Cube Midcap Report (7 Feb 2020) – Coronavirus takes its toll #BRBY #HYUD #NCYT #ADM

Cube Midcap Report (7 Feb 2020) – Coronavirus takes its toll #BRBY #HYUD #NCYT #ADM

Good morning!

As a reminder, you can read my stream of consciousness every morning in the Chat Room, which is free to access.

Today we have a virus-themed report:

  • Burberry (BRBY)
  • Hyundai GDR (HYUD)
  • Novacyt (NCYT)
  • Admiral (ADM)

Finished at 13:40pm.

Burberry (BRBY)

  • Share price: £19.88p (-1.4%)
  • Market cap: £8.0 billion

Update on the impact of coronavirus

Please note that I have a long position in BRBY.

Today’s share price decline is quite modest, because Burberry shares had already retreated due to coronavirus fears.

Scroll back to mid-January, and they were changing hands around £23.30.

The market (quite rationally) sold off, knowing that the luxury fashion industry in China was going to take a hit.

And now we have the confirmation:

Currently 24 of our 64 stores in Mainland China are closed with remaining stores operating with reduced hours and seeing significant footfall declines… The spending patterns of Chinese customers in Europe and other tourist destinations have been less impacted to date but given widening travel restrictions, we anticipate these to worsen over the coming weeks.

The financial damage to the 40 mainland China stores which aren’t closed isn’t quantified, but we can presume that it is significant.

The rest of the update is upbeat. Burberry continues its growth initiatives, in preparation for a recovery.

My view

Honestly, I’m surprised that Burberry shares haven’t sold off more. Chinese customers are crucial to the company’s success not just in Mainland China but in tourist destinations such as London, where they account for a huge percentage of the business at the flagship store in Regent Street.

Furthermore, the Burberry share price has a history of being “spooked” by macro fears. In the past, these have been terrific buying opportunities for me. Nick Train said something similar in yesterday’s IC:

“We think [Burberry’s] best years are still ahead and [buy] the shares [during] periodic scares about China.”

Having said that, I can’t find evidence of Burberry shares declining by much during the 2003 SARS outlook. Perhaps viruses aren’t one of the macro events which spook Burberry investors much?

Burberry shares may have been overcooked around the £23 mark. At these slightly cooler levels, they offer a P/E multiple of 21x and EV/EBITDA multiple of 12.5x (the low EV/EBITDA multiple is helped by the company’s traditionally rich balance sheet).

My personal trading history with Burberry is that I’ve bought it twice, each time around the £11 mark.

  • The first time, I bought it in 2012 and sold it above £15 in 2013.
  • The second time, I bought it in 2016 and continue to hold the majority of that purchase. I top-sliced just below £17 in 2017.

From here, my plans are to continue holding it and it’s quite possible that I won’t buy or sell another Burberry share for a very long time. It’s currently 14% of my portfolio.

I continue to believe that it’s a unique and powerful brand. Recent management changes (new CEO and new Chief Creative Officer, since 2018) appear to have gone smoothly.

Revenue growth could be stronger – only 3.3% growth was forecast for FY March 2020, and the coronavirus will have hurt this. But sales are at excellent gross margins (c. 68%) and translate to excellent financial returns.

While I expect the share price to continue hurting and to be volatile in the short-term, I have an open-ended holding period with this share and expect that it will be an outperformer over the long-term.


Hyundai Motor Company (London GDR:HYUD)

  • Share price: $31.35 (+2%)
  • Market cap: $84.6 billion

Work stoppage

Hyundai reports that supply chain disruption in China is causing a work stoppage at its three Korean plants: Ulsan, Asan & Jeonju.

Korean press have quoted a company spokesperson saying:

“If auto parts factories in China resume operations on Feb. 10 or 11, production losses from lack of parts will be limited.”

Fair enough, but who knows whether or not that will happen?

The affected plants are responsible for 44.6% of Hyundai’s total revenues – wow! It’s difficult to comprehend the scale of the (hopefully temporary) disruption.

GDRs – for anyone who is unfamiliar with the concept, GDRs are Global Depositary Receipts. They enable you to buy an ownership interest in foreign companies, such as Hyundai, on the London Stock Exchange.


Novacyt S.A. (NCYT)

  • Share price: 47p (+16%)
  • Market cap: £28 million

Update on novel coronavirus fears

This is not a midcap-cap, and it hasn’t got a great financial track record.

But I’ve seen its ticker a lot over on Twitter, and it has something to say about the coronavirus. Its share price has trebled over the past week and a half.

On January 28th, it reported that its subsidiary Primerdesign was:

“…in the final stages of developing a new molecular novel coronavirus (2019-nCoV) test as a direct response to the recent outbreak of the potentially deadly respiratory virus in China. The Company will make the test available as a research use only (RUO) test for use on Primerdesign’s proprietary genesig® Q16 and Q32 instruments, as well as a number of other real-time PCR instruments commonly used in testing laboratories. A number of Novacyt’s customers have already enquired about the availability of this test and orders have already been received.”

On January 31st, the coronavirus test was launched.

Today, it says:

Since the World Health Organization declared the 2019-nCoV outbreak a global emergency on the 30 January 2020, the Company has seen strong demand for its nCoV test, which was launched on 31 January 2020. To date, Primerdesign has received orders for 33,000 tests and requests for quotations for another 32,000 tests from over 30 countries, with a high conversion rate from quotations to ordersThe Directors believe the Company is well placed to support the growing global demand for nCoV testing.

It’s amazing news. Well done to Novacyt for spotting an urgent need and coming up with a potential solution!

It would break my investing rules to buy shares in this, since it’s beyond my area of expertise. Nonetheless, it’s interesting that there is at least one LSE company directly responding to the coronavirus emergency. Do you know of any others?

For your info, Novacyt shares are dual-listed and by my calculations, there could be a slight mismatch between the Paris price and the London price. Whether the liquidity and borrow are available to arbitrage away the difference, I don’t know. I do know that I would first check the price at which I could buy it in Paris, before buying it in London!

London price:

Paris price (equates to 48p at latest exchange rate):

The Twitter crowd in France must be less excited than the Twitter crowd in the UK!


Admiral  (ADM)

  • Share price: £22.74 (unch.)
  • Market cap: £6.7 billion

Trading statement

Solid news from this mainstream insurer. Pre-profits for 2019 will be within the range of £510 million – £540 million.

The higher than expected profit is due to unusually positive development, during 2019, in the cost of UK motor bodily injury claims from a number of prior underwriting years.  This has led to elevated reserve releases and profit commission revenue.  Clarity over the new Personal Injury Discount Rate (the ‘Ogden’ rate) in July 2019 led to an increase in the number of large claims settling in 2019 compared to recent years which contributed to the level of releases.  There has been no change to Admiral’s prudent approach to reserving.

In simple language: prior years (before 2019) turned out to be more profitable than expected, as cases from those prior years have at last been settled (in a favourable way for Admiral).

However, 2019 itself was less profitable than usual:

Current year profitability continues to be impacted by higher levels of claims inflation during 2019 and as a result, Admiral expects its 2019 loss ratio to be higher than recent years.

My view  – a large, quality insurer which should be of great interest to dividend-hunters. The prospective yield is c. 5.5%.



Calling it a day there – see you next week!





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