Cube Midcap Report (Tue 4 June 2019) – Woodford sinks, 888, AO, GROW

Cube Midcap Report (Tue 4 June 2019) – Woodford sinks, 888, AO, GROW

Good morning, and welcome back to the Cube Midcap Report. I’ve been thrilled to receive such positive feedback to the launch of this report!

The big news yesterday evening was the suspension of the Woodford Equity Income Fund. Click here for the statement on

And we have some results to digest today:

  • 888 (888) – trading update
  • AO World (AO) – final results
  • Draper Esprit (GROW) – final results

Woodford Equity Income Fund

I’ve been looking at the composition of the Woodford Equity Income Fund, to see if there are any holdings I might be interested to purchase off this distressed seller.

Looking for the top UK publicly-listed holdings in this fund, I see:

  • Barratt Developments, Burford Capital, Taylor Wimpey
  • Profident Financial, IP Group, Countryside Properties
  • Imperial Brands, Stobart, BCA Market Place
  • NewRiver REIT, Purplebricks, Eddie Stobard Logistics
  • Crest Nicholson, Redde, Oakley Capital, Woodford Patient Capital
  • Kier, Paypoint, Watkin Jones, Allied Minds
  • Amigo, AA, Non-Standard Finance
  • Card Factory, Raven Property, Circassia
  • Time Out, Mercia Technologies, ReNeuron
  • 4D Pharma, Tissue Regenix, RM2 International
  • Itaconix, Brave Bison, Netscientific

The only one of these which I would strongly consider adding to my portfolio is Burford (BUR), though I do not yet have the conviction to buy it at the current share price – maybe Woodford’s selling will help me?

There are other names where I take a passive interest (e.g. BCA Marketplace, Paypoint, AA), so I will keep Woodford’s selling in mind.

Imperial Brands (IMB) is relevant for me, too, but I doubt that Woodford’s selling will have a huge impact on this highly liquid, £18 billion-market cap share.

Another way to exploit the Woodford situation would be to short the weakest companies listed above. I only short where I have extremely high conviction, so do not plan to short any of the above. But I do suspect that Purplebricks (PURP) remains vulnerable to continued decline, with Woodford being a 29% shareholder.

Wider implications

Perhaps this situation will help to accelerate the switch into passive funds? After all, if even Woodford finds it difficult to succeed, what hope is there for the ordinary person to pick a good active manager?

While I agree that the switch into passive funds continues to make a lot of sense, I think it’s also fair to say that Woodford’s style changed dramatically in recent years. He had a strategy that worked well at Invesco, investing in mainstream companies. In recent years, on the other hand, many of his holdings have been highly speculative. Those of us who do this for a living could see quite plainly that he had moved up the risk spectrum.

Instead of abandoning active investments, I think the lesson here is to understand the strategy rather than just trusting the person. Woodford was an excellent investor using one type of strategy, but this did not necessarily mean that he would be able to implement another strategy with success!



This is only just below our £500 million lower bound. It also happens to be something I own shares in!

I thought the share price would enjoy some relief with this update, but instead it is down modestly.

888 reports the following for the period from January 1 to May 18:

  • revenue up 6% on a like-for-like basis – at constant currency and adjusting for acquisitions.
  • revenue up 2% on a reported basis.
  • new customer acquisition up 20% year-on-year. Perhaps this could have led to a better revenue increase?

My personal interaction with 888 has been primarily in its poker room, where revenue has declined by a further 28% in this period. Poker already declined by a massive 37% last year, bringing last year’s poker revenue down to just $49 million.

Competition is pretty tough in poker, and unfortunately 888 hasn’t kept its room fresh with the latest software. The new software platform should have been rolled out in most locations by now – see this article from April – so I will be looking for any sign that the downward momentum has been reversed. The CEO does mention an “improving revenue trend in Q1 against Q4”, but I think he is referring to the second derivative, against an extremely weak comparative!

Poker is like other marketplaces where customers benefit from liquidity. The fewer players, the less attractive that a venue becomes. So it’s important that 888 turns poker around soon, to salvage as much value as possible.

Casino and Sport are the categories which matter most now in terms of their revenue contribution, and they both record significant revenue increases (29% and 13%, respectively). Customer acquisition is clearly being driven in these categories, rather than Bingo (flat revenue) or poker.

888 also highlights its focus on the developed and regulated UK market, where revenues are up 18% on a like-for-like basis (8% on a reported basis).

Given all of the above, management remain confident that full-year results will be in line with expectations. They will host a capital markets event for investors later today.

My view  – I continue to hold and am determined to find out if the market is right to be so cautious on its prospects. The consensus EPS forecast this year is 15.2 US cents (12p).

The company finished 2018 with zero debts and cash of $133 million (£105 million). It subsequently spent £33 million on acquisitions, and sought permission to repurchase up to 10% of its own shares. This resolution was decisively approved at its AGM.

I would like to see the company make use of this permission, if it agrees with me that its shares are undervalued.

How did the share price get where it is today? A mix of valid and exaggerated reasons, in my view:

  • Remote gaming duty of 21% to be implemented by the UK
  • Share sales by the former CEO
  • Share price collapse at other Israeli internet companies (Plus500, XLM, etc).

To me, it makes for an interesting contrarian play, and I’m content to have 3% of my portfolio here.

AO World

  • Share price: 104.3p (-5%)
  • Market cap: £492 million
  • Final Results

I’ve never said particularly nice things about this distributor of electrical products. I even picked it out as one of my top 2 favourite shorts at an investment conference a few years ago (the other one was Fastjet!).

Since then, the share price has indeed declined but at a slower rate than I would have expected. As of last night, the market cap was just above our £500 million market cap limit.

Cash drain

The company has moved into profitability in the UK, but expansion in Germany and the Netherlands brings the overall Group result to a significant loss, even at an adjusted EBITDA level.

Last year, it has also spent nearly £40 million on the acquisition of Mobile Phones Direct (MPD), which does what it says on the tin.

MPD was carrying a big cash pile when it was acquired (see Note 9 of today’s statement), so the deal didn’t make such a large difference to AO World’s cash position. However, the total drain on cash from operations and investing activities was almost £46 million.

The company moved from net funds of £38 million to net debt of £9 million in twelve months.

It states that total available liquidity is still £85 million (as of March 2019), which is significant. But since I don’t have faith in the likelihood of this company making sustainable profits, I would be eager to investigate it further as a shorting opportunity if I see any signs of financial distress.

Some red flags:

  • Negative gross margin (-1.7%) in the European business. Struggled with local legislation. This currently looks like an ill-fated Continental expedition.
  • UK Trade Receivables of £188 million, up by almost £100 million, “principally reflecting an increase in accrued income in respect of commissions due on product protection plans as a result of the higher retail volumes”. For context, this receivables balance is almost 40% of the market cap! Hat-tip to those on Twitter who alerted me to this.
  • Dodgy adjustment – the company calculated its adjusted EBITDA by adding back the cost of a marketing contract in Germany which didn’t work out as planned.

The company makes no reference to “outlook” or “expectations” in this statement. The closest thing to an outlook statement is:

Our ambition remains to be run-rate profitable in Europe during FY2113. We have a number of initiatives in place across four key measures; customer service, revenue growth, gross margin and cost to deliver that are currently being actioned.  We will provide a further update at the time of our interim results in November against these measures.

My view – while I would not short it at the present time, I will consider shorting it at a future date.

Draper Esprit (GROW)

Draper Esprit (LSE: GROW, Euronext Growth: GRW), a leading venture capital firm investing in and developing high growth digital technology businesses, today announces its final results for the year ended 31 March 2019.

This investment vehicle reports excellent results, as expected.

NAV per share has increased by 26% to 524p. Since the year-end, the company has realised £15 million from its Transferwise investment, and secured a new £50 million revolving credit facility. Total investable cash is in excess of £150 million.

I don’t have the time to study this in further detail today, but I do have a positive initial impression of this investment vehicle.


That’s all for today, thanks for dropping by and we’ll be back again tomorrow!



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  • comment-avatar

    Hi Graham, Great addition to your site. Many thanks for starting this, just what I need, some measured commentary on shares above the SCVR universe.

  • comment-avatar


    I think the silence from AO World on current trading speaks volumes given the way John Roberts usually speaks. I understand most investors are nervous of shorting but as a long term professional I am surprised you don’t use them more as a market beta hedge. I am short AO as well as WPCT and HL so having good day today at least from running a significant short book.

    How does this report sit with your contribution to SCVR?


    • comment-avatar


      Good points you make, it’s nice to have some shorts on (!) but there are a few issues. Firstly, it’s against my nature to sell low and buy high, but covering shorts at a loss is sometimes necessary to protect against a portfolio disaster. So I find shorting stressful from that point of view.

      The other problem is that if your timing is off, then a short position can tie up collateral for a long time for little return, with an opportunity cost. So for this reason, I only like to short things when I am confident that there is a timeline to failure (i.e. I can see the company running out of cash before too long).

      As a market hedge, it does have attractions, but I personally feel that I have the stomach and an overall portfolio strategy that can handle market volatility so from that perspective, I don’t need a further hedge. But I can see how others might feel differently about it.

      Regarding the SCVR, it’s simple enough – I won’t produce this report on days when I write the SCVR.



  • comment-avatar

    Hi Graham
    I wanted to add my support for the midcap report.
    The hope of something like this was the reason I subscribed to cube, so thanks very much!

  • comment-avatar

    Seems to me Woodford conned himself with how easy it used to be to make money in the previous semi perm bull market . Much harder now the bears hold sway .

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