Cube Midcap Report (3 June 2020) – Housing market slows to a crawl
I’m very pleased to report that my difficulty in recent days – overheating in the hot weather – has now been fixed.
Firstly, I have installed a large fan in my home office, which can send delightful cool air in my direction.
Even better than that, the heatwave has ended and sun has gone away for a few days.
So now I have no excuses!
The market continues to show excellent recovery – this has been a great source of consolation to me over the last few days (you’ll remember that I have a leveraged long trade on the FTSE, open for the last several months). At 6300, I’m getting very close to my breakeven level.
In macro, the main news that caught my eye this morning is house prices falling at the fastest pace since 2009 (month-on-month basis).
House prices are still up 1.8% year-on-year, but are now growing very slowly. Is this just a blip? Personally, I doubt that this is just a blip and reckon we could be looking at a medium-term correction or at least stagnation.
When discussing the housebuilders, I’ve been making the (perhaps obvious) point that a depressed economy with high unemployment has fewer people capable of borrowing for house purchases.
It might not be so bad for the private rental sector, I’m not sure, but I think the mortgage market is clearly going to have some issues in the medium-term. Employment is too precarious for too many people, and the economic uncertainty caused by lockdown is going to linger. There are obvious knock-on effects for banks.
So I would continue to maintain some caution towards the housebuilders. At the end of the day, it’s about valuation and at bargain pricing, I don’t object. But if housebuilders are priced for a strong domestic economy, low unemployment and a healthy mortgage market, I would worry.
The news in midcaps yesterday was quiet.
Today we have news from:
- C&C Group
- Wizz Air
Timings: finished at 6pm. Didn’t cover Ibstock/Forterra.
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|Market cap||£651 million (€730 million)|
|Writer disclosure||Long CCR.|
This is well-known as the owner of Magners (UK), Bulmers (Ireland) and Tennent’s (Scotland).
The shutdown of the entire pub and restaurant industry in the UK and Ireland has been, let’s say, unfortunate.
I got involved last year at what I thought was a very reasonable entry price: 280p. The shares zoomed up to 400p by Christmas, and I thought I had done very well indeed.
Then lockdown struck and we reached 150p at the lows.
Thankfully, my “do-nothing” strategy kicked in, and I did nothing.
Let’s see what the latest position is.
FY February 2020
These numbers are of historical interest now.
Worth mentioning that they are flattered by the acquisition of businesses from the failed Conviviality (CVR) in April 2018.
At constant FX, and excluding the impact of IFRS 16:
- net revenue +7.8% (€1.7 billion)
- adjusted operating profit +10.4% (€116 million)
- operating margin almost flat at 6.8%
As you can see, there is a very cheap multiple against historic adjusted earnings.
The major reasons for this are: 1) the effects of lockdown and economic crisis on the alcohol trade; 2) C&C’s debt position.
The good news is that net debt reduced by almost €70 milion during FY 2020 – very impressive! It fell to just €233.6 million.
The net debt/adjusted EBITDA multiple fell to just 1.77x, down from 2.51x over the year, and better than the group’s 2x target.
€92.5 million of exceptional items are disappointingly large. They wipe out most of the adjusted operating profit. Let’s investigate what they contain.
€47.6 million is said to relate to Covid-19 – fair enough. This includes credit losses (customers not paying), expiring stocks, onerous marketing contracts and an uncompleted IT project.
€34.1 million relates to impairment of North American cider brands. Competition from hard seltzers is a problem.
Maybe I should be worried about this trend? Hard seltzers have just launched in the UK. Sounds like it could be a serious competitive threat.
The other items are fairly minor and I’m not going to spend time on them. The impact of the competitive landscape is the only one that concerns me.
C&C has been working hard to survive the shutdown of the hospitality industry.
- €140 million of private placement notes issued in March (after year-end)
- Bulmers revenues down 16% in April/May, Tennent’s down 42%, Magners down 7%.
- Loss of the on-trade partially replaced by off-trade demand.
- Liquidity of €550 million
- Monthly cash burn €7 million. Would be €12 million without government furlough scheme.
There’s a lot to like here, I think. So I’m not surprised to see a positive reaction in the share price today.
Firstly, the revenue decline for core brands is not as bad as I would have expected – particularly in cider.
Secondly, the liquidity position relative to monthly cash burn is huge.
The most important thing is that the lenders remain relaxed. The traditional covenants have been waived until August 2021, and replaced by covenants more suited to the current conditions (minimum liquidity plus a limit on gross debt).
C&C can also borrow under the government’s Covid Facility, if it wishes to.
There will be no final dividend for this financial year – of course not.
I’m very relieved that C&C made such good progress paying down debt over the last 12 months. I think this has set it up well to survive this economic disaster.
If pubs and restaurants re-open in July and there is a gradual recovery for the rest of the year, then we will be set up for a better 2021.
I do expect this year’s results to be terrible. I’m happy to hang around for a return to normality, while keeping an eye on the competitive landscape.
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|Market cap||£763 million|
|Writer disclosure||No position.|
A long time ago (c. 2012), I used to follow this aerospace/defence group.
For someone who enjoyed playing games like Metal Gear Solid and Syphon Filter as a teenager, it was fun to own shares in a business that made heat-seeking and radar-controlled missiles, flares, chaff countermeasures, and various other sensors and electronic systems.
It ended badly – demand for its product was too erratic, and I realised I could not predict its fortunes. So I gave up.
If I had stuck around, I would have suffered eight more years of erratic trading, accidents and mishaps. The share price today is still below the level at which I crystallised a modest loss.
For traders, the shares do offer plenty of volatility. The share price doubled from March 2019 to early 2020, gave all of those gains back during the pandemic, and has now doubled again.
H1 (to the end of April) was excellent and ahead of expectations, though full-year expectations are unchanged:
- revenue +38% at constant FX
- underlying operating profit +110% to £25.4 million
- statutory operating profit trebles from £6.5 million to £20.4 million.
The business has remained open throughout the pandemic. I guess warfare is an essential service.
The company has good reason to be confident in H2: 95% of H2 revenue is in the order book already, or has already been delivered. The share price movement today suggests we could get a beat?
Liquidity – an impressive £188 million is still available, from total facilities of nearly £250 million (includes the government’s Covid Facility).
Net debt at the end of H1 was £60.6 million.
Order book – up by £10 million year-on-year at £504 million. Up considerably against six months ago. Some big orders received in Husky Mounted Detection Systems.
Markets – an interesting comment that defence spending is shifting “from asymmetric operations to near-peer threats” (I guess this means China and Russia?).
Dividends – the interim dividend is increased. Always a real statement when a company can do that in the current environment.
Forecasts – the full-year consensus forecasts are for net income of £36 million and EPS of 12.6p, rising to 14.2p in FY October 2021.
Experience has taught me that I can’t predict this company’s results, and I won’t try.
If you think that warfare is likely to spread, and defence spending will increase in the UK, US and Australia, and if you also don’t have ethical problems with investing in this sector, then this should be of interest.
I will be firmly on the sidelines.
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|Market cap||£3.8 billion (€4.3 billion)|
|Writer disclosure||No position.|
I’m not going to dwell on the results to March 2020, except to point out the very nice load factor of 93.6% (up from 92.8% the prior year).
That was achieved despite an increase in fleet size over the year, from 112 to 121.
Passengers carried were up by a tremendous 16%.
What I’m really interested in is the outlook statement:
We have taken various initiatives during the COVID-19 pandemic to safeguard the Company’s cost position and excellent balance sheet with €1.5 billion of cash, one of the strongest in the airline industry.
In addition, we are taking advantage of arising market opportunities and have recently announced the expansion of our network with new bases in Albania, Cyprus, Italy and Ukraine, with more exciting developments to come.
Balance sheet – I note that “free cash” is €1.3 billion.
Borrowings add up to over €2 billion, so that the net debt position is €700 million.
The airline industry makes me very nervous – while I expect many parts of our economies to be up and running again soon, the foreign travel industry is not in this category.
Wizz is buying 268 new A320 aircraft. Fortunately, these orders are spaced out over many years.
Even so, by 2024-2025, it plans to have a total fleet of 235 aircraft, i.e. nearly a doubling of the current fleet.
As Michael O’Leary has argued, competition among airlines is likely to be intense, and the industry will have excess capacity in the short-term (and I would argue in the medium-term, i.e. until at least next year but possibly 2022).
Buying airline shares requires courage at the best of times. I have zero interest in them in these conditions, except perhaps below book value.
Calling it a day there. See you tomorrow, and thank you for the thumbs up!