investors are more cautious when it comes to Hiscox’s potential liability, e.g. in the comments last week:

“…the wording used by Hiscox in respect of “notifiable human disease” would seem to provide much wider cover than is normal elsewhere in the market.”

There is now a Hiscox Action Group with 200 business members, to fight Hiscox for business interruption payouts. They have received litigation funding for an initial review of their claims.

According to a partner in the law firm working for the Action Group, quoted by Insurance Age:

Hiscox have said that they did not intend to cover what has happened. That is irrelevant. We are looking at what is in the contract. They have provided a very broad form of wording and its natural meaning would cover someone whose business was interrupted by the lockdown.

The business interruption policies are supposed to cover “an occurrence of any human infectious or human contagion disease”. That does indeed seem very broad.

Edited to add: You can read about Hiscox’s response to an estate agent here:

“The Public Authority clause you refer to is designed to cover losses resulting ‘solely and directly’ from an interruption caused by an inability to use insured premises due to restrictions imposed by a public authority.

“This means that in no case would it cover losses that would have arisen even if the premises could have been used or accessed, such as those suffered as a result of the wider economic slow-down following the actions the Government has taken requiring people to stay at home.

“It is triggered following the happening of certain specific events at, or local to, the premises, for example; a murder, an occurrence of a contagious disease that must be notified to the local authority, food poisoning, problems with the drains or vermin.”

The company also says it took “senior independent legal advice” on this matter.

Balance sheet – more like Swiss Cheese, less Cheddar?

I noted in last week’s report that Hiscox had year-end balance sheet equity (NAV) of $2.2 billion, including cash of $1.1 billion.

According to the 2019 Annual Report, total available capital was $2.3 billion, made up of:

  • tangible NAV of $1.9 billion
  • subordinated debt c. $400 million
  • in addition, $750 million of further funding was available from letter of credit facilities

This graphic assured that there was plenty of headroom over regulatory capital:

So just how big is the hit from Covid-19?

The point was made on the message boards last week (yes, I read them!) that last week’s RNS failed to quantify the potential risk from larger customers, i.e. the company said:

Over 70% of [business interruption] customers have monthly revenues of less than £40,000 in a normal trading environment…

What about the other 30% – are some huge companies inside that group, who could claim for BI payouts if the Hiscox Action Group succeeds? It’s an important question.

I estimated that 10,000 BI customers, if their revenues are at the lower end of the scale, could potentially claim in the region of £300 million.

But if 30% of those customers are much larger, where does that leave us – does this number have to be doubled? Is that the real “worst-case” scenario?

If the total hit, including $175 million from event cancellation/abandonment policies, turned out to be $800 million, then most of Hiscox’s cash balance would be wiped out. Letters of credit would not be a sustainable solution to that problem.

Eyeballing the above bar chart, I think there would still be a surplus above regulatory capital, but it would be far from comfortable. The credit rating would suffer and there would be a strong desire to plug the hole in the balance sheet.

All of which brings us to today’s RNS:

The Hiscox Board believes the Group has sufficient capital to meet expected liabilities arising as a result of exposures to the pandemic…

Hiscox expects the resultant uncertainty arising from the pandemic and consequent capital contraction to result in rates hardening across US wholesale and reinsurance markets. Whilst Hiscox’s capital, liquidity and funding positions remain robust, Hiscox is evaluating possible sources of capital to respond in an appropriate way to these market dynamics, which could include raising new equity.

Hiscox is not changing its tune with respect to the BI issue. It is saying that because rates will harden in wholesale and reinsurance markets in America, i.e. because it will become more expensive to do business there, that it may wish to raise equity.

My view

I don’t buy this RNS. Higher wholesale and reinsurance rates are hardly sufficient, on their own, to justify a capital raise?

Instead, this looks like it might be a precautionary move to raise capital, in case it loses on the BI issue.

It might be easier to raise funds before it loses on BI, when it is still possible that it will win the BI dispute, instead of trying to raise funds after a major loss on that issue (when I guess the share price would be much lower).

To be clear, I don’t have a strong view on who will win between Hiscox and its customers disputing the interpretation of BI policies.

But I’m glad I didn’t rush in to buy HSX shares last week. It is a company that I do want to own, but I would like some more clarity on this issue, and on its balance sheet.

I would be very interested to buy in if the market cap was at a discount, or only a small premium, to the company’s balance sheet equity, after adjusting equity downwards for expected Covid-19 losses. As others have noted, I also need to think of possible reputational damage.

At the moment, I’m unable to make the calculation. Will keep an eye on it.



  • Stock data should display here.
Market cap £6.25 billion
RNS Trading Statement
Writer disclosure Long NXT.

This is in my 2nd tier of portfolio holdings – I’ll need to do another update soon, covering my next tier of holdings.

Next has been admirably and predictably transparent in its response to this crisis. The management team here are much-appreciated by the investor community.

Let’s see what’s new here:

  • Sales have fallen faster than was anticipated in the March stress test. Lower sales are now being modelled for the rest of the year – bad
  • Higher cost savings and stock cancellations than anticipated can be achieved – good.
  • bank covenants waived for this year – good, though I’m disappointed this is necessary!
  • government’s Covid Corporate Financing Facility secured – good, but I hope they don’t need to use it.

An important conclusion:

“The conclusion is that we now believe that the finances of the Company are as secure as when we announced in March, if not more so.”

The March announcement included measures to keep an extra £835 million in the business, if necessary. That would help it to manage its £1.6 billion in debts (excluding those to do with its lending activities).

In March, it thought a 25% reduction in sales for the year was too pessimistic. It is now planning for a 40% reduction.

It says:

“…the mitigation we have put in place means that (1) the Company can operate comfortably within its cash resources and (2) we will end the year with less net financial debt than at the end of last year.”

Recent trading

Sales fell to almost nothing around the end of March/beginning of April, and appear to be recovering from this very low base:

Online sales are currently running in a limited state, after some employees volunteered to return to warehouse operations. You can view the employee safety video here.

I’m encouraged to read that online capacity is planned to get back to 70% in the next two weeks. 76% of staff are “able to work” (not limited by childcare or health vulnerability).

Reopening – “We have plans in place for the re-purposing of our stores ready to re-open in a socially distanced world.”

Modelling an uncertain future

This is a very important table, showing the cash impact of what is expected to happen.

Have you ever seen a company be so transparent?

I’ve highlighted the figures in the bottom right, as they are the conclusion of the analysis for a “worst-case” scenario.

Full-price sales could be worse than 40% lower for the year, of course. But based on the previous bar chart, showing a nice recovery in the last week or two, it is hard to imagine that it could be as bad as that.

Anyway, you’ll see that there is a nice inflow from reduced lending to customers, helping to mitigate the cash impact of reduced sales.

Reduced wage costs (from the government furlough scheme), the business rates holiday and lower corporation tax will all help.

Furthermore, the company thinks it can raise over £800 million in cash from cutting buybacks and dividends, the sale and leaseback of Head Office and warehouses, reducing capex, etc.

Indeed, it thinks that net debt is going to fall for the rest of the year, with plenty of headroom:

My view

I’m delighted with today’s update and will continue holding NXT shares.

Management teams which are as transparent and logical as this deserve to be supported by their shareholders.

I expect that this year’s result will be a mess, and it will take some time for economic recovery. But I’m happy to stay in it for the long-term.



  • Stock data should display here.
Market cap £1.75 billion
RNS Covenant waiver agreed with lenders
Writer disclosure No position.

Trainline gets a waiver on its covenants, too.

As discussed before, I’m still a bit sceptical about this company. Why can’t it produce a good income statement? Why does the market rate it so highly? Can anyone explain?

Not tempted to get involved.


Dixons Carphone

  • Stock data should display here.
Market cap £922 million
RNS COVID-19 Business Update
Writer disclosure No position in DC. Long GAW.

Genuinely good news here. UK & Ireland online sales at Dixons are “recovering around two-thirds of lost store sales“. What a result!

Here is the overall picture from Dixons Carphone:

I’ve highlighted the last 5 weeks (roughly matching the Coronavirus panic). Like-for-like electrical sales are only down 3%, as international growth has offset the decline in UK&I.

Nordics trading strong across stores and online” – I noted yesterday that Games Workshop (GAW) stores are currently open in Scandinavia. Lockdown never happened in Sweden, and Norway is emerging, too.

I suppose it makes sense that with people stuck at home, and having to work from home, would want more electronic gear. Dixons says that the demand for computers, home networking, gaming, TVs, refrigeration and things like bread makers has increased. Only items associated with moving house (other white goods) and photography have declined.

This trend was also discussed in the March update.

Financial headroom – sounds very big. £1 billion of undrawn debt. “We do not foresee needing to access any additional liquidity, and we expect to comply with bank covenants unless substantially all of our operations are required to close for an extended period.”

Net debt currently around £300 million.

My view

I am surprised the market cap has got so low, as this doesn’t appear to be at risk of going bust. It generated operating profit of over £300 million last year.

It might be due another name change, now that the standalone Carphone Warehouse stores are closed.



  • Stock data should display here.
Market cap £17.6 billion
RNS Q1 2020 results announcement
Writer disclosure No position.

Barclays says it is doing its bit for the country with a £100 million charitable donation and:

As at 24 April 2020 we have facilitated significant commercial paper issuance though the Covid Corporate Financing Facility, lent £737m in Coronavirus Business Interruption Loans, approved over 238,000 mortgage and loan payment holidays, and over 6 million customers and clients are currently paying no personal overdraft or business banking charges. 

Highlights from the results:

  • Credit impairment charge: £2.1 billion, reflecting “initial estimates” of Covid-19 impact.
  • Return on Tangible Equity (RoTE): 5.1%. Hard to get excited about that return.
  • CET1 ratio: 13.1%. Less conservative than HSBC, still at a safe level.
  • TNAV per share: up 8% to 282p, helped by changes in things like pension calculations and FX rates.

The low returns are the big problem here. Barclays still wants to get to over 10% RoTE:

Given the uncertainty around the developing economic downturn and low interest rate environment, 2020 is expected to be challenging. However, the Group believes that a RoTE of greater than 10% remains the right target for the Group over time

In other words, RoTE of over 10% won’t be happening this year.

My view

It’s tempting to get involved here when you see the big discount to tangible NAV. It might be fun to speculate on a bounce back towards NAV

However, I don’t have faith in it achieving a good RoTE over time, so I’m not tempted. It hasn’t achieved a return on equity greater than 10% for over a decade.



That will do it for this report, cheers!




Wordpress (7)
  • comment-avatar

    Hiscox is going to be an interesting one to monitor going forward. “Hiscox have said that they did not intend to cover what has happened” – ha! I wonder how often they’ve heard the other side of the argument from claiming customers, along the lines of “I took out this policy because I intended it to cover what’s just happened”. However, I’m also reminded of the outcome in the Equitable Life fiasco a number of years ago where the courts finally agreed that a guarantee given in policy documents was worthless in light of events that could not have been forseen.

    As worrying for Hiscox going forward is the reputational damage that this is all going to cause – they are by no means the cheapest insurer but have managed to maintain their “best in class” premiums primarily on their advertising featuring the very high percentage of customers who would recommend them and the very high percentage of claims that were settled without fuss. I doubt that those metrics are likely to apply in future.

    No, I don’t hold, always wanted to but now think I’ll wait and see.

  • comment-avatar

    p.s. – I don’t understand how the “Chat” feature works anymore, Graham. Or maybe it’s only there for Gold members?

    • comment-avatar

      Hi Laughton, when you’re logged in you should see a Chat box in the bottom right corner. It opens up when you click on it.

      Hopefully it’s there for you?


  • comment-avatar

    Good afternoon Graham, another way of looking at the Hiscox announcement is that they are looking at raising capital to take advantage of rising premium rates. Which I have heard from another broker have been rising steeply since the pandemic.
    Regards, Graham

    • comment-avatar

      GF, I would suggest that that is the illusion that Hiscox are trying to create. Do you see any other insurance company anywhere looking to raise fresh capital to take advantage of current market conditions?

    • comment-avatar

      Hi GF. Thanks – yes, that’s an interpretation. I agree that rates are likely to rise a lot, and am not surprised to hear that they have already risen.

      Question is does Hiscox need any more capital to exploit that, though? Should it not have plenty spare, assuming Covid payouts are limited to event cancellation?


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