Cube Midcap Report (9 April 2020) – Spending slows down at Trainline #TRN #DGE #FLTR

Cube Midcap Report (9 April 2020) – Spending slows down at Trainline #TRN #DGE #FLTR

Good morning!

Today we have updates from:

  • Trainline (TRN)
  • Diageo (DGE)
  • Flutter Entertainment (FLTR)
  • Redrow (RDW)

Personal Note

The FTSE is up 2% as fears of the virus-induced shutdown continue to fade.

While the number of deaths with the virus in the UK reached a high yesterday, the number of official new cases failed to do so.

The case data is of extreme poor quality (due to limited testing). But to whatever extent that it reflects truth, it suggests that viral spread has failed to accelerate much in April:

Source: Worldometer

My own “base case” view is that London has already achieved herd immunity, or is very close to doing so, and many other parts of Europe have probably done that, too.

The real-life hero of The Big Short movie, Michael Burry, thinks that the peak ventilator need has already been reached in New York, i.e. that the worst is over.

If this is true, then it will become more widely believed in the coming days and weeks, and the argument for continued lockdown will fall apart.

It has been nice seeing my portfolio making a partial recovery in recent days. You have probably noticed your own portfolio doing rather well, too.

Since I believe that the solvency of my companies is good, and the lockdowns will be over soon, I think that my portfolo recovery is justified.



  • Stock data should display here.
Market cap £1.7 billion
RNS Update in response to Covid-19
Writer disclosure No position

I thought this one was an overpriced IPO last year (at 350p).

The share price fell as low as 200p last month, before rebounding sharply back to its original IPO price.

With that sort of volatility, we can call this a “high-beta” name!

Let’s hear what it has to say for itself now:

  • all teams working from home with minimal disruption to business
  • new automated processes for changing bookings and sending refunds to customers

And on the cost-cutting front:

  • pausing marketing and other discretionary spend
  • recruitment freeze
  • 50% CEO salary cut “for the foreseeable future”
  • 20% cut for Board and Management
  • postponed bonuses for everyone
  • some teams are furloughed

The monthly cash outflow from operating costs and capex is now “£8-9 million“.

Headroom is promising:

We forecast that Trainline’s liquidity headroom will be c.£150 million by the end of May 2020. By this time, the Group expects to have fully completed the working capital outflow arising from settling pre-existing bookings to train and coach operators as well as processing refunds to customers. 

It thinks it “can operate through an extended downturn period if required, without any further cost mitigation”.

My view

Net debt as of August 2019 was £42 million, although this included a temporary working capital benefit worth c. £23 million which we can now assume has been reversed. So “real” net debt was c. £65 million.

At that time, Trailine had drawn down around £300 million on a new £350 million credit facility. Of that drawn down amount, £200 million was in the form of cash and nearly £100 million was in the form of a non-bank cash guarantee.

If the company today says it will have around £150 million in headroom by the end of May, I will assume that means it will have £150 million spare on that facility, maybe because it’s not using the bank guarantee?

Either way, let’s treat this company as having an enterprise value of £1.9 billion.

The financial statistics don’t currently say this, but I think it could prove to be a high-quality company some day. It uses PPE of just £21 million and net working capital (current assets minus current liabilities) is typically negative.

However, it is yet to have a good year on the income statement, so I would continue to treat it cautiously. At some point, it needs to produce a proper result to justify this sort of valuation.



  • Stock data should display here.
Market cap £60.7 billion
RNS Trading update – Impact of COVID-19 outbreak
Writer disclosure No position

This is a global update to reflect the shift of the pandemic panic from China/Asia to worldwide.

  • Global Travel Retail – significant impact has extended due to a steep drop in passenger numbers
  • China – “a very slow return of on-trade consumption, as restaurants and bars have started to gradually re-open”
  • North America – 20% of spirits sales are to the on-trade. Most US states have closed their on-trade.
  • Europe – on-trade is (used to be) responsible for 50% of sales.
  • India – lockdown has shut all channels and production/supply facilities for 3 weeks.
  • Africa – on-trade impacted, two production sites closed in Nigeria. LatAm and Caribbean are also impacted.

Response by Diageo is as you’d expect: advertising and promotional spending halted if it’s not going to achieve anything in this environment, and discretionary capex is postponed.

Financial guidance for the year is withdrawn, of course.

Net borrowings as of December 2019 were £13.6 billion, of which £3.4 billion were coming due in 2020.

Diageo reminds us today that its net debt/EBITDA multiple at that time was 2.8x. It issued another £1.9 billion in bonds in March.

Importantly, there are no covenants attached to any of this debt, so nothing to trip it up in that regard.

There is an interest coverage covenant attached to its £2.8 billion bank facilities, but these facilities are currently undrawn.

Shareholder returns – the dividend which is due next week will be paid, but the buyback programme is suspended.

My view – it’s obviously a very disruptive situation. The result this year will be poor, of that I have no doubt.

On the other hand, this is (or was) a business with a 30% operating margin. The cash burn this year might be limited (depending on the duration of lockdown), and it doesn’t have to worry about any covenants.

I would like to own shares in this some day. For the moment, I’m still priced out.


Flutter Entertainment

  • Stock data should display here.
Market cap £5.9 billion
RNS 2019 Final Dividend
Writer disclosure No position

This is confirmation that Flutter’s proposed dividend for FY 2019 will in the form of ordinary shares.

On March 27th, the company said:

Given the impact of COVID-19, the Flutter Board will now propose that the Final 2019 Dividend be paid in the form of ordinary Flutter shares. 

Stock dividends are mostly pointless. Why bother?

It’s true that some shareholders will sell the stock dividend to generate the equivalent amount of cash income. But they could have sold an equivalent fraction of their existing holding, for the same result.

I would have just cancelled the dividend.



  • Stock data should display here.
Market cap £1.5 billion
RNS COVID-19 Update
Writer disclosure No position

The market likes this update. Redrow is being given a huge amount of headroom:

  • £300 million from the government under the Covid Corporate Financing Facility
  • Existing £250 million RCF with six banks may be increased by £100 million, by the end of the month.

80% of staff are furloughed. Board and Directors have volunteered to take a 20% pay cut.

This company reported net cash of £14 million as of December 2019 (after paying out £149 million in dividends). A cash balance of £89 million was offset by £75 million in bank loans.

The interim dividend was later cancelled, saving the company around £35 million.

Given that salaries are being covered by the government, and borrowings are in plentiful supply, this should be reasonably safe.

With equity of £1.6 billion, it also looks to offer decent value.



That’s it for today, thanks everyone.

If you enjoyed this article, please do smash the like button!





Wordpress (7)
  • comment-avatar

    Agree, we are moving quickly into a post Covid market, although the various trading statements that will be released down the line could be pretty unpalatable and a second fall precipiated! Sorry, off topic to mention here the research showing the media-induced government ventilator panic buying is on a par with the public stockpiling loo-rolls. With Covid-19 it’s unlikely there is actually any benefit from being put on a ventilator – apart from allowing ICUs to ‘appear to do something’.

    • comment-avatar

      Nothing to do with Covid-19 is off-topic right now, I think! I mentioned the ventilator hysteria in today’s report! Cheers for the comment.

  • comment-avatar

    Your attitude to Covid 19 is selfish and self serving . Very dissapointing . London is not near herd immunity and nor is the rest of the country . The tail is as big as the ramp . Your just worried about your own portfolio since you feel safe in the knowledge that 90% of deaths due to covid 19 are over 50 years old . You feel safe and unaffected in terms of health risk . We need to maintain the lockdown until a similar length of time as the China regime . This would be at least late May / Early June . Ventilation is an important part of ICU care and saves lives . At some point elective surgery needs to resume and increased ICU capacity is an important part of being able to manage that while COVID 19 is ongoing . Do try to be less money oriented .

    • comment-avatar

      Thank you for your insights as always 😀

    • comment-avatar

      I only know Graham from his market reports on Stockopedia and on here, he’s always struck me as decent bloke (except when he calls Plus500 ‘a bucket shop’). I’ve re-read his write up with your comments in mind and I can’t say I agree that he is the total twat that you paint him out to be. It’s possible you may well have personal reasons at them moment for taking what he wrote in the way you did – and if that’s the case I hope everything will be OK.

      • comment-avatar

        Thanks for the support shine, but it’s no biggie – wildrides is known for his inflammatory language. He has followed me here from Shareprophets (not a Stocko reader). I enjoy his comments and I’m glad he’s here. G

  • comment-avatar

    Mr Shine 600 ……I agree with you that Graham Neary is a decent bloke, which made the general thrust of his editorial recently regarding Covid 19 all the more surprising to me . He is not in isolation in this respect with Whinifroth of Share Prophets also calling for an end to isolation policy . Most surprising is Scott from Stocko who has undergone the illness himself, including losing a loved one to the disease, and yet still calling for an early end to the isolation policy . No doubt he feels safe now via gaining immunity having undergone the disease and so is content to promote concepts that assist his portfolio whilst putting those with no immunity at risk . very dissapointing stance from all three . I would sooner my wealth declined than lose a loved one to this disease . Fortunately for me having three NHS Doctors in my close family I have no need to make ill informed pronouncements on ICU performance .

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