Cube Midcap Report (4 July 2019) – CCR, PSH

Cube Midcap Report (4 July 2019) – CCR, PSH

Good morning! Happy 4th of July to our American friends.

Today I plan to look at:


C&C (CCR)

  • Share price: €4.10 (+4.4%)
  • Market cap:  €1,270 million

AGM Statement

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

The trading update is the least interesting part of this – in line with expectations.

What’s of greater relevance today is the announcement that C&C is going to cancel its listing on Euronext Dublin (what used to be known as the Irish Stock Exchange), to assist its inclusion in the FTSE UK Index Series.

Given its market cap, I don’t see why C&C shouldn’t quality for inclusion in the FTSE-250 index. This would attract more institutions and perhaps tracker funds, and today’s share price reaction may reflect investor anticipation of this.

And it’s a strong sign of commitment to the UK in advance of the next Brexit deadline, even though C&C will remain an Irish company headquartered in Dublin.

CEO comment:

“FY19 was a transformational year for the Group. The acquisition and subsequent performance of Matthew Clark & Bibendum contributed to earnings growth of over 20%. Reflecting the inherent strength of the C&C business today, our objective is to again deliver double digit EPS growth in FY20. Thereafter, we will target EPS growth in a mid to high single digit range.”

My view

The change in listing doesn’t change its fundamental value, but probably will make more investors want to look at the stock.

On a fundamental level, I’m looking forward to what this company could achieve in the next few years, in terms of Matthew Clark/Bibendum synergies and financial deleveraging. In the financial year ending February 2021, which starts in just over six months, the company is forecast to generate EPS of 32.1 cents, and the debt pile is forecast to reduce to less than twice its growing EBIT.

This deleveraging process, along with FTSE-250 membership, could work together to drive the earnings multiple higher (currently at 14x). Hopefully, a pleasant ride for us shareholders!


Pershing Square Holdings

  • Share price: £14.51 (+1.5%)
  • Market cap:  £3,135 million

Transaction in own shares

This is managed by Bill Ackman’s hedge fund company Pershing Square Capital Management, based in New York (so my choice of picture today was not completely random!)

There is nothing special about today’s RNS – it announces something similar every week.

I just want to mention it because PSH was pointed out to me some time ago by a reader of this website. I should have investigated it more closely:

The NAV per share is £19.63, so there is potentially another 35% gain to be made from closing the discount (plus or minus investment returns).

Pershing’s reputation was damaged by its concentrated investment in Valent Pharmaceuticals, and also by the failed shorting campaign against Herbalife. The 2015-2017 period was disastrous for its relative performance:

  • 2015: PSH -20.5%, S&P500 +1.4%
  • 2016: PSH -13.5%, S&P500 +11.9%
  • 2017: PSH -4.0%, S&P500 +21.8%

Performance in 2018 was ok (-0.7% vs. S&P500 -4.4%), but what of the future?

The annual report for 2018, released in March 2019, suggests that lessons have been learned and that a “quality” approach is being pursued.

Comments by Bill Ackman:

We attribute our improved performance to initiatives that we have implemented over the last 18 months. First, we refocused our investment strategy on the core principles that have driven our profitability since the inception of Pershing Square. Our portfolio today represents the results of our strategy of investing in simple, predictable, free-cash-flow-generative businesses which are protected by large competitive moats. Today, we own one of the highest quality collections of businesses we have owned since the inception of Pershing Square.

Ackman provides other reasons to be reassured: asset-growing efforts outside PSH have been abandoned, PSH now represents the majority of funds under Pershing’s management, and Pershing employees own more than 20% of PSH shares. So their minds are fully focused on PSH performance.

The strategy is easy to understand: a concentrated portfolio (10 holdings) of high-quality companies and an activist approach to influence the investees. Investees include the household names Starbucks, Hilton Worldwide and Chipotle Mexican Grill.

Latest buyback program

On June 20th, PSH announced the latest $100 million share buyback program, that is currently ongoing.

It is not a huge buyback program, relative to the total size of the company, but I think it’s safe to assume that it will be a significant support for the share price. PSH is illiquid: average daily traded volume is much less than 100,000 shares, while the buyback could see up to 6 million shares bought back. The PSH share price has rallied by 7% since this announcement.

My view – I think that this is currently undervalued, and am tempted to have a nibble. I do admire Pershing’s returns over a very long time horizon.


 

I also planned to cover the trading update at  Mattioli Woods (MTW), but can’t think of anything very exciting to say about it, so I will spare you!

Please note that the Cube Midcap Report will be taking a break for two weeks, but it will be back on July 18th at the latest.

Thanks,

Graham

 

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    Hi Graham,

    As an “in the middle of becoming an ex client” of Mattioli Woods, I did choke when reading their claim to have “lowered costs for our clients” highlight.

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