Cube Midcap Report (8 Aug 2019) – BUR, HL, CCH, CINE

Cube Midcap Report (8 Aug 2019) – BUR, HL, CCH, CINE

Good morning!

After a few remarks on Burford, I am looking at:

We also had half year reports today from Funding Circle and Savills. I will consider them for coverage tomorrow, if the flow of results finally comes to a halt!


Burford (BUR)

  • Share price: 592p
  • Market cap: £1,300 million

What a dramatic day it was yesterday with Burford.

In the afternoon, the company issued an RNS stating that the claims by Muddy Waters were “without merit” and promising to issue a detailed response “as soon as practicable”. The CEO and CIO also pledged to buy shares personally (but did not say how many).

A detailed response from the company is needed, so hopefully they can provide one by next week. Invesco is also considering its response.

Burford shares are trading at about 592p, or $7.20. Perhaps we are anchored to book value now, which I calculated yesterday as $7.17 per share.

Lessons we can learn

Every situation is unique, but were there some red or amber flags in this instance which we could look out for in future?

Here are some warning signs which people might have been wary of:

  • Listed on AIM despite having a huge market capitalisation (the biggest on AIM). Most companies would be interested to move to the Main Market of the London Stock Exchange once they reached a significant size.
  • The CEO and CIO do not sit on the Board of the listed company. This is highly unusual and it’s hard to imagine any good reason for it.
  • The CEO and CFO being a married couple is also highly unusual.
  • The company’s operations are primarily in the United States, so a London listing is unusual. Why didn’t US investors want to fund this company instead of Neil Woodford and Invesco?
  • The company is incorporated in Guernsey. I own shares in a Guernsey company myself (Duke Royalty), so I’m not suggesting that this is a fatal red flag, but it’s just something to be aware of in terms of governance requirements and legal systems.

I can’t pretend that I saw the collapse of Burford’s share price coming. I had started to believe the hype! But thankfully, I never had the courage to buy into it: I always believed that it should be treated as an investment vehicle and that there should be some relationship between its book value and its overall market cap. Paying a big multiple of book was never something that I wanted to do.

The market’s perception of the stock has shifted radically, and it is now back around “normal” levels, i.e. around book value.

I don’t believe that Muddy Waters made a strong argument for its insolvency, so I don’t see this as a zero (yet). But there are some questions around the integrity of the company’s reporting which need to be answered. If they aren’t answered properly, then zero is the only lower bound for the company’s share price. I personally view this stock as uninvestable for now.

Hargreaves Lansdown (HL)

  • Share price: £19.325p (+5%)
  • Market cap: £9,170 million

Final results

The juicy part of this report is that which talks about the Woodford Equity Income Fund, which HL had championed for its customers. There has been sharp criticism of this policy by Terry Smith.

Hargreaves outlines its response following the suspension of EIF:

We immediately removed the fund from the Wealth 50, communicated the suspension to clients and dealt with all calls and emails received since in a timely and orderly manner. We waived our platform administration fee on direct holdings in this fund and we believe that Woodford Investment Management should suspend collecting its fees whilst their investors cannot access their cash. This is the right thing for them to do.

Well said!

In addition, the CEO and CFO will not take a bonus for 2019. This is a strong move and should help to restore some goodwill and credibility for Hargreaves among customers.

As for the result this year, it has been another good performance with Assets under Administration climbing from £91.6 billion to £99.3 million. The stock market failed to contribute much, with the growth instead coming from net new business flows. These flows were almost as good as last year, which seems fine given the market environment.

Key points:

  • number of active clients up 12%
  • revenue up 7%, almost matching the growth in AUA

Unfortunately for the financial result, we did not see any operational leverage this year as costs increased 13%.

The rationale is worth reading, to understand why the company has accepted higher overheads:

As highlighted previously, we consciously and significantly increased our investment in people, digital marketing and technology during the 2017 and 2018 financial years as we believe the Group’s focus on client service is core to our success and necessary to capture the structural growth opportunity in the UK savings and investments market. This investment has been validated by net new business flows, net new clients, increased market shares, high client retention rates and continued development of our product set and growth capabilities during the period. 

The period of fast growth in costs may be over now, as Hargreaves says that cost growth was just 5% in H2. So perhaps we can see some operational leverage next year?

Because of the rising costs in FY 2019, operating profit increased by just 4% to £303 million.

Net cash is £394 million.

Outlook statement is confident while recognising “industry headwinds” and a “difficult environment”.

My view

I agree with those such as Andrew Latto who consider Hargreaves to be a high-quality company that is worthy of a high valuation. Market leaders deserve premium ratings and those interested in Hargreaves might also want to study in some detail the attractions of AJ Bell, its faster-growing competitor.

One of the key features of Hargreaves is its recurring revenue streams. Since Andrew wrote his previous article, recurring revenues have increased to 81% of the total. From an investment standpoint, this is highly attractive.

Therefore, for someone with a very long time horizon, I can’t argue against Hargreaves as an attractive candidate for buying and holding.

Personally, however, I would rather wait until we have a bear market and widespread investor depression before getting into this sort of stock that is so closely tied to the fortunes of the broader market.

EPS is forecast at 67.3p in FY June 2021, the financial year starting in ten months. The P/E ratio for that financial year is therefore currently about 29x. I’m a bit old-fashioned and I like paying less than 20x, even for great companies!

Hargreaves is a mature company which pays out most of its profits to shareholders in the form of dividends and is not expected to grow rapidly, so I do think that it is reasonable to hold out for a better valuation. Its PEG ratio is 2.5x, according to Stocko, for example – this is a simple way of checking the price of growth. A ratio higher than 1x is generally thought to be expensive!


Coca-Cola HBC (CCH)

  • Share price: £27.60p (-2.5%)
  • Market cap: £10,020 million

Half year report

This is a fine company that gets very little attention. It’s the Coca-Cola Hellenic Bottling Company. I’ll call it Coke HBC for short.

It describes itself as “the most diversified footprint in the Coca-Cola system”, since it works in 28 countries in Europe (including Russia) and Africa. No single country accounts for more than 20% of its sales volumes.

I’ve toyed with the idea of buying shares in it before, but I’ve always felt like it would make more sense to buy shares in the Coca-Cola Company (US:KO) first, so long as KO is available at a reasonable price, before buying shares in one of its European bottlers.

With that preamble out of the way, today’s H1 results leave full year expectations unchanged at Coke HBC.

Revenue growth was 3.4% at constant currencies with volume growth of 2.2% – pricing is still firm. Net sales revenue per case increases by nearly 2%.

The one big negative point in these numbers is €30 million of restructuring costs, which are a significant drag on the reported profit result. But hopefully they will have the long-term benefits which are promised:

We expect these initiatives to yield €19 million in annualised benefits from 2020 onwards. The initiatives already taken in 2018 and the first part of 2019 are expected to yield €30 million of total benefits in 2019. We do not expect any significant restructuring opportunities for the rest of 2019.

My view – I will keep monitoring this company from a distance and will hopefully get a nice opportunity to buy it some day!


Cineworld (CINE)

  • Share price: 246p (unch.)
  • Market cap: £3,375 million

Half year report

This cinema group is trading in line with expectations.

Its the second-largest cinema operator in the world, following the merger with Regal Cinemas in 2018.

On a like-for-like basis, comparing H1 2019 with H1 2018 on a pro-forma basis, this is a weak report. Admissions are down 14% while revenue is down 11%. The timing of major film releases is blamed. US admissions are particularly weak, down 18.5% on a pro-forma basis.

Leverage – adjusted net debt has fallen by $550 million, matching up almost perfectly with the value of sale-and-leaseback transactions on US-based sites. So  debt of one form has been swapped out for leverage of another kind. “Adjusted net debt”, excluding leases, is now $3.3 billion.

Outlook is calming:

The second half of 2019 has started well with the release in July of “Spiderman: Far From Home”, “The Lion King” and “Fast and Furious: Hobbs & Shaw”. Still to come in 2019 there is “It Chapter Two”, “Joker”, “Maleficent: Mistress of Evil”, “Terminator: Dark Fate”, “Frozen 2”, “Jumanji: The Next Level”, “Star Wars: The Rise of Skywalker” and many more. Based on the film slate in the second half and our first half results, we remain confident in delivering a performance for the full year in line with management’s expectations.        

My view

To me, this sort of share is halfway between property investment and an operating business. We shouldn’t expect big compound returns, but we should expect steady profitability.

Cineworld is arguably in value territory at the moment, with a P/E ratio of just 9x and a dividend yield in excess of 6%.

Fears over disruption by streaming services are real and the falling US admissions in H1 will add fuel to these concerns.

For my part, I tend to think that cinemas will remain the first and best place to watch new releases. Terrestrial TV and VHS/DVD did not replace the cinema, after all, I don’t think that Netflix will, either.

On this basis, I think the prospects are decent for shareholders here.



That will do for today. Thanks for dropping by and I’ll see you again with more midcap news tomorrow!

Best regards,




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