Cube Midcap Report (4 March 2020) – New schedule at Wizz #INTU #WIZZ #SMDS #LGEN

Cube Midcap Report (4 March 2020) – New schedule at Wizz #INTU #WIZZ #SMDS #LGEN

Good morning!

Today we have announcements from:

  • Wizz Air (WIZZ)
  • DS Smith (SMDS)
  • Legal & General (LGEN)
  • Elementis (ELM)
  • Hill & Smith (HLS)

In small-cap news, the former FTSE 250 component Intu (INTU) has failed to raise the £1 billion  – £1.5 billion in new equity it was looking for.

The shopping centre owner concludes:

…intu will continue and broaden its conversations with its stakeholders with a view to discussing the range of options available to the Company to demonstrate the equity value of the business and to utilise its assets to provide further liquidity . These include alternative capital structures and solutions and further disposals. intu will also continue to keep under review the feasibility of an equity raise.

Like-for-like net rental income continues to decline. Occupancy is ok at 95%. Property values are independently estimated to be down an enormous 22% for the year.

And debt covenants might be breached in July 2020, e.g. if property valuations or net rental income fell by a further 10%.

I previously thought that there might be some merit in Intu’s equity, but it looks like I was  wrong about that (the share price was 92.5p at the time!).

Intu’s fate appears to depend on the terms of its future refinancing, and the signs so far aren’t great.

Timings: finished at 4.20pm.

The featured image above is Matthias Church in Budapest, the home of Wizz Air.

Wizz Air (WIZZ)

  • Share price: £35.34p (+4%)
  • Market cap: £3.6 billion

Trading Update

WIZZ is among the travel/tourism shares which have been hurt by the recent virus outbreak (shares dropping from £44 to a low of around £32).

This trading update is designed to address the issue. Key points:

  • Adjustments to the flight schedule, primarily to Italian destinations. I note that Ryanair has cancelled many Italian trips, too, after a drop in demand for these flights.
  • Reductions in overhead and discretionary spending, a pause on recruitment and non-essential travel, and special negotiations with suppliers. Again, I note that Ryanair has also cancelled recruitment and reduced hours for staff.

The company remains positive for the long-term:

At this point in time it is difficult to predict the extent and the duration of the outbreak and the impact on the next financial year, however we remain confident that as the situation normalizes, Wizz Air will continue its highly successful trajectory. 

My view

I agree with the CEO that the company’s strong balance sheet will help it through any difficulty posed by the virus. Cash as of December 2019 was €1.3 billion.

More negatively, I note that the private equity group Indigo Partners, which previously was the cornerstone investor for Wizz, sold off 12.5 million Wizz shares in early February, raising £500 million. The sale price was £40.15p.

It might be fully priced around those levels, if Indigo is happy to make a large sale. Indigo is a specialist in low-cost airlines, so I would presume that it has a very good handle on the prospects at Wizz.

Due to home bias, I would choose Ryanair (RYA) if forced to invest in one of these airlines. It’s also available at a cheap-ish earnings multiple (both companies are available at around 13x forecast earnings).


DS Smith (SMDS)

  • Share price: 336.7p (+4.4%)
  • Market cap: £4.6 billion

Trading Statement

Everything sounds fine at this packaging giant and paper manufacturer. It’s an update for H2, which started in November 2019.

We have:

  • like-for-like volume growth in corrugated boxes (its main product).
  • FMCG/e-commerce doing well, but export-led markets (including Germany) subdued.
  • Lower Chinese demand for US paper exports are an issue.

A disposal in February for £400 million brings the SMDS leverage multiple towards the medium-term target of 2.0x. In general, I’m ok with that multiple for a manufacturing business like this.

Net debt at the end of H1 was £2.4 billion, including £242 million which arose from the adoption of IFRS 16. The net debt/EBITDA multiple at the time was 2.3x.

CEO comment: Miles Roberts says that DS Smith “delivered a robust performance” and that they “have not to date seen any material impact to our business from coronavirus”.

My view: this bears the hallmarks of a well-run manufacturer. ROE is excellent, thanks to solid ROCE juiced up by the significant use of debt. On the basis that results are very solid, this looks a sensible move. Keeping the leverage multiple below 2x would help me to relax a little bit more, if I was a shareholder here.


Legal & General (LGEN)

  • Share price: 267.95p (+1%)
  • Market cap: £16.0 billion

Full-year Results (Part 1)

This investment manager and insurance giant has pumpted out another excellent set of results.

They say that “elephants don’t gallop” but LGEN is cantering at a brisk pace.

  • Operating profit (from continuing operations) is up 17% to £2.5 billion.
  • PBT +16% (excluding mortality reserve release)
  • Assets under management +18% to £1.2 trillion, helped by net flows of £86 billion.
  • Insurance gross written premium +6%
  • Return on equity 20.4% (a bit weaker than last year)

In terms of raw valuation metrics, LGEN now has  book value per share of 156p. Paying a c. 70% premium to this at the current share price, for a diversified financial group earning 20% ROE, does not sound too bad to me.

Mortality assumptions

Providers of life insurance and annuities have to estimate their profits based on provisioning for future events – and this means estimating the mortality of their customers.

In 2018, LGEN released £433 million from its provisions, based on 2016 mortality tables issued by the Continuous Mortality Investigation. The year before that, it had released £332 million.

This year (2019), it has only released £155 million. Compared to last year’s explanation of this matter, this year LGEN has included the word “conservatively” in its description of the calculations. It implies that maybe the new mortality tables are a bit too cautious (in terms of the likely result for LGEN).

Because of these new mortality tables, the statutory operating profit for LGEN is only up 1%. And statutory PBT is down slightly.


There is a very confident outlook statement, pointing to strong EPS growth over the past five years and £7.3 billlion in surplus regulatory capital.

Some key bullet points from the outlook statement, looking at each of LGEN’s divisions:

  • LG Retirement (Institutional) – to benefit from the trasnfer of UK defined benefit schemes to insurance companies.
  • LG Retirement (Retail) – 25% market share in lifetime mortgages (down because of “pricing and underwriting discipline”). LGEN working to improve its annuity offering. Mortality tables to be reviewed again later this year

Personally, I would be bearish on the annuity market. If heavily supressed interest rates are with us for the foreseeable future, I don’t see any reason for consumers to want them again.

  • LG Investment Management – good track record in net flows. International flows are growing well and the division is diversifying.

I like the fund management sector and have a position impression of LGIM’s positioning.

  • Legal & General Capital (LGC) – investing in alternative assets. Delivering infrastructure, clean energy and residential/commercial property. LGEN expects the portfolio to grow to £5 billion over five years (from the current £2.9 billion) and targets a return of 8% – 10%.
  • Legal & General Insurance (LGI) – “We have completed the successful turnaround of our group protection business as reflected by the strong performance in 2019, and we are well positioned to increase market share in 2020.

My view

I can find few reasons not to think that LGEN will continue to do well for its shareholders.

Looking for mention of the “v”-word in today’s report, I discover the following in the “Risks” section, relating to investment performance:

The emergence of COVID-19 in China also has potential to temporarily impact global growth rates through the disruption of supply chains, as well as the value of investment assets that may be perceived as being adversely impacted from a slowdown. While concerns about COVID-19 have had minimal effect on our business to date, they have driven a return to more volatile markets in the current quarter.

So apart from the gyrations of stock indexes, the virus hasn’t had any impact on LGEN yet.

The virus could change the mortality tables to some extent. Of course it’s very morbid and unpleasant to even think about this. Presumably the financial impact for LGEN would be positive?

The bigger picture is that I’m attracted to the ROE available here, and the huge investment management division. LGEN gets the thumbs up from me.


Elementis (ELM)

  • Share price: 98.55p (+0.4%)
  • Market cap: £572 million

Preliminary Results

I covered the downbeat trading update for this chemicals company in January.

Let’s skip ahead to the outlook:

· Market conditions remain challenging but solid start to the year.

· Stable performance expected, with overall progress in Personal Care, Coatings and Talc (c.80% of Group earnings) offset by a weak market in Chromium. Performance to be supported by progress on delivery of $15m medium term cost savings and new business opportunities.

My view – this one fails to excite me.


Hill & Smith (HILS)

  • Share price: £14.375 (+4.5%)
  • Market cap: £1,140 million

Final Results

This performance is in line with expectations and the outlook for 2020 is unchanged.



Out of time for today. See you tomorrow!




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