Cube Report (4 Nov 2020) – The Don looking strong

Cube Report (4 Nov 2020) – The Don looking strong

Good morning!

I was up late last night, and placed a bet on Joe Biden at 1.47. On Twitter, I described this as an “emotional hedge” – winning the bet would make up for the reduction in TV entertainment value over the next four years.

Waking up this morning, I discovered that my man Joe wasn’t looking so good. He is beaten in Florida, Texas, Ohio… and Pennsylvania? Pennsylvania sounds like it could go either way.

So I did what any newbie trader does. I closed out my Biden bet at 2.76 and backed trump at 1.56.

If Trump wins, my loss will be reduced to less than I spend on a Saturday night takeway. If Biden wins, my recreational trading will have reached its natural conclusion: a busted account.

On with the financial news.

In company updates today, we have:

  • Marks & Spencer
  • Provident Financial
  • Smurfit Kappa

Marks & Spencer

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Market cap £1.8 billion
RNS Half-Year Report
Writer disclosure No position.

This has been a dire performer in share price terms and a minimum of 3% of the shares are still sold short (that makes it one of the top 30 shorted UK names).

The food offering has a strong rep (the JV with Ocado is going well), but other retail activities face the same headwinds as the rest of the sector.

  • group revenue down 15.8% (better than the Covid planning scenario).
  • food revenue +2.7% (like-for-like).
  • Ocado retail revenue +47.9%, contributes £38.8 million to MKS adjusted operating profits.
  • Clothing and Home revenue minus 40.8% (minus 61.5% in Q1, minus 21.3% in Q2).

I note in the C&H commentary the headwinds facing the business even after it reopened:

“substantial headwinds to deal with in the form of a store estate generating two thirds of sales in high streets, shopping centres and town centres and a product mix in which formal, outerwear and event related categories accounted for around one quarter of sales last year.”

Even stores in Retail Parks, which suffered less from declining footfall, still saw a 25% revenue decline in Q2 (compared to last year).

The High Street, Shopping Centre and City Centre stores are described as giving rise to a “legacy estate”. The long-terrm plan is to “rotate the estate and release cash from the group’s freehold and leasehold asset base”.

Outlook – H2 (starting in October) has continued with a similar trend to Q2 (ending in September). Food revenue +3%, C&H down 21.5%.

Throughout this uncertain period and as we start to emerge from the crisis, our financial priority is to fund the transformation while focusing on generating cash and strengthening the balance sheet. Our objective is to ensure the business emerges from these uncertainties in a stronger, leaner and more focused position and with balance sheet metrics consistent with investment grade in the medium term.

My view

I note that net debt remains significant at £1.4 billion, before taking lease liabilities into account.

In the good times (let’s use 2019 as an exmple), operating profit was in the order of £600 million, so the debt ratios were no problem. Different story now.

Net assets are £2.7 billion, or £2.35 billion excluding intangibles. I’m not sure what adjustments I should make for changes in the value of the company’s freehold property – but I can’t imagine that property values for MKS assets are very attractive right now.

Net assets are also affected in a major way by movements in the £11 billion pension scheme:

Overall, I’m much happier on the sidelines. The JV with Ocado, and the food offering more broadly, might be enough to justify the current market cap. But I don’t think the C&H business is very well diferrentiated, and there are some dangerous headwinds and hazards in play. Caution required.


Provident Financial

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Market cap £608 million
RNS Third Quarter Trading Update
Writer disclosure No position.

This accident-prone lender gives an update that is in line with expectations.

Forecasts suggest we will see turnover of £842 million and a net loss of £47 million.

But it is scheduled to recover next year and by 2022, it’s supposed to earn after-tax profits of nearly £80 million (depending on whose forecast you check). Quite reasonable to be sceptical, given the recent history.

Some metrics:

  • CET1 ratio 36% (would be considered very safe).
  • credit card spending at its Vanquis Bank subsidiary was down 15% in Q3, compared to the prior year.
  • Home Credit lending to existing customers running at 70% of normal levels

CEO summary of performance:

…delinquency trends across the businesses were stable and the take-up of payment holidays continued to be lower than our initial expectations. New business volumes increased during the period and, importantly, we are well positioned for the traditionally busier fourth quarter.

My view

Consumers are clearly taking things very cautiously, as they should.

The good news for PFG is that the balance sheet appears to be sound, and conditions have potentially stabilised here.

Valuation is not demanding, if you foresee an economic recovery and a resumption of normal lending.

Could be a decent value play.


Smurfit Kappa

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Market cap £7.6 billion
RNS Trading Statement
Writer disclosure No position.

Packaging isn’t glamorous, but Smurfit Kappa’s performance has been a long-term success for shareholders.

The share price is up again today as Q3 was ahead of expectations.

But I’m disappointed to note that the company has left out comparisons with last year from this RNS, for no obvious reason except that growth has been negative. It’s pointless when companies do this. Is it their PR companies who insist on it?

Here is the equivalent Q3 update from last year, which you can see does include the growth rates.

So for first nine months of 2020, we have:

  • Revenue down 8% to €6.3 billion
  • EBITDA down 10.5% to €1,125 million
  • EBITDA margin down 50bps to 17.8%

Q3 EBITDA was €390 million, versus €410 million last year (another comparison left out). At least we can see that recent performance is not far off 2019.

In other good news, there will be a catch-up interim dividend of 27.9 euro cents. So shareholders won’t receive less than they did last year.

The performance review includes a useful reminder of position:

Our business today is strongly weighted towards FMCG customers where we are well positioned to enhance our growth from the accelerating trends in e-commerce, innovative packaging and increased consumer demand for sustainable packaging.

My view

There’s not much to dislike here. Not much to get excited about, but maybe that’s a good thing. Boring is good?



All done for this report,

As I type this (11.13 AM, GMT), Biden is the favourite once again, but it’s close. Looks like we are in for a nailbiting finish!

Have a great day,




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