Cube Midcap Report (3 July 2020) – The urge to gamble
Here is the link for today’s live-stream:
This report covers:
- CMC Markets (CMCX)
- Rank Group (RNK)
- Land Securities (LAND)
|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.
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:
- We must assume that client activity will go back to normal, at some point.
- 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.
|Market cap||£571 million|
|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.
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.
|Market cap||£4.3 billion|
|RNS||Update on June rent collection|
|Writer disclosure||No position.|
Another important update from a major REIT.
- 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.
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.