Hi, it's Paul here with the SCVR for Weds.
I'm writing this late on Tuesday evening, because feedback has been very positive when I write about the general Macro/Covid situation, and subscribers seem to like something new to read first thing in the mornings, understandably. I'm a night owl, so it's difficult to balance all this because there are so many distractions when the market is open, even when I have managed to crank my brain into action in the mornings. Hence writing macro stuff late at night suits me well. I'll try to do this once or twice per week in these SCVRs in future, when there is something to discuss.
Embarrassing error - can't remember if I've mentioned it, but I feel a bit of a fool for putting in an incorrect link in Monday's SCVR, which I thought was CNN, but was some mickey mouse website with a similar name. Sorry about that, and thanks to readers who pointed it out. That said, the headlines & commentary in UK newspapers are no less ridiculous very often - e.g. market plunges or collapses, now seem to apply to moves of c.1%!
PIWorld podcasts
Many of us find the professional investor videos from PIWorld very useful & enjoyable. These are made for investors, by investors.
I particularly liked this discussion with Stephen English, which is full of insights. And of course anything with Leon Boros is always worth tuning in to.
What I didn't know, is that for apparently 18 months, PIWorld content has been available as audio podcasts. I've only just discovered the podcasts, and last weekend I really enjoyed listening to the charming & interesting commentator David Buik, being interviewed by Tamzin (very polite, and she doesn't interrupt!) on my headphones, whilst doing oddjobs over the weekend What a great use of otherwise wasted time!
Macro/Covid news & views
In these unprecedented times, I keep an A4 pad by me, and often jot down interesting snippets from the press, news, and CNBC. Here are the latest snippets, with my additional comments, as I'm trying (as we all are) to work out what's going on, and where it might take us. After all, that has to guide our investment decisions. Even if your approach is "do nothing", that still implies that you've decided the outlook isn't too bad, and should recover back to normal in a reasonable timescale.
In no particular order then;
UK furlough scheme
Press reports say it was intended for 3-3.5m people, but the actual number of people has turned out to be about double that. If the scheme stops, then many companies would have no choice but to make a large number of those redundant. Hence we could conceivably looking at unemployment shooting up to multiple millions. For this reason, I don't see any choice in the Government extending the scheme beyond the end of June.
Apparently the Chancellor is working on a scheme to extend/modify the scheme, so I'm watching out for news on that. Any scheme to pay people to sit at home doing nothing, could only be temporary anyway. I think it needs to somehow be modified to encourage companies to take people back on full pay, whilst perhaps the Govt could focus on paying out for vulnerable people who cannot return to work? It's fraught with risk, if it goes wrong.
Press reports suggest that Mike Ashley (who else!) has tried to get some furloughed staff to work - "volunteers" to pack up stock in closed shops & move it back to the warehouse for online sales. This is a tricky one. It sounds like breaking the rules, but surely it makes commercial sense for companies to do this? The scheme must be wide open to abuse and fraud.
I'm eagerly awaiting the mooted rent furlough scheme, reported as imminent in press articles. This could be a lifeline for the hospitality sector, as I mentioned in Monday's SCVR. Rents are the one major cash outflow that the hospitality sector currently has to pay (since staff costs, rates, and VAT/payroll taxes are currently suspended). Therefore, if a rent furlough scheme is introduced, then companies like Revolution Bars (LON:RBG) (in which I have a large long position) should be able to survive a possible extended lockdown.
Hospitality sector
It seems likely that hotels could re-open soon, with social distancing rules. I think that was covered in the Government's recent stuff about how various businesses can re-start. Obviously, bars & restaurants are likely to be further down the line. I remain of the view that this could come sooner than people think but it depends on all sorts of variables. In particular the dreaded second covid wave which may or may not happen, and may or may not be contained. It could be more lethal, or hopefully more mild. Nobody knows for sure about any of these things.
I can't find the link now, but I noted on my pad that Italy is apparently re-opening bars & restaurants on 1 June. No doubt there's more to it than that, e.g. some restrictions, etc, but it's still very interesting. If that works in Europe, then the UK is likely to follow suit. A favourable outcome would see a big re-rating in UK hospitality shares, in my view, and the potential rent furlough could protect the downside risk. It all looks interesting to me, but far too risky for most investors, I get that!
Some interesting comments
Carl Quintanilla of CNBC, who I think is an excellent presenter & interviewer, made this very important point yesterday;
The (USA) economy is re-starting. It's not normalising
The stock market seems to be already pricing in an element of normalising, before we've even hit the worst patch of economic damage.
There again, the Fed, and some other Governments/central banks, have stimulated things so much, that arguably there may not be the downside risk there should be, and investors are emboldened. After all, for markets to keep going up, somebody must be buying.
Warren Buffett recently said (paraphrasing, as I didn't write it down verbatim);
The Fed acted with such unprecedented speed and determination, this allowed masses of corporate debt to be issued on terms that would normally not have been possible.
Buffett expanded on this point, saying that Governments & civil services had learned from 2008, that fast and decisive action is required to stem economic & market meltdowns. I think that's a very important point actually. The sheer scale of USA & UK Govt stimulus, is unprecedented. If enough money is thrown at the economy & markets, it will prop things up, and stimulate recovery.
Unlimited QE?
I think Trump in particular is not likely to stop at anything to get the US economy running again. What about if the Fed is instructed to aggressively buy equities? It's possible.
Now that Govts can create unlimited quantities of new money, then use it to buy their own newly issued debt, then they can keep interest rates at zero, and issue unlimited debt. What is to stop them, especially if other Govts are doing the same thing? Currency devaluation wouldn't happen, as there's nothing to devalue against if everyone is doing the same thing. This all makes my head spin, as conventional economics has gone out of the window. I can't shake off the feeling that it's all likely to end in disaster, but I'm not sure what the catalyst would be?
Theoretically, the Bank of England could just create £1.6tn in new money, and then buy up all of the UK's Govt debt that it doesn't already own. Then just agree with the Treasury to cancel the whole lot. Contra the Treasury's liabilities, against the Bank of England's assets, and the UK's entire National Debt simply vanishes. Let's have a discussion about this, as I cannot see why in theory, this could not be done, especially if other Govts agree to do the same thing, at the same time.
Brexit
It's amazing to think that we wrangled about this for several years, yet it's barely mentioned now, understandably as we have a bigger problem.
However, this got me thinking. We now have the most economically interventionist Government since arguably the 1970s, with artificially deep pockets due to QE & zero interest rates.
The Govt is now prepared to throw previously unimaginable amounts of money at propping up people and businesses. The furlough scheme could be costing around the same as running the entire NHS on a monthly basis, according to some estimates (£8-14 bn per month).
Therefore, roll things forward a bit, to when covid is hopefully under control, and I imagine that policymakers & civil servants could be emboldened to do whatever it takes to make Brexit happen - as opposed to kicking the can down the road. If it can support the entire economy to combat the covid shutdown, then why can't it take the same sort of bold action to support businesses that could be damaged (in the short term anyway) by Brexit?
As investors, I feel we should be thinking about how we imagine Brexit could pan out. That's why I'm flagging up this issue, as something to think about for the end of year. Would we see another extension of the transition period in Dec 2020, or a strategy that is emboldened by us having overcome (hopefully) covid, and prepared to dive into a so-called hard Brexit? A few months ago, I would have put my money on another extension. Now, I'm wondering if a more bold approach might be taken? How that affects my investments? No idea, I haven't thought it through enough yet.
That's probably enough for now. Let's have a quick look at this;
M&c Saatchi (LON:SAA)
Share price: 59p (up 30%)
No. shares: 101.4m
Market cap: £59.8m
This is a dramatic price rise, which seems to be due to renowned tech investor Vinodka Murria & family buying 15.25m shares (13.25%) in this PR company.
Annoyingly, this share is on my list of potentially interesting things to research, but I hadn't got round to finishing off my research. The financial watchdog probe over its accounting, put me off a bit. I cannot imagine that a savvy investor would take a 13.25% stake, without being satisfied that the accounting investigation might turn out to be OK.
I must find some time to properly look at this. At this stage though, when I'm not yet fully up to speed, it looks interesting.
Signing off now for Tuesday night. I'll edit it for typos in the morning.
Let's see what fresh horrors the morning RNS throws up.
Weds morning - good morning! Let's look at today's news.
Card Factory (LON:CARD)
Share price: 39.5p (up 3% today)
No. shares: 341.5m
Market cap: £134.9m
Financial and operational update on response to COVID-19
This is a large (possibly the largest?) UK retailer of greetings cards & associated products.
Recap - I used to like this share, for the high dividend yield, supported by amazing cash generation and a very high operating profit margin. Obviously everything has changed since covid caused shops to be shut. We don't know how long it's going to take for High Streets to return to normal, if they ever do. That's bad enough, but CARD has also (foolishly as it turns out) taken on too much debt, and paid out excessive dividends. I doubt it can carry on paying divis, hence the main attraction to the share is now gone, and it might even end up fighting for survival, due to the heavy bank debt. Hence I'm feeling negative about this share before I've even read today's update.
Today's update - much of this is similar to what so many other companies are saying - i.e. conserving cash, thank employees, etc.
Key points;
- Banks are supportive. Has £200m RCF until Oct 2023
- Bank of England confirmed access to CCFF (but not stated how much CARD can borrow)
- 90%+ staff furloughed
- Capex, VAT & payroll taxes deferred. No divi
- New store openings cut back unless contractually obliged, so only 7 in FY 01/2021
- Online sales up considerably, but only a small part of overall sales
- Confident it has sufficient liquidity
My opinion - that's all fine for the time being, but my concern is the bank debt. Bank covenants are not mentioned, and my worry is that covenants would almost certainly be breached when the stores are closed. We're not told when the stores are likely to re-open.
Given the very high level of debt, I think this share is currently too high risk and doesn't come with multibagger potential upside. As readers know, I don't mind taking on high risk positions, but only if I can see a realistic upside opportunity to make say 5 times my money. That's not likely to happen here, even if trading resumes fairly soon. Note that things were going downhill before covid struck, with a profit warning in Jan 2020.
My other concern is that income seekers who held this share for the divis, are likely to be sellers. That's an overhang that could last a long time, and keep the share price suppressed.
.
Halfords (LON:HFD)
Share price: 133p (up 15% today)
No. shares: 199.1m
Market cap: £264.8m
Halfords, the UK's leading provider of motoring and cycling products and services, today confirms the revised date for publication of its preliminary results for the year to 3 April 2020 ("results") and provides an update on recent trading and liquidity.
This share has bucked the trend, so well done to Halfords shareholders, who managed to pick one of the best of a bad bunch, that has recovered well.
.
Halfords stores have remained open during the lockdown, since its products and services are considered essential.
FY 03/2020 results update -
Our results for FY20 were boosted by better than expected sales in the final weeks of the financial year during the lockdown period. Subject to audit adjustments, we now expect that Adjusted Profit Before Tax, on a pre-IFRS16 and 52-week basis, will be at the upper end of our previously guided range of £50-55m.
Recent trading - this seems resilient, in the bizarre circumstances of the moment -
Group sales for the four weeks to 1 May 2020 were 23% below last year on a like-for-like basis, which was better than we initially anticipated. This was fairly consistent across the period and reflected a strong performance in Cycling, as the public explored alternatives to public transport and looked for ways to stay healthy. In Motoring, essential categories such as batteries and battery care performed well, but overall weakness reflected a significant reduction in car journeys during the lockdown period.
I never thought I would consider -23% LFL to be fairly decent! The trouble is, trading at -23% LFL is very likely to be trading at a loss. It will be interesting to find out in the future if they were better off continuing to trade, or if shutting down would have been cheaper? I think there's a lot to be said for business continuity, so staying open was probably a good decision.
Liquidity - this next section below is self-explanatory, and sounds reassuring. Although as with any other business that is relying on bank support, it's the covenants that worry me. That said, banks seem to be very flexible at the moment towards listed companies, and usually just waive or modify problematic covenants. Hence perhaps we don't need to be quite so paranoid about bank debt as in the past? Although banks remaining patient & supportive, depends on how long and how bad the recession becomes.
Better than expected trading and the proactive measures we have taken to preserve cash have resulted in an improvement in our liquidity position. On 1 May 2020, we had approximately £159m of total liquidity available, including overdraft facilities. Despite this improvement, the severity and duration of the pandemic remain very uncertain and as such the Board will continue to take the actions necessary to preserve cash in the coming months and seek to position the Group for an easing of lockdown. We also
remain in active dialogue with our existing lending syndicate to provide additional flexibility should we require it.
The last sentence worries me a bit.
My opinion - so far, Halfords seems to be weathering the storm well. That has been reflected in a strong rebound in share price. I certainly am not inclined to want to chase this share price up any higher, given its reliance on bank support, and interim results later this year that are probably going to look absolutely dire.
Timings update - for the sake of what's left of my sanity, I have to get back home to Bou'mth this afternoon, as I've been stranded in London since 27 Feb, amazingly. I got more than I bargained for, coming into London for a meeting with RBG management on 28 Feb. Oh well, as Cilla Black used to say, life is full of surprises! Hence I'm parking today's report to one side, and will finish it either tonight, or tomorrow. Apologies for any inconvenience. Paul.
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