Good morning! Graham here.
Covid-19 update
I've already written lots about this subject. It's the topic right now.
Since I last wrote about it in the SCVR, the most important news stories and things I have noticed are:
- The UK lockdown was extended for 3 weeks, to the first week in May. The PM continues his recovery.
- We can look forward to a staggered reopening of the European economies. It is likely that schools will open first in most countries, and the hospitality industry will open last. See the most recent proposal by UCL economists.
- New cases and deaths with the virus are falling pretty much everywhere, according to official data - see Worldometer.
- The capacity of the healthcare system has not been exceeded in the UK, nor in most other countries (but patients with other conditions have not received their scheduled, elective treatments).
- Localised studies show high levels of asymptomatic infection and the buildup of antibodies in local populations.
- Demonstrations against the lockdown policy have started taking place in the USA, Germany, Israel, and India. The severe economic consequences of lockdown are causing millions of people to go hungry, including in the UK.
After all of this, the FTSE has roared ahead to c. 5800.
I was very bullish around 5000, and I still have a long trade on the index (opened a few months ago), but I'm currently neutral in the short-term.
Even if the policy of near-total lockdown ends soon, I don't believe that we will get the pre-Coronavirus economy back straight away.
For a start, there are likely to be social distancing rules and guidelines for a long time. These could be a major drag on the retail, leisure and hospitality sectors if they limit customer numbers or if they cause some people to deliberately avoid places where crowds may gather or where irritating rules have to be followed.
Secondly, I don't see how the unemployed and furloughed masses will be able to start spending again soon. For those living from paycheck to paycheck, even a 20% pay cut (if they are on the UK government's job retention scheme, for example) is a major blow to their spending power.
A severe financial shock can have long-lasting effects both on an individual, and on the wider economy. We have just witnessed a financial shock like no other.
In the US, 5.2 million more people filed for unemployment last week, bringing the total jobless to 22 million.
It is now thought by economists, in advance of the official numbers, that the US unemployment rate may be in the region of 15% already - the highest unemployment rate since World War 2. The longer that lockdown persists, the higher this number will rocket.
The US labour market is generally more flexible, and so it is possible that many of the unemployed could be hired again quickly once the lockdown is over.
But as I keep saying, many of these people, and their counterparts in Europe, will need to repair their personal balance sheets:
- they will be behind on their mortgage or rent, and their credit cards/overdraft.
- their employers (particularly in travel, leisure and hospitality) will be restarting from a position of weakness and in no mood to pay high salaries.
- people might also worry about lockdown coming back, if there is a "second peak".
Against all of that, we have the prospect of very high money-printing by central banks. Which makes it rather difficult to hold cash.
One company which does hold lots of cash is Berkshire Hathaway ($BRK.B) (in which I have a long position). There are no signs yet that Berkshire is making any major investments at the present time - which is interesting, to say the least.
I'm still holding all of the shares I did before this crisis kicked off, and have no plans to sell anything. I do expect that lockdown will end soon, perhaps when the data around the virus becomes more widely understood but (more likely) when most people can't bear the economic consequences of this any longer, and start putting pressure on politicians for change.
If you're not comfortable with all of this uncertainty, there is no shame in heading for the exits and holding cash instead, until this is over.
A popular tweet from yesterday:
Right, onto some small-caps...
- DFS Furniture (LON:DFS)
- Aston Martin Lagonda Global Holdings (LON:AML)
- Premier Foods (LON:PFD)
Finished at 3pm. Not covered: NAHL, PHD.
DFS Furniture (LON:DFS)
- Share price: 147.19p (+12.5%)
- No. of shares: 213 million
- Market cap: £313 million
Paul looked at this furniture company in January. He ruled it out, because of its "absolutely diabolical balance sheet". Good call!
Net debt was last seen at £160 million (interim results).
In a March CV-19 update, DFS said it had headroom of £70 million, implying that it had used up around £180 million of its £250 million debt facility.
In that update, it highlighted the potential of a cash crunch, since a large supplier book (£100 million) needed to be settled. Deliveries to customer are suspended, so DFS is not getting paid for outstanding orders.
Today's RNS
DFS confirms that it is negotiating a new £60 million - £70 million facility, which is basically to let it pay its suppliers ("near-term working capital unwind").
It also wants to dilute shareholders by up to 19.9%, with an equity issue.
At the current share price, that would raise £62 million.
In combination with the new debt facility, that means DFS would be able to pay its suppliers and plug the near-term hole in its finances.
Cash burn is reduced to £14 million/month following discussions with suppliers and landlords. Showrooms, manufacturing and distribution remain closed.
Trading - the website is still open and taking orders, and some warehouse activity is taking place.
Online orders are up 20% but of course there are zero purchases taking place in-store at the moment.
At the interims, online sales were less than 20% of the total. So the increase in online orders does not come closed to replacing the large quantity of lost in-store orders.
Outlook
The combination of the proposed additional financing together with the operating cost mitigation measures is expected to, when agreed, give the Group significant liquidity to see through an extended lock-down.
My view
If you liked DFS before this crisis, then you might like it even more at current levels, after the share price has halved.
And from the point of view of the banks, if they see shareholder support for an equity raise, then I imagine they'll be comfortable extending a short-term loan.
The equity is superficially cheap vs. normalised earnings and, like other retailing shares, could prove to be a multi-bagger in time.
But it doesn't interest me at all. For the reasons outlined in my macro update, I'm gloomy on consumer spending, especially big-ticket items.
This company could spend years focusing on the management of its debt load, during which time profits could easily be de minimis or negative (remember that it's an operationally leveraged, low-operating margin business).
I think it's likely that this will have to be run on behalf of its lenders.
Aston Martin Lagonda Global Holdings (LON:AML)
- Share price: 55.775p (-4%)
- No. of shares: 1,520 million
- Market cap: £850 million
Statement from Executive Chairman, Lawrence Stroll
Aston Martin has been recapitalised with a huge fundraising: 1.2 billion new shares following a 4 for 1 rights issue. This means 4 new shares were offered for every share that was previously outstanding.
The pricing for the 1.2 billion new shares was just 30p, ensuring that the rights would be taken up.
A large new consortium of investors has taken control, headed by the billionaire Lawrence Stroll. He is taking Aston Martin back to Formula 1 for the first time since 1960.
The total new equity that has been raised is £536 million, as announced at the end of March.
Net debt as of the end of 2019 was £876 million. Without the capital raise, there would have been an "immediate liquidity shortfall", and AML could have been forced into administration or liquidation "shortly thereafter" (1st Supplementary Prospectus, p. 6).
Working capital
The following statement appears in the 2nd Supplementary Prospectus (p. 1). The bold is mine:
Taking into account the proceeds of the Capital Raise, the Company is of the opinion that the Group does not have sufficient working capital to meet its requirements for 12 months following the publication of the Original Prospectus. This is due to the increased impact, since the Company published the First Supplementary Prospectus on 13 March 2020, of COVID-19 and the ongoing and unquantifiable uncertainty it has created and continues to create.
They go on to say that they do have sufficient funding, because of various other options and facilities they have - such as inventory repurchase arrangements and possible support packages from government.
What I think this means is that the £536 million capital raise alone is insufficient to ensure survival, but in combination with other measures, the company will be able to survive another 12 months.
My view
Aston Martin has gone bust seven times in its history. It would almost certainly have done so again, if not for this rescue package.
I understand the attraction of these shares as trading counters, but what are the odds that AML won't go bust an eighth, ninth and tenth time?
I would treat these shares in the same way that I do the shares of Manchester United ($MANU). They are a luxurious holding of the super-wealthy, and are unlikely to make anyone rich who wasn't there already.
Premier Foods (LON:PFD)
- Share price: 39.85p (+22%)
- No. of shares: 848 million
- Market cap: £337 million
Strategic review, pensions and trading update
I've just checked the archives, as I always do, to see the most recent comments on this share.
Funnily enough, Premier shows up in a November 2011 article by Ben, titled "How to avoid investing in distressed stocks". Not investing in Premier would be a good start, apparently!
Today, it announces the conclusion of a strategic review which began over a year ago.
The main idea is that it is merging all of its defined benefit pension schemes together, so that the surplus of one of them ("RHM") can fund the deficits in the other schemes, after a buyout.
There is the potential for "significant reduction in future pension deficit contributions".
Premier thinks that future annual deficit contributions, from FY 2024, could be between £17 million and £30 million (down from the current £38 million).
There are also immediate savings on expenses from the plan, worth £4 million p.a.
If I'm reading it right, the total annual savings will reach between £12 million and £25 million, by FY 2024.
Trading update - FY March 2020 will be at the top end of expectations.
This is the first update from Premier since the C-19 crisis began, and perhaps it's to be expected that it had a good year? Its brand portfolio looks perfect for the eat-at-home, cost-conscious culture we are currently living in: Ambrosia, Batchelors, Bisto, Oxo, Sharwood's, Mr. Kipling, etc.
Sales in March were up 10.5% year-on-year (up 15.1% in the UK).
As an essential service, Premier's manufacturing and distribution operations are working "at maximum capacity".
While the initial bulk-buying panic is over, Premier expects to see continued strong demand - everybody has to eat at home, so home cooking ingredients are needed more than ever.
Leverage has reduced - trailing net debt/EBITDA is "comfortably lower than the previous 3.0x target". The cash balance is £177 million, after drawing down nearly half of its RCF.
My view
It's an excellent update. Great news on the pension schemes, on trading and on liquidity.
The September 2019 balance sheet showed an accounting surplus of nearly £600 million (pre-tax) in the aggregate, across its various pension schemes.
Management signalled that they might start to have breathing room soon:
Looking a little further ahead, the Group is starting to see options regarding its future cash deployment, especially in light of its disciplined and consistent track record of Net debt reduction.
But the net debt position was still very large at £470 million (versus adjusted EBITA of £51 million). It will be good to know what the latest figure is.
Overall, I'm neutral on Premier. It's working through its balance sheet challenges, and has the potential to come through on the other side.
That's it for today - back tomorrow!
Graham
See what our investor community has to say
Enjoying the free article? Unlock access to all subscriber comments and dive deeper into discussions from our experienced community of private investors. Don't miss out on valuable insights. Start your free trial today!
Start your free trialWe require a payment card to verify your account, but you can cancel anytime with a single click and won’t be charged.