Cube Midcap Report (5 June 2020) – Green shoots of many kinds

Cube Midcap Report (5 June 2020) – Green shoots of many kinds

Good afternoon!

Do you find that your mood fluctuates?

Yesterday, I was experiencing a lot of frustration about the pace of re-opening from lockdown.

Today, I’m delighted to see the Irish government looks set to accelerate its (extremely conservative) original roadmap. I hope and believe that we might have a de facto resumption of something very close to normality within a few short weeks.

As is the case in the UK, there are components of the economy where re-opening remains very uncertain:

  • foreign travel – quarantine/isolation for air passengers.
  • bars, restaurants, hotels, gyms – it’s not clear if or when they will be open and normal again.
  • large events – ditto, not clear when large events will happen again.

These are very important parts of the economy and our lives, and I hope they are back soon, but if everything else comes back, it will do so much for our quality of life.

Another reason for happiness today is that there are literal green shoots in my back garden.

After removing a huge quantity of stones, breaking up the ground and adding several bags of multi-purpose compost, I put seeds down about a week ago. And I have been religiously watering them every day.

The internet tells me that new grass is visible between 5 and 30 days after planting.

What do you think? Hopefully I will see far more growth in the next few weeks – will add more nutrients and more seeds if it fails.

Another reason for happiness is my portfolio – what an incredible month or so it has been.

And the FTSE index continues to add to our nominal wealth, now over 6400.

So I’m finding plenty of reasons for gratitude right now. The sun is shining again, which doesn’t hurt.

Perhaps I should write about some midcaps?

  • Taylor Wimpey
  • Biffa
  • Renishaw
  • Workspace

Finished at 7pm.


Taylor Wimpey

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Market cap £5.3 billion
RNS Business Update
Writer disclosure No position.

Great news, which I have come to expect from housebuilders:

  • construction has started in England and Wales, in accordance with Covid-19 Code of Conduct.
  • Scottish sites preparing to return (depends on govt. guidance).
  • most show homes and sales centres open in England for appointments.
  • all employees back from furlough.

Some of the best bits of this update are that there is “a very high level of demand” for appointments at sales centres, and “a healthy increase in reservations” in recent weeks.

Meaningful production will be back by the end of this month.

Completions are down 40% so far this year. One of the big questions is: will there be pent-up demand, so that the company can catch up? The order book at £2.8 billion is up nearly £300 million year-on-year.

Personally, I doubt that there will be a full recovery of lost business, because of the hit to the job market. I do think that ongoing business will return to a normal pace, and the enlarged order book will provide plenty of revenue visibility. Cancellations are low.

Land market“we have maintained an active dialogue and strong relationships with land vendors and agents and are beginning to see increased opportunities on favourable terms, as a result of these strong relationships.”

My view – a very encouraging update. Anyone who has continued to hold housebuilder shares through the last few months will hardly be incentivised to sell out, now that business is going back to normal.

 


Biffa

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Market cap £611 million
RNS Preliminary Results
Writer disclosure No position.

This is  a waste management company – Peter Lynch would love it, in principle (boring companies are good!).

FY March 2020 was a good year:

  • revenue +6.6%
  • underlying operating profit +10.8% to £90.5 million
  • statutory PBT £56.4 million

Cash flow conversion is good: “underlying free cash flow” is £53.6 million.

Skipping ahead to the cash flow statement, I’ve calculated that operating cash flow, minus investing cash flow and lease payments, was £62.6 million. You might also wish to subtract interest of £17 million.

Either way, the cash generation is clearly not bad.

Covid-19

I’ve never thought about this before, but the fortunes of the waste management industry are clearly dependent on the health of the economy. The less economic activity, the less waste we produce.

Revenues at Biffa’s industrial and commercial division, and landfill activities, fell 50% during lockdown. They are currently down 40%.

I&C had grown 8% in FY March 2020, or 1% organically.

Resources and energy had a mixed financial year to March 2020, but have seemingly been less affected by Covid-19.

Dividend – cancelled.

Balance sheet – there is “modest monthly cash burn”.

Net debt finished the year at £425 million, and could reasonably be adjusted higher to £460 million to allow for a contingent liability. For context, underlying EBITDA was £174 million.

Base case scenario planning sees leverage increase to 3x by the end of the current financial year. That multiple would generally be seen as high. Biffa’s worst-case scenario would see the leverage multiple at 4x.

It’s all a bit uncomfortable, and therefore not a surprise (but very important) to note that some dilution could be on the cards:

As a consequence of the covenant amendments agreed with lenders, we have agreed a number of restrictions, relating to levels of capex, M&A and shareholder distributions… The Company is therefore continuing to consider its funding options on an ongoing basis, including raising equity capital, to allow it to continue with all the previously outlined growth investment opportunities across I&C, closed loop plastic recycling and Energy from Waste, without delay.

My view

The financial quality metrics, the industry and the balance sheet don’t appeal to me. It’s not a piece of garbage, but I don’t want to own it.

 


Renishaw

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Market cap £3.0 billion
RNS Business Update
Writer disclosure No position.

In March, Renishaw cancelled its interim dividend which was due to be paid in early April.

It was a shocking turn of events for me to see companies cancelling dividends, when their shares had already started trading “ex-div”. Renishaw shares had been trading “ex-div” for weeks, when the interim dividend was cancelled.

Renishaw reported net cash of some £94 million at the end of March, making the decision not to pay a little stranger.

Today’s announcement:

In view of the ongoing macroeconomic uncertainty due to the Covid-19 pandemic, the Board continues with measures to closely manage the Group’s cost base, particularly in relation to our labour costs. The Board has decided that there will be no final dividend declared in respect of the year ending 30 June 2020.

A final dividend at the same level as last year would have resulted in an outflow of some £34 million, so I can understand the company’s reluctance to pay.

That said, I do have a preference for most companies to pay a small dividend, if they can afford it and haven’t got something better to do with the money.

Perhaps Renishaw could have paid out a fraction of the previous amount, instead of eliminating the dividend entirely?

 


Workspace

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Market cap £1.4 billion
RNS Final Results
Writer disclosure No position.

This London-focused office REIT announces good numbers for FY March 2020.

It brutally sold off during the pandemic, and continues to languish at a little over half its pre-Covid level.

The trend to WFH is exactly what office owners don’t want to see, and the “stay-at-home” orders are a complete disaster for them.

Millions of people and companies have just realised something I’ve known for a few years, namely, that productivity is high when you WFH.

Personally, I didn’t hate my office life, but I knew that I was losing time to distractions. The distractions don’t go away when you work from home, but you have more control over them – and at the end of the day your customers will judge you on your output. So there is every incentive in the world to manage the distractions well.

Balance sheet  – Workspace REIT is only modestly leveraged: 21% loan-to-value (LTV) at the end of FY March 2020, and £166 million in liquidity.

Covid Impact

The “V” in LTV might need to be revised:

· Significant slowdown in enquiries from the end of March 2020

· Majority of customers (c.75% by rent) benefitting from 50% rent reduction offer until end of June 2020, as well as rent deferrals on a case by case basis

· Overall cash collection (net of discounts and deferrals) running at c.70% in the quarter

Customers are said be “increasingly” planning to return to work. But will work ever go back to the way it was before? The jury’s out.

CEO comment:

Looking forward, we will undoubtedly see subdued levels of operational performance in the short term with a reduction in rental income. However, we expect that the structural shift in the office market towards flexibility will now accelerate more broadly. We believe that, with our well established flexible offer and the quality of our space and services, Workspace is ideally positioned to benefit as London recovers from the impact of the Covid-19 pandemic.”

The strategy and the typical customer offer by Workspace does appear well-geared towards modern SMEs, but I don’t know if this is enough to counteract the work-from-home trend.

Valuation – net asset value per share (under the EPRA method) is £10.89. So the current share price is at a discount of 29%.

That seems fair enough to me, given the headwinds. But perhaps I am too pessimistic.

 


Calling it a day there. I’m planning to work tomorrow (Saturday), so I’ll see you then!

Graham

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Wordpress (3)
  • comment-avatar

    Well, it’s either green shoots or moss 🙂

    Good idea that – having a ready supply of small stones to throw at the pigeons trying for a free meal of grass seed.

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  • comment-avatar

    Your grass should come up fine . The best time of year for re seeding grass is September but you can do it this time of year with ( plenty ) watering . The key is seed not too deep under the soil , 1 CM or there abouts , roll or pat down the soil after sowing process to a firm surface , water frequently so the area never dries right out . This may mean damping down two or three times a day with a fine rose spray on a hose pipe on sunny / hot / windy days . Does not need drowning but just keep the soil in a damp ( dark colour ) state rather than dry . If you have to go away see if a neighbour will do it once a day for you . September is easier because of the lower sun / cooler / damper soil conditions at that time of year means no watering needed most years .

    ( I used to work on an ICI grassland trial research farm 35 years ago ! )

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    • comment-avatar

      Thanks very much for sharing your wisdom, WR. There is a hosepipe ban in effect currently but I don’t own a hose right now. Trusty watering can is doing the job.

      Cheers

      Graham

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