Cube Midcap Report (3 March 2020) – Greggs brings home the bacon #NMC #GRG #DLG

Cube Midcap Report (3 March 2020) – Greggs brings home the bacon #NMC #GRG #DLG

Good morning!

The FTSE is looking chirpy at 6800 this morning. After hitting a low in the 6400s, we’ve had quite a rebound.

A dead cat bounce, or a sign that the worst is past? Check out Joel’s piece this morning for some macro musings.

In other news: I’m pleased to say that the Cube Midcap Report will be here every day for the rest of this week, and every day next week!

There are quite a few things I might look at today, but I’ll start with:

  • NMC Healthcare (NMC)
  • Greggs (GRG)
  • Direct Line (DLG)
  • Intertek (ITRK)

Timings: finished at 6.40pm. See you tomorrow!

NMC Healthcare (NMC)

  • Share price: 938.4p (suspended)
  • Market cap: £1.96 billion

Advisers, stabilisation, shareholders and control

A quick update on this farce. We covered it last week.

I won’t spend too long on it, since the shares are suspended and nothing can be done with it for the time being.

But I will say that it looks awful.

Yesterday’s RNS (linked above) announced the appointment of new advisors, including a new “operational adviser” – which I think is an admission that trustworthy and capable internal management are lacking.

It’s generally a bad sign whenever consultants are hired. It means one of two things:

  1. Company executives themselves don’t know how to run their company.
  2. Difficult decisions are being made, but senior management or the Board don’t wish to take responsibility for them.

Of course, NMC is not lacking in bad signs.

The same RNS also announced that the company has asked its lenders “not to exercise any rights and remedies that may arise from any current or future defaults under the group’s finance documentation“.

My spider senses were tingling last week that NMC could turn out to be worthless, and I was considering a trade on the short side (to join Muddy Waters, et al, who did the research and got there first). But with the shares suspended, there is nothing more than can be done. The company stepped in to stop trading and “ensure the smooth operation of the market” – and perhaps to prevent fraud from taking place?

Make no mistake: the so-called “standstill request” to lenders is a clear indication that financial distress could be on the cards. And in periods of financial distress, zero is nearly always an unfortunate possibility for shareholders.

This same RNS also states that the three insiders at the heart of this fiasco now hold less than 30% of NMC’s shares (although I doubt there is any certainty about their true shareholding).

According to the most recent data on financial software, these three individuals held 59.8% of NMC’s shares as of late February. At some point in time, they managed to dump huge quantities of shares with nobody noticing.

As the cherry on top for this horror RNS, the Group Company Secretary informs us that under change of control provisions relating to NMC’s debt facilities, individual lenders can call in their debts by giving five business days’ notice.

FCA Investigation – on Thursday, we were notified that the FCA has started a “formal enforcement investigation”.

Statement regarding major shareholdings – yesterday (Monday), NMC also issued a bizarre statement following notifications from “advisers to Dr. Shetty”. The craziness of these disclosures was not befitting a member of the venerable FTSE-100 index.

  • One of Shetty’s companies entered into a complex transaction with Goldman Sachs, using NMC shares as collateral. This agreement has now been terminated. 7 million NMC shares were transferred to GS (and I would guess have probably already been sold).
  • Updates are given on various share sales which took place last month, by Dr. Shetty or banks who had agreements with his companies.

This sentence is a doozy:

The PCA notifications and amendments that follow relate to the periods before and after Dr B. R. Shetty ceased to be a director and Joint Non-Executive Chairman of the Company on 16 February 2020. However, Dr B. R. Shetty’s obligation to provide the Company with PDMR/PCA notifications continues as his spouse, Dr C. R. Shetty, remains a PDMR of the Company.

My view

Anybody who was buying NMC shares last month was providing an exit for Shetty and/or his lenders and banking partners.

I am finding it hard to think of a FTSE-100 stock which ever became as toxic as this one currently is.


Greggs (GRG)

  • Share price: £21.98 (+5%)
  • Market cap: £2.2 billion

Preliminary Results

What a headline!


I covered the Greggs trading update last month. It was already perfectly clear that Greggs is a stand-out performer in the food retailing space.

One nice little feature of the results, which I try to highlight whenever I see it, is the absence of lots of exceptional items.

The exceptional charges for Greggs in 2019 amount to £6 million, down from £7 million last year.

When you have a £2.2 billion market cap, I can forgive exceptional charges of this size. Low exceptional charges are a wonderful thing because they mean the company doesn’t feel the need to come up with excuses for poor statutory results.

Last year, Greggs said it “expected” to declare a special dividend at the interim results. The special amounted to 35p per share.

This year, Greggs says it “will consider capacity for special dividend at time of interim results“.

The special is therefore less likely in the current year, but income hunters shouldn’t despair. The ordinary dividend is being increased by 26%, to reflect the 27% increase in pre-tax underlying operating profit (to £114 million).

Strategic progress

Greggs has that je ne sais quoi, the winning formula in food retailing. Perhaps it’s the calories?

Whatever it is, Greggs is ambitious to continue developing it, and growing:

  • “transformational changes made across multi-year strategic investment programme”.
  • “product development driving quality, sustainability, variety and brand appeal”.
  • “significant progress in delivery of supply chain investment programme, with benefits ahead of plan”.
  • delivery service being rolled out along with “Next Generation Greggs” programme (to increase customer loyalty and open up new channels).

Trading update

  • “Very strong start to 2020 in January, but significant slowdown in February due to storms”.
  • Like-for-likes up 7.5% in nine weeks to end of February.

The 7.5% LfL result for the start of the year is slower than the 9.2% growth in 2019, but that was an exceptional performance (helped by terrible weather in 2018). 7.5% is still a result that other food retailers would die for.

2020 outlook

The outlook statement bears much in common with that given in January. Cost increases are an issue: wages and pork prices.

“We intend to invest some of the margin generated by our strong performance in 2019 to protect customers from these costs” – so we can pencil in a reduction in margin, as Greggs won’t pass on all of the price increases to customers.

Gross margin in 2019 was an excellent 64.7%, 100 bps higher than 2018. Since the margin is so high, it sounds reasonable to give back a little on this, for the benefit of customers.

Overall, expectations are unchanged:

Demand for food-on-the-go continues to grow and we are investing in opportunities to develop further market share.  Nevertheless, there is some uncertainty in the outlook, particularly given the potential impact of Coronavirus.  This aside, we expect to make year-on-year progress and will do so from a strong financial position, supporting our investment for further growth whilst also delivering good returns for all stakeholders. 

Growth plans

Another 100 net new shops are planned each year (currently the total is 2,050).

The “medium-term” capex spend will be c. £90 million p.a., which matches up with the capex spend in 2019. But it will be higher in 2020 (£100 million) and in 2021, as there are a wave of shops currently coming up for refurbishement.

My view

I have the impression that Greggs runs a tight ship, i.e. it knows where its costs are and keeps a lid on them. It reports significant (£10 million) annual savings from various initiatives.

I like the clarity of its reporting. I like the way it explains its success so clearly.

For example, it reports a reduction in distribution and selling costs, as a percentage of sales (from 49.9% to 49.0%). This reflects “the operational gearing inherent in our shop costs“. It’s nice to see a retailer acknowledge its huge operational gearing!

And I love the way it focuses on its its ROCE, and achieves such a high ROCE (20% if you include leases on the balance sheet, 33.6% if you exclude them).

It gives a very clear and simple explanation of its balance sheet plans: it wants to have cash of £50 million at year-end. If it has more than this, which it doesn’t need, then it will pay special dividends. Cash at year-end was £91 million, which makes the payment of a special dividend this year seem likely.

Overall, I consider Greggs to be highly investable. The shares are suitably expensive at c. 22x forward earnings, which makes it difficult for me to pay up for them. But I’m a definite fan of the company, all the same.


Direct Line (DLG)

  • Share price: 324p (+4%)
  • Market cap: £4.45 billion

Preliminary Results

I won’t be able to do these results justice in a few paragraphs, but will try to give a brief overview.

Most of Direct Line’s numbers are in reverse:

  • gross written premium down 0.3%
  • PBT down 12.2%
  • the combined operating ratio deteriorates by 60bps (still profitable at 92.2% – anything less than 100% is profitable)
  • return on tangible equity down 80bps (still excellent at 20.8%)

The reason given for the slight reduction in gross written premium is underwriting discipline. This is rarely a bad excuse.

After making adjustments for unusually benign weather in 2019, DLG thinks its adjusted combined operating ratio was 93.5%. That’s within the target range of 93% – 95% (and remember that lower is better).

Price comparison websites – Roland admirably covered Moneysupermarket (MONY) in a midcap report last month.

Direct Line is well-known for refusing to engage with price comparison websites, but there are shifts in its approach. Its subsidiary Privilege is now picking up new business on PCWs.

On top of that, Direct Line launched a new website to appeal to PCW users, Darwin.

Outlook is ambitious. By the end of next year, DLG wants its “current-year” operating profit to be more than half of the total. This will require greater profitability from new policies, which means greater sophistication in pricing and better fraud detection.

DLG is also looking to cut its operating expenses and continue to achieve a return on tangible equity of 15% per annum (it is already doing this).

My view – these are famous last words, but DLG does appear moderately priced to me. Price to tangible book value is 2.2x, hardly an outrageous price to pay for a company earning 20% RoTE (and likely to earn at least 15% p.a.).

If you like dividends, you’ll love DLG at a yield at 7%.

It takes an unusual approach to sales in an industry that is mostly dictated by the price comparison websites, but there appear to be some benefits for customers in terms of service. Earning 4.2 out of 5 stars on Trustpilot, after 3000 reviews, can’t be very easy (for comparison, Admiral gets 3.7).

DLG gets thumbs up from me.


Intertek (ITRK)

  • Share price: £54.12 (+2%)
  • Market cap: £8.7 billion

Preliminary Results

This is a super-high-quality company. As far back as records will allow, it has earned a ROCE in excess of 15% (usually much higher than this).

The only exception was 2015, when it suffered a loss during the bear market in oil.

Intertek is a leading quality assurance (AKA “testing”) business. Beyond energy and chemicals, it serves many other industries. It has 1000+ labs in 100+ countries.

The results for 2019 are absolutely fine. Organic revenue growth is 3.3% at constant FX, adjusted operating profit is +5.2% at constant FX, and the company reports its return on invested capital (ROIC) increasing to 22.8%.

Outlook – Intertek says it is “too early to quantify” the effects of Coronavirus. In the absence of Covid-19, it would have targeted another year of growth in 2020. But supply chain problems in various industries will knock on to activity at Intertek’s clients. There will be an update when the company has better visibility.

The bigger picture remains as pleasant as ever, according to Intertek:

We continue to be uniquely positioned to benefit from the GDP+ organic revenue growth prospects in the Quality Assurance Industry in the medium- to long-term, leveraging our high quality and highly cash-generative earnings model.

My view – I think this should be a staple entry in a diversified, quality-focused FTSE portfolio. It has been horribly expensive in recent years but it’s still possible that Covid-19 could create a nice entry point.


That will do it for today. See you tomorrow, everyone!


PS: I’m delighted to see the positive response to Joel’s article this morning. Well done to him!



Wordpress (4)
  • comment-avatar

    Perky indeed. Personally I’m taking the opportunity to make a few sales and reduce portfolio risk a bit more (obviously that’s at an increased risk of missing further days like today).

  • comment-avatar

    Fed cuts rates by 50 BPS.

    US not panicking then.

  • comment-avatar

    Looks like they’ll have to think of something more effective.

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