Small Cap Value Report (10 Oct 2016) - AMO, RBG, YOU, VCP, RIC, PTD, WTM

10th Oct '16 by Paul Scott

39 comments 24062 reads

Good afternoon!

I'm running late today, so please update this report later afternoon, as I'll be adding sections throughout the afternoon. I'm currently imprisoned for the day in my London abode, as our affable but incompetent handyman is currently making his third attempt of the year at painting our doorstep. So due to wet paint, I can't leave the house, unless I miraculously find a pair of those spikey shoes at the back of a cupboard. Or perfect the art of levitation.

To keep you busy until today's report is finished, please make a start on Friday's report (which I wrote yesterday evening), which is here. I looked more closely at exchange rates, and I fear for the impact on retailers in particular in 2017.

Interestingly, I've also seen some recent data/commentary suggesting that consumers are less interested in buying stuff, with wardrobes bursting at the seams with clothing & shoes, after years of heavy buying. Consumers appear to be focusing more on experiences, such as nights out. So I think bars & restaurants are looking a more interesting area to focus on, although care is needed as some of the older bar chains have horribly structured, and expensive debt (e.g. Punch Taverns (LON:PUB) and Enterprise Inns (LON:ETI) ) and are killing many of their tenants with unbearably high rents - not a sustainable model at all.

However, I do very much like the format, and figures at Revolution Bars (LON:RBG) (in which I hold a long position) - which is completely ungeared, and is generating tons of cashflow to fund its future roll out. The price looks far too low to me (fwd PER of 9, with no debt), for a self-funding retail roll-out. This one appears to have simply been overlooked, as a relatively recent IPO which many private investors may not be aware of yet. So I think that's a really good one to check out. The recent results presentation slides are very interesting, and are here.

Note that 60% of the customers are female, with a premium, high margin drinks (cocktails) and food offering. Also, with new sites costing around £1m to fit out, this puts them well above the run of the mill bar offering. Rental deals seem good value, as…

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Richard Goodwin

10th Oct '16

I've never short sold but I think that the key is to know that there is a reason for the shares to go down within a reasonable timescale rather than that they are generally over valued. This is because (due to dividends) it pays you to own the shares but it costs you each day you bet against them.
It may be better to keep an eye on it and wait for the cracks to start appearing before piling in. £YOU

JohnEustace

Re Revolution Bars (LON:RBG), I appreciate they are showing no debt but how do you treat the leasehold commitments? All of their bars are third party leases so they have significant outgoings in that respect that are not dissimilar to servicing interest on borrowings.

Wol

What a shame about the Brighton Sharesoc meeting. I couldn't come tomorrow because I am in Austria this week - a bit far to travel. I am very keen to come next time. It would be great if we can get enough participants to make it a regular event for those of us who live in Sussex. Just saying this now in the hope that Sharesoc won't get disheartened and drop the idea entirely.

Aislabie

Thank you for your always interesting analyses. I was surprised by your enthusiasm for VCP's plan to reward distributors with stock.
My experience in Japan was that cross holdings of shares across businesses led, over time, to an unhealthy and unrealistic market in the shares. At the level currently envisaged by VCP this is not likely to be a problem, but as a concept I am far from enamoured by it.

carmensfella

YOU.....I see the directors nicely load up on LTIP nil cost shares whilst selling in the market at regular intervals....bad sign http://www.investegate.co.uk/yougov-plc--you-/rns/long-term-incentive-plan/201512141000019332I/ The chart looks incredibly strong but I have taken an initial short position and may increase it once some downward momentum commences.

jonesj

The Sharesoc meetings sound like a great concept, but if based in Brighton, the catchment area will most probably be semi-circular, since not many people travel from south of the town.

Now if I were running the portfolio full time, of course it would be very pleasant to take a train down, stay over night then travel back the next day, or even later.
Since I have a day job to attend to, it's not quite as easy. Must work harder at growing my portfolio.

Thanks for another excellent report today & thank you for putting me on to BooHoo. Purchased @ £0.253p, then top sliced @ £1.02 & £1.17.

MichaelFBS

Richoux (LON:RIC) in the early 80's I worked in Harrods and used to pop into Richoux (LON:RIC) for coffee and a fag quite frequently. From memory the cakes and coffee was always great but the staff always rude!:-). But I have not tried them since then. But that memory stopped me looking at the stock, which is of course silly but there we go.

Anyway enough rambling. What makes me wary is saturation. I can only go by one of my local towns Great Malvern, which is I think relatively affluent (Richoux target market) and the number of cafes is extraordinary. There are:

- Mac and Jac's small private cafe/restaurant
- cafe Nero
- Costa
- Waitrose cafe
- bread shop with cafe
- another private cafe
- Henrys private cafe
- Ask

Those are the ones that I can recall from memory.

My point is that the space seems so crowded and personally I would rather go to a small non chain cafe and in my case Mac and Jacks has the best coffee this side of Florence! There's one in Worcester as well!

Paul Scott

Hi John,

Well, as with any retailer, the rents payable are just an operating cost.
Providing each site is profitable, then the lease liabilities are not a problem at all.

Issues arise when sites become loss-making, e.g. if there's an unfavourable rent review. That can happen. Almost all retailers tend to have a tail of problem sites, which they dispose of when the lease expires, or assign the lease to someone else, wherever possible.

The admission document for RBG says that the bulk of its profits come from about half its sites. That's probably true of most retailers.

Some people like to regard shop leases as being like a form of debt. Personally, I don't. The way I always viewed our shops, in my FD days, was that an individual shop was an asset if it traded profitably, or a liability if it traded at a loss. That's the most logical & practical way to see things.

It's also exactly what happens when you want to exit from a shop lease - you can sell the lease as an asset to another retailer (if the landlord clears the lease assignment, based on credit scoring the proposed new tenant), if it's a low rented unit that makes a profit.

The reverse is then true for loss-making, over-rented sites - you have to pay someone to take the lease off your hands, by financing a rent free period for the new tenant, or giving them a cash bung - a reverse premium.

In my view accounting standards should mirror this commercial reality, rather than the proposed new rules to bring in a gigantic notional asset, offset by a gigantic notional debt. That seems bonkers to me.

Regards, Paul.

Paul
The thing that worries me about RBG is the large difference between reported and normalised EPS (on the Stockopedia stock report). As usual, Normalised EPS is higher than reported. And reported EPS for 2016 is the same as reported EPS for 2012 at 11.5p. Are the normalised EPS figures excluding bar opening costs? Which would make no sense as these happen every year during a roll-out, so they are hardly exceptional. Otherwise the business does sound interesting

Rusty2

Anyone know what is happening at Bioventix (LON:BVXP), shares are up 15% today and there were 3 Price Monitoring Extensions?

Otemple1

Tipped in penny share letter according to posting on advfn

Ramridge

Hi Paul - Re YouGov (LON:YOU) . I think you have given us a master class in how to analyse company accounts for signs of creative accounting. You have shown clearly how this company has seemingly created value out of thin air.

Just to add something I do on a regular basis these days when looking at accounts in detail. I home in very quickly on the Cash Flow statements. In my opinion there is little opportunity for companies to get up to trickery here.
Looking at YOU's Operating Cash Flow it shows a net OCF of £11.8m which is inflated by the amortisation of intangibles of £5,6m. But then when calculating Free Cash Flow, you need to subtract the purchase of ppe and purchase of intangible assets shown just underneath, in the Investing Cash Flow, totalling £6.1m. So FCF becomes £5.7m . That is the true cash generated by the business. It is more than the statutory net profit of £3.6m , but far less than the ridiculous "adjusted" net profit of £9.1m on which the adjusted earnings per share are calculated.

OK I see thanks.

Hi Ramridge,

Yes, good points on YouGov (LON:YOU) .

However, bear in mind that the cashflow statement this year is assisted by favourable working capital movements. So if you normalise that, then the cashflow is a good bit less than you mention.

It's a crazily over-valued share, and I'm really troubled that investors don't seem to question the absurd "adjusted" accounting measures.

Regards, Paul.

Hi Julianh,

I think most of the adjustments to Revolution Bars (LON:RBG) EPS is down to exceptionals, as follows;

I've highlighted the big items. So the IPO costs in FY2015 are understandable.

Turning to FY2016, I'm surprised that the professional fees for the apparently aborted acquisition of 4 bars in Edinburgh were over £1m. That sounds remarkably high.

The other adjusting items seem to be non-recurring opening costs.

Overall, I don't see anything untoward of any significance in the above.

Regards, Paul.

Boros10

11th Oct '16

Paul, this is an excellent piece of analysis on Yougov's approach to increasing its adjusted profits by in part adding back amortisation on intangibles. Part of the problem is that acquisitive companies are required by accounting standards to analyse the goodwill paid for a business and allocate part of it to specific intangibles (e.g. customer relationships, brands, databases). I think it is normally ok to add back to profits the amortisation on these "goodwill like" intangibles. Some of Yougov's amortisation is of this kind. However, amortisation of its internally generated intangibles should never be added back to adjusted profits. This is a real cost of doing business and results in a cash outflow from the business.

The problem comes where a company like Yougov acquires a business which has been capitalising its own internally developed intangibles. Now the acquirer has an opportunity to present the amortisation of these previously capitalised costs as amortisation arising on an acquisition and so add them back to the adjusted profit. Shareholders get mislead as to the real costs of doing business.

I think the only way for investors to deal with this problem is to look at the FCF as Ramridge suggests in his excellent post. This approach still masks the fact that Yougov spent over £5m on internally generated intangibles in FY16 compared to an amortisation charge on internally generated intangible of only £1.8m.

Another clue in assessing the underlying quality of the business is Yougov's very low cash return on total assets. FCF was around £5.7m in FY16 on total assets of around £107m, a return of just 5.3%.

Thanks Paul
That is very clear. Your example is a great encouragement. I will try to do a bit more digging myself in future. And thanks as always for your blog. I never buy or sell a share without first checking to see what you have written on the subject.
Julian

sharw

There is a parallel between events at Richoux (LON:RIC) and Restaurant (LON:RTN) - on 12th August the latter announced that it had replaced the CEO. On the day the sp rose from 376,8p to 417,7p. At the moment it is 363p, up12 from last night's close. However good a new CEO there is always some kitchen-sinking to be done. So if you didn't manage to pick up shares in Richoux (LON:RIC) yesterday there could well be another opportunity.

Excellent points, thanks Leon!

P.

LittonOwl

28th Nov '16

Just stumbled on this thread this morning and agree with others, a great piece by Paul on YouGov.

What surprises me somewhat is the fact that despite all these accounting issues highlighted by Paul, Stockopedia have this on a ranking of 93 in terms of 'quality' and an overall stockrank of 67!

I guess it highlights the risk of relying solely on quantitative data, without applying some qualitative research to the figures...

Small Cap Value Report (10 Oct 2016) - AMO, RBG, YOU, VCP, RIC, PTD, WTM

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Paul Scott

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