Cube Midcap Report (7 May 2020) – An economy built on picnics

Cube Midcap Report (7 May 2020) – An economy built on picnics

Good morning!

Economic catastrophe revealed in the numbers

The FTSE is up today, flirting with 5900 despite what is likely to be the biggest crash in the UK economy ever – or in the last 300 years, to be precise.

The Bank of England’s “illustrative scenario” sees a 14% crash in GDP this year.

The unemployment data is certain to be woeful. And yet the government’s furlough scheme will mask how bad the employment picture truly is.

In the US, the monthly non-farm payrolls report tomorrow is expected to be the stuff of nightmares. We’ve already seen the loss of 20 million jobs in April, according to the ADP figures.

That’s more than 20 times worse than the worst month during the Global Financial Crisis of 2008-2009.

The good news is that it will be hard to keep losing jobs at this rate – there aren’t that many jobs to lose.

The bad news is that our economies are now much, much poorer than they were at the start of the year.

And I’m starting to worry about the rebound.

It’s hard to build an economy on picnics and sunbathing – and that might be the limit of the basic freedoms which Boris Johnson might bring back on Sunday.

The “experts” who created this situation seem determined to ensure that social distancing will be here for many more months. In which case, we can forget about normal life returning, and we can forget about many parts of the travel and leisure economy coming back soon.

I am still not making any new trades, or closing existing positions. I still think that many companies will survive this, if they are starting from a position of strength and can cut costs as appropriate. As a stock-picker, I think I have a decent chance of avoiding the worst-hit companies.

I am just very, very worried about the broad economic destruction I am witnessing.


With that cheery note out of the way, here are some companies I am interested in today:

  • Trainline (TRN)
  • Rolls-Royce (RR)
  • Coca-Cola HBC (CCH)
  • InterContinental Hotels (IHG)
  • Int’l Consolidated Airlines (IAG)

Finished at 4.30pm.


  • Stock data should display here.
Market cap £1,760 million
RNS Results for the Year ended 29 Feb 2020
Writer disclosure No position.

These results are pre-Covid.

They show excellent revenue growth (+24%) and adjusted EBITDA growth (+62%), but operating profit is still only around breakeven.

I’ve been scratching my head at the valuation attached to these shares. The company would no doubt point to the high operating free cash flow (£59 million) and adjusted EBITDA (£85 million).

Covid trading – passenger volumes down 95%.

Headroom – still expecting £150 million in headroom at the end of May. Its debt facility has total size £350 million.

Measures – plenty of cost cuts. The only parts of the business still being invested in as before are Tech and Product teams, “to drive the Group’s strategic priorities to enable long term growth”.

Monthly cash outflow is c. £8 – £9 million per month, which implies that it could survive for well over a year. It already has agreement from its lending banks to forgive covenant breaches until August 2021.

Outlook – none for FY Feb 2021, thought it is happy with its liquidity headroom.

My view

The performance is not bad if you exclude £92 million of costs/exceptional items which the company says were triggered by the IPO. This includes £70 million of share-based payments and other “non-cash” IPO-related charges.

I will probably be too slow to buy into this. I do think it has potential. But I want to see some “clean” accounts.

Even putting COVID-19 to one side, it is still trading at around 23x trailing adjusted EBITDA on an enterprise value basis (£1760m market cap + £200m of debt facility used / £85m).

While I am often wrong, I have to think that it will be possible to get this on a day when it offers better risk/reward prospects! Printing some clean, profitable numbers would be a great way to reassure me.



  • Stock data should display here.
Market cap £5.4 billion
RNS AGM Statement
Writer disclosure No position.

The near-death of the airline industry is going to hit Rolls hard.

The CEO’s statement includes this warning:

“…we must also take the difficult but necessary decisions to ensure the Group emerges from this period with the appropriate cost base for what will be a smaller commercial aerospace market which may take several years to recover

Flying hours by civil widebody aircraft were down 90% in April.

Aircraft production is down and Rolls expects to only deliver 250 widebody engines this year (previous guidance was 450).

The Power Systems division, likewise, expects a “material deterioration” compared to last year.

4,000 UK employees are furloughed (total headcount in the region of 52,000).

Headroom – ought to be plentiful, seeing as there’s a new £1.9 billion RCF.

My view

It’s impossible to predict with any confidence the future trends affecting Rolls. I do expect air travel to take some time to recover – 2-3 years anyway, if not longer.

The company has produced a very patchy track record and it doesn’t interest me as a potential investment, if I’m being honest.

Shareholders here have had a very rough time, and my own early attempts to invest in the aerospace sector (e.g. at Chemring (CHG)) were disastrous. So I’ve mentally written off this sector.


Coca-Cola HBC (CCH)

  • Stock data should display here.
Market cap £6.9 billion
RNS Q1 Trading Update
Writer disclosure No position.

As discussed in March, the “out-of-home” channel represents (or at least, used to represent) 35%-40% of CCH’s sales.

This Q1 update, for the period ending in March, only reflects the beginning of lockdowns, until we scroll down for the April update:

 In April, with every market in lockdown 3 , FX-neutral revenue fell -37.2% and volumes -27.3% (ex.Bambi)

Nearly all of CCH’s markets went into lockdown. The only country whose government did not respond to the panic was Belarus.

Headroom – €1.4 billion of cash and deposits as of the end of April. After a maturing bond, interest and the dividend, it will be left with €0.6 billion.

In addition, there is an undrawn RCF of €0.8 billion and €0.9 billion available in another facility.

None of these credit lines have any financial covenants and we have no further bond maturities until November 2024.

My view

Should be safe. Despite a fairly high overall debt load, the available facilities and lack of covenants makes for a lower risk profile.

I’d consider adding this with an ambition to hold it for the long-term.


Intercontinental Hotels

  • Stock data should display here.
Market cap £6.5 billion ($8 billion)
RNS Q1 Trading Update
Writer disclosure No position.

We already knew that Revenue per Available Room (RevPAR) was down 55% in March.

Today we learn that it was down 80% in April. This is “the most significant challenge both IHG and our industry have ever faced“.

Liquidity is the same as recently reported, c. $2 billion. Should be plenty, assuming covenant waivers from all providers for the foreseeable future.


International Consolidated Airlines

  • Stock data should display here.
Market cap £3.8 billion
RNS Results for the Year ended 29 Feb 2020
Writer disclosure No position in IAG. Long $BRK.B.

Same story here. Capacity in April is down 94%.

The Q1 loss is massive: €556 million on an adjusted basis, €1.7 billion on an unadjusted basis. That’s the same size as the profit for all of 2019.

Headroom – suitably huge at €10 billion.

Cash burn – weekly operating cash burn is €200 million.

Spending – reduced capex plans for the rest of this year of €3 billion – “covered by committed and agreed financing”.

Outlook – a possible return to operations in July, at the earliest:

 IAG is planning a meaningful return to service in July with a planning scenario that could see an overall reduction in passenger capacity of c.50 per cent in 2020, but these plans are highly uncertain and subject to the easing of lockdowns and travel restrictions…

IAG does not expect the level of passenger demand in 2019 to recover before 2023, making further Group-wide restructuring measures essential; as a result IAG expects to defer deliveries of 68 aircraft

See what I wrote above about the recovery of air travel being a number years away. IAG is pencilling in at least 3 years.

My view

As you may have heard by now, Buffett recently sold Berkshire Hathaway’s airline stocks.

Airline stocks make me incredibly nervous and unless I found one with a rock-solid balance sheet where I didn’t have to worry about the length of lockdown, I wouldn’t even think about buying shares in them.


That’s it for today, thank you for dropping by!




Wordpress (2)
  • comment-avatar

    Cheer up Graham ! Your not dead , old , on a ventilator or in a care home ……lifes all gravy for you !

    Must say I am a bit non plussed by your almost total non trading strategy over the pandemic period . I saw it as a massive opportunity to average down many of my positions by selling down to a token price monitoring position ( I keep a few or I forget all about them altogether ! ) and buying back lower down . I think your strategy must be born of your background as a fund manager as I know shutting down large positions is a PITA and discouraged by the “higher ups” what with all the associated trading costs , stamp duty etc. I have had some good gains rebuying oil stocks down at the bottom . You should try it on the next market plunge coming soon no doubt. Maybe try with just one holding until the “trading fear” wains and you settle into it a bit . It does work . Most stuff has re rated now but the next opportunity will be soon when the hypoxia delusions caused by impending end of lockdown abate and reality strikes . This is a total bubble right now.

    • comment-avatar

      Thanks WR. I try to be good at gratitude but it’s tough when what seemed like reasonable expectations for a year aren’t being met.

      Re: selling and buying back, well done for doing that successfully. I have enough on my plate without adding extra trading to the mix. I’ll sell something if I don’t want to own it any more, but otherwise I’m a HODLer.

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