Cube Midcap Report (9 Jan 2020) – Tempted by Nichols #DNLM #NICL #TSCO #MKS

Cube Midcap Report (9 Jan 2020) – Tempted by Nichols #DNLM #NICL #TSCO #MKS

Good morning!

It’s a a very busy day for updates – let’s see how much I can cover by lunchtime.

  • Dunelm (DNLM)
  • Nichols (NICL)
  • Tesco (TSCO)
  • SIG (SHI)
  • Marks & Spencer (MKS)

2pm: Finished for today.

Fridays are usually quieter for news, so I will be able to look at stocks I missed today:

  • Mitchells & Butler (MAB)
  • Polar Capital (POLR)
  • Liontrust Asset Management (LIO)
  • International Consolidated Airlines (IAG)

Dunelm (DNLM)

  • Share price: £11.48 (+0.4%)
  • Market cap: £2,318 million

Q2 trading update

Roland has covered this homeware retailer on multiple occasions – see the archives.

It has repeatedly surprised to the upside, and continues the good form today with a positive trading update. Expectations for the full year are unchanged.

I’ve highlighted the four revenue numbers which are most important to me: like-for-like store sales growth, and online sales growth, over the Q2 and H1 period:

I would note that online sales are still only 14% of the total – and the nature of home furnishings suggests to me that there is a limit to how large they can get, as a proportion of total sales. Unlike fashion items, you can’t easily put a rug or a bed in the post and send it back, if you don’t like it!

Even so, 33% growth in online sales is encouraging and suggests that there is scope for further growth in this channel.

Margins – “we maintained our commitment to everyday great value and did not participate in Black Friday or additional pre-Christmas discounting”. Wow!

But Dunelm is participating in the January sales. If you go to today, you are greeted with:

Not discounting before Christmas is one thing. But not discounting at all after Christmas, like every other retailer, would be very strange. There are discounts of 20% on many Dunelm products right now, with discounts of 30% – 50% on a few items.

Other news

  • new website platform being used, greater online capacity and no problems
  • 171 superstores, and three new ones planned in H2 (of which two are relocations)

Net debt was £68 million at the end of H1. Average weekly net debt during the period was £24 million (more companies should publish this, and not just when it portrays them in a favourable light!)

This level of debt is very small relative to the company’s profitability and so it would be of no concern to me. The next balance sheet published will include IFRS 16 liabilities (i.e. lease liabilities), illustrating the inherently leveraged nature of this sort of business.

H1 PBT will be c. £83 million. It would have been c. £84.3 million without IFRS 16.

CEO comment is bullish and ends with:

“Our ambitious growth plans are centred on extending and enhancing our customer proposition, helping more customers than ever create a home that they love.  We are excited by the significant opportunities ahead of us.”

My view

I can’t fault Dunelm’s performance and perhaps this is another “good” retailer that I should consider breaking my rules for. Roland has described it as a high quality retailer, and I’m inclined to agree. The balance sheet is ok, return on equity is excellent (63%) and online sales are about as good as we could expect.

The market is in love with the shares – they are up by 150% over the past 18 months. Arguably, I have no right to comment on their prospects from here, since I failed to predict such a momentous rally.

But I have to wonder about the wisdom of paying a P/E multiple in excess of 20x for a company enjoying total sales growth of 6%, and like-for-like sales growth of slightly less than that. EPS is forecast to grow at 4.5% next year, and in 2022. Perhaps I’m too miserly, but it seems to me that the market is paying a very full price for these prospects.


Nichols (NICL)

  • Share price: £14.175 (+0.4%)
  • Market cap: £524 million

Trading update

This update from the soft drinks maker is in line with expectations. It should serve to soothe investors who were upset by the December trading update.

In that update, Nichols disclosed to the market that it expected to be hit by the special tax on sweetened drinks in Saudi Arabia/UAE. I studied this over on Stockopedia, finding that Middle East sales were a small proportion of the total – just 5%. And yet the share price fell 17% in response to this news.

The news was partiularly disappointing since that region had previously been considered to be a great source of growth. See the growth figures below.

Nichols is a share which I hope to own some day – perhaps I need to look at it in more detail right now. The share price has made no progress over the last 4.5 years – but EPS has improved from 60p to 70p over this time period. In other words, relative to their recent history, Nichols shares are offering a rare degree of “value” right now!

Key points from today’s update:

  • Revenue +3.6% in FY December 2019 (but note that the Saudi/UAE tax only recently been implemented)
  • UK sales +2.7%. Vimto maintained its market share.
  • International sales +7.5%. Mid East sales +20.6%.
  • Outlook for 2020 unchanged.

Chairman comment: confident of the company’s long-term progress.

My view: I am strongly considering opening a position in this stock, for a long-term hold. It has many of my favourite features of companies: great ROE (24%) and ROCE (26.5%) (numbers from Stockopedia), family ownership and stewardship, long-lasting brands, no debt and international growth opportunities. And finally, the valuation is in a zone which I consider to be reasonable!


Tesco (TSCO)

  • Share price: 256p (+2%)
  • Market cap: £25.1 billion

Q3 and Christmas trading statement

It’s been a busy week for supermarket updates.

As most of you will know by now, I vigorously avoid this sector.

Let’s briefly catch up with Tesco’s progress. All of these numbers are excluding fuel:

UK retail like-f0r-likes are negative, though less bad than Morrisons or Sainsbury.

The overall UK & ROI result is less poor (0.4%), due to  better performance in Ireland and especially from the acquired wholesaler, Booker.


The UK market “has clearly been very challenging” and is “subdued”.

The rest of the commentary is not very interesting. Thailand and Malaysia operations are under review for “strategic options”, i.e. they might be disposed in what would be another unsurprising abandonment of foreign adventures by a Western PLC.

Tesco’s debt mountain (£12.6 billion of net debt before a recent tender offer) makes it one of my least favourite supermarket shares.



  • Share price: 95.725p (-20%)
  • Market cap: £566 million

2019 Full Year Trading Update

This is a very large share price fall for a large company. SIG is a supplier of building materials – and I don’t remember studying it before.

Today’s update talks about a successful turnaround, including some disposals to “complete the transformation to a robust balance sheet”. Net debt was £162 million at December 2019 but when the disposals complete (particularly the Air Handling division for £200 million) this should get the company out of the red.

Terrible macro conditions were reported in October. The twin curse of cylical markets and political uncertainty:

The Group has been reporting during the year a deterioration in the level of construction activity in key markets and highlighting a number of key indicators pointing to further weakening of the macro-economic backdrop, notably in the UK and in Germany. This deterioration in trading conditions has accelerated over recent weeks, and political and macro-economic uncertainty has continued to increase.

With the recent decisive election result, should the company not have benefited from less uncertainty?

Unfortunately, things remained very poor during the election month:

“[The] deterioration in sales accelerated during December, with sales per working day in the month around a quarter lower than November.”

Protective measures were initiated, but they were too late for FY December 2019. Underlying PBT for the year is now expected at £42 million – a huge miss versus forecasts I can see for £68.9 million.


The key challenge for the Group in 2020 is to deliver a return to top line growth. Management is taking a number of actions to address sales performance which, coupled with profit protection actions taken in recent months and the annualised benefit of the broader transformation, will leave the Group well placed to capitalise on any recovery in trading conditions.

The trend at the moment is truly awful. H1 like-for-likes were negative against the prior year, H2 was worse than H1, and December was the worst month of all (minus 25% compared to November!).

My view

Building materials as a sector doesn’t seem very “moaty” to me, so I’m inclined to stay away. But it’s intriguing that this company’s performance is so bad – I knew that political uncertainty was holding up investment and building work last year, but I didn’t think it was quite as bad as this company’s results would suggest. There must be some company-specific reasons, surely?

Marks & Spencer (MKS)

  • Share price: 197.75p (-9.5%)
  • Market cap: £3.86 billion

Q3 Trading Statement

M&S like-for-likes are flat overall. Divergent performance between Food and Clothing/Home:

The company says the UK experienced an “improved quarter in both main businesses”, but I struggle to see anything positive about the Clothing/Home business this quarter. In the company’s words:

Clothing & Home improved run rate from H1 reflecting strong initial customer reception of Autumn ranges with signs of continuing recovery in core Womenswear, offset by underperformance in Menswear and Gifting.

Scrolling back to H1, I see that Clothing/Home like-for-likes were -5.5% at the time. So from the point of view of the second derivative, Q3 is better.

Outlook: Full year guidance unchanged, although gross margins expected to be around lower end of guidance, largely offset by cost reduction programme

So earnings might be close to forecasts, but only through cost savings. Without those cost savings, the company would be sinking.

CEO comment: when the company does well, it takes the credit. When it does poorly, external conditions are to blame. And there is no shortage of one-off problems:

We delivered an improved performance in Q3 across both main businesses. The Food business continued to outperform the market and Clothing and Home had a strong start to the quarter, albeit this was followed by a challenging trading environment in the lead up to Christmas. As we drive a faster pace of change, disappointing one-off issues – notably waste and supply chain in the Food business, the shape of buy in Menswear and performance in our Gifting categories – held us back from delivering a stronger result. 

My view: I don’t blame the CEO for the difficulties faced by M&S. It’s a large legacy business that truly is surrounded on all sides by cutthroat competition. The brand name still carries value and the loyalty of many customers can still be relied on, but generating consistent returns for shareholders is not going to get any easier.

The best-case scenario that I envisage is M&S becoming a food-only brand. With the help of Ocado and a premium positioning, it might earn better returns than its more run-of-the-mill competitors.

The worst-case scenario is that it goes the way of so many other tech-disrupted legacy retailers with a large debt burden, i.e. the equity turns out to be worthless.

Therefore, I see the risk/reward here skewed to the downside. Little wonder that it is so popular among short-sellers at present (4.5% of shares sold short, according to shorttracker).


That’s it for today, thanks for dropping by!

I’ll be back tomorrow to catch up with the latest midcap news, and will cover the stories I missed today, if the news is light.





Wordpress (5)
  • comment-avatar

    Re Nichols much the same – I am thinking of taking a starter – generally I think the beverages sector has had a pull back. AG Barr also taken a hit on no news that I am aware of.
    Must do a review of the sector – although in general I do find it a little on the expensive side, albeit with good reason.

    Do you still hold Britvic – expect that to be on more reasonable multiples but not sure they have the same brand quality /durability

  • comment-avatar

    “The best-case scenario that I envisage is M&S becoming a food-only brand. With the help of Ocado and a premium positioning, it might earn better returns than its more run-of-the-mill competitors”.

    But isn’t that going to be a VERY long term solution (if it is a solution). The majority of M & S stores that I’ve been in are huge and on multiple stories. Much too big to support food only and who wants to food shop on anything above ground floor.

    Maybe they could look at food only on the ground floor and hive off the floors above to other companies (offices maybe). But then they still have the problem that the stores I know about don’t have parking which I would have thought would be a big turn off for the majority of people doing their weekly food shop.

    • comment-avatar

      Hi Laughton – I agree that it will be extremely difficult. I know the format you describe, and I agree that it doesn’t work for the majority of people for a weekly shop. It’s more suitable as a place to get a meal or ingredients for a weekday night. That is the food function which M&S serves for many people, I expect.

  • comment-avatar

    Hi Graham.  I only just saw this post and then only by dint of it appearing in the Recent Comments thread – it doesn’t appear under the list of Midcaps report or under the list of your posts.  I’d be interested in how you view Nichols as compared to AG Barr.  Side by side there are pros and cons to both but on balance AG Barr looks moderately more tempting.  Both are family owned too I believe.

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