Cube Midcap Report (5 March 2020) – Loss of Jeremy Kyle bites for ITV #FLYB #ITV #SDR #AV

Cube Midcap Report (5 March 2020) – Loss of Jeremy Kyle bites for ITV #FLYB #ITV #SDR #AV


Stocks on my radar today:

  • ITV (ITV)
  • Schroders (SDR)
  • Aviva (AV.)

I didn’t get around to Admiral (ADM) or GVC (GVC).

Airlines – Having discussed Wizz Air (WIZZ), and to a lesser extent Ryanair (RYA), in yesterday’s report, I see that Flybe is no more.

It must be said that Flybe was in an utterly different situation to Wizz & Ryanair. It has been struggling for years.

Investors will remember that its public listing was cancelled last year when it got taken over for 1p, at the pitiful valuation of £2 million. The alternative was an immediate administration.

In January this year, the government had to help with tax measures to save it again.

Flybe survived those episodes, but it could not survive the coronavirus and the drop in demand for flights that it has caused (perhaps as much as 50%).

Interestingly, the company denied that it was going under as recently as last night. A spokewoman said: “Flybe can confirm that, following a miscommunication regarding refuelling this evening, two flights were delayed and that due to the crew now being out of hours, have been cancelled. Normal operations have now resumed.”

The cash finally ran out last night.

Lessons from the story?

  • Activity at regional airports may decline, unless another airline wants to fill the void left by Flybe.
  • We shouldn’t underestimate the impact of airport passenger duty (adding £26 to the price of return domestic flights). Flybe was desperate for it to be changed.
  • The coronavirus has claimed its first noteworthy UK corporate casualty.

I certainly wouldn’t extrapolate from this event that healthy businesses will be claimed by the virus, too.

There were many factors which could have finished off Flybe. In the end, it was Covid-19. If it wasn’t that, it could have been something else in a few months or a year from now.


  • Share price: 103.95p (-11%)
  • Market cap: £4.2 billion

Final Results

These results start off well, showing results “ahead of expectations”.

  • revenue +3%
  • ITV advertising revenue only down 1.5%
  • adjusted EBITA and adjusted EPS both down 10%. Affected by “strategic investments we are making to drive growth”.

Operational progress sounds ok. ITV Studios is growing, while the Broadcasting division is declining (EBITA down 16%). Britbox (launched Nov 2019) is on plan.

Net debt to adjusted EBITDA is at the very reasonable level of 1x.


This is where things start to get a bit worrying.

  • advertising revenue up 2% in Q1, but down 10% in April.
  • travel advertising in March and April has been hit by the Coronavirus (this is not quantified – I would presume by a very large percentage).
  • revenue at ITV Studios will continue to grow in 2020 but will be negatively impacted by the phasing of deliveries.
  • expecting double-digit growth in online revenues and growth in DTC (e.g. by Britbox).


Most of the commentary is uninteresting, but I note the following snippets.

The Jeremy Kyle cancellation has hit ITV’s brand power. Reports suggest that Kyle will be making a comeback soon, but I wonder if ITV’s reputation can do likewise?

Despite lots of positive comparatives, depending on how you measure it, total viewing was down whether you compare to 2018 (World Cup year) or 2017 (a more reasonable comparison).

The schedule for the rest of the year will be boosted by Saturday Night Takeway, a new program “The Epic Gameshow“, dramas The Bay and Quiz, and the European Football Championships.

Statutory Results are poor, as operating profit falls out at £535 million (vs. £600 million in 2018). The result was saved by a £62 million windfall profit from selling London Television Centre.

My view

These results aren’t very encouragin, and the near-term outlook also appears to be weak.

More EPS downgrades are coming, in light of Covid-19’s effect on advertising. Adjusted EPS was 11.8p in 2019. Should we pencil in around 10p EPS for 2020?

Television has been disrupted by Netflix, YouTube and other streaming/online alternatives. On a long-term view, it’s hard to predict how people will consume content on their TVs.

There are many reasons for bearishness. This is reflected in a P/E multiple around 9x – 10x (depending on your EPS estimate), and a dividend yield of around 8%, as the payout has been maintained.

Personally, I suspect that these shares have been punished enough, and would be surprised to see them trade much lower than their current level. But I won’t back up this view with my own funds, since there are too many variables I can’t predict in the TV business.


Schroders (SDR)

  • Share price: £27.845 (-3.6%)
  • Market cap: £7.9 billion*

*Schroders has an unorthodox capital structure. I believe that the correct number of ordinary shares to use is 282.5 million, of which 56.5 million do not have voting rights and trade with the ticker SDRC.

Final Results

These results show the negative effect of operational gearing at work.

Earnings before operating expenses and tax are flat, but operating expenses are up 4%.

This results in a decline in adjusted PBT of 8%. Thankfully, the exceptional charges were lower this year. So in the end, PBT was down by only 4%.

Even though average AUM for the year was only up 2%, the year-end AUM was up 23% on the prior year-end figure. This is thanks to strong equity markets towards the end of the year (which have subsequently reversed) and some mandates won towards the end of the year. AUM finished the year at £500 billion.

Pricing pressures? The “net operating revenue margin” declined to just 43 basis points of AUM, from 45 basis points in 2018.

Outlook. Excerpt:

In the near term, Covid-19 is creating considerable uncertainty for economies and markets. We believe that our business resilience is sufficient to deal with this, but the impact on economies and markets will be highly correlated with how effective containment measures are.

There are challenges facing the traditional asset management industry, but we see a range of growth opportunities particularly in our Wealth Management, Private Assets & Alternatives and Solutions business areas, which now account for more than half of our assets under management.

My view

This one also looks like it might be too cheap. And since I have some familiarity with the funds industry, I would have more confidence in the future for Schroders.

The company in the space I am most interested in, however, is Blackrock ($BLK). It’s currently available at a P/E multiple of 15x (Schroders is at 10x), but the difference is that Blackrock has incredible strength in passive funds.

Personally I’d want to own Blackrock first, before dabbling in Schroders.


Aviva (AV.)

  • Share price: 348.35p (-0.5%)
  • Market cap: £13.7 billion

Preliminary Results

These are solid numbers and Aviva is outperforming the FTSE today (only down 0.5% while the FTSE is down 2.2%).

Aviva shows a positive movement in RoE, from 12.5% to 14.3%. That’s not spectacular by any means but net asset value here on an IFRS basis is 434p (i.e. a big premium to the share price) and the forecast P/E multiple is only around 6x. So the market is not pricing in much success.

Aviva seems to be reasonably happy with its own progress, and hikes the dividend by 3%. Note that the prospective yield here is an amazing 9%.

New business is moving in the right direction, too. Life policies (including all geographies) see the present value of the new business premiums increase by 12%.

The net written premiums for general insurance are growing at a more relaxed pace, up by just 2%.

Coronavirus gets the following mention:

COVID-19 presents a new uncertainty in 2020. Our primary focus is the operational readiness and safety for our customers and staff, such that we continue to deliver on our promises. Our scale, diversity and the strength of our balance sheet allows us to meet short-term challenges.

Hitting targets

Aviva has a medium-term ROE target of 12% (I would be happy if all my companies always achieved an ROE of 12%).

The CEO comments on this target as follows:

Aviva’s RoE was 14.3% in 2019, benefiting from favourable assumption changes. Meeting our 2022 ambition of a sustainable 12% RoE will require improved underlying returns that will be achieved through cost reductions, organic business growth and active capital allocation to higher returning segments.

It turns out that underlying ROE was only 8.1% for 2019. It was boosted by ” significant levels of longevity reserve reductions in our UK Life business, active balance sheet management and other modelling and assumption changes”.

Longevity expectations have slumped in England and Wales, in the last few years.  This has contributed to significant reserve releases for Aviva, but it is not expecting a repeat in future periods.

The CFO goes into some more detail:

In the last three years, operating profit4,‡# and OCG2,‡# [GN: capital generation] have benefited from large assumption changes and other actions, most notably a reduction of longevity reserves. We expect our results to benefit from some similar actions over the medium term, but from 2020, we expect this to be in a range of zero to £200 million per annum for IFRS and c.£200 million per annum for OCG, as we highlighted at our capital markets day in November.

My view

The market might be pricing this much more fairly than it first appears. Without changes in assumptions and other non-underlying factors, ROE is at a more ordinary level.

This looks like a fine stock for a dividend but I’m uncertain as to whether much capital growth can be achieved.


I’ve run out of time here. Back tomorrow!




Wordpress (4)
  • comment-avatar

    You are spot on with FlyBe and it should have been put out of its misery years ago, let along tax payer money being transferred from the treasury to Virgin, Stobart and CCP. 

    It is beyond sad for employees and businesses that depended on FlyBe (I understand that Southampton Airport flights were 95% FlyBe) but this is capitalism. 

  • comment-avatar

    I think it was at last Mays Mello event I sold Flybe for 100% profit. They had dropped suddenly to 12p which I felt was overdone and 14 days later I sold them for 24p. I didn’t risk it again after that. Just a stroke of luck I guess but I needed a bit of luck in 2018 which was not a good year for me.Always a shame to see any company go bust, I know the misery for employees.

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