Cube Midcap Report (30 Oct 2019)- EPS gains are next at #NXT #CTEC #STAN

Cube Midcap Report (30 Oct 2019)- EPS gains are next at #NXT #CTEC #STAN

Good morning!

Some interesting stories for us to look at today.

This report covers:

Later in the week, if there’s time, I’ll add a few thoughts on:

Next (NXT)

  • Share price: £67.08 (-2%)
  • Market cap: £8,900 million

Trading Statement

(Please note that I have a long position in NXT.)

This is the only traditional retailer I own shares in, and I’ve been here continuously since early 2017.

This sector is so hazardous, and yet so cheap (!), that I couldn’t resist participating in it. But I wanted to go for the best-in-class company, the one that was most likely to emerge in a healthy way from the changing conditions of the retail landscape. Next has been engaged in meticulous planning, for many years, to reduce its physical footprint (if necesssary). So far, I’ve been rewarded well for backing it.

Here is the Q3 performance:

This continues the familiar trend of Retail decline, while revenues from Online and Interest Income continue to grow.

I’ve highlighted year-to-date Product full price sales, which are robust at a growth rate of 3.1%. But of course the 4.8% decline in the Retail division brings with it the risk of creating unprofitable stores, which could in time necessitate the painful restructuring of its physical estate.

Growth in interest income is outstripping growth in Product full price sales, and it’s reasonable to ask whether this is sustainable. It might be a fair assumption that Next’s impressive growth in interest income should, over the long-term, move in tandem with its revenue figures.

On a personal note, I should probably explain that my participation in Next has never been on the basis that growth in profitability was very likely. It has always been on the basis that if the company’s plans to navigate a changing retail landscape succeed, then it should be able to avoid significant and long-term declines in profitability. I was happy with low expectations and a low valuation.

The Next share price has strengthened by almost 90% compared to its absolute lows in 2017, and yet it still does not seem to me that it is obviously overpriced. The forward P/E multiple is currently in the region of 15x.

Let’s consider other elements of today’s update:

  • guidance for the growth in full-year full price sales is maintained at 3.6%
  • guidance for full-year pre-tax profit is maintained at £725 million (marginally higher than last year)

In addition to the dividend stream, Next has been engaged in regular share buybacks. Therefore, despite marginal growth in profits, EPS is set to grow by c. 5.25% this year.

I have a preference for capital gains rather than income, and prefer buybacks to dividends. So this is perfectly in tune with my personal preferences. If you prefer a huge dividend yield, then this share might not be for you!

I’m delighted to see EPS at Next making progress, even if the cause is a declining share count.

I knew that Next had a fine track record of share buybacks, and that was certainly one of my considerations two years ago.

The announcement also includes a reminder of the month-by-month volatility in this business:

Company commentary:

We believe that strong sales in July (shown in grey in the chart below) pulled forward sales from August.  Sales in September were adversely affected by unusually warm weather and we saw a significant improvement in October when temperatures fell.  We believe the improved sales growth in October recouped some of the lost sales in September and we do not expect sales growth for the rest of the year to be as strong as October.

Hey-ho, variable weather is a fact of life and investors in this sort of business need to accept that sales will be variable. It should all balance out in the end (hopefully!).


There is no need to change my stance on this company or its shares: I’m a content holder, looking forward to more EPS improvement via share buybacks and careful management of the physical estate (including preparations to shut down stores if/when they fail to generate acceptable returns).

ConvaTec (CTEC)

  • Share price: 200.95p (+10%)
  • Market cap: £3,986 million

Q3 trading update

ConvaTec is “a global medical products and technologies company focused on therapies for the management of chronic conditions, with leading market positions in advanced wound care, ostomy care, continence and critical care, and infusion devices“.

It has been listed since October 2016, and has been a rocky ride for investors. The IPO price was 225p.

Today’s update is in line with expectations and management guidance is unchanged.

Key points:

  • Q3 revenue +4.6% on an organic basis to $463 million, “in part reflecting the benefits of some short-term tailwinds”.
  • year-to-date revenue +1.5% on an organic basis.

The fastest-growing segment during the quarter was Continence and Critical Care: organic growth of 8%. This “was flattered, as expected, by a weaker prior year comparator”.

Currency headwinds (weaker non-USD currencies) were a headwind, e.g. the actual revenue growth was only 2.4%, not the 4.6% shown above.

FY 2019 Outlook
  • Organic revenue growth 1% – 2.5%
  • adjusted EBIT margin 21% to 22.5% excluding the company’s transformation initiative and costs associated with new Medical Device Regulations.
  • Including those costs, adjusted EBIT margin of 18% to 20%.

My view: I am new to this share. Perhaps it has similar economic characteristics to Smith & Nephew (SN.), which has been a very successful investment? Googling “Smith and Nephew Convatec”, I see that there has been some litigation between the two.


Standard Chartered (STAN)

  • Share price: 712.7p (+2.6%)
  • Market cap: £22.8 billion

Third Quarter 2019 results

I covered HSBC on Monday. Standard Chartered should be doing a little better, since it’s not held back by poor banking performance in the UK/Europe!

  • Return on tangible equity is reported at 8.9%. In fact, this is worse than HSBC reported for the year-to-date.
  • The CET1 ratio (the key measure of safety) is 13.5%, not too far off HSBC (14.3%) and well above the regulatory requirement of 10.2%.
  • Net interest margin flat at 1.58%, around the same as HSBC.

As with HSBC, I’m concerned that the combination of a high CET1 ratio and a weak return on assets means that the prospects for return on equity are poor.

Standard Chartered confirms this as follows:

We continue to focus on executing our strategy with the objective of delivering a 10% return on tangible equity by 2021 but there are growing headwinds from the combination of continuing geopolitical tensions and expectations of declining near-term global growth and interest rates.

Therefore, even on a forecast P/E multiple of c. 11x, I find it difficult to get enthused about this share. One feature which I do notice is the lower dividend yield at StanChart, with a $1 billion share buy-back having recently been completed. Those seeking capital gains instead of yield might have reason to prefer this one over HSBC.


Going to hang up my pen there for today. See you tomorrow!




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