Cube Midcap Report (3 July 2020) – The urge to gamble

Cube Midcap Report (3 July 2020) – The urge to gamble

Good morning!

Here is the link for today’s live-stream:

This report covers:

  • CMC Markets (CMCX)
  • Rank Group (RNK)
  • Land Securities (LAND)

CMC Markets

Market cap £955 million
RNS Q1 2021 Trading Update
Writer disclosure No position in CMCX. Long IGG.

I discussed CMC’s final results in some detail over at Stockopedia last month.

The main point of that article:

My fear is that CMC decided to take on a somewhat riskier business model, as a way to make up for the business that was crushed by the leverage limits.

CMC is now hedging less than it was before, and accepting a wider range of daily revenue.

Its results have benefited enormously from what it calls “risk management gains and losses”.

Today’s Q1 update shows more of the same positive trend:

  • client trading activity still running at double what it was last year
  • “Client income retention for the period is materially higher than the 82% reported in H1 2020”

Result: net operating income for Q1 2021 exceeded the entire H1 2020 result of £102.3 million (thanks to the reader Dave for pointing out an error in this sentence.)

Not bad for a company with a market cap still less than £1 billion.

Customers are super busy:

Client acquisition and active client numbers remain at elevated levels.

Outlook – even if trading activity returns to normal levels, 2021 net operating income will “exceed the upper end of current market consensus”.

As of this morning, I can see financial software suggesting that EBIT for the current financial year (FY March 2021) will be £85 million. This forecast is basically worthless now.

My view

This is not quite in the same category as Plus500, but it’s getting there. It is looking super-cheap against exploding earnings, but investors have to think about two major issues:

  1. We must assume that client activity will go back to normal, at some point.
  2. This is now a riskier business than it was before.

Perhaps I’m too much of a cynic, but I find it hard to trust that CMC has figured out a safe way of making far more money than it did before. I’m much more inclined to think that it is now accepting the risk of major drawdowns, from time to time, when clients make winning bets. I think that CMC itself is now gambling in ways that it did not before.

It had better keep a large cash balance, just in case.


Rank Group

Market cap £571 million
RNS Market Update
Writer disclosure No position.

Bingo clubs are back! From tomorrow (Saturday).

Mecca Bingo is re-opening 35 venues in England, in line with government guidance.

30 other venues will re-open at a later date, while another 12 are assessed for their viability. Rank will be looking to renegotiate rents.

Casinos haven’t got an opening date yet. I have been known to spend the very occasional evening at a Grosvenor venue, on my travels.

Digital revenue growth has been strong in Q4 (April to June) at 17%.


Underlying operating profit for the year ended 30 June 2020 is expected to be at the lower end of the previously provided guidance range of £48m to £58m after IFRS16 (£40m to £50m pre-IFRS16) due to the venues reopening costs being expensed.

Headroom could be worse at £140 million, and the company expects to meet its covenants.

However, Rank continues to “review opportunities for maintaining appropriate levels of liquidity“.

Monthly cash burn will be something like £7 million from this point onwards, and the company will continue to burn cash until Grosvenor casinos are allowed to re-open. After that, it will generate cash if revenues recover to at least 60% of pre-Covid levels.

My view

There is a sense of urgency at Rank to get the casinos open, which they think (and I expect) they will be able to do in a safe manner.

But when will government allow them? Who knows?

Revenues are likely to suffer for the foreseeable future. I’ve seen clips of US casinos with perspex screens everywhere – they are still busy, but it looks very unattractive. And nobody will want to queue outside in the rain in the winter months.

This might possibly need little top-up placing, as hinted by today’s RNS.

I have a fondness for Rank but I can’t consider investing in it in these circumstances.


Land Securities

Market cap £4.3 billion
RNS Update on June rent collection
Writer disclosure No position.

Another important update from a major REIT.

Key points:

  • All shopping centres, outlets and retail parks are open.
  • Within these, 79% of units are trading.
  • 16 out of 18 leisure parks are open.
  • Footfall in England is at 60% of last year.
  • Like-for-like store sales are 80% of last year.

There is evidence of some pent-up demand with average transaction values up significantly.

This table shows that rent collection has suffered, particularly in the retail and specialist categories. Office tenants have been much more willing to pay:

There is “supportive and constructive dialogue” (!). With only 60% of the rent received, I guess they have little choice?

We also learn that of the rent due in March, only 75% has been received at this stage. There is £30 million unpaid, of which LAND has now forgiven or deferred £5 million.

Balance sheet – net debt is unchanged at £3.9 billion and LTV is virtually unchanged at 30.7%.

Headroom is an enormous £1.2 billion.

My view

This is another REIT trading at a huge discount to its official net asset value.

I see that LAND’s tangible NAV (under the EPRA methodology) was 1192p as of March (latest share price: 578p).

Figuring out the current value of the portfolio is no easy task, naturally.

I’m starting to wonder if a small trade on the iShares UK Property REIT ETF might be a nice way to express my interest in these REITs. Since it’s hard to figure out the worth of specific portfolios, but the sector as a whole is in the dumps and on the receiving end of extreme negative sentiment, maybe that would be a reasonable thing to do? As you can tell, I haven’t got much conviction in this!


That will do it for this report.

Thanks for dropping by and I will see if I can publish something tomorrow morning for you.

Best regards





Wordpress (4)
  • comment-avatar

    Funny that you mention IGG as being externally hedged and thus lower risk. When the CHF de-pegged, they had a £30m loss. Plus500 had no loss. Now we both know they are different businesses, and CHF will have been a much bigger part of IG’s book than it was for Plus500, but the point for me is that having an external hedging counterparts actually increases the risk in such a situation, paradoxically. It’s also possible that Plus500 was lucky.

    CMC gave total disaggregation of revenues in November, but have not done now, as you say.

  • comment-avatar

    Thanks for the video and particularly the analysis of CMC (which I bought on the recent crash but sold far too soon, as per usual).

    My understanding is that IG Group protects itself somewhat by hedging but would those hedges be worth anything if the whole market collapses through a calamitous black swan type event of the kind you describe? And on a more mundane level hedging hits the bottom line. If their balance sheet was bomb-proof with cash they’d be making more by taking on the risk. As for holding a ton of cash – it’s not going to earn anything elsewhere so holding it is super efficient.

    As for IG not profiting from its customers positions, I would have thought compared to similar companies the percentage of customers who lose money would be similarily high. People on these platforms tend to lose money either way. Whether it is to the owner of the platform is it really here or there so long as there is no malpractice involved?

    IG allows customers to qualify themselves as expert investors and when the market tanked recently (a la the Swiss franc calamity Oudeis points out) people’s lives are completely ruined. As lawyers described previously, IG as ‘a disaster waiting to happen’. If I was a legal firm taking an interest in the recent customer-destruction I’d want to see how IG vetted those clients in the first place. I expect there were deficiences that could be exploited in court to get those so-called expert investors off the hook and result in the FDA imposing new standards and a substantial fine, again (I think they did this last time).

    As you may know, I hold Plus500. Always extremely lowly valued, in part due to the exposure you describe and almost as it is a foreign firm which is always cause for doubt. I thought it interesting after the recent announcement from them in regard to the hit taken in early June as the markets roared back and customers made a killing. The share price plunged (it’s recovered since). In the past announcements where the profit numbers were compelling were often met with incredulity. It’s nice that that one RNS was believed, at least.

    Any ripostes welcome and wish you well with IG, as always. One concern for all these firms is the truckloads of money that they are making, particularly of late. Regulators/governments seem to be turning a blind eye since the last round but let’s face it, it’s outrageous. But that’s an ethical argument and finding a balance between one’s ethics and making money on shares is a highly personal matter.

    Best always,

  • comment-avatar

    Hi, I checked the most recent CMCX trading update and it doesn’t say that Q1 is double the whole of H1 2020. it says:

    “As a result, net operating income for Q1 2021 is in excess of that reported for H1 2020 of £102.3 million. “

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