Cube Midcap Report (4 June 2020) – Still bullish

Cube Midcap Report (4 June 2020) – Still bullish

Good morning!

If you had told me six months ago that extremely bullish markets would have pushed the FTSE back to almost 6400, I would have laughed.

Since the March low, the UK market is now up by over 30%. Extraordinary.

Still a few months to go, but I’m starting to feel very good about not making a loss on my FTSE trade.

In midcaps, I note that one of my holdings has returned to the FTSE 250: 888 (888).

888 has been in and out of this index. Hopefully it can stay, this time?

As you will know, companies which make it into the 250 have a greater tendency to be picked up by tracker funds and by investors who prefer “blue-chip” stocks.

New additions to the FTSE 250 (the first four have been relegated from the FTSE-100):

And these companies have left the FTSE 250 (the first four being promoted to the FTSE-100):

Today I’m looking at:

  • IG Group
  • XP power
  • Euromoney

 


IG Group

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Market cap £2.9 billion
RNS Pre Close Trading Update
Writer disclosure Long IGG.

This is currently my 3rd-largest position and is over 10% of my portfolio.

I covered IG’s previous trading update, when it was clear that Q4 was going extremely well.

The results for Q4 (to the end of May) are now in, and it was spectacular:

Financial market volatility has remained elevated and the Group has continued to see high levels of client trading activity. Net trading revenue in Q4 FY20 is now estimated to be approximately £259 million (Q4 FY19: £117.9 million), with full year net trading revenue anticipated to be approximately £649 million (FY19: £476.9 million).

To be clear, Q4 revenue more than doubled and full-year revenue is up 36%.

With the help of some operational leverage, I hope to see a generous increase in profitability.

IG’s employees continue to work from home. As a shareholder in the business I’m very relaxed about that – I certainly wouldn’t want them to be in the office, worrying about a killer virus. But as soon as the (real or perceived) threat is gone, I hope they will have the option to work a few days per week in HQ.

Volatility

Here’s a reminder that the VIX has been at high levels for a sustained period (they are monthly bars in the chart). It’s not really been like this since 2008/2009:

My view

I remain very excited to see this year’s results – how much of the revenue will IG have converted to profits?

I do expect to be slightly disappointed by additional costs incurred during the year, but the bottom line should still be very impressive.

This has been a record-breaking year. For comparison, the previous high was in FY May 2018, when revenues of £590 million were achieved. And now we are at £649 million.

Remember that FY 2018 was before the imposition of strict leverage limits, and other controls, by the EU’s ESMA regulator.

When that happened, it was feared that the industry would never recover.

I knew that it would make the industry smaller, but I also thought that it would be less competitive, and that life might ultimately be easier for IG.

And then the virus pandemic came along, and took the VIX to an all-time high. Traders have been exceptionally busy for over three months now.

Volatility always returns to “normal levels”, and usually sooner than later. It’s still hard to figure out what a “normal” level of profitability for IG might be.

If we take FY May 2019 as an example of a quiet year, net income then was just £160 million. I hope that net income can remain significantly higher than this in future years, even if the markets quieten down again.

 


XP Power

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Market cap £700 million
RNS Trading Update
Writer disclosure No position.

This provider of power solutions continues to trade well:

Trading during April and May 2020 has been encouraging.  Order intake in April and May continued to be strong, building on the levels seen in Q1 and the Group will enter H2 2020 with a healthy order book. 

XPP is big in medical power supplies and reports broad demand for its products, including for products used in ventilators (related to Covid-19).

I’ve highlighted the three numbers I think are most important:

As you can hopefully see, orders are growing faster than revenues. And the book-to-bill ratio is very healthy indeed, at nearly 1.5.

Net debt – £38 million as of the end of May. Available liquidity is £58 million.

Outlook – vague, as the company recognises the general economic uncertainty. The most specific information given is:

Order intake in Healthcare and Semiconductor Equipment Manufacturing, in particular, remains encouraging.  Current conditions in the global airfreight market are creating some cost pressures which are likely to remain a feature until capacity recovers.  

My view  – an excellent company which continues to perform well.

 


Euromoney Institutional Investor

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Market cap £950 million
RNS Half-year Report
Writer disclosure No position.

This is a large group of publishing, data and research businesses.

Results for the period ending March are pretty good:

Events were responsible for £45 million of H1 revenue, or 24% of total. Events are clearly the most affected by the Covid-19 situation.

Net cash is small at £8 million. There is a £188 million RCF which should be plenty big for its needs. There is another £130 million potentially available in an accordion facility.

Dividend is cancelled, for the sake of prudence. The yield would be less than 2% anyway.

Outlook section is not too helpful – “Trading in April and May has been substantially in line with recent trends“. Live events will be back “rapidly when restrictions are lifted”.

My view – Growth here is too pedestrian to get me interested.

ERM has considered selling off parts of its Asset Management business, where revenues have just declined by 5%. In the end, It has decided to keep them, and is planning for these businesses to return to growth by the end of next year.

Good luck to it. I will be fishing elsewhere for opportunities.

 


 

Thanks for dropping by, see you tomorrow.

Graham

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COMMENTS

Wordpress (3)
  • comment-avatar

    Good morning Graham- a request for brief comments on RDL today!

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  • comment-avatar

    Hi Graham

    To add to your thoughts on IG Group, take a look at revenue/day over the last Quarter, over various time periods (sorry about the formatting, it’s straight from a spreadsheet)

    Q4
    PERIOD REV (£m)# DAYS REV/DAY
    1-12 52 12 4.33 TU
    1-36 173 36 4.81 TU
    13-36 121 24 5.04 calc.
    37-61 86 25 3.44 calc.
    1-61 259 61 4.25 TU

    You’ll see that there was quite a dip in May (£3.44m) vs April (£5.04m)
    FYI FY2019 looks like the revenue/day was closer to £1.8m

    Also, it’s worth noting that we have:
    a) been guided OPEX = c.£300m, and
    b) variable costs are c 5-6% of revenue, so let’s assume £42m

    That leaves an operating profit of £300m vs £192m last year, so quite a jump even if I have made a mistake somewhere.

    It’s unlikely we will reach such elevated levels next year, nonetheless I did try to forecast how things might pan out going forward:
    2020-21
    PERIOD REV (£m) # DAYS REV/DAY
    Q1 212 66 3.2 Jun-Aug
    Q2 117 65 1.8 Sep-Nov
    Q3 186 64 2.9 Dec-Feb
    Q4 122 66 1.9 Mar-May
    FY 637 261 2.4

    So FY revenue of £637m.
    Perhaps this isn’t a good way to look at things, but if correct a YOY fall of only 2% going forward doesn’t make me want to sell at current levels.

    A

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