Cube Midcap Report (5 Feb 2020) – No problems at Domino’s #DOM #IMB #FDEV #RDW

Cube Midcap Report (5 Feb 2020) – No problems at Domino’s #DOM #IMB #FDEV #RDW

Good morning!

Today I’ve covered:

  • Domino’s Pizza (DOM)
  • Imperial Brands (IMB)
  • Frontier Developments (FDEV)
  • Redrow (RDW)

By the way, I’ve made the Chat Room open to the public, as an experiment – anybody can view it and it’s free to take part!



Dominos Pizza (DOM)

  • Share price: 322.5p (+8.5%)
  • Market cap: £1.5 billion

Q4 trading statement

A pleasant Q4 update from Domino’s and the market reacts positively.

  • There is like-for-like sales growth of 3.9% in the UK & Republic of Ireland (Q4 2019 versus Q4 2018).
  • Online orders continue to grow their share of activity and now account for 91% of deliveries.
  • UK/ROI operating profit for 2019 to be “within the range of current market expectations“.

Note that Domino’s reports two measures of like-for-like growth: “excluding splits” and “including splits”.

The 3.9% growth I’ve shown above is “excluding splits”. This means that it only looks at stores which have not been cannibalised by new Domino’s stores nearby, i.e. by the company “splitting” its territories. That’s a reasonable metric, in my view.

If you include stores which have been cannibalised by new openings, the like-for-like growth measure is just 2.6%.

CEO comment

This performance was driven by the power of our brand, our strong digital capabilities and the operational expertise of our franchisee partners.


Looking ahead to FY December 2020 (the current year!), I can see forecasts for EBIT of £97 million and EPS of 16.1p.

My view

I’m slightly annoyed that I didn’t buy shares in this last year, when the multiple was more compressed. It’s a high quality company earning franchise-based royalties and huge returns on capital – the sort of thing which deserves a high multiple, in other words.

The shares have built up a head of steam and are now at a P/E of c. 20x. To me, this is priced at fair value.

For long-term holders, everything seems fine: the company is disposing of unprofitable foreign operations and focusing on its lucrative UK/ROI business. Makes sense.

As a holder of DP Eurasia (DPEU), I am obviously very interested to find out if the Domino’s formula can work in other parts of Europe (and the Near East). I still think that it might – we shall see!


Imperial Brands (IMB)

  • Share price: £17.874 (-8%)
  • Market cap: £16.9 billion

AGM Statement

There is no getting away from the fact that this is a poor update.

Tobacco is in line with expectations, but vapour isn’t working out as planned:

…following the US FDA’s ban on certain flavours of cartridge-based vapour devices and weaker than expected consumer demand for vapour, we now expect constant currency full year Group net revenue to be at a similar level to last year and adjusted earnings per share to be slightly lower than last year.

First half adjusted earnings per share is expected to be down c. 10% at constant currency, due to the phasing of inventory write-downs, primarily relating to the US flavour ban.

IMB issued a profit warning last year, for the same reason: “next generation products” (NGP) in the USA failed to hit targets.

Despite NGP revenues growing 48% year-on-year, this was below the company’s expectations. As a consequence, total adjusted operating profit from tobacco and NGP was marginally lower, year-on-year.

Earnings are now moving in reverse, and problems in NGP are to blame:

  1. Weaker than expected demand in the US/Europe, due to “regulatory uncertainty and adverse news flow”, is going to force provisions for slow-moving stock. The hit to profits is £40 million.
  2. The imminent FDA ban on certain flavours will result in an inventory writedown. The hit is £45 million (in line with previous estimates).

Tobacco, by contrast, has had a “good start” to the year.

In relation to the “adverse news flow” hurting vapour demand, the US-based Centers for Disease Control and Prevention has launched an investigation into lung injuries associated with e-cigarettes/vaping. It says that 2,711 hospitalised lung injury cases or deaths have been reported to it, that are associated with e-cigarettes or vaping.

In the UK, the Medicines and Healthcare Products Regulatory Agency is investigating two deaths and has received reports of 20 “serious adverse reactions to vaping”.

With this sort of news flow, it’s perhaps not such a great surprise that the demand for vaping products would decline.

My view

As a shareholder in British American Tobacco (BATS) (down 1% today), I think I may have picked the winning horse in this race.

BATS hasn’t suffered this sort of inventory writedown. The BATS vaping brand, Vuse, comes in eight flavours: Tobacco, Menthol, Mint, Chai, Crema, Berry, Melon and Nectar.

The IMB vaping brand, Blu, on the other hand, comes in these flavours:

  • Tobacco
  • Caramel Café
  • Polar Mint
  • Menthol
  • Blueberry
  • Green Apple
  • Tropic Tonic
  • Strawberry Mint
  • Vanilla Creme
  • Peach Passion
  • Cherry
  • Mint Chocolate
  • Berry Swirl

While the same accusation could be made against one or two of the Vuse flavours, the Blu options definitely seem more “childish” to me. They are therefore exactly the type of thing that the FDA wants to crack down on – and will have to be disposed of by IMB.

IMB shares are now cheaper than BATS when it comes to their respective earnings multiples, but I think BATS might be the safer bet. In the short-term at least, BATS has managed to avoid one or two banana skins which have tripped up its smaller competitor.



Frontier Developments (FDEV)

  • Share price: £13.30 (-8%)
  • Market cap: £517 million

Interim Results

I feel poorly qualified to comment on this video game developer, as I’ve been saying for a long time that I don’t understand its valuation.

Its results rise and fall with the release of its new game titles. Today’s H1 report shows a collapse in operating profit compared to H1 last year (minus 70%+).

The company deals with this by also presenting the H2 FY2019 numbers – this is highly irregular, but it’s a technique to show that the bigger picture is not as disastrous as the year-on-year comparison would suggest:

The latest release, Planet Zoo (November 2019) has been successful, according to FDEV. Its contribution will show up in H2 (the period ending May 2020):

The base game and the deluxe product achieved the global number one and number two bestseller spots on Steam both prior to, and after, release. To date Planet Zoo has sold the most units on PC of any of Frontier’s games during an equivalent time period, crossing 500,000 units in early December.

On top of this success, previous launches continue to grow with expansion packs and add-ons.

And the company is currently planning two major new releases in FY May 2022. In recent years, it has managed one major launch per annum, but it now has the headcount for two in FY 2022.

On top of this, it is now working with external partners to help launch 3rd-party games.

Outlook is in line with expectations. The only major problem at the moment is a currency headwind, since the company’s costs are in GBP and revenues are in USD (GBP has been appreciating recently, in case you hadn’t noticed!).

Since the majority of Frontier’s revenues are recorded and received in US Dollars,  the appreciation of Sterling during Q4 2019 has had a negative impact on revenue earned over the important November/December holiday period, which also included the launches of Planet Zoo (November) and the Return to Jurassic Park pack (December).  However, the strong performance of all four titles has largely offset this foreign currency headwind, and Frontier continues to expect that total revenue in FY20 will fall within the previously stated range of £65-73 million.

So sales could fall to the lower end of the range. The consensus EPS forecast is 28.5p, rising to 38.7p in 2021 and 65.8p in 2022.

My view

I think this is a good update – operationally, it is hard to fault FDEV. It has released new games titles when it said it would, and the games are popular.

I still wouldn’t pay up in advance for growth that hasn’t happened yet, but I like what the company is doing.



Redrow (RDW)

  • Share price: 826p (+0.5%)
  • Market cap: £2.9 billion

Half-year report

This housebuilder leaves full-year expectations unchanged.

It forecasts a 40:60 H1/H2 split, with some justification: reservations in H1 were up 18%, and reserversations so far in H2 are up 15%.

Therefore, despite the decline in revenue (10%) and completions (14%) in H1, prospects for the rest of the year are positive.

Checking last year’s H1 report, I see that reservations were merely flat, year-on-year.

Management changes – the founder has retired and a new CEO will be in place from July 2020.

ROCE comes in at 25%, down from 28% last year. Still an excellent performance (housebuilders should be able to do this when times are good, as they are now).

Help to buy remains an important factor – 36% of Redrow’s buyers are using it.

Outlook is ok:

Planned changes to Help to Buy next year will limit the scheme to first-time buyers and introduce regional price caps. Whilst we expect this will see demand increase in the short-term from buyers that will not qualify for the scheme in 2021, we continue to urge government to review the caps that, as they stand, will disadvantage buyers in the North and Midlands.

Due to constrained outlet growth last year and the timing of apartment block completions, we budgeted to deliver significantly more completions than usual in the second-half. We are on-track to do so and our expectations for the full year remain unchanged.

With our very strong order book, a promising start to the second-half and a more stable political outlook, prospects are encouraging and I am confident this will be another year of progress for Redrow.



I’m going to call it a day there. A couple of suggestions before I go:

  • Check out Vivek’s article on Ted Baker, which is currently winning the competition for the article with the most “likes” this month!
  • Drop in to our Chat Room, which is now free to access. I’ll be there again tomorrow morning at RNS o’clock (7AM), to react to the latest announcements.
  • If you enjoy this website, please consider supporting us by taking out Gold Membership. Thank you!

That’s all for today, see you tomorrow!





Wordpress (0)
Your Cart