Cube Midcap Report (Wed 5 June 2019) – CARD, APGN, LTG, GBG

Cube Midcap Report (Wed 5 June 2019) – CARD, APGN, LTG, GBG

Plenty to digest

Morning everyone,

This might be the busiest Midcap Report so far. We have updates from:

Card Factory (CARD)

Expectations for the year remain unchanged at Card Factory, the greeting card retailer with almost one thousand stores across the UK and Ireland.

There are positive metrics in like-for-like (+2.3%) and total (+6.4%) sales. Let’s fast forward to the outlook statement:

Considering the uncertain macro outlook and the continuation of challenging consumer conditions, and with the key trading periods still to come, the Board expects LFL sales for the year to be marginally positive, with full year profit expectations remaining unchanged.

“Marginally positive” LFL sales – so the 2.3% result in Q1 might be as good as it gets this year? Q2 began in May, so the company has some additional visibility beyond the Q1 numbers.

EPS this year is forecast at 17.3p (so the current-year P/E multiple is c. 11.5x).

Most of the EPS gets paid out in the form of dividends, which helps to explain why net debt remains stubbornly around £150 million. The forecast dividend yield is nearly 8%!

My view – once upon a time, I shorted this company. I believed that it was overvalued and probably of poor quality. Bear in mind that in 2015, when its profits were significantly lower than they are today, the share price was about 400p!

The short didn’t pay off, because I came to realise that it was not such a poor-quality business after all. While it’s true that cards are somewhat commoditised, Card Factory earns significant profit margins (c. 16%) through its vertical integration: it operates in-house design, in-house printing and in-house central warehousing. Through the efficient use of debt, it converts this to significant return on equity.

Therefore, from the current share price, and given the strength of its performance and cash generation, I would now much prefer to be long than short this stock. But I am happiest on the sidelines.

Applegreen (APGN)

This AGM is taking place less than two miles from me. Applegreen is a wonderfully successful petrol filling station (PFS) and motorway service area (MSA) operator that has expanded from Ireland to the UK and now the US.

Trading for the first five months of the year is in line with expectations.

Performance at the “legacy” PFS business is strong, even taking into account the weak comparators caused by poor weather last year.

The MSA business is distinct from Welcome Break, the operator of 34 large motorway services areas, where Applegreen owns a 50%+ stake.

Trading at Welcome Break is “satisfactory, despite the more challenging trading conditions in 2019”, while Applegreen’s US business is “performing well”.

My view – This is a midcap I’ve been watching from the sidelines for some time, and I think it continues to be worthy of significant research efforts.

I must warn that there is significant leverage at play here, as the Welcome Break transaction saw debt balloon to >€500 million at December 2018.

2018’s results were nothing to write home about in terms of net income (just €12 million), held back by significant non-recurring charges. In 2019, with the help of Welcome Break, and in the absence of so many exceptional costs, the consensus forecast is for net income of €40 million, rising to €47 million in 2020.

I am going to make this a priority for additional study. It helps that I’m a regular Applegreen user, due to my frequent motorway driving across Ireland!

Learning Technologies (LTG)

  • Share price: 86.75p (+3%)
  • Market cap: £579 million
  • AGM Statement

Learning Technologies Group plc, the leading integrated digital learning and talent management services and technologies provider, is holding its Annual General Meeting (AGM) at 11am today, 5 June 2019.

This group has grown via acquisition with some aggressive revenue and EBIT targets. Shareholders from the 2013-2016 period have been richly rewarded, as both the share count and the share price have made serious gains. Although anyone who bought late last year will not be feeling so lucky.

2018 was “transformational”, as it so often is for acquisitive companies, with LTG acquiring PeopleFluent, a large HR software business. This was followed up in April this year with the acquisition of Breezy HR, which similarly is a developer of recruiting software.

Year-to-date performance for 2019  is “very positive”, and the Group continues to hunt for “run-rate revenues of £200m and run-rate EBIT of at least £55m by the end of 2021.

My view – regular readers will know that I don’t like it when companies target revenues and EBIT. I am much more interested in EPS, DPS and ROCE!

And a big problem with acquisitive companies is that they can become too difficult to analyse. LTG has 11 subsidiaries listed on its homepage.

This goes in my “too difficult” basket. At a forward P/E multiple of 20x, the investment thesis is just too hard for me to unpack right now. Reader comments to enlighten me are very welcome!

GB Group (GBG)

  • Share price: 620p (+3%)
  • Market cap: £1,195 million
  • Final Results

This is a large software business describing itself as “the global identity data intelligence specialist”. It has four main categories of activity:

  1. Fraud/risk/compliance
  2. Employee screening
  3. Customer & location intelligence
  4. Privacy and data compliance

Again, this is an acquisition-led story. We can see this immediately from the fact that net assets more than doubled over 12 months (to £320 million), despite pre-tax profits of just £15 million. GBG made a $300 million purchase last year, of an American ID verification/anti-fraud business (IDology).

But there is also some meaningful organic revenue growth: nearly 9%, at constant FX rates – encouraging.

Revenues are up 20%, converting to an increase in adjusted operating profit of 22% – not bad.

Everything is in line with expectations, including the outlook.

It sounds like organic growth opportunities will continue to be plentiful. GBG points to the rise of e-commerce, growing incidents of fraud and data breaches, data privacy & regulations, and customer expectations with respect to their online experiences. I can’t argue with any of this.

What I am nervous about is the forward P/E multiple of nearly 36x (per Stockopedia). This understates cash flow, due to the significant amortisation of intangibles, but I am not sure how much weight I would give to this factor.

If we were to consider it for one moment as an investing company, given the extent to which it has grown by acquisition, we must note that the price/book value ratio is not far off 4x.

So I fear that some investors might be involved with this share as a fashionable “big data” story, pushing it to significantly overvalued levels, even if it’s true that the underlying business is rather good.

Woodford Suspension Video

I’ve seen this for the first time, and pasting it for anyone who hasn’t seen it yet. Nothing groundbreaking, but the key admission in it is at the start: the market was anticipating Woodford’s forced selling of positions, and the prices he could achieve when selling his positions had deteriorated.

Key lesson: open-ended funds are dangerous if there is any question marks about the liquidity of their positions.

Biffa (BIFF)

I’m mentioning this just for completeness, because waste management is not really a sector I cover. I lump it in with “utilities” and just leave it alone.

A quick review of its metrics reveals that margins are indeed rather low (op. margin 7.5%) and return on capital is average (c. 7%-8%, according to financial data providers).

So it’s not something I want to pursue, but just to round out this report I will note that Biffa’s expectations for the year ahead are unchanged.

Babcock International (BAB)

An unusual announcement from Babcock. It says that it contains “inside information”, but there is no update on trading (except that recent guidance for  FY March 2020 is unchanged).

Instead of a trading update, the medium-term financial targets are set out:

  • Earnings growth 3%-4% CAGR
  • Margins to stay around 11% (gross margins)
  • Cash flows to increase in line with earnings
  • £1.4 billion in free cash flow over five years
  • Reduce net debt, improve ROIC, and pay a sustainable dividend

We also get strategy updates for the nuclearmarineland and aviation divisions.

My view – these are admirable goals, but I would have liked to see more specific guidance on returns target.

The primary reason that I stay away from engineering groups is the labour-intensive and complicated nature of their operations, making a sustainably high ROIC difficult or impossible for them to achieve. ROCE at Babcock has been less than 10% for the past four years.


All done for today. This was a more difficult set of companies (for me) compared to yesterday’s report, but hopefully I added some value for you. Thanks for reading and helping us to get this new report off the ground!

See you again tomorrow.



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