A good thing about the coronavirus -- at least relative to the very many extremely bad things about it, to be clear -- is that it generates a huge amount of data. It’s a brand new global macro indicator that overarches all trends and has fresh numbers available each day that can match every scenario. Stocks up? That’ll be on the sharp decline in European infection rates. Stocks down? Well, there’s the surge in Latin America daily deaths. C19 is an invaluable convenience for when a person is trying to avoid writing about currency debasement for the 700,000th time, or just wants to come with an argument more scientific than stocks falling today because they rose yesterday. Here’s what such a day would look like, BTW:

And so to Tuesday’s corporate.

Plus500 is having an exceptional plague. Second quarter customer income for Plus is $323.4m, up 38 per cent from the record total it recorded in the first quarter. Another 115,225 customers have been lured into the lobster trap, approximately 32k more than Q1. Active customers are also at an (unquantified) record.

Didn’t markets go up in the second quarter though? Yeah, about that. Plus500’s customer trading income in Q2 was negative $75.8m, which erased nearly all of the company’s first quarter gain of $83.0m. No, but that’s a good thing apparently! Here’s house broker Liberum:

We believe that this performance will go a long way to addressing investors concerns regarding the medium-term volatility in the group’s revenues created by its hedging policy, and believe that over time it will result in benefits of the absence of hedging costs being reflected in the group’s rating.

It’s arguable, sort of, that losing money in rising markets and making money in falling markets is a form of natural hedge. Trading income accounting for approximately 1 per cent of group revenue is about where a CFD broker should be aiming, so in that respect it’s been a reassuring first half. Trading income accounting for approximately a third of revenue in a quarter probably isn’t, but providing the quarters balance out who cares? How much of a premium investors want to pay for hedging by Jacob Bernoulli is a matter for them. Back to Liberum:

The record performance, is in our view, a testament to the quality of the model. Plus500’s superior platform enabled it to take full advantage of the surge in trading activity and new customer interest. What makes this performance even more impressive, in our view, is that it has come at a time when its operations will have been stretched by COVID-19 related disruptions, such as the need for its staff to work at home. This best in class technology, combined with the scalability of the business and the agility of its marketing operations, is why we continue to see Plus500 as the leading CFD platform in the industry. . . . 

Based on our unchanged forecasts for FY20 the shares trade on a PE of 4.8x and offer a dividend yield of 12.4%. We see the latter as particularly attractive given the upside that could prevail should volatility remain at elevated levels beyond the end of 1H20, and the fact that on more normalised earnings the stock is just trading on just 10.7x CY21 earnings and 5.9x EV/EBITDA.

Given the performance of the platform during the quarter, it is clear to us that Plus500 is the leading operator in the retail CFD space. As a result, we believe that the current discount at which it trades to its peers will unwind, and set our target price using a 13.0x multiple to reflect this. We apply this to our FY21 earnings and add a small premium to reflect the supernormal returns being generated in FY20, part of which is likely to be returned to shareholders via the dividend. Our unchanged target price of 1680p implies upside of 26% from the current share price.

Micro Focus, the rollup legacy software support milking machine, is having an unexceptional plague. Interim result headlines are much as pre-announced in mid may and full year guidance remains pulled. There’s a goodwill impairment charge of ~$922m and a very negative outlook (Covid, discount rates, etc), to no great surprise.

The bigger worry is that maintenance and licence revenue are in very sharp decline, led by North America. Does this suggest Micro Focus’s customers are using the pandemic as an opportunity to upgrade their old systems? Yes, probably. Where does that leave Micro Focus? In need of a new business model, quite frankly, which’ll take investment. Product investment is an alien concept for Micro Focus so no one is quite sure how that’ll go. Here’s Credit Suisse:

The key debate for us today is whether any conclusions can be drawn from the revenue mix. On the one hand, at a group level, all the revenue trends look soft with licences down 21.3% and maintenance down 7.7%. There is no particular surprise at the licence performance but a 7.7% decline in maintenance – normally seen as a recurring revenue line – looks disappointing and raises questions around terminal value. However, the questions for us revolve around the mix by portfolio. Notably ITOM and ADM were down 20.5% and 12.3% respectively, masking relative resilience in AMC (-5.3%) and Security (-3.9%, albeit against very weak comps in the prior period). If resilience in AMC and Security is a leading indicator to investment plans working, this may be a more optimistic message than the simple headlines.

The outlook comments broadly mirror the tone of the pre-close statement and refrain from numerical guidance. Whereas previously Micro stated investors should be “prepared for a level of disruption to our new sales activity and timing pressure on renewals”, the statement today more clearly notes that “our current assumption is macro-economic conditions are unlikely to improve in the second half of the financial year. As a minimum, we continue to believe It appropriate to be prepared for further disruption to our new sales activity and timing pressure on renewals”.

Micro Focus started the year expecting revenues to decline 6 to 8%. If a 2% COVID-related disruption persists all year, it would imply a revised outlook (not specified by management) of -8% to -10%. This compares to existing FY20 CSe at -9.1%.

Stifel’s still keen though:

We like the strong cash generation with US$560m operating cash and cash at US$808m. As a negative, license sales were US$267m, short of our US$320.8m expectation – that and an impairment should give succour to the bears. Our investment view on Micro Focus is that while it wins the valuation war (EV/EBITDA of c.6x), now it needs customers to extend maintenance contracts (H1 Maintenance was 66.5% of revenue), to ensure it can survive and thrive through these difficult end-markets – that was the success of H1. To be sure, Micro Focus has lots to do, but it is a core supplier to enterprises focusing on the heaving lifting of digital transformation through Enterprise DevOps, Hybrid IT Management, Predictive Analytics and Security, Risk & Governance – these should be core spending areas in Stage 3 of the coronavirus crisis. Generally, not one for widows or orphans, but the data points remind us that there is a beating pulse at the company. We are also reminded to Buy when others are cautious. Our target price is 1,356p.

Have the plimsoll manufacturers held off releasing special editions until after lockdown, like the film studios delayed their big releases? The specialist blogs don’t seem to have wanted for content over the past few months, suggesting a lot of deadstock in storerooms, but maybe Air Jordan 5 “Alternate Grape” is the trainer equivalent of Scoob! rather than Tenet.

Anyway. JD Sports is down a bit even after full-year results (for the year ended January!) come in slightly better than forecast. There’s no real guidance on current trading though, management saying it’s too early for that kind of thing. Fine, but bear in mind here that it’s JD’s first market update in six months. Here’s RBC with the summary, most of which it’s had to improvise:

FY PBT before exceptionals was £439mn post IFRS 16, 2% ahead of our £430mn expectation. FY net funds were better than we expected at £400mn vs our £300mn estimate. Trading in the US in FY20 was stronger than we expected but Outdoor was weaker.

We estimate trading since stores have reopened has been a mixed bag, with pressure on shopping mall stores, high street stores ok and retail park/out of town stores performing well. Footfall has been impacted by social distancing but conversion rates are better.

In the UK, we estimate JD would have seen strong pent-up demand but this will start to flatten out now. Northern Europe is likely to have improved after a slow start, whereas the less online-penetrated southern Europe would have seen strong pent-up demand before softening recently. In the US, Finish Line is likely to have benefited from government stimulus but demand is now weakening in areas with high COVID infection rates. We estimate JD will be overstocked at the HY but will aim for a normalized inventory by year end, and JD’s net cash position remains robust, not far off where it was at the year end.

JD is seeing big structural changes in the market so is in the process of negotiating rents down with an average length of 3 years. Online margins are good so far, given stronger full-price sales, but we think JD is at risk of seeing op deleverage on the stores side of the business. Overall, we see risks to consensus PBT for this year as small to the downside, for next year there’s a wide range. Overall, we don’t envisage huge changes to consensus after today.

Halfords has results for the year ended March and does a much better job of presenting what’s happening. This is true even though Halfords has withdrawn full-year 2021 guidance. Instead, investors get a range of outcomes and a reminder that bike stuff is lower margin than car stuff. Like for like sales declines have moderated and online’s doing well, though that’s possibly a consequence of the stores running out of bikes. Shares are down mostly because they’ve gone up a lot. Here’s Liberum to summarise the guidance.

 Scenario 1: Q1 LFLs -6.5%, rest of year -10.5%. It is estimated that this would result in adj. PBT of £(10)m to £0m and net debt of £55m-65m.

 Scenario 2: Q1 LFLs -6.5%, rest of year -7.5%. It is estimated that this would result in adj. PBT of £0m to £10m and net debt of £45m-55m.

 Scenario 3: Q1 LFLs -6.5%, rest of year -4.5%. It is estimated that this would result in adj. PBT of £10m to £20m and net debt of £35m-45m.

Management notes that in each of these scenarios it has forecast a significant reduction in variable and discretionary costs, such that the profit differential between the scenarios is driven principally by the sales outturn. In addition to the cost reductions assumed, it is working on a more strategic reduction of our cost base to lay a strong foundation for FY22. Importantly it notes that in all these scenarios the group significant liquidity available throughout the financial year.

Liberum view: This is clearly another very encouraging update, demonstrating the resilience of Halfords’ model and its appeal to consumers. The cycling boom has been very helpful, both at the end of FY20 and in recent months, with Halfords’ being well placed to benefit through its leading market shares. We expect this continue, supported by recent government plans to invest into the UK cycling infrastructure. We also think the market has probably been cautious on the performance of motoring and particularly autocentres. With guidance for the public to still avoid public transport where possible, private vehicles (alongside cycling and walking) has remained one of few travel options. The reintroduction of compulsory MOTs from August will provide further sales boost. We also believe Halfords focus on older cars should provide protection in the event of any prolonged macro downturn, which could likely impact new car sales.

And Investec:

The early benefits from the refocused strategy can be seen in FY20 results. A better-than-expected Q1 performance should pleasantly surprise as well as a stronger liquidity position from good trading and cash conversion. We cut FY21E PBT to reflect higher opex costs from a mix swing to Cycling and PPE, but a stronger emphasis on cost reduction together with the planned closure of up to 10% of physical portfolio underpins FY22E in our view. We believe valuation does not reflect strong cash generation and recovery potential. BUY.

... FY21E PBT cut by 30% with higher sales from the good start to the year not enough to offset lower gross margin from better cycling performance and higher opex costs associate with Cycling and PPE. However, we raise FY22E PBT by 2% on lower costs. Our TP, based on a low teens CY21E PE rises to 195p (prev 180p).

Halfords looks well positioned to deliver its differentiated, service-led strategy post COVID. It is yet to benefit from its recent acquisitions, the new integrated website, the disposal of Cycle Republic, and savings from a lump of lease renewals. These benefits and the more ‘needs’ driven nature of its offer, should ensure Halfords’ profitability recovers relatively quickly post lockdown. This, and cash generation, are not reflected in valuation (CY21E PE 11.5x)

Across the channel, Bayer continues to benefit lawyers much more than shareholders. The glyphosate/Roundup settlement Bayer appeared to have agreed last month isn’t a done deal. Court documents released overnight from the US District court for the Northern District of California reveal that the Judge Chhabria is sceptical about the propriety and fairness of the proposed settlement’s treatment of future claims and is tentatively inclined to deny the motion. Here’s Barclays:

Since settlement announcement last week, Bayer’s performance has been surprisingly lackluster, a phenomenon we attribute in part to a misperception that the agreement announced lacked comprehensiveness and finality, e.g. partly related to upfront commentary that the main $8.8-9.6bn settlement only covered 75% of plaintiffs and a lack of clarity as to whether the tail would be fully captured by the separate, proposed $1.25bn “class of future plaintiffs” settlement. In contrast, we had viewed the settlement announcement as remarkably conclusive, noting in particular that the requirement for future potential plaintiffs to proactively opt out of the future class action within 150 days or be bound by its terms was remarkably favourable. As we also noted last week however, the latter proposal was also subject to court approval and based on the preliminary evidence filed yesterday (docket available on request), that may not be freely forthcoming, with the court citing that it “is skeptical of the propriety and fairness of the proposed settlement, and is tentatively inclined to deny the motion” ahead of a 24th July hearing. A reading of the reasons for being skeptical suggests that Bayer will face deep challenges in getting the court to approve a satisfactory settlement to address the tail; whilst we note that likely represents a minority of value associated with the litigation, it is nonetheless also important in bringing closure to the process and as such any failure is likely to prove an ongoing overhang.

And UBS with the outliner:

As a reminder, Bayer’s Roundup settlement comes in two parts with a settlement covering the 125,000 cases (at the moment 75%) filed and an agreement that creates a class of potential future claimants who have used Roundup prior to 24 June, have not filed a case, and have or will develop non-Hodgkin’s lymphoma. The agreement would establish a scientific panel that would bindingly decide whether there is causality and if so at what level of exposure. Chhabria is not tasked with signing off the settlement, he is asked to rule on the class agreement including the panel. A hearing has been set for 24 July and in a four-page document the judge has outlined his current concerns. Judge Chhabria’s concerns are a little confusing to us given he appointed the mediator, Mr Feinberg, who orchestrated the settlement and agreement – and the agreement and settlement has been accepted by the multi-district litigation firms in the settlement.

The judge’s concerns Judge Chhabria is outlining the following concerns: (a) Is it lawful to move the question of causality from judges and juries to scientists? (b) How does the class benefit compared to a normal trial process? (c) What about evidence that comes to light after the panel ruled? (d) Would the potential class members have enough time and information to decide whether to opt out? Our initial assessment of these concerns are as follows: (d) seems to be a question of logistics; (c) seems potentially immaterial given our understanding that people who use Roundup after 24 June are not covered by any settlement or agreement; therefore the crux, in our view, is (a) and (b). We suspect the hearing on 24 July will mostly focus on these two points, maybe surprisingly so as Judge Chhabria was the judge who advocated scientific discussion in the case he oversaw where he enforced a focus on causality first.

One without the other?

Whilst the settlement and the agreement for a future class are in theory independent, there is an argument that there isn’t much point settling without limiting future exposure. What this would mean for all parties is not clear. For Bayer, it could bring back overhang; for plaintiffs, possibly a long time until cases could go to court.

Among the morning’s notable sellside there’s a Rightmove downgrade to “sell” from Investec, as part of an internet portal sector review. Page one looks like this:

The online platform space has been a key area of interest in Media in recent years, and will remain so given the potential growth and cash generation they offer. That said, not all are created equal, and drawing parallels between them can help identify the key similarities and differences that will drive relative performance within the group, which could expand given GoCo’s AutoSave product. We reiterate our Buy ratings on Auto Trader and OnTheBeach, and move to Sell (from Hold) on Rightmove.

Emerging robustly from the crisis: Although it took a placing to get there in one case, the existing platforms of AUTO, RMV & OTB will emerge from the crisis with a net cash position, as will MONY as it attempts to drive penetration of its new auto-compare product. In contrast, GoCo’s leverage is higher but has not thus far limited the forecast beating growth of its AutoSave product. From a customer perspective, cash flow dynamics should allow AUTO to exit furlough less painfully than RMV, the next price increase event is helpfully further away for AUTO than RMV and its pricing strategy may facilitate better customer relationships over the long-term. OTB’s customer relationships should also have been strengthened through the crisis by the company paying and refunding promptly in both directions (unlike peers).

Growing the revenue pool: All the platforms have scope to varying degrees to grow their addressable revenue pools – but particularly with OTB expanding into long haul / European markets and GoCo launching AutoSave into new verticals. We see the key difference however being between AUTO & RMV – AUTO already fundamentally helps customers with both managing sales and costs, and has structurally greater scope to launch products to save its customers money as transactions shift online, a pathway that is more limited for RMV.

Relative position of the market leaders... The attractive characteristics of platforms and their markets naturally attract competition, but it is the ability and cost of addressing this that differentiates within the group. All five companies benefit from the ability to offer consumers a full range of providers in a market (unlike Just Eat Takeaway, which allowed Deliveroo to gain a foothold). Auto Trader (>90% of total) and Rightmove both benefit from significant free organic traffic given their brands and network effects, limiting the ability of new entrants to successfully threaten their market leadership (GumTree & ZPG are respectively 9x / 5x smaller than them in terms of share of audience time).

...and the emerging platforms: OTB, GOCO & MONY are in varying stages of transition. GOCO/MONY’s autosave products may not have the same ‘winner takes all’ opportunity from becoming the market leader, or the brand strength at this stage, but both have first mover advantage as the cost savings to the consumer should ensure subscriber retention once acquired (reducing marketing intensity to drive up profitability). The balance sheet issues of OTB’s competitors are helping it drive up spontaneous brand awareness and organic search traffic (nearing 90% during lockdown, from <60% in 2017) – market share gains can have revenue AND cost benefits.

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