Cube Midcap Report (9 Aug 2019) – #WMH #WPP #BUR

Cube Midcap Report (9 Aug 2019) – #WMH #WPP #BUR

Good morning!

There has been more Burford news flow over the past 24 hours, which I might cover, but I also want to look at:

William Hill

  • Share price: 156.3p (+6.5%)
  • Market cap: £1,365 million

Half year report

This is a relief rally as William Hill reports H1 results in line with expectations and says that the full-year performance will be “in line with previous guidance, assuming normalised gross win margins in the remainder of the year.

After a difficult period for shareholders, merely hitting forecasts and maintaining guidance is cause for cheer:

Key points:

  • net revenue +1% but on a pro forma basis, taking into account the acquisition of Mr Green, net revenue is -2%.
  • Sportsbook revenue minus 10%, gaming revenue plus 3%. Note that the previous period included part of the World Cup, making difficult comparatives for Sportsbook.

Drilling into the divisions, the piece of the business which has done most poorly is gaming net revenue in Retail, down 25%. This is the bit which is hit by the £2 stake limit. The company previously guided that 900 shops would become loss-making as a result, and is looking to close about 700 of them. The current total number of shops is 2,300.

In absolute terms, the hit to net revenue from Retail gaming was £61 million over the six-month period.

Exceptional charges and adjustments are very large at £114 million. This includes nearly £100 million to close retail shops and other measures in response to the £2 stake limit. The remainder of the charges are to do with a “transformation programme” and the integration of Mr Green.

Net debt nearly doubles to £566 million and with falling EBITDA, the multiple of net debt to EBITDA doubles to 2x.

Going concern statement:

Whilst there are a number of risks to the Group’s trading performance… the Group is confident of its ability to continue to access sources of funding in the medium term. The Group’s strategic forecasts, based on reasonable assumptions, indicate that the Group should be able to operate within the level of its currently available and expected future facilities and its banking covenants for the period of the strategic forecast.

My view: While William Hill has already taken huge exceptional charges to deal with the £2 stake limit, I’m nervous that this disruption isn’t over by a long shot. Closing one-third of the retail estate is going to be very messy and doubtless will distract management from other activities to grow the business.

Taking net debt into account, the enterprise value is the best part of £2 billion. We can compare this to forecast EBIT next year of £160 million: perhaps this represents fair value?

I can’t see any particular reason to get involved at current levels.


  • Share price: 981.5p (+7%)
  • Market cap:  £12,400 million

Half year report

This is another big stock whose share price has rallied after it left full-year guidance unchanged.

Perhaps the market is realising that it was unduly worried during the panicked sell-off a week ago?

Today’s rally brings the WPP share price back to approximately where it was six trading sessions ago (a little higher, in fact). The same goes for WMH – it has recovered the gains over the past week, and a little bit more.

The market experienced broad feelings of terror for a few days, but soothing statements and reports from some of the companies which sold off has been enough, at least in the case of WMH and WPP, to bring them back where they were.

(I should note that the market as a whole still has quite a long way to recover: the FTSE-100 is still about 300 points lower than where it was this time last week.)

Let’s see if there is anything worth commenting on from WPP, the world’s largest advertising company.

Key points:

  • H1 revenue is flat on a like-for-like basis
  • H1 revenue less pass-through costs on a like-for-like basis is down by 2%.
  • Headline operating margin on a like-for-like basis down 1.2% to 11.9%.
  • Headline operating profit down 6.8% to £730 million

I think it’s right, in this instance, to focus on the adjusted or “headline” numbers, rather than the reported numbers, since the company reported net exceptional gains of over £100 million in H1 last year. These have not been repeated, so it’s appropriate to ignore their impact.

WPP’s US business is the weakest, continuing to lose automotive, pharma and FMCG clients. At least the rate of client loss appears to be slowing:

This performance, whilst disappointing, is in line with our budgets.

Net debt is £4.4 billion, and is falling thanks to a disposal programme. A majority stake in Kantar is set to go soon.


As I stated at the top, WPP’s guidance for the current financial year is unchanged. Headline operating margin at constant currencies is set to fall around 1%. In the medium-term, WPP wants this to recover to 15%.

My view

I have a positive overall view of WPP, and note that it offers “value” at a forward P/E multiple of just 9x, and a prospective dividend yield of 6.5%.

What holds me back from investing is the view that it’s a business we might not invent, if it did not already exist. I have a long position in Alphabet Inc (GOOGL), which is WPP’s largest media partner. In my view, the likes of Google and Facebook are in the driving seat when it comes to ad pricing, and WPP is a price-taker on behalf of its clients.

For this reason, I am more comfortable holding Alphabet shares, even at a P/E multiple in excess of 20x.


Burford (BUR)

  • Share price: 819.25p (+8%)
  • Market cap: £1,790 million

Burford has published a response to the short attack and also had a conference call with investors. Go to their investor relations website for more info.

Key points:

  • “Burford is solvent, generates strong cash flow and has good access to expansion capital”

I agree with Burford on the point of solvency: as I said two days ago, this was the weakest part of the Muddy Waters report. It didn’t take into account the company’s cash balance and likely returns on its investments between now and the time that its debts are due. It’s true that Burford has been very capital-hungry over the years but you would expect it to be, if it is producing healthy returns on its investments and wants to grow faster.

This bit is important and positive for shareholders: “Burford has no current intention of raising equity capital; Burford has raised equity only once since 2010 and has no plan to become a serial equity issuer.”

  • “Burford’s accounting and financial reporting is transparent, appropriate and has been consistent for many years”

I partially agree with this. It’s true that the accounting appears to be in line with financial reporting standards and has been consistent. However, transparency has historically been questionable and even today, after Burford has produced line-by-line case data to investors in a PDF file, it’s still not entirely clear how much some of its biggest cases are worth on the balance sheet. Transparency has improved a lot, but it could still improve further.

I also think that the company could have been clearer in its presentation of “realised gains” versus “fair value movements”, but it is primarily the responsibility of investors to understand this.

  • “Burford’s governance is robust and serves the business well – Burford has been listening to investors and is actively considering their feedback.”

This can be argued either way. It is possibly fine, but still rather odd, for a large company (by market cap) to remain on AIM, where some institutional money will be unable to invest in it. I do agree that the relationship between the CEO and CFO is not news, though some investors may not have noticed it until the Muddy Waters report.

  • Napo/Jaguar

Burford argues that its work at Napo was successful and that far from working in concert with Invesco, it acted in ways which often disadvantaged Invesco (Burford was a senior creditor, while Invesco was an equity holder).

It is a complicated case and I think it serves to highlight the extremely complicated nature of Burford’s balance sheet and its returns. This is not a simple business. While the Napo case looks like a successful one for Burford, investors were exposed to unusual risks throughout the life of the investment. The likely outcome of corporate restructuring at Napo would be impossible for ordinary private shareholders to analyse.

My perspective is that this case is impossible to analyse for those of us who do not have many hours to devote to it.

  • Gray and delayed recoveries

This is the case where Burford received a promissory note instead of cash from its client.

“Burford has explained many times before that while most of its investments resolve for cash, some involve other kinds of consideration.”

That’s fine, but again highlights the uncertainty around Burford’s balance sheet and its historical IRR calculations.

As I said on Wednesday, the outcome from the Gray case looks good, even with the negative developments which eventually transpired. It looks like classic high-risk, high-reward type of  behaviour!

  • Delaying recognition of losses

Burford defends its treatment of a loss in a case where an appeal was ongoing. This sounds fair enough, but again we must bear in mind that this affects reported overall IRRs, which might be too high when cases are on appeal and those appeals are unlikely to succeed.

  • Treatment of trial losses

It sounds like MW has made some factual errors in this category. Though Burford can’t fully explain all of the problems with MW’s analysis, due to “ongoing active litigation”.

  • Deducting costs from recoveries

The company defends its accounting of realised and unrealised gains.

I have some sympathy with it on this point: it has followed the accounting rules. And investors must first of all take responsibility for our own decisions, if a company’s accounting is unclear to us.

For example, despite priding myself on my ability to analyse a company’s financials, I personally found Burford’s accounts to be very confusing. If I had ever bought Burford shares, it would have been my own responsibility to understand the accounts.

At the end of the day, I agree with MW that many investors will not have understood the proportion of Burford’s income which was from fair value movements, and that Burford could have been a lot more helpful in its presentation of same.

In this section of the rebuttal, Burford appears to accept the criticism that its big returns have been generated from a small number of investments. It compares its activities to venture capital: a few big winners, a few losses, and some investments which perform conventionally.

What this highlights for me once again is the high-risk, high-reward nature of Burford’s activities. I would argue that at a price-to-book multiple of 5x, investors were too complacent about the likelihood of Burford’s historical success continuing. At a more normal price-to-book multiple, such as currently prevails, I think investors are more correctly pricing in the risk associated with Burford’s activities.

  • Concluding remarks

I can’t agree with Burford that short attacks are “a fundamental menace to an orderly market”. The report by Muddy Waters has in fact helped to greatly improve the investing public’s understanding of the company, through the report itself, through the company’s detailed response and through the debate which has taken place on Twitter, on this website and elsewhere.

Markets are not efficient and it is only through the messy, chaotic function of this sort of frank debate that efficiency can be improved. Muddy Waters may have acted for selfish reasons, and many individuals will feel harmed by its actions. However, if the bear thesis is incorrect, then the events of this week will ultimately prove to be a blip in Burford’s long-term success.

As for me personally, I have no desire to be long or short of this stock. Why take a chance, when the outcome is so uncertain?



That was an exciting week in midcaps! We’ll be back next Tuesday with the next edition of this report.

Have a great weekend.




Wordpress (1)
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    Great Burford stuff . Spot on , never mind neary nuff 😉 I shall avoid like a plane from Sierra Leone .

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