Small Cap Value Report (16 Apr 2014) - ZZZ, LRM, RSTR

16th Apr '14 by Paul Scott

4 comments 13847 reads

Good morning!

Snoozebox Holdings (LON:ZZZ)

This is an interesting company. If you cast your mind back to 2012, Panmure Gordon did the IPO for this innovative company. I remember reading the admission document, and being intrigued by the concept - of converting standard shipping containers into portable hotel rooms, which could be used for events (e.g. Festivals, sporting events, etc), as well as semi-permanent overspill accommodation wherever needed.

I also recall reading that the original CEO was being sued by the Administrator of a company that he had previously been a Director of, and thinking to myself that that rarely happens, and is usually a very bad sign indeed. So with that in the back of my mind, once things started to go wrong, I exited quickly, and avoided the big fall in price once it became apparent that the original business plan just wasn't working.

It's been a big can of worms since, with original management leaving under a cloud, allegations of impropriety again swirling around the (now deceased) former CEO, and multiple fundraisings. So it all sounds pretty grim. However, as investors we should note the past, but mainly look to the future, so when I recently spoke to new management at Snoozebox I was impressed with how they have completely re-worked the business. So I took part in the latest Placing at 10p, which is announced this morning.

It hasn't gone down too well so far, with the share price dipping below the Placing price this morning. That's probably because the 2013 results, also announced this morning, are attrocious. However, as we all know investing is all about looking forwards. I've drilled into the business plan, and the Version 2 Snoozebox units, which are being ordered using the Placing proceeds, are a whole different proposition. They are a radically better business concept - instead of taking an army of people & equipment 3 days to erect, and another 3 days to dismantle (as did the Version 1), a V2 Snoozebox portable hotel can now be set up in one day, at low cost.

Also the demand has been very strong - see the trading statement from 20 Feb 2014 which generated the interest to enable this Placing to succeed. There are a lot of positives in there, regarding much higher selling…

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snickers

16th Apr '14

Paul. You must have looked hard at the figures for Snoozebox, so can you comment on mine:

ZZZ used £18m to create 578 rooms => £31k each. and 578*360 = 208,000 possible nights.
6.7m revenue last year / 578 rooms = £11k per room.
If at £60 a night (the rate stated for several events), 6.7m revenue = 110,000 nights rented out. so max revenue would be 13m. :-(
Or £11k revenue per room / £60 = 183 days occupation: quite full.
But then it says only 32,000 nights sold: 6.7m/32k = £210 a night. surely too much.. since the event organizer has a markup on top of this? So is a lot of revenue from food and drink?
On the website it says the event organiser sets their own room rate, while zzz get a flat fee. You can buy 5 nights for 2 at glasto for £2000: but 1 night at a car rally = £75, which seems to be per room not per person, with breakfast included. (presumably a night in some non-sexy overflow situation costs even less.)
& then 32k nights is 15% of occupation over the year. Suppose 60% is achievable, revenue could be 25m... :-o
So optimistically say 25% profit on £80, and 150 nights use a year = £3k, so room breaks even in 10 years. :-(
Ratio of (admin+CoS) to revenue was 205% in 2012, 152% in 2013, so some way to go... Costs include hiring trucks and cranes? Key is therefore longer installations, but that means non-event locations and lower pricing. :-(
Have they dug themselves in too big a hole with the existing units? What's to stop someone else copying the new design? How robust and easy to maintain were the rooms?
And most of all how do you reconcile the 6.7m/32k = £210 a night revenue, with the cost of reserving a room?

Paul Scott

Hi Snickers,

I don't tend to do analysis like that, as usually some or all of the variables are sufficiently wrong to make the end results pretty meaningless. Or at least that's what has happened in the past when I've tried to do that type of analysis!

The way I look at it, is that the main impediment to the previous business model working, was that they took way too long (up to a week!) to erect, then several days to dismantle, which involved using an army of at first employees, then contractors. A lot of this was because of essentially design faults in the v1s, which made them totally unsuitable for short-term installations. They do however work well with semi-permanent installations, and from 2015 onwards should make a contribution on that basis, from contracts already in place or in the pipeline. So the v1s are OK, they will generate positive cashflow in future.

The opportunity now is with the V2s. Demand is strong, as you can see from previous announcements. They just need a unit that can be quickly & cheaply set up & dismantled, which is what they have achieved with v2. The main cost is now just the haulage. It can be set up in just 1 day. That transforms the business model. Installation costs are now down by 60%+, so suddenly it starts to make money from short term events, and they can do far more events with the v2 units, since they are so quick to set up & dismantle.

So combining strong demand at good prices from events, with the now drastically more efficient v2 units, should produce a good profit. I've no idea how much. Once that is proven, it becomes a roll-out, probably debt funded, which is where it could become very exciting.

If they can't make the v2 units work as a viable business, then I think it's game over. But based on the discussion I had with management, and the figures we discussed, I reckon the v2 unit will work. Hence why I put some money into the Placing. Not a big amount I hasten to add.

Cheers, Paul.

cig

Not sure I get the benefits of the container room concept. That's a lot of empty space to lug around from site to site. The first page of google results yields this competitor which seems superior to me (from a cursory look):

http://www.flexotels.com/en/about/factsheet/
http://www.flexotels.com/en/fotos.php?album=17

The rooms are flat packed and unfolded on site, so much less empty space to carry around and they can use a truck's crane while you surely need bigger kit to move entire containers. May be a bit longer to set up, but then most of the (premium) events look like weekend things so may not be booked back to back that often. No en-suite but for for festival etc type events, a share bathroom block seems fine and mobile sanitary blocks are a commodity product they can rent from existing suppliers on demand.

Paul, have they shown what the V2 looks like? The website only seems to show the V1 design.

jonesj

Google tells me trucks cost about £1.50 per mile plus wages.
Lets assume an average 100 miles between events, 2 containers per truck 1 way, empty return leg. Therefore over £150 in just transport costs.

Small Cap Value Report (16 Apr 2014) - ZZZ, LRM, RSTR

Snoozebox Holdings (LON:ZZZ)

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Paul Scott

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