Cube Midcap Report (30 July 2020) – Shell investors get used to New Normal

Cube Midcap Report (30 July 2020) – Shell investors get used to New Normal

Good morning!

H1 results continue to fly in, I am reading these today:

  • Royal Dutch Shell
  • Standard Chartered
  • Schroders
  • Vesuvius
  • Inchcape

I also see that Future (FUTR) has appointed Goldman Sachs as joint corporate broker (with Numis). I wonder what they might be working on?

Royal Dutch Shell

  • Stock data should display here.
Market cap £89.9 billion
RNS 2nd Quarter 2020 and Half Year Unaudited Results
Writer disclosure No position.

This is a massive quarterly loss: $18.1 billion, or $18.4 billion on a “current cost of supplies basis” (adjusting for current commodity prices).

Brent crude is still well off its pre-Covid levels, in case you need reminding:

Shell’s Q1 result was around breakeven, so the total H1 result is a loss of $18.2 billion.

The company does report an adjusted profit, if you are willing to look part an enormous $25 billion (pre-tax) in “identified items”.

The most important identified items in H1 are:

  • Impairments – $23 billion
  • derivatives/gas contract losses – $900 million
  • restructuring – $500 million

Last year, identified items added up to less than $1 billion. The $25 billion impact this year is all about adjusting to lower commodity prices. Or in the company’s words:

“…revised medium- and long-term price and refining margin outlook assumptions in response to the COVID-19 pandemic and macroeconomic conditions as well as energy market demand and supply fundamentals.”

The pain is spread over the big three divisions: gas, upstream and oil products.

Gearing increases from 28.9% at the end of Q1, to 32.7% at the end of Q2.

Net debt is now $78 billion ($105 billion of borrowings minus $28 billion in cash). When net debt is similar to the market cap, for a non-financial company, I start to get a little nervous. But the leases are worth nearly $30 billion – if they weren’t on the balance sheet, it wouldn’t look so bad.

In a separate RNS, Shell announces a 16 cents interim dividend.

I predicted in March that Shell would have to borrow to pay shareholders.

In April, it finally gave up on the very large payout, and “reset” its dividend, as the balance sheet couldn’t take it any more.

Today’s Q2 dividend is at the same level as the one in Q1. Shareholders will have to get used to a quarterly payout of c. 12.3p (depends on Cable exchange rate).

My view

Isn’t this primarily a bet on the oil price? Does studying the company in detail add any value?

I have a strong preference for companies with high ROCE (return on capital employed) that can be delivered over a sustained period of time.

If you scroll back a year, to comparatively benign conditions, Shell calculates that ROCE was running at 8.4% – not bad, but nothing special.

ROCE is now negative and even if you allow for all the adjustments, the best result you can get is 5.3%.

The best argument for the shares is probably that there is equity of $160 billion on the balance sheet, even after the impairments in Q2. Take out the intangibles and deferred tax (which should hopefully provide a future benefit) and there is still equity of $120 billion.

But you have to balance the stated asset value against the risk of further impairments and the likelihood that ROCE will be below average.

I could see myself buying shares in Shell if it was at a huge discount to equity value. At a market cap of $90 billion, we aren’t there yet. I am long the FTSE, but I don’t want to specifically be long Shell.


Standard Chartered

  • Stock data should display here.
Market cap £12.6 billion ($16.4 billion)
RNS Half Year Report
Writer disclosure No position.

This is anther large FTSE-100 share where investors have had to get used to much lower dividend payments than they were previously accustomed to.

It was back in 2015 when StanChart was forced to scrap its dividend and raise equity. Dividends started again in 2018:

Safety – It is now very well capitalised with a CET1 ratio of 14.3% (above c. 10%  is “safe”).

The downside to such a high ratio is that it’s hard to earn big returns on equity, when you’re using far more equity than you otherwise would.

StanChart’s target CET1 ratio is 13%-14% over the medium-term. So it’s over-capitalised even by its own standards.

Returns return on tangible equity has declined significantly to just 6%. This is not helped by higher credit and goodwill impairments.

$14 billion of loans (4% of total) are “subject to some form of relief measure”. The economic carnage could yet blow a big hole in the balance sheet.

Here are the statutory results ($ million):

As you can see, operating income was up but the impairments held back the profit result.

Balance sheet equity is enormous at $50 billion. Strip out goodwill, intangibles and tax assets and you still have equity of $44 billion.

The market cap is only 37% of this, i.e. there’s a 63% discount available.

My view

I’m tempted to look at the large banks in more detail. In general, I’m not interested in them. But you can see from my very simple overview of StanChart that there is potentially some value on offer. We don’t usually see such huge discounts available.

The primary factors which have kept me away so far are:

  1. The fact that long-term returns are unlikely to be stellar – they are too heavily capitalised, and the industry as a whole is commoditised.
  2. StanChart has extended $276 billion in loans to non-bank customers. Credit impairments may continue to be material – we just saw $1.6 billion in Q2.

Overall, I’m tempted to go long of some bank names. This might not be in the form of a long-term investment, but more on the basis that I think the discount to book value should close in a relatively short timeframe (1-2 years). More work needed.



  • Stock data should display here.
Market cap £8.4 billion ($16.4 billion)
RNS Half Year Report
Writer disclosure No position.

I’ve just been reminding myself about the unusual share structure at Schroders.

There are 226 million ordinary shares outstanding, and they are priced just below £30.

There are also 56.5 million non-voting ordinary shares. These have the ticker SDRC. They are priced at just £21.10.

So if you are in this for the yield, then I don’t see why you would buy SDR – it makes more sense to buy SDRC. You get the same dividend, either way.

The risk with SDRC is that some day, there might be a battle for control of the company. In that instance, you would prefer to own SDR, as an acquirer will pay quite a big premium for them!

(Side Note: When it came to Alphabet Inc, I opted for the very slightly more expensive $GOOGL shares, instead of the non-voting $GOOG shares. The premium required to get voting rights wasn’t much, in that case.)

H1 wasn’t too bad for Schroders:

A small decline in net income (c. 3%) and a 12% decline in PBT.

Net inflows were an impressive £38 billion and compensated for the decline in stock markets. Total AUM increased by over £25 billion to £526 billion. You can contrast that with the sorry situation at Jupiter (JUP) which I discussed yesterday.

We can still see evidence of competitive pressures in the sector, even at Schroders, as the “net operating revenue margin” fell to just 39 basis, i.e. the cost of fund management continues to decline.

Divisions – the really big growth here is from “Solutions“, consisting of very large and complicated mandates from other institutions. This can be a lumpy business.

In contrast to the growth in “Solutions”, there was “limited demand from retail investors“, and Mutual Funds saw significant outflows. AUM in mutual funds declined by around 6%.

The interim dividend is held flat.

My view

I think the positive features of this company might be priced in already. Long-term, I would still prefer to own shares in a passive manager like Blackrock ($BLK).



  • Stock data should display here.
Market cap £1,120 million
RNS Results for the six months ended 30 June 2020
Writer disclosure No position.

Does anyone remember Cookson (CKSN)? That’s what Vesuvius used to be called?

It is “a global leader in molten metal flow engineering and technology“. Hot, molten metal – the type of thing you might find in a volcano.

These results are quite bad vs. last year: revenue down 18%, “trading profit” (adjusted EBITA) down 49%.

The adjustments are large and reported net income is just £25 million (versus “trading profit” of £51 million).

What went wrong?

Unless you’ve been hiding under a rock, you’ll know that these have been bad economic times. The impact on Vesuvius arises from “lower global steel production and industrial output across the world“.

VSVS has responded with cost savings (£10 million/quarter), on the assumption that market conditions will remain weak. Perhaps it’s worth noting how pessimistic such a course of action is?

Balance sheet is still ok. Net debt/EBITDA at 1.2x, vs. covenant level of 3.0x. There was good cash conversion and net debt fell to £230 million.

CEO comment:

…the first signs of improvement are now apparent in both Steel and Foundry, but we expect the pace of a recovery to be slow over the coming months. Consequently, the Board has not declared an interim dividend at this time and will review the position as the year progresses. Likewise, until we have greater certainty on the shape of the recovery, we cannot provide meaningful guidance as to our full year results.

No green flags here in terms of the dividend and guidance, then.

My view

This share is a bet on a global economic recovery. As bearish as I am in the short-term, I have to presume that the global economy will be back on track in, say, 3 years.

If you still have a sunny long-term disposition, VSVS shares might be of interest.



  • Stock data should display here.
Market cap £1.7 billion
RNS Half-year Report
Writer disclosure No position.

This is yet another share whose fortunes, at least in the near-term, are closely tied to the economic winds.

It is “the global distribution and retail leader in the premium and luxury automotive sectors”.

It claims to have outperformed the market in H1, but that hasn’t stopped revenue from falling 29% (organic basis) or 36% (reported basis).

There is a great big pre-tax loss of £188 million, after impairments were taken.

Excluding impairments and other “exceptionals”, the result is around breakeven (PBT of £9 million).

No dividend for the time being:

Indeed, the company is doing all it can to save money – there’s a huge cost-cutting programme to save £90 million p.a.

Comment by the new CEO:

Unsurprisingly, the effect of Covid-19 has materially impacted the Group’s performance in the first half, with either partial or complete shutdowns affecting a substantial proportion of our operations… The Covid-19 situation remains very dynamic, and it is unclear how the world will change once the virus has been contained.

Outlook statement:

While the majority of our markets have now reopened, given the lack of visibility of underlying demand, coupled with the ongoing uncertainty regarding a potential second wave of the virus, it is still too early to provide a forward-looking view of the Group’s performance.

My view

Inchcape is a difficult one: earnings are amazingly volatile, and I feel unable to predict what they might do from year to year.

It is clear that if you timed your purchase of INCH in the past, waiting until the depths of recession, you could have hit a home run. Buyers in 2000 and 2009 saw their purchases multiply many times in value (although the gains after 2000 were eventually all given back).

INCH does have a net cash position, excluding lease liabilities, so it ought to be reasonably safe from that perspective.

Personally, I’m much happier on the sidelines when it comes to this share.


Out of time for today – thanks for dropping by!





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