Cube Midcap Report (3 April 2020) – London rents go missing #GPOR #ABF #SGC

Cube Midcap Report (3 April 2020) – London rents go missing #GPOR #ABF #SGC

Good morning!

The FTSE is only down by 1%. That’s virtually unchanged, in the context of recent moves.

In other news, we have just published a new premium article highlighting three cylical stocks which could benefit from a rebound. A huge thanks to Andy for sharing his views.

That article is available to our Gold Members, who are also contributing to the production of this report. We really, really appreciate your membership – this website couldn’t survive without you!

Today, I plan to look at:

  • Great Portland Estates (GPE)
  • Associated British Foods (ABF)
  • Stagecoach (SGC)
  • XP Power (XPP)

Timings: finished at 2.20pm.


Great Portland Estates (GPOR)

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Market cap £1.6 billion
RNS Trading Update
Writer disclosure No position.

This is a REIT focused on central London (hence, our featured image today).

Its property portfolio can be reviewed on its website.

The CEO has some calming words today:

However long the Coronavirus lasts, with our low gearing and ample liquidity, GPE is well positioned to weather the impact until market conditions normalise. In the meantime, unsurprisingly, we expect leasing activity to decline until the crisis passes, particularly in retail, although it is pleasing that a number of our office pre-letting negotiations are ongoing and we continue to receive new enquiries from prospective occupiers.

Checking the half-year results, for the period ending September 2019, the company said it had a “rock solid financial position”. It had just completed £200 million in share buybacks (at an average price of 720p).

The net asset value per share was reported to be 868p (on an EPRA NAV basis, which is adjusted for fair values).

Then in February, GPOR made a further update. Its LTV was said to be 15.8% as of the end of December (a very low lever) and there were cash and undrawn facilities of £368 million – plenty of headroom. Also, the company made a £64.5 million disposal in January.

Now let’s return to today’s update:

  • GPOR is “agreeing on a case by case basis the payment of monthly rents or deferring rental payments” (particularly for retail, hospitality and leisure tenants)
  • “All of our occupied buildings remain operational, albeit the majority of our occupiers are working from home, and activity on two of our three development sites has temporarily been suspended”

The major bombshell is about rent collection: only 63% of quarterly rent was collected within seven days of March quarter day (versus over 99% for March last year, and for December). Most of the missing rent is from retail, leisure and hospitality occupiers.

GPOR has agreed to collect monthly-in-advance (instead of quarterly-in-advance) rents from 9% of its rent roll. These are excluded from the rent collection percentage in the previous paragraph.

The next annual results will include a “material valuation uncertainty statement” from the external valuers.

As for GPOR’s financial situation:

  • LTV has reduced to 14.1% following the recent disposal.
  • Property values can fall by 72% before the company breaches its debt covenants.
  • The cash balance of £111 million exceeds committed capex of £76 million. Further headroom with £300 million of undrawn facilities.
  • Total net debt is £373 million

My view

This looks very secure to me. I am not predicting that property values will fall by more than 70%, or that GPOR will be forced into a firesale.

Some sizeable defaults may be unavoidable – depending on the duration of lockdown. It’s pure guesswork but let’s pencil in around 10% of the quarterly rent roll defaulting. Earnings will take a hit this year.

Valuations are merely a function of rent payments, and again are uncertain. Similarly, let’s pencil in a 10% decline in property values as a “base case” scenario (please let me know if you have a better suggestion!)

A 10% reduction in property values would hit the GPOR balance sheet (as of September 2019) by around £250 million.

Based on 254 million shares outstanding, that’s about £1 per share in NAV.

That would take GPOR’s September 2019 NAV to 768p (before taking into account rental earnings, dividends and gains on disposals since then).

The market is evidently pricing in a bigger hit, with the shares currently in the low 600s. By my maths, the current share price of 636p values the company’s assets at a c. 22% discount to their previous balance sheet value*.

Is that too pessimistic?

Unfortunately, the answer to that question depends entirely on the duration of the lockdown.

Based on 35%-40% of the rent not getting paid in the usual way this quarter, it doesn’t appear to be overly pessimistic. However, if the lockdown is lifted soon, then we can expect that nearly all of these tenants will want to keep using the properties in the manner they did before. If GPOR hasn’t been forced to sell anything, it’s long-term income stream won’t change very much.

While I don’t have any conviction in this call, I am inclined to think that the market is a little too pessimistic about GPOR’s prospects.


*Based on a discount to previous NAV of 232p, 254 million shares outstanding (valued discount of £590 million), and assets of £2,656 million.


Associated British Foods (ABF)

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Market cap £13.5 billion
RNS Covid-19 Update – Executive Director Remuneration
Writer disclosure No position.

The CEO and FD have asked for a temporary 50% reduction in base pay, and they won’t receive any bonuses for this year.

The CEO of their subsidiary, Primark, has also asked for a 50% reduction in base.

Non-executive directors of ABF haven’t gone quite so far (though of course their fees are much lower to start with). They are taking a temporary 25% cut.

You can check out various parts of the entire ABF group here. Sugar, grocery, ingredients and agriculture are not materially impacted by the Covid-19 crisis. But Primark most certainly is:

The board is acutely aware that many Primark employees will see their livelihoods affected by Covid-19.

According to thisismoney, Primark’s 30,000 staff will be on the government’s job retention scheme from this Sunday.

Cash balance

At year-end, ABF had cash of £1.36 billion and net cash of £936 million.

In the update two weeks ago, ABF said it had net cash of £800 million and a further facility of £1.1 billion.

Today, it says it has cash of £1.7 billion. It doesn’t say what the net cash is – I’m going to go out on a limb and suggest that it is probably lower than the £800 million of two weeks ago.

Even so, that cash balance should provide a good deal of flexibility.

Primark net sales of £650 million per month have been lost, but the staff costs are going to be borne by government and the company is not making any orders from its suppliers. So I guess that leaves the thorny issue of rent.

As of March 25th, Primark hadn’t paid its quarterly rent for two-thirds of its UK stores. It also stopped making rent payments in Ireland, where it trades as Penneys.

Primark is not alone. JD sports, Burger King and H&M are said to be kicking up a fuss, too.

My view

Checking the most recent annual report, I see that Primark was responsible for £910 million of adjusted operating profit in FY September 2019, out of £1,420 million for the entire group.

On the basis that the other parts of the group should still be profitable and can help to subsidise its losses, I would expect that its existing equity has a better chance of survival than other retailers.

Other reasons for optimism:

  • Staff pay is being taken care of by the government
  • There could be some movement on rents with landlords
  • It has that huge warchest of £1.7 billion in cash, and probably has significant additional headroom in its borrowing facility

This is no sure thing by any means, but on the face of it, ABF does appear to have decent chances.


Stagecoach (SGC)

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Market cap £376 million
RNS Covid-19 update
Writer disclosure No position.

I didn’t realise this has dropped below our £500 million cut-off, before I selected it for inclusion today.

The share price has more than halved since the end of February.

Today’s RNS reminds us that the governments of England, Scotland and Wales have measures “to support the continuity of bus services”, and these will “reduce the risk of substantial ongoing operating losses” (though anything could happen in the short-term).

Key workers such as NHS staff still need to get to work, and bus services will continue to be there for them, with the government’s support. There are a range of grants being made available – I won’t go into the detail of these here.

Other key points:

  • Commercial sales at SGC’s local regional bus companies are at 15% of normal levels.
  • Vehicle mileage has reduced to 50% of normal levels and will soon reduce to 40%.
  • 55% of bus drivers and engineers will be furloughed, plus some other employees. They will receive the government’s job retention payments.

Balance sheet – available cash and undrawn borrowing adds up to £506 million. This reduces to £272 million if you subtract liabilities of the rail business and faciltiies which expire late next year.

Guidance – there isn’t any.

Given the fast moving and extreme situation, it remains difficult to reliably estimate and forecast the effects of the COVID-19 situation on our regional bus income statement. 

The lack of guidance even extends to the performance in March, since retrospective government support might be received for it.

My view

The £506 million in headroom, or £272 million in “adjusted headroom” is  much bigger than the new planned capex of £40 million, and £20 million to be spent on leases.

Could the imminent losses use up all of this headroom?

I honestly don’t know.

Monthly operating costs were £120 million in H1. Those costs will be slashed by the reduction in mileage and staff costs, but we should probably assume that monthly losses could be up to half of that amount.

If monthly losses were, say, £50 million, in the short-term, that would still leave plenty of time before the £506 million in headroom was depleted – time for the lockdown to end, or time for mileage and headcount to be reduced even further.

I have no specific information on covenants – none was given in the most recent annual report. An outstanding £400 million bond does not expire until 2025.

On the assumption that it won’t trip a banking covenant, my conclusion is that this also looks like it has good survival chances.

But a share price recovery depends, as is the case for most shares, on how quickly life returns to normal.


XP Power (XPP)

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Market cap £515 million
RNS Trading Update and COVID-19 impact
Writer disclosure No position.

This provider of power products seems to be doing ok:

  • all manufacturing facilities are operational (in China and Vietnam)
  • Vietnam manufacturing has seen “minimal impact”
  • China manufacturing capacity expected to return to normal in Q2
  • trading in Q1 (Jan-March) was in line with expectations!

Current trading – order intake is strong, with exceptional demand in Healthcare.

The book-to-bill ratio was 1.49 in Q1. There were more orders than XPP could fill.

Net debt is £45 million, with £50 million of headroom in cash and facilities. That headroom is nearly a year’s worth of operating expenses. XPP is “very comfortably within its financial covenants”.

Dividend – this looks very cautious, but XPP is not planning to proceed with its next dividend, which would have cost £6.9 million. Maybe a sharp cut in the dividend would have been more appropriate, instead of outright eliminating it?

Outlook – cautious, which makes sense in the light of the dividend suspension.

While trading in the first quarter has been resilient, with some pull forward of demand and exceptional order strength in Healthcare, the global effort to combat COVID-19 creates a high level of uncertainty about the Group’s performance in the balance of the year. To date, order intake has remained robust and the Group has a substantial backlog to fulfil, with shipments weighted towards the second half.  While we remain encouraged by the strength of our order book, the extent of disruption to the global economy from the impact of COVID-19 is currently impossible to predict, introducing a significant element of uncertainty into the outlook for 2020 as a whole.  

My view

I would have made a small payment to shareholders, since the trading performance at XPP is still very good.

The demand for power components should be fairly robust, in my view, even if many parts of the global economy are struggling.

This share has been a solid performer over the years and is arguably very good value at 16x earnings. Worth looking at more closely.



That will do it for today, have a relaxing weekend everyone.

Best wishes





Wordpress (2)
  • comment-avatar

    Thanks for the interesting analysis Graham. At the moment, my aim is to invest in companies which I think will survive this crisis. As such it is helpful tome that your focus is on financial strength & withstanding the economic shutdown. 

    I do like ABF, but won’t touch anything with direct retail exposure at the moment. XPP would be my pick from today’s report. 

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