Cube Midcap Report (6 May 2020) – Buffett hints at Great Depression

Cube Midcap Report (6 May 2020) – Buffett hints at Great Depression

Good morning!

Quite a lot to chew on today.

I will be out from 10.30 until after lunch, and will continue the report on my return.

Midcap stories include:

  • Hiscox (HSX)
  • ITV (ITV)
  • Ocado (OCDO)
  • National Express (NEX)

Finished at 18.45.

Buffett 2020 Notes

I’ve been gradually working my way through the 2020 Berkshire Hathaway AGM (I am long BRK.B shares).

He was sadly not joined by Charlie Munger this time, and spoke to an empty room:

The first section is a talk about how amazingly successful America has been over the long-term, sprinkled with caution that progress doesn’t resemble a straight line. There have been good times, there have been bad times.

The purpose is apparently to help investors put the current crisis in context – we could be in for a very rocky period now, but it will pass. The overall, big-picture trend is for societal and economic progress.

He says the range of possibilities has narrowed for the health crisis – I agree with this. Experts are starting to make reasonable estimates of the infection fatality rate, now that they have more data.

But he says the range of possibilities for the economy are still very wide. I agree with that too – we don’t know how long a recovery might take, or what it will look like.

This surely explains why he hasn’t bought anything? If he can’t predict the economy, and foresees a very wide range of possible outcomes, that’s not a very appetising position in which to start making investments, unless they’re available at bargain levels.

He noted that in August 1929, after the stock market had made its initial crash and then recovered 20%, that people did not realise that they were headed for a Depression. Total economic and stock market collapse soon followed and by July 2032, the Dow had fallen 83%.

I think he might genuinely fear an economic shock of that magnitude. I fear it too. If we (by which I mean Western countries) have Depression-era unemployment for longer than a few months, the ramifications of that will be truly awful. It’s enough to make you think twice before buying shares.

If you’re a regular reader here, you’ll know that I have been doing very little trading in recent months, and have no major plans to start doing any. I am mostly just monitoring my existent portfolio.

While I do think that equities are the best asset class to own for the long-term, and plan to hold on to my existing portfolio, I am wondering if future purchases should be geared towards gold and other defensive plays. I don’t think the FTSE is very expensive, but I would still be very cautious towards US indexes.

Getting back to Buffett, he reiterated the Ben Graham idea that a stock market is there to serve you – you don’t have to take its price quotes seriously, but you can take advantage of them when they are irrational. And he promotes indexing (or “buying a broad slice of America”).

I’m looking forward to watching the rest of the video. I’ll surely have more to say about it, by the time I get to the end!



  • Stock data should display here.
Market cap £2.1 billion (£2.5 billion post-Placing)
RNS Proposed Capital Raise of Ordinary Shares

Results of Capital Raise

Writer disclosure No position.

57.7 million new shares been issued, at 650p, to raise gross proceeds of £375 million. Dilution is just below 20%.

Management and directors participated with amounts which look modest relative to their remuneration.

Update – there was a trading statement last night, as the market closed.

I still find it hard to stomach the rationale for the fundraise:

“We are announcing an equity placing today in order to respond to growth opportunities and rate improvement in the US wholesale and reinsurance markets. We have managed our investments prudently and our capital position is robust, with an estimated group regulatory solvency ratio at the end of March of 195%.”

What sort of growth is it looking to achieve, to justify an extra £375 million? If its capital position is so robust, why not deploy its existing capital?

One tidbit I found interesting is that US public company directors and officers’ insurance rates are up 85%. Helps to explain Musk/Tesla’s decision not to renew (renewing was probably still a good idea, though…)

Covid-19 exposure

An update on this thorny subject, which I suspect is the real reason for the fundraise.

Event cancellation, media and entertainment, travel, etc. – no change to estimates. Up to $175 million in claims.

US retail business interruption – these policies require physical damage, and all policies had “an explicit virus exclusion”.

Europe – “We believe we have limited business interruption exposure in Europe”

London/reinsurance – “Exposure to losses in our London market and reinsurance divisions is uncertain at this stage”.

It has around 10,000 UK business interruption customers who have been ordered to close under pandemic measures.

There are other customers – about 6,000 – who have not been ordered to close but may have been materially impacted.

Hiscox insists that forced government closures and pandemic measures are “not a covered loss”, but has modelled outcomes in which it is forced to pay out anyway.

…our analysis suggests a range of modelled outcomes between £10 million and £250 million1 net of reinsurance.

I pencilled in £300 million in my initial analysis, so I feel somewhat vindicated with those sums. But then I thought it could turn to be a lot higher in my subsequent analysis, if larger clients were to successfully claim.

Balance sheet – Hiscox says that it finished the quarter with $1.25 billion in surplus capital, above its regulatory requirement.

Investment performance – minus 1.2% in Q1, but most of these losses were recovered by the end of April.

My view

I’m trying to see it from Hiscox’s point of view.

My belief is that they wanted to raise cash, primarily in case they are forced to make large BI-related payouts.

But they can’t say that’s why they want to raise cash, because to do so would be to admit that they are nervous of losing the dispute with some of their customers.

So instead, they say they are raising growth capital.

It makes sense, when I think about it this way.

Valuation – as for whether I would buy the shares here – again, I am thinking about it.

The equity raise was at a material discount to the current share price, and I don’t like paying a premium to the price that others are getting in at.

I can see why others would want to get in, though. The current premium to NAV is much smaller than it has been for a long time.

Tangible NAV at year-end 2019 was £1.9 billion.

NAV has just increased by nearly £400 million (gross). If the fundraise exactly covers BI-related claims, then NAV is unchanged.

In that case, I think the premium to tangible NAV at the current market cap is around 30%.

Or if BI-related claims don’t materialise, then the premium might only be around 10%.

Definitely worth thinking about, in my view.



I have to go out now, but I’ll back after lunch to continue this report. Cheers!




  • Stock data should display here.
Market cap £3.0 billion
RNS Q1 Trading Statement
Writer disclosure No position.

This has been all over the mainstream news today, due to some eye-catching figures.

Q1 was predictably weak – external revenue down 7% to £694 million. This was despite a high overall level of viewing and good broadcasting revenues.

Share of viewing was lost to BBC, and the Studios (creators of Love Island, Dancing on Ice, etc.) did poorly, revenues down 11%. They were “impacted by the phasing of deliveries and restrictions on working practices due to COVID-19“.

Since Mid-March, production is mostly stopped and April advertising revenues were down 42% (see what I mean by eye-catching).

There are some positives, but they appear minor in comparison to the negatives, e.g. growth in revenues from competitions.


  • expenses to be cut by £60 million (half already being actioned).
  • capex savings £30 million being achieved by the delay of certain investments.
  • programme budget reduced by £100m to £1 billion.
  • 15% of UK workforce furloughed, mostly in Studios.

Cash savings – dividends cancelled (previously spent > £300 million p.a. on these) and delaying £150 million of pension/tax payments.

Headroom– £100 million in cash plus undrawn £630 million RCF plus £199 million available in other facility. I make that total headroom of £929 million. Impressive!

Net debt of £851 million. This excludes defcon, the pension deficit and lease liabilities (these added up to c. £400 million at year-end). Its bonds mature between Sep 2022 and Sep 2026.

Operationally – most staff moved “seamlessly” to home working. Another blow to expensive city offices.

Outlook – no guidance given.

My view

Checking the 2019 annual report, I see that advertising revenue last year was £1,768 million.

This is good news for those business customers still wishing to advertise, but what should we pencil in for this year and for the post-Covid economy? A fall of 20%-30%, maybe?

A fall of £350 million in revenue, before mitigating actions, would more than halve ITV’s pre-tax profits.

It looks like we could be headed back to the profitability levels last seen in the post-GFC era of 2010-2012.

Appropriately, ITV’s share price is now back at levels last seen around then.

Since the balance sheet looks reasonably safe, I wouldn’t hate the idea of picking up a few shares in this, looking forward to a recovery over the next 2-3 years. But see my piece at the start of this report – if we are heading for a Great Depression economy, it will take longer than 2-3 years for things to rebound.

Also, even before the C19 crisis, the earnings multiple attached to ITV had been falling for years. I think it’s right to be cautious when it comes to predicting the media landscape of the future – it’s not easy!



  • Stock data should display here.
Market cap £12.7 billion
RNS Trading Statement
Writer disclosure No position.

This is one of the gainers from the Covid-19 crisis. Its shares are up around 70% since the beginning of March. Impressive for a company which has hitherto never made a meaningful profit.

  • Retail revenue (i.e. revenue from the JV with Waitrose, soon to be replaced by M&S) is up 40% in Q2 so far.
  • Number of items per basket has peaked, is still high. Panic buying is over, I guess.
  • Customer fulfilment centres busier and more efficient than ever.

Guidance – withdrawn. Too many uncertainties around the length of the crisis, customer behaviour and customer disposable incomes.

A bit like IG Group (IGG), which I own, it feels like Ocado can’t predict how good the crisis will be to its financial performance.

I suppose there is a limit, in the sense that a widespread collapse in disposable incomes would eventually hurt it.

Ocado Solutions – new facility launched in Paris and another facility in Ontario being tested. No material delays being experienced for future facilities.

Cash – £1.2 billion.

My view

Only 2.5% of Ocado shares are currently sold short, according to shorttracker.

Mostly of the short interest got squeezed, from around the end of 2017:

My sympathies are with the shorts, as I don’t really know if this company will be able to make money in the long-run.

However, I don’t believe in attempting to short solvent companies, so I won’t touch this.


National Express

  • Stock data should display here.
Market cap £1.2 billion (pre-placing)
RNS Market update
Writer disclosure No position.

National Express has raised gross £235 million at 230p, despite having headroom beforehand of £1.3 billion.

Without the anticipated proceeds of the Placing, the Company would expect to be in the top end of its previous target gearing range of 2.0 – 2.5x at the end of 2021, and therefore need to manage its cost base for longer, potentially limiting its ability to take advantage of growth opportunities that might arise after the Group emerges from the COVID-19 crisis.

The net proceeds of the Placing will allow the Group to accelerate a reduction in gearing to within a new target range of 1.5 to 2.0 times, which the Board believes is a more appropriate level post-COVID-19 and which the Group will target for the end of 2021. 

I’m impressed that so many institutions have been ready with cash to participate in these fundraisings at reasonable share prices.

102 million new shares are issued – dilution of 19.9%, as usual.



Calling it a day there. Thank you for dropping by.




Wordpress (1)
  • comment-avatar

    Have been thinking a bit about Hiscox. I have a feeling that the Court is likely to agree with Hiscox (I don’t) however – think about this for a moment, let’s say that, after submissions by Hiscox and the plaintiffs, the Court does not agree with Hiscox and says the policies do cover the current situation and they must pay out on all the claims. Are the re-insurance policies that Hiscox holds worded the same? Do they have the same jurisdiction? Are the re-insurers going to agree to pay out without a separate court hearing?

    Assume that the re-insurers deny liability resulting in a separate court case. That will entail Hiscox arguing that their re-insurance policies do give cover for something that they only recently argued was never intended.

    Could be interesting (or not so much depending on how much re-insurance cover is involved).

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