The latest Investing Matters Podcast episode featuring financial educator and author Jared Dillian has been released. Listen here.
Equity raise all but confirmed here. From the half year report;
Furthermore, the Group must use best efforts to raise equity if leverage is above 3.0x before the later of January 2021 or 3 months before the redemption of the final commercial paper issuance. The Board expects to take a prudent approach, ensuring that the Group has sufficient liquidity available, including in the event of further downturns.”
£5m EBITDA, £90m net debt and confirmation in the update that funding options are being considered.
With a further 2 months of lockdown, implied messaging of an increase in net debt to come, it’s hard to imagine a dilutive placing will be favourable to equity holders.
Wait for the dust to settle and reassess once it becomes clear. It’s a complete gamble at this point.
Long term I think Card Factory will be a buy, but here’s the elephant in the room, buried deep within the half year report which I don’t think has been widely acknowledged and certainly wasn’t highlighted in the results webinar.
“As previously announced, the Group entered into a revised agreement with its banking partners during the period. This enables it to utilise not only the full Revolving Credit Facility (“RCF”) of £200m but, also secured funding from the Bank of England Covid Corporate Financing Facility (“CCFF”). As part of this agreement, the Group’s previous covenant requirements have lapsed and have been replaced by three new covenant tests relating to total net debt; cash burn; and last twelve months EBITDA. These tests are applied monthly until June 2021, after which it is envisaged that the business will have a phased return back to its pre-Covid six-monthly covenant tests of EBITDA to net debt and interest cover.”
“ Until the business returns to those pre-Covid covenant tests, while adjusted leverage is less than 2.0x (i.e. pre- IFRS 16) and it has no outstanding commercial papers issued under the CCFF, there will be a prohibition of any payment to shareholders by way of dividend or share buy-back, with the same tests applying to acquisitions. Furthermore, the Group must use best efforts to raise equity if leverage is above 3.0x before the later of January 2021 or 3 months before the redemption of the final commercial paper issuance. The Board expects to take a prudent approach, ensuring that the Group has sufficient liquidity available, including in the event of further downturns.”
Back in September an equity raise looked touch and go if reopening level of trade held up, but LD 2 and tier system means an equity raise looks likely, hence the share price. If they do raise equity, I wouldn’t expect it to be favourable to current shareholders given the current state of the high street. All IMHO.
Exactly, PRSM rarely mentioned in these articles I find. Hopefully a strong catalyst for the share price in 2021. RPA is undoubtedly one of those technologies that isn’t widely understood amongst the retail masses so a high profile US IPO can only be good thing. The disparity on valuations with AA and UI is incredible
Fredr, you’re right this ETF does in fact track the performance of the bloomberg index well, but the bloomberg index “bakes in” the impact of negative roll yield so the index in itself isn’t trackIng the wti spot price 1:1.
It’s clearly a very unique set of circumstances at the moment given the “Super Contango” but the best way of understanding It for those that are new to this concept is:
If i invested 1000 USD in the index today at a spot price of 20 USD then I’m gaining exposure to 50 barrels. However the ETF isn’t actually going to take delivery of 50 barrels and keep them in a vault for me, so they take my money and generally buy next months futures contract. This way they actually have an cashflow stream to pay out any gains. The issue is that if the futures contract expiring were 10 USD (for ease of Maths) and the next months was 20 USD then the roll loses 10USD per barrel, so my 50 barrels exposure turns into 25 immediately whilst the spot price is still 20USD i.e. 50% loss. Clearly this is an extreme scenario and the expectation would be that the ETF fund manager would do as best as they could to mitigate this risk but you get the idea, all of a sudden my break even is 40USD per barrel.
Unfortunately it looks like this trend will continue (just look at the delta between the June contract and July contract at the minute) which is due to the market pricing in a relatively quick recovery in demand and seeing this as a somewhat short term storage issue driving down short term prices.
The best time to invest to reduce the impact of a super contango will be when the futures prices settle into a more normal pattern (i.e. slightly more expensive the further out you go to take account of the incremental storage costs over a longer hold period). Bizarrely this point may come at a higher price to the current spot price - if it’s lower than current spot prices that will most likely come at a point where the market realises that this isn’t going to be a quick demand recovery but a long deep recession. For me that’s the time to buy, but I don’t see that scenario until maybe August once the dust has settled and real economic data is out.
I’m not saying it’s impossible to make money at the minute in here, but its a gamble (needs big news rather than fundamentals) and people need to understand the risks they could be sleepwalking into..
I've been looking at the best way to go long on oil and like many here was about to pile in here until I read about negative roll yield. You could be blindly walking into a 30%+ loss overnight here once futures contract roll over which has put me off for now - this isn't as simple as riding the oil price back up to $50.
This is from ETF.com;
"Pitfalls Of Oil ETFs
It’s fair to say that at some point in the next few years, oil prices will be back over $40 at least—double from here. Investors may look at that and see a juicy opportunity to double their money, but it’s not that easy.
ETFs are some of the best tools to get exposure to oil and the broader energy space, but even with them, there are many pitfalls that investors face.
For one, it’s not possible to get one-for-one exposure to spot oil prices. Even if you had access to storage tanks and could hold oil there for a couple of years, it would be exceedingly expensive in the current environment, when capacity is so scarce.
In an ETF wrapper, the closest thing to that are funds that hold oil futures, such as the United States Oil Fund LP (USO) , but they face a similar dilemma. Futures contracts must be rolled from month to month, leading to substantial roll costs. Those roll costs are even higher than normal today, a reflection of the premium cost of storing physical barrels.
For example, as of this writing (16 April2020), crude oil for June delivery was trading at a whopping 20% premium to crude oil for May delivery. Rolling from the May to the June contract would net you 20% fewer contracts in just one month.
That’s why an investor cannot simply buy USO today with oil at $20 and expect to generate a return of 100% if and when oil prices go back to $40. Actual returns will be dramatically less than that.
Moreover, if oil prices continue to slide in the short term, USO could tumble much further from here before it rebounds, leading to steep losses that will be difficult or nearly impossible to make up."
Be careful
In my opinion this has been dragged down by (1) supply of shares > demand as cash is moved from equities into less risky asset classes - always bound to happen on a Brexit result (2) dragged down by the risks now present for major UK airlines. To my mind the fundamentals of WIZZ haven't changed though because: - Only a very small % of flights to / from the UK so we should be sheltered from any economic headwinds from Brexit affecting UK demand for flights - The major risk affecting UK airlines post Brexit is being kicked out of the European single market which again won't massively impact WIZZ. Remember WIZZ is only listed in the UK, but for all intents and purposes is a Hungarian company with exposure primarily to central and eastern Europe. This point has been widely misreported in the media, I read an article from Reuters earlier which referred to shares in airlines (including WIZZ) 'heavily exposed to the UK' being hit hard - simply not true in the case of WIZZ but misinformation in the market only creates opportunities for those who understand the business well! The only questions is picking the right time to buy what I consider to be the least exposed stock in a sector that is perceived as being risky at present - "Be greedy when others are fearful" I think a wise man once said! In terms of exchange rate movement, the majority of revenue is earned in € and we're valued on a £sterling basis - so our PE ratio will look much more favourable than say 12 months ago. €/$ exchange rate looks to have held up well too thus far although that could change if the EU descends into meltdown. Depends what your holding period is likely to be but I suspect that 4 years down the line this mini collapse will look like a bump in the road.