Cube Report (3 Nov 2020) – US Election Day Roundup

Cube Report (3 Nov 2020) – US Election Day Roundup

Good morning!

It’s election day in the US. But much closer to home, I want to take a quick look at the updates from:

  • British American Tobacco
  • Coats
  • Associated British Foods
  • Carnival
  • Chemring

For the mining investors among us, we’ve published a nice article by Joel today, on the subject of Hummingbird Resources.


BATS

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Market cap £57.3 billion
RNS Acquisition of Dryft Modern Oral Business
Writer disclosure Long BATS.

I’ve been nursing a loss on my BATS shares for a long time, but they’ve been brilliant dividend payers and the prospective yield is currently over 8%.

These dividends are forecast to continue growing, which I expect them to. Maybe I should be increasing my exposure to this sector, on the basis of the yield?

Today’s RNS is light on numbers but it does give us some useful reminders of the company’s strategic direction:

  • Dryft is a US-based maker of nicotine pouches
  • the acquisition expands the BATS portfolio in Modern Oral nicotine in the US (see the BATS website for more info on this category)
  • the products will be sold under the BATS brand VELO

There’s no impact on deleveraging targets – perhaps a fairly small deal then, which will repay itself quickly?

The deal is consistent with the goal “to accelerate the growth of its New Category revenues at a faster rate than its total revenue, reaching £5bn in 2025“.

For context, New Category revenues were £1.2 billion in 2019.

My view – I think I’m backing the right horse with BATS, which appears to be doing quite well in the changing tobacco/nicotine industry.

The forecast P/E multiple is now a derisory 7.5x, which I suspect more than fully prices in the US political-regulatory risks and the company’s own credit risk. Happy to continue holding it for now.


Coats

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Market cap £882 million
RNS Trading Statement
Writer disclosure No position.

The market loves this update from Coats, a maker of zips and threads:

  • sales down 9% at constant FX (July to October). An improvement from H1, which was down 21%.
  • “Improving demand trend” in various divisions, “notably into the start of the peak trading period” (September to November).
  • adjusted operating profit for 2020 to be ahead of market expectations, in the range of $100 – $110 million.

Checking forecasts, I see an EBIT prediction of $87.3 million for 2020. So if that’s what market participants were expecting for operating profit, today’s update is a very pleasant surprise.

Net debt (ex IFRS 16) is $211 million as of the end of September, little changed since June. But cash generation was actually ahead of expectations – a cash outflow had been expected, due to lower sales during the Covid-19 outbreak.

Headroom is $300 million – so there could be both “organic and inorganic investments”.

Dividend – under review for this year. Decision to be announced in March 2021.

Outlook:

The improving performance seen to date and trading outlook for the remainder of 2020 remains encouraging, however, we are mindful that uncertainties related to Covid remain around the recovery profile of our various global end markets as we look into 2021.

My view – Coats has historically had a few hiccups in performance, but it’s been very solid in recent years. May be worth investigating in more detail.

 


Associated British Foods

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Market cap £13.4 billion
RNS Annual Results
Writer disclosure No position.

Headline financial numbers here:

  • revenue -11% (constant FX) to £13.9 bilion
  • adjusted PBT -34% to £914 million
  • actual PBT -40% to £686 million
  • EPS -47%
  • net cash £1.6 billion (excluding leases)

The food business saw its adjusted op. profit increase 26%, “driven by high demand and improved productivity”.

Primark, on the other hand, has had a terrible year. It’s perhaps surprising that these numbers aren’t worse:

In the absence of store closures/Covid-19, sales would be an estimated £2 billion higher, i.e. around £7.9 billion with some modest growth versus 2019.

The good news is that “sales performance since reopening has in aggregate been reassuring and encouraging“.

Dividend – it sounds like this was a close decision. There will be no final dividend.

Our experience of the cash outflow following government restrictions that required us to close all of our stores in March and, at the time of writing, the increasing restrictions in a number of Primark’s major markets, lead us to be cautious.

Outlook

Notwithstanding the currently announced periods of restriction, we expect Primark full year sales and profit to be higher next year… We will continue to expand retail selling space.

Sugar is expected to deliver a higher profit next year with improvements in Europe and in the performance of Illovo. 

My view

This one deserves more analysis but I am under time constraints. The bottom line is that this appears to have stabilised and I expect that Primark will be able to trade for most months of next year, albeit with restrictions and in conditions which might lead to lower business than it had before (especially the effect of lower footfall).

Adjusted operating profit in the non-retail segments alone adds up to £727 million, before £63 million in central costs. So let’s call that £660 million (net). I don’t think I’d be a seller at these levels.

 


Carnival

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Market cap £7.9 billion
RNS North American Brands Extend Pause
Writer disclosure No position.

Carnival’s shares have been stable for the past few months. Maybe this reflects better tourism prospects in the US and elsewhere, versus the cycle of lockdowns faced by the UK?

Having said that, Carnival is still not ready to launch cruise operations in North America.

The brands affected are Carnival Cruise Line, Cunard North America, Holland America Line, Princess Cruises and Seabourn.

They are working on it:

“We continue to work with the U.S. Centers for Disease Control and Prevention, and global government and public health authorities, as well as top medical and science experts around the globe, on a comprehensive plan for the eventual restart of cruising in North America. With their collective guidance, we have developed and continue to update our enhanced health and safety protocols that are in the best interest of our guests, crew and overall public health. Whenever we restart our cruise operations in the U.S., we certainly look forward to welcoming our guests on board.”

My view – this one is making me nervous. In Q3, it burned through $2 billion in cash, before taking into account the return of customer deposits and capex. Cash on the balance sheet was $8.2 billion.

The debt schedule is serious:

Will it avoiding raising again? I’m not sure.

 


Chemring

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Market cap £744 million
RNS Trading Update
Writer disclosure No position.

This warfare group is a very unpredictable investment.

Today, it announces some medium-sized contracts with the MOD, and provides a year-end update (the financial year ends in October).

  • adjusted operating profit at the top end of market expectations (£47m to £53m)
  • net debt £48 million
  • order book £476 million (up 6% compared to a year ago).

I can’t predict the fortunes of this company, so I won’t try. Defence is, I suppose, an “essential” industry, so lockdowns are of little relevance.

 


 

That will do it for today. Enjoy the US election coverage, if you’ll be tuning in! I might stay up late and see how it’s going.

Cheers

Graham

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