Cube Midcap Report (3 May 2020) – Divis, no capital gains for tobacco

Cube Midcap Report (3 May 2020) – Divis, no capital gains for tobacco

Good morning!

Graham here with a weekend edition of the Midcap Report. News flow was heavy during the week, so I want to catch up on some of the stories I missed.

Some stories that I’m interested in:

  • British American Tobacco (BATS)
  • JD Wetherspoon (JDW)
  • Admiral (ADM)
  • InterContinental Hotels (ICG)

British American Tobacco

  • Stock data should display here.
Market cap £67.6 billion
RNS COVID-19 Market Update
Writer disclosure Long BATS.

I’ve been perplexed about this cheapness of this share for some time.

It has not been hit too hard by CV19, so its share price has held up quite well – £32 at the end of the 2019, vs. £29.50 today.

Its relative strength during this crisis has enabled it to help out with its distribution system and manufacturing facilities. A wide range of Covid-related products have been delivered and manufactured using BATS’ infrastructure.

It is even trying to develop a vaccine for Covid-19, on a not-for-profit basis.

2019 – “strong operational performance”, before the virus struck.

Delivered against all financial targets:

  • revenue +5.7%, including the traditional “combustibles” +4.6% (at constant FX).
  • adjusted net debt/adjusted EBITDA (be cautious when using these) reduced to 3.5x, as planned. Should be safe, assuming consumption/taxes are modestly stable.
  • dividends of 210.4p per share. That is over 7% of the current share price, and dividends have increased this year.

Looking for big growth in “New Categories”, and getting it so far:

  • revenue +32% (at constant FX) to £1.2 billion.
  • 11 million consumers, looking to make this 50 million by 2030.

Big medium-term targets for cost savings (£1 billion p.a.), management simplification and high single-figure EPS growth (at constant FX) are still in place.

2020 outlook

BATS is still planning to achieve that high single-figure EPS growth this year, on the back of 3%-5% revenue growth. This will be achieved even as the traditional cigarette industry is set to decline by around 5%, worse than previously expected.

So far this this year, it has made small gains in market share and overall volume is positive. There is a “strong price mix”, in line with plans.

Resilient vs. Covid

Strong reassurance that the business is not materially affected by pandemic restrictions. Internet sales have more than doubled:

Most of our factories are open and are currently operating at full capacity, and we have built up an average stock of around 2 months of finished goods, with further stock throughout our wholesale and retail footprint.

We are a very geographically diverse company and including the US around 75% of our global revenue is in developed markets where distribution and availability is largely unchanged…

To date, we have seen limited impact on consumer demand, pricing or consumers’ ability to access products. Sales in global travel retail have been significantly impacted, although this represents less than 1% of our sales.

My view

I don’t see any reason to sell. Of course, I’ve been saying that for a while now, and have been nursing a large-ish, unrealised capital loss for a couple of years on this share.

The market still hates it. And it will always be excluded from the “ESG” funds, which are increasingly popular.

I guess I’ll just have to accept the rather large dividend income stream and not expect the share price to do anything very interesting. Forward dividend yield c. 7.5%.


JD Wetherspoon

  • Stock data should display here.
Market cap £996 million (£1.15 billion post-placing)
RNS Results of the placing
Writer disclosure No position.

Gross proceeds of £141 million for ‘Spoons from this placing.

The new shares will be available to trade on Monday.

The dilution is reasonable, c. 15%. Not bad at all, if it helps to keep the company alive.

The insiders taking part, including Tim Martin, are doing so with fairly small amounts, in some cases nominal amounts relative to their salary/wealth.

The update on April 29th talked about the pubs going into hibernation. Sales have been zero since March 20th and more than 99% of employees are furloughed.


  • suppliers – most have been paid, extended payment terms agreed with some of the larger ones.
  • landlords – extended payment terms agreed with “many” of them.
  • business rates – £60 million saving from the rates holiday.
  • overheads – reduced from £210m annualised to £35m annualised.

Net debt of £836 million as of March 2020.

Covenant waivers have been agreed “as a precaution”.

Trailing net debt/EBITDA is 3.85x.

That’s moderately high, in my book. The company wants a maximum of 3.5x, with a long-term target of 0.0-2.0x.

63.6% of pubs are freehold. That’s great, makes things much more flexible.

Outlook – pubs are expected to stay closed until late June 2020. It is forecasting a sales decline for FY July 2020 of 26%.

The monthly cash burn is currently low, but would increase to £11 million if pubs are closed for longer.

My view

I don’t have a strong view on this share but I do think we should be extremely cautious about consumer spending when pubs reopens. With a much poorer economy, I expect the appetite for pub spending to be very low.

The great value at Wetherspoons will help it recover. I just think we should assume the worst as far as the consumer is concerned for the rest of this year.

The balance sheet has a decent chance of survival, with the help of this placing and with the support of the banks. But I find it very easy to sleep at night not owning these shares.



  • Stock data should display here.
Market cap £6.8 billion
RNS Statement re Dividend Update
Writer disclosure No position.

A curious RNS:

In light of the regulatory guidance to insurers urging restraint on the payments of dividends due to the uncertainty of the current economic environment, the Board has decided to amend its recommendation in relation to the final dividend for the year ended 31 December 2019. 

The ordinary dividend (56.3p) is still recommended, but the Board is not recommending that shareholders vote for the special dividend (20.7p).

Hmm, what if shareholders vote for it anyway?

The Board intends to pay the amount later in the year anyway, so I guess shareholders can probably wait.

Admiral is a very strong company, and one that I admire. It thinks it could pay this special dividend now, but wants to act in accordance with the wishes of the regulators (usually a wise thing to do):

The Group has significant liquidity and a strong solvency position, well above its target level and regulatory thresholds.  Robust stress tests against the Company’s financial position support the payment of the previously announced final dividend in full under normal circumstances.  However, the Board is mindful of the call for heightened prudence from its regulators and has concluded that suspending the payment of the special dividend is appropriate at this time.


InterContinental Hotels

  • Stock data should display here.
Market cap £6.5 billion ($8.125 billion)
RNS Financing and current trading update
Writer disclosure No position.

Some decent news here:

  • Waiver on RCF covenants until 31 December 2021, but new “minimum liquidity covenant” of $400 million.

That’s the thing about banks – they prefer lending to companies who don’t need it!

  • Eligible for government’s Covid Facility. £600 million issued through this facility.

Cash is now $1.35 billion, plus $660 million undrawn on facility, so total liquidity is $2 billion.

Trading – 55% decline in RevPAR (revenue per room) in March.

Most hotels in China have reopened, and most US hotels are open, too. Occupancy in open hotels is currently very low (20%).

My view

$2 billion is a lot of liquidity, surely more than it could possibly need? I’m open-minded as to whether there could be an opportunity with these shares.


That’s it, just a brief catch-up report for some stories I missed.

I hope you’ve had a great weekend.




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