Cube Report (11 Jan 2021) – Frothy markets

Cube Report (11 Jan 2021) – Frothy markets

Good morning, everyone.

Hope you’re all doing well. I’m very refreshed after a long Christmas holiday, and looking forward to developing this website again! And of course providing my thoughts on the markets.

So without further ado, let’s see what’s happening today:

FTSE – off 0.5% this morning at 6840.

The bounce from late October has been very impressive. It was all the way down at 5600! And as recently as New Year’s Eve, it was only at 6460.

As you might know, I run a quarterly FTSE option selling strategy, which profits when the FTSE doesn’t fall.

However, I haven’t yet rolled out my strategy this quarter, as I normally do. The strong run up in the index has made me a little nervous, and I’m hesitant. However, I might still run this strategy. I’m just a little more cautious than usual. As I said on Twitter, “markets may be a little frothy”.

Today I’m looking at:

  • Smith & Nephew
  • British Land
  • JD Sports
  • Direct Line
  • Duke Royalty

Smith & Nephew

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Market cap £13.9 billion
RNS Trading Statement
Writer disclosure No position

Let’s check in with this large medical devices company.

  • Q4 underlying revenue -7%.
  • full-year underlying revenue -12%.

As noted in October, Smith & Nephew’s products are used in elective surgeries. With increasing Covid/lockdown in the US and Europe in recent months, “more procedures were postponed following the reintroduction of restrictions”.

As in previous months, the impact was most pronounced on our Orthopaedic Reconstruction, Sports Medicine and ENT businesses, driven by lower levels of elective surgery. Our Advanced Wound Management and Trauma businesses remained more resilient.

It’s a setback versus Q3, when the revenue decline was only 4%.

But at least we aren’t in the terrible territory of Q2 (minus 29%).

I note that the consensus earnings forecast for 2022 has reduced from 112 cents to 109.5 cents. Quite a lot of patience needed at this valution, but the quality of the business is undeniable.


British Land

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Market cap £4.2 billion
RNS Operational Update
Writer disclosure No position

The dust has settled after Christmas. How is British Land’s portfolio doing?


Tough times

Activity is not completely decimated:

  • On 24 December, 73% of stores were operational, “footfall and sales proved resilient in the four weeks to Christmas“.
  • Over the Christmas period, like-for-like store sales were at 81% versus 2019.
  • Open air retail parks outperforming other assets.

Rent collection is unfortunate:

  • 71% of rent due in the December quarter had been collected as of last Thursday.
  • 95% of office rent for December has been collected, but only 46% of retail rent.

There is still a major backlog of prior rent from retailers – they’ve only paid 49% of rent due last March, 73% of June, and 72% of September. And now only 46% of December. The uncollected amounts have been partially deferred, partially forgiven, and are partially awaiting collection.

We continue to engage with those customers who have strong businesses, but have been disproportionately impacted by Covid-19, to help them manage their rental obligations.  We are agreeing solutions which are both equitable and mutually beneficial, generally involving moves to monthly rents, deferrals and partial settlement of outstanding rents for the period of closure in return for lease extensions, reduced incentives, commitments to additional space and the removal of lease breaks. 

My view – I don’t have a strong view on this one, but I note some key metrics from the half-year report: EPRA net tangible assets per share 773p (latest share price: 454.5p), and loan to value ratio of 34%.

Since then, there has been a £177 million at 7.6% above valuation, and a £401 million sale at what looks like a 5% premium to valuation.

LTV reductions from an already modest level of 34% should be quite safe. The market clearly has a problem with the numbers, however, given the discount in the share price. I’d be interested in any thoughts from readers on this one.

JD Sports

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Market cap £8.7 billion
RNS Trading Update
Writer disclosure No position

Some encouragement here: H2 saw “robust” demand, sales up 5% in the 22-week period to 2 January 2021 “as consumers readily switched between physical and digital channels“.

huge boost to profit expectations:

The positive nature of the demand through the second half to date means that we are now confident that the Group headline profit before tax for the full year to 30 January 2021 will be significantly ahead of the current market expectations, which average approximately £295 million. It is now anticipated that the outturn for the full year will be at least £400 million.

At the same time, there are “significant challenges” in scaling down store activity, and scaling up online activity, at short notice.

Under normal circumstances, we would be confident that the results for the forthcoming year to 29 January 2022 would show a strong improvement on the current year. However, given the ongoing uncertain outlook with stores in the UK likely to be closed until at least Easter and closures in other countries possible at any time, our current best estimate is that the Group headline profit before tax for the full year to 29 January 2022 will be 5% to 10% ahead of the current year.

My view  – I’m happy for shareholders, especially anyone who bought in during the summer and has enjoyed the massive rebound in valuation. There is clearly a lot of momentum right now, as the share price breaks out to a new all-time high.

The P/E ratio seems to be around 30x versus earnings for the current year (FY February 2021), after today’s upgrade. If you see 5%-10% as the lower bound for earnings growth, then I can see how this rating might be justified. But I’m always very cautious in this sector.

Direct Line Group (DLG) – CFO Update

The CFO takes a leave of absence “with immediate effect whilst a family member undergoes medical treatment“. The current Chief Strategy Officer becomes Acting CFO during this interim period.

Duke Royalty (DUKE) – Appointment of Chief Investment Officer

An interesting new appointment at this former holding of mine. Duke will now have a CIO in London, “who has extensive private equity and credit experience”.

The prior CIO, who I believe is based in Canada, will continue to be Chair of the Investment Committee.

In light of the Company’s growing pipeline of opportunities driven by business owners’ desires turn to long-term capital solutions, Mr. Madouros’ appointment provides Duke Royalty’s Investment team with additional expertise, particularly in the European non-bank credit sector and increases capacity for origination and execution of new transactions.

Duke’s market cap is a modest £70 million, with the interim results showing net assets of £77 million. More fundraisings will be along in due course, I guess?

That’s a wrap for now. See you tomorrow!




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