Activist short sellers get a lot of flak. There are instances of short attacks helping bring down frauds, of course, but they are hugely outnumbered by situations where a company’s known or historic issues are hyped up for a new audience.
There’s an argument that to say that most investors don’t really benefit from a short seller publicising in shock-horror fashion a company’s questionable governance standards and murky accounting methods. It might be that wider attention forces the company to improve these things, but improvement is not really what the short-seller wants. Attacks are designed to put executives on the defensive. The whole gambit hangs on making the target embattled, not better.
Congratulations, then, to Matt Earl’s Shadowfall for breaking the mould and helping cure its victim. On Tuesday Shadowfall launched a short attack against Boohoo that had at its centre the conflict of interest around PrettyLittleThing, a frock shop still minority owned by investors including the son of the company founder. Boohoo had an option to buy the remaining 34 per cent of PrettyLittleThing up in February 2022 and now it doesn’t. Problem solved. Short case (or its central plank at least) neutralised. Everyone (apart from those short) wins.
Boohoo announced this morning that it is acquiring the remaining 34% of PLT it does not currently own for £269.8mn, potentially rising to £323.8mn, using a combination of cash and shares. This implies valuation of 1.3x / 1.5x FY21E sales and 12.2x / 14.7x FY21E EBITDA (on our estimates), including any minority discount was applied – i.e. well below the £1,650mn we have for PLT in our SOTP. In other words, we think Boohoo has paid a good price for a great asset – and we estimate this transaction creates c5% of value for shareholders. The cash used in this transaction relates to what was already on the balance sheet at Feb YE – so it does not have anything to do with the 14 May capital raise. Indeed, the company is still highly cash generative and still has £350mn of cash on the balance sheet following this transaction – plenty of M&A firepower for further opportunities. We are OW.
Boohoo’s acquisition of PLT silenced the debate before it got started. At a maximum consideration of £323.8m, PLT has been valued by KPMG at £462.6m, representing c0.8x FY21 sales and c9x PAT. Our fully diluted EPS increases by c20% for FY21 onwards as the MI is eliminated in what is clearly a very accretive transaction. Boohoo retains cash of £350m on the balance sheet to fund potential M&A deals, which we suspect will focus on internationally relevant brands, potentially located overseas. The business has generated £80m in cash over Q1 too. TP raised from 350p to 425p.
We think management took the opportunity to stop the speculation and swiftly completed the acquisition ahead of time. We see the move in a positive way: PLT has contributed to the Group’s momentum over the past two years by complementing the brand’s portfolio and creating healthy internal competition with its other brands, and is expected to aid the global expansion of the Group.
By absorbing PLT, notably from its pre-equity-raise cash pile, Boohoo has firmly and immediately closed the book on this matter. We do not expect the equity dilution to drag down the stock, given the strong expected performance this year and the relief at putting this governance concern to bed.
The valuation looks favourable to us at £270m (potentially rising to £324m, dependent on upside on the Boohoo share price). As would have been the case in 2022, the valuation was based on an independent audit (KPMG) and accounted for the majority stake ownership structure (i.e. provided a discount to market valuation). The company is valued at 1.4X FY1 sales (BERNe) and a mid-teens earnings multiple: a considerable discount to peers and indeed the Boohoo group itself (which trades on 2.8X FY1 sales). This is well below what we assume the company would have paid in 2022 [£600m].
The company will have £350m of net cash immediately after the acquisition … Importantly, we think that the £200m raised via equity earlier this month can be considered untouched, with the acquisition funded by the further raises and already existing net cash. We expect Boohoo’s further M&A plans to be unchanged by this announcement.
Our view on this deal is very positive – it addresses governance concerns immediately and consolidates a margin accretive business into the group; at a very favorable acquisition price.
On our estimates, the deal would be immediately earnings enhancing (adding approximately 1p to FY21E earnings). We had previously ascribed a value of either 1.5x FY21E sales or 25x FY21E EBITDA to PLT earnings, implying a valuation in the range of £1.2bn and £1.6bn for PLT.
The acquisition draws a line under recent concerns surrounding potential dilution from acquiring the remaining 34% stake in PLT. We would add that we too have no issues with the representation of free cash flow reported by boohoo or the reported profitability of PLT.
While we take no view on the transaction closing, other things equal, this transaction would enable Boohoo shareholders to fully participate in the growth potential of the Boohoo group, and would align the interests of PLT management with Boohoo shareholders (the 491p average share price target for the contingent deal consideration is the same as boohoo CEO’s incentive scheme target), and on our estimates would enhance FY21E/22E earnings by +13.6%/16.3%.
Valuation: Our DCF derived 12-month price target is 430p. We are Buy rated.
You get the idea.
What else? Rolls-Royce has reversed Wednesday’s rally after Ako Capital unloaded its 5.21 per cent stake overnight at 318p apiece. The shares, having risen 12 per cent over the past month, are now back to flat at about 309p.
It’s a journalistic convention that three things are a trend, irrelevant to complicating circumstances. Today’s Rolls sale follows private equity on Wednesday slotting 8.8 per cent of Nexi, the Italian payments thing, and Saint-Gobain getting shot of its 10.8 per cent stake in Swiss chemicals thing Sika. Are these sales signalling the top of the market? Seven hundred words by midday please, make it punchy.
Cineworld’s managed to get waivers out of its banks along with another $180m of thereabouts of cash to burn through. It also expects cinemas to reopen in July with a “great movie line up” including Disney’s live-action Mulan remake and the latest Chris Nolan one that cost about 70 times what Memento did and won’t be nearly as good. There’s no comment on whether Cineplex, Cineword’s badly timed Canadian acquisition, might complete. Here’s Jefferies with all the detail:
Lenders will waive the leverage covenant for the credit facility for the June 2020 testing date and has increased its leverage covenant to 9.0x Net Debt to EBITDA for the December 2020 testing date. CINE has also extended liquidity by $180m: $110m in the RCF, $45m through the CLBILS loan scheme in the UK and an application for $45m from the US Cares Act.
We estimate a c.$40m monthly cash burn for CINE standalone (with only 15% of rents paid), the extension adds a handful of extra months of cash burn to the eight we had previously assumed (starting in March). We estimate that Cineworld had c.$500m funds available as at the end of FY19 ($140m in cash, plus $368m of undrawn RCF). …[On Cineplex] we await a decision under the Investment Canada Act, with a decision needed by the end of June for the deal to complete. We initially liked the Cineplex deal financially and strategically. Things have changed. The Cineplex deal would lead to a higher rate of monthly cash but no additional liquidity, so the deal now looks short-term unattractive. A reduced price for Cineplex that also increases bank facility headroom for the combination (therefore extending liquidity) would clearly be preferable, although difficult to achieve. Investment Canada Act may require commitments around employment and investment that CINE may be (understandably) unable to give in current circumstances. …
In mid-March, we cut numbers to reflect a 10% admissions decline across all divisions. We have not included a specific view on COVID-19 in our formal forecasts beyond a 10% FY20E admissions decline, but our ‘two months shut’ scenario shows a 40% EBITDA downgrade for FY20E. Our current FY21E estimates effectively assume flat admissions versus FY19 (which were 14% below FY18 in the USA).
Valuation. For FY21E, CINE currently trades on a c4x P/E, 3x EV/EBITDA, c30% free cash flow yield (pre-Cineplex).
And JP Morgan Cazenove:
Altogether, this means Cineworld believes it is now in a position to survive even if all cinemas remained shut until the end of 2020. Given the expectation that all of Cineworld’s cinemas worldwide will have re-opened by July, this suggests that the group has managed to navigate the unprecedented threat to its business from COVID-19 and can at last think about the future. …
JP Morgan also highlights Wonder Woman 1984 (August 14), Black Widow (November 6), No Time to Die (November 12 in UK, November 25 in US) and Top Gun: Maverick (December 23) as worth getting excited about. “The compression of the best part of a year’s worth of blockbuster releases effectively into 6 months will mean the channel is not lacking for content assuming consumer demand is there,” it says. Assuming.
Peel Hunt goes up to “buy”, 140p target:
Cineworld’s share price is up fourfold since the post-Covid-19 trough; some of that movement has been quite recent, perhaps in anticipation of a positive announcement on debt facilities such as the one made today. However, it remains more than 70% off its high, one of the biggest laggards among the travel & leisure companies we follow. We believe there is more upside, but we will be more confident once it becomes clear whether the Cineplex deal, priced before Covid-19, is to go ahead and on what terms.
IWG, the office landlord that used to be Regus, has done a £315m equity placing after a quite solid four-month update in the circumstances. The cash is for predatory reasons rather than survival. The gist is that a lot of tenants have kept paying for empty offices, though they’re needing notably fewer meeting rooms. That still means positive revenue growth year-on-year in April with cash holding up very well. Berenberg can summarise:
Despite the impact from the pandemic in March and April, particularly on centre ancillary sales, the group’s revenues were up 9% over the first four months of the year, and even grew 1.2% yoy in April (sites opened pre-2019 were down 2.9%). This is much better than we expected and implies that the business may be more resilient than we had assumed, or compared to prior downturns. There are also encouraging comments about greater enterprise (larger corporate) deals, potentially implying that some corporates are “trading down” to flexible workspaces as a result of the pandemic, rather than signing a traditional five- to ten-year office lease.
Most impressive is the performance on cash. While we had expected a worse period for cash collections and a step-up in bad debts, this does not appear to have materialised. Despite spending £155m on capex over the first four months of the year, leverage has barely moved, moving from £294m at December 2019 to £307m at the end of March and £321m at the end of April. This implies that cash collections from customers have been broadly unchanged, and/or that IWG has been able to obtain significant rent support, such as deferrals or reductions, from its own landlords. Alongside this, the company has mentioned £150m of cash savings “so far” from its operations, supporting its financial position for the remainder of the crisis.
Post-crisis, we believe IWG will emerge as the clear leader in its marketplace, with WeWork in particular likely to be in a significantly reduced state in 12-24 months’ time. With a less well-funded and more rationale competitor set, this potentially means an easing of the margin pressures faced by the company in recent years, and could see occupancy and margins continue the recovery that started in 2019. In a structurally growing marketplace, with multiple avenues to deploy capital, this leaves an attractive growth outlook post-crisis. With the further potential for franchising sales, there are clearly plenty of areas for IWG shareholders to be positive.
Berenberg sticks with a 130p price target, which is 56 per cent below the current price. It is, nevertheless, a “hold” rather than a “sell” because cyclicals are cyclical:
Our concern is that the crisis will ultimately result in a meaningful fall in occupancy in IWG’s centres (even if this is yet to be proven in April), from which it will take a long period to recover. The recovery from the pandemic and its economic fallout remain highly uncertain, and it is impossible to state how long it will take IWG to return to its prior level of profitability. As a guide, it took the company seven years to recover its profits to the levels achieved in 2008, as a result of the GFC. While there are multiple reasons to assume the fallout from the current crisis will not be as severe, our concerns remain that investor excitement has moved to a point where this risk is ignored. If we use 2018 as an example of a normal year’s earnings, then shares are now trading at 22.2x 2018 P/E (pre-dilution from the placing). The average forward multiple over the past five years is just 20.6x, suggesting the company is trading on an above-average valuation, on normalised trading levels. We worry that these levels may prove unsustainable over the coming months.
On our forecasts, IWG trades on 77.4x 2021E P/E, before the impact of this placing. Clearly, our ability to forecast earnings over the next six to 18 months is limited, making this valuation less relevant. As above, our view therefore is that IWG is already pricing in a full recovery in trading for 2021.
In non-results sellside, Citigroup has a rejig of the drinks makers that’s focused on cost structures. Coca-Cola European Partners (the NYSE and Euronext listed one) goes up to “buy”, Campari and Diageo both go down to “sell”:
H1 expectations too high. CITI -21% below consensus
CITI’s FY20 Beverage EPS estimates are -7% below consensus BUT our H1 20 EPS estimates are -21% lower. We believe consensus still underestimates the scale of margin pressures and is potentially overestimating the offset from better than expected off-premise sales and management’s ability to cut discretionary spend fast enough to offset deleverage headwinds. As investors turn their attention to examine Q2/H1 profitability and pre-close updates begin, we expect the pace of earnings downgrades to intensify.
We prefer soft drinks to spirits & beer
Soft drinks have been the worst-performing Staples sub-sector of late, underperforming beer and spirits. Although amongst the hardest hit by COVID, with valuations at decade-plus lows, the risks to soft drinks are skewed positively. Near-term we prefer soft drinks over beer and spirits.
CCEP – Upgrade to BUY: CCEP shares have been the weakest in Staples in the last month as EPS downgrades intensified post Q1. Although H1 results will be poor, many of its markets should be early to exit the COVID crisis. With a Yr.2 PE valuation at the low-end of long-run avg vs. Staples, risk/reward is skewed positive.
Campari – Downgrade to SELL: Stronger off-premise sales in a number of markets has prompted a relative re-rating of the stock in recent weeks. However, we believe the market maybe over-estimating the scale of these offsets. With the group’s higher margin and higher growth brands – e.g. Aperol – skewed to the on-trade, the group is particularly vulnerable volume/mix margin deleverage in H1.
Diageo – Downgrade to NEUTRAL: Diageo has been one of our top picks across Staples. Although robust US off-trade sales are providing a greater offset to COVID headwinds than first expected, after the recent strong share price and with cash returns limited for now, catalysts for significant outperformance are now waning.
And Jefferies starts coverage of Games Workshop, which it calls a “unique and high-quality asset” with “decades of rich IP, scale, and vertical integration”. Target £85, or about 15 per cent above current levels. At that price Games Workshop would be worth more by market cap than easyJet, Centrica and Alliance Trust. Here’s Jefferies:
The Sorcerer Fecula Flyblown saw a vision of a shard-curse of endless sterility in which nothing stayed dead long enough to rot, and was horrified. She summoned a monstrous wyrmaggot which swallowed the Sorcerer and her two favoured bodyguards whole This creature burrowed until it burst into Beastgrave, where it disgorged the group in a tide of steaming vomit. …
Apologies, that’s not a broker note, it’s the product description for Warhammer Underworlds: Beastgrave – The Wurmspat. Here’s Jefferies.
Games Workshop has had an outstanding run. Revenue stagnated for nearly 15 years but, following the appointment of CEO Kevin Rountree in 2016, top line more than doubled from FY16 to FY19, while profit increased >4x. We have taken a deep-dive look at the underpinning fundamentals, uncovering scores of operational improvements – customer interaction and marketing have been step-changed (e.g. 10-fold increase in YouTube video content), new product is now as regular as it is high quality, price points have been sharpened… and fans have paid attention. We expect the benefits of these changes to continue to resonate, attracting new customers into the hobby, and reactivating lapsed fans. Reflecting this, our data analysis shows solid underlying momentum in YouTube subscribers (+25%), website traffic (+25%), and search (+15%). We expect this to support above-trend sales growth for the foreseeable future.
Having shuttered stores and closed its website in late March, we estimate a c.£25m hit to profit in FY20 (to £71m PBT) and, as disruption continues, limited financial progress in FY21. However, we see no reason that COVID should affect the long-run outlook and model a firm recovery in FY22 (PBT +44% to £103m). Indeed, we think more time spent at home could be supportive for hobby gaming. The recent +25% uptick in searches for ‘Warhammer’ certainly suggests this may be the case.
We expect longer-term growth to be underpinned by the ongoing internationalisation of GAW’s business and launches of new and updated game editions – a case in point, Warhammer 40k 9th edition was announced this weekend. Possibly most exciting, over the last few years Games Workshop has thrown itself into IP licensing, with major TV/animation projects already underway. There is a vast library of Warhammer history that the group can use to promote the hobby. And monetise.
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