Cube Midcap Report (7 August 2020) – Pandemic winners and losers

Cube Midcap Report (7 August 2020) – Pandemic winners and losers

Good morning, it’s Roland here with today’s Midcap Report.

Half-year results season is gradually winding up. For income investors there’s been some relief as dividends have been restored at a number of companies. Some firms have managed to perform better than expected while others have disappointed.

I think the overall theme is one of continued uncertainty, with unemployment likely to rise and government support measures set to ease. In terms of my own investments, I feel pretty comfortable that most will weather the storm and return to profitable growth. I’m also relieved that my dividend income will rise during the second half of this year.

Today’s newsflow reflects this mixed picture. There are a couple of clear winners from the pandemic, some losers, and one company I really thought would have done better. Here’s my list for today:

  • Rightmove (RMV)
  • Hargreaves Lansdown (HL)
  • Hikma Pharmaceuticals (HIK)
  • Standard Life Aberdeen (SLA)

As always, requests are welcome – I’m happy to order these in terms of popularity!

While I get started, I’d like to draw you attention to a couple of other recent articles here at Cube.

The outlook for the housing market is anything but certain in the current environment, but I think we can be fairly sure the government will do whatever it can to prop up this market. My colleague Andrew Ross believes there are opportunities in this sector. In this recent premium article Andrew explained why he’s been buying one particular FTSE 100 housebuilder recently. I think it’s worth a read, if you’re interested in this sector.

Traditional value hunters may also want to check out Tony Boden’s recent premium piece on Smiths News owner Connect. Is this perennial value stock now too cheap to ignore?


  • Loading stock data...
Market cap £5.3bn
RNS Half-year report
Writer disclosure No position

Shares in the UK’s dominant property listing website are up today, despite Rightmove reporting a 43% fall in half-year operating profit.

The headline figures look a bit grim, but that’s no surprise given the impact of lockdown:

RMV 1H 20 results

Of course, a (relatively) bad set of half-year figures was expected. What the market is interested in is how Rightmove has been trading since the property market reopened. Early indications seem positive:

  • Since 13 May, Rightmove has had 65 days when traffic beat the previous record (19 Feb 2020)
  • Demand for sale properties was 50% higher in June and July than the same period in 2019
  • Rental demand 20% higher in June/July vs 2019

What’s less clear is whether this surge of interest will result in an increase in transaction numbers or supply of new listings. Management admit the outlook is still unclear:

Rightmove data suggests that the significant increase in activity is being driven not only from the pent up demand from the period of lock down, but an increased number of home hunters who have decided to move following the experience of lock down. However, it is too early to assess whether the strength of this positive momentum in the housing market will be maintained against the threat of further lock downs and wider economic slowdown.

Discount period extended: Management have decided that “it is in the best long-term interests of the Group” to continue discounting its listing rates until the end of September 2020. As a result, no interim dividend has been declared. Nor will the group resume share buybacks, which were suspended in March.

This is an interesting contrast with Auto Trader, which returned to full pricing from 1 July. Of course, moving house is a more considered purchase than changing your car. But to me, Rightmove’s actions suggest management are quite nervous about the outlook for the property market. That’s a view I share.

My view

We’ve covered this business quite a lot here at Cube. It’s no secret that both Graham and I think this is an excellent business that enjoys strong network effects, exceptional profitability and a dominant market position.

Today’s half-year report contains lots of interesting metrics for anyone interested in more granular detail. There’s also plenty of material on recent technical developments and growth initiatives.

Personally, I’m only really interested in the big picture at the moment. In my view, there are only really two risks Rightmove shareholders might want to worry about:

Short/medium term: a recession could slow the housing market and put a dent in Rightmove’s income. This seems relatively likely to me, but I don’t see it as an existential threat or a reason to sell.

Longer term: I think the only serious risk to Rightmove is that management will be greedy and/or stupid and fail to nurture and respect the firm’s advertiser base.

We’ve already seen signs of this — the company was slow to offer discounted rates at the start of lockdown and in the past has often faced accusations of price-gouging. These have indirectly led to the creation of a third rival listing website, This should be a warning, in my view. This is the only area where I’d say Rightmove needs to do better.

Rightmove shares are never cheap, nor should they be. Companies which generate sustainable operating margins of 73% and ROCE of >100% are rare indeed. The shares trade on 30x 2021 forecast profits at the moment, which I’d suggest is about right. I don’t think anything in today’s results should change the view of existing bulls (or bears) of this stock.

Standard Life Aberdeen

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Market cap £6.0bn
RNS Half-year report
Writer disclosure No position

The merger of Aberdeen Asset Management and Standard Life Aberdeen has created “a capital-light global investment house”, in the words of outgoing CEO Keith Skeoch.

Perhaps. But I struggle to work up much enthusiasm for this generalist business. SLA seems to report continually declining fee income and AUM, while propping up its dividend by gradually selling its shares in India’s HDFC Life and HDFC Asset Management businesses.

This year’s half-year results were always going to be hit by COVID-19, but even so they seem lacklustre to me.

SLA 1H20 highlights

With a cost/income ratio of 85%, Staberdeen is even more burdened by costs than the big high street banks. I don’t see how this is likely to lead to attractive returns on equity without a significant improvement in fee revenue per employee.

I’d also note that the interim dividend is no longer even covered by adjusted earnings. SLA says it has a strong balance sheet, with surplus regulatory capital of £1.8bn. But I would prefer a dividend that’s supported by continuing operations, not the proceeds of disposals, which I believe to be the case here. Further share HDFC share sales totalled £709m during H1 — I find it hard to see how the dividend could be afforded without this cash inflow.

One minor highlight is that the group seems to have finally stemmed its net outflows, excluding the impact of the one-off loss of a large mandate with Lloyds. Aggregate fund performance against benchmark has also improved slightly too:

SLA 1H20 business metrics

My view

I can’t motivate myself to spend any more time on Standard Life Aberdeen. The group generated a return on equity of just 3% last year. I continue to think that investing in specialist asset managers makes more sense than bloated generalists.

I suspect that SLA’s incoming chief executive Stephen Bird is likely to cut the dividend, too, so I would not set too much store by the stock’s current 8% dividend yield.

Hargreaves Lansdown

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Market cap £9.1bn
RNS Final results
Writer disclosure No position

The contrast between Standard Life Aberdeen and Hargreaves Lansdown couldn’t be more stark. The UK’s largest DIY investment platform has assets under administration of £104bn — around 20% of those managed by SLA. But Hargreaves’ £9bn market cap is 50% greater than SLA’s £6bn valuation.

It’s not hard to see why. Hargreaves profits from providing the market access, tools and data investors need to manage their own wealth. The fund supermarket doesn’t need to worry about whether its customers’ investments beat any benchmarks. This business model supports a 60%+ operating margin and very high returns on capital.

And while the market crash has resulted in a sharp drop in fee income for traditional fund managers, Hargreaves’ clients were eager to put fresh cash to work. The firm’s final results show that it was yet another record-breaking year for the firm:

HL FY20 highlights

Total client numbers rose by a record 188,000 to more than 1.4m last year, giving this firm impressive reach. The firm has launched a new initiatives including “Wealth Shortlist” and “Fund Finder”. These services appear to be part of a move to improve governance processes in response to criticism over the Woodford fiasco last year (when HL continued to promote Woodford’s Equity Income Fund until it was suspended).

A market crash always brings high levels of trading and this year was no exception. Hargreaves says that the volume of “client driven share deals” rose by 96%, while revenue from share dealing was up 94%. Market share is impressive, too:

  • 41.1% share of direct-to-consumer platform market
  • 39.5% share of executive-only stockbroking market
My view

Hargreaves Lansdown’s performance and market share does not appear to have been tarnished by the Woodford affair. Like Rightmove, I think this business enjoys network effects from its large size and bargaining power with fund managers and other providers.

It’s also a widely-known and ‘safe’ name that I guess new customers will feel comfortable with, supported by a big online presence.

Financially, this remains an excellent business. My sums show an operating margin of 61.3% and return on capital employed of 65%. Cash generation is good and of course there’s no debt.

Profits are expected to dip next year and the firm warns of the potential impact of a weaker economy. But I don’t see too much to dislike about this stock, even at the current valuation of 37x next year’s earnings.

Hikma Pharmaceuticals

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Market cap £5.5bn
RNS Half-year report
Writer disclosure No position

Generic specialist Hikma Pharmaceuticals went through a difficult patch a few years ago, but the shares have doubled since the start of 2018 and are up by more than 10% as I write.

It’s no surprise to see a pharmaceutical firm performing well this year, but today’s results look very strong to me and the firm has upgraded its full-year guidance.

Hikma says that demand for COVID-19 related injectables such as “anaesthetics, analgesics, sedatives, neuromuscular blocking agents and anti-infectiveshas driven strong performance during the first half. Core operating margin from the group’s injectables division is now expected to be 38%-40% this year, compared to previous expectations of 35%-37%.

Elsewhere, demand for generics has been stable, with better-than-expected performance from new products. The firm’s branded division has also performed well, especially in its primary MENA markets.

Lets take a look at the financial highlights from today’s results:

HIK 1H20 highlights

There are several things I like about Hikma in comparison to its larger FTSE 100 rivals, GlaxoSmithKline (I hold) and AstraZeneca.

Clean profits: Unlike both AZN and GSK, Hikma’s adjusted ‘core’ results are very close to its statutory results (above).

Strong balance sheet: Net debt is less than 1x EBITDA and I would argue Hikma has a genuinely strong balance sheet.

Cash generation: As I’d expect from a company with clean profits and low leverage, cash generation is good. Half-year operating cash flow of £292m matched operating profit of £297 almost exactly. At a post-tax level, free cash flow of £192m is an impressive near-match for post-tax profit of £212m.

My view

With a dividend yield of around 1.6%, this isn’t an obvious income play like Glaxo or even AstraZeneca. But Hikma’s yield is covered comfortably by free cash flow and supported by a strong balance sheet and a c.25% operating margin. Dividend growth has averaged 16.5% per year since 2014, during a period when both Glaxo and Astra have only been able to maintain flat payouts. There’s more than one way to skin a cat…

I rate Hikma and CEO Siggi Olafsson highly. Although the shares have risen by nearly 20% this year, I’d argue that they are probably fairly priced at the moment.

My sums suggest a TTM earnings yield (EBIT/EV) of around 11% — I see that as a very attractive figure. In terms of a P/E rating, I think the current multiple of c.18 times forecast earnings is not excessive, given the group’s high margins and low debt levels.

I suspect the market may provide a better opportunity to buy at some point, but I would certainly be very happy to continue holding Hikma at this level.


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Market cap £1.7bn
RNS Half-year report
Writer disclosure No position

I’m running short of time, but I want to finish with a look at interdealer broker TP ICAP. During periods of market volatility we expect trading and transactional platforms to perform well. Examples of companies that have delivered on this promise this year IG Group (I hold), CMC Markets, Hargreaves Lansdown and LSE Group.

I expected TP ICAP to fall into this category, given its specialist role in broking complex deals between market participants. However, today’s half-year results show that profits and margins fell during the first half. The market reaction (the shares are down 12% as I write) suggests that I’m not the only disappointed observer.

Here are the statutory half-year numbers:

TCAP 1H20 highlights

Revenue is up strongly, but the firm doesn’t seem to have been able to make any extra money from this.

The outlook for the remainder of the year seems uncertain, too. Management warn that trading activity has slowed in July and is “materially lower than 2019 levels”.

My view

There’s probably more that could be said here. I don’t think TP ICAP is a bad business, but I am inclined to file it in the too difficult category. The firm’s broking operations are specialist and only partly computerised. Many deals are still handled by highly-paid telephone brokers.

I don’t think that telephone broking will completely disappear, but I suspect it will remain under pressure from computerised trading and become increasingly specialised. TP ICAP’s existence reflects this reality — the group is the product of a merger between former rivals Tullett Prebon and ICAP a few years ago.

TP ICAP shares look reasonably priced on nine times forecast earnings and offer a 5.2% dividend yield. But profits margins and returns on equity look very average. I’m not sure what the future holds for this business. I suspect there will be a continued dependence on acquisitions and consolidation – not always an easy way to make money.

It’s not for me, although I might be missing something.

Codemasters: one final comment. In my last Midcap Report in July I commented unfavourably on gaming group Codemasters’ balance sheet and questioned the cost of a recent acquisition, Slightly Mad Studios. Codemasters has now released the first big game from the Slightly Mad stable, Fast and Furious Crossroads.

Fast and Furious is a well-known franchise, so I’ll be watching for the next trading update from Codemasters to try and gauge what impact Slightly Mad is having on the group’s performance.

That’s all I’ve got time for today. Thanks for tuning in and as always, if you’ve found this useful I’d be very grateful if you could hit the thumbs up below to show your support. We really appreciate all reader feedback.

Enjoy the sunny weekend,





Wordpress (2)
  • comment-avatar

    Good effort!! Some things there to add to the watch list. Thanks

  • comment-avatar

    Good stuff Rollars .

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