Small Cap Value Report (Fri 19 May 2017 - Part 1) - RBG, G4M

19th May '17 by Paul Scott

114 comments 35784 reads

I would say good morning, but it's been a lousy morning so far - with a profit warning from one of my largest long positions - Revolution Bars (LON:RBG) . So I'll focus on that mainly.

Graham's doing a separate report today - which is taking shape here.

However, I'I need to get my head around what's gone wrong at RBG, and report to you - plus hear your views too of course, in the comments section below.

Revolution Bars (LON:RBG)

Share price: 139.75p (down 31.5% today)
No. shares: 50.0m
Market cap: £69.9m

(at the time of writing, I hold a long position in this share)

Trading update (profit warning) - covering the year (to date) ending 1 Jul 2017.

This is an expanding operator of town/city centre bars with a premium drinks offering (cocktail-driven).

The share price has been clobbered this morning by a profit warning. Let's dig into what's gone wrong.

Revenues - this sounds alright;

The underlying sales performance of the business has remained positive in the second half with like for like sales continuing to grow by 1.7% for the year to date ...

The company last reported LFL sales at 1.7% for the 8 weeks to 25 Feb 2017

Prior to that, it reported LFL sales for H1 at 2.0%

Therefore, this implies that LFL sales for the most recent 11 weeks to 13 May 2017 must have been lower than 1.7%, in order to drag the average at the H1 stage down from 2.0% to 1.7%.

In order to estimate the most recent LFL sales performance, I've knocked up a simple spreadsheet (NB. this ignores seasonality):

This is all about LFL sales. So in column D I've plugged in the reported LFL sales - the beige section is the 2.0% LFL sales increase for H1, as reported on 28 Feb 2017.

The yellow section in column D is the 1.7% LFL sales also reported on 28 Feb 2017.

The blue section is my estimate, by trial and error, to arrive at a cumulative total of 1.7% LFL for the year to date, as reported today. This is in cell H46 above.

So the key takeaway from…

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alpha2

22nd May '17

I have been reading this thread with great interest as I was a bit bearish a few months ago thinking that they may have a few ultra profitable units but their expansion plans were a tad unrealistic. I also suspected a long tail of iffy ones and a problem in finding sites of a suitable profile for further expansion.

I have asked an acquaintance who operates in this market what he makes of them and his quote was "I don't know them personally but they are superb operators and I think this is just a bump in the road". He also mentioned that they needed the right FD. He is a very discreet character so i presume he has heard something to confirm this view.

With this in mind I am going to open a position as the sell off does seem overdone.

Cisk

I think the real question, leaving aside the numbers, is whether there is a market for a high-end, national, cocktail bar venue?

Add into this mix that a) real wages are getting smaller (thanks to inflation headwinds), b) consumers tightening their belts and c) other costs increasing, to me it doesn't paint a rosy picture for RBG. And any such venues are notoriously fickle as the customers they attract quickly change their minds, e.g. has there ever been a considistently profitable chain of nightclubs?

Good luck to all holders - undoubtedly there's an opportunity to make money in stocks like these but personally I'm not convinced that they are a long term hold. I don't hold but have held companies like clapham house group - initially did well then it came crashing back to earth. Now, in the sector, I prefer someone like Fuller Smith & Turner (LON:FSTA), relatively low gearing, market leading products, excellent sites. Yes it will never offer explosive growth, it's unlikely to double in six months.

Just depends on your investing style. After a quarter decade of investing and, occasionally losing money on serious 'dogs', I now prefer the slow and steady approach, and only allocate a small % of my portfolio to highly speculative shares.

dscollard

took myself out in the opening liquidity: no legs in the brief relief rally, price action is still fairly bearish and bottom picking tends to be messy ( and best left to monkeys as one of my rules says). Reckon this is probably one for the long haul but this is not my area of expertise; I don't even do much "field" research in this sector these days so little experience either. Hospitality may be cruelly affected by Brexit given the multiple whammies of input costs, inflation, lack of immigrant workers and consumer confidence

Zoiberg

On the food issue; my son who is a chef had said they were improving their food offering so today I popped into my local (Brighton, Sussex) for lunch and enjoyed a penang chicken curry which was frankly delicious.

The venue is spacious with two large bars, a clubbing area downstairs and an equally spacious garden area out back and all of this in the bullseye of Brighton's night life area.

I briefly eavesdropped on what sounded like a training evaluation meeting.

So there's my six pennies worth. My only complaint was that I had inadvertently visited on a "half price Monday" and my lunch was too cheap!

kbkb

I am looking at this from the perspective of how busy are the bars.....are they becoming unpopular.....what is the potential downside.....and also taking on board the fact that the recent announcement does not reflect well on them.
Having asked around...and knowing the Cambridge bar....still busy.....not becoming unpopular....often aiming for sites with a student or young market....which is a self refreshing customer base. Potential downside seems to be therefore pretty limited...in light of the large fall.
So....for what it is worth I decided to buy in....and have set myself an objective of making 15% in the next 12 months....whether that be through a short term-predator......or a gradual recovery over that time.
Should the dividend remain as is....that would give a yield of roughly 3% I think...which is just a little bonus.

ExpectingValue

"have set myself an objective of making 15% in the next 12 months"

Why would you set yourself an objective over which you have no influence? It's a bit like me setting myself an objective of it being sunny tomorrow.

I phrased it badly....that is my selling price.....I never buy a share without having a price I will sell at....unless it is a long term hold.
If you think about it....none of us ever have any influence over shares we buy...so your comment is a little.....strange in some ways

JamesrWilson1989

Why only 15%? If I was entering at these levels I would want a bigger reward for the risk.

James....because I am not being greedy...and 15% for this share is just dandy.

I don't think a 15% gain from here is being greedy. If you have a stop loss of say, 20% on RBG then I'll be aiming for atleast a 60% gain.

As they say, stick with your winners and ditch the losers

PhilHofGrowYourDough

Interesting strategy ...

You seem to be running losers and cutting winners!

When deciding if I want to buy into a stock I first find a stop loss position which is usually less than 10%. Then I use point and figure charts to generate price targets. Then I discard any stocks that generate risk reward ratios of less than three. I too would be looking for at least 30% with a stop of 10%.

Each to their own!

I have different positions on different stocks. Still running AMO at over 100% profit.....TET 20% profit in five weeks.....happy to take 15% profit on RBG

I don't understand the arbitrary assignments of % either stop or profit: it makes much more sense to base your risk on units of ATR (average true range) - a measure of the volatility of the stock. That way you are grounding your assumptions in a bit of numeric analysis rather than gut feel or your personal risk appetite

Revolution Bars (LON:RBG) has just gone through a huge volatility event and will be prone to spikes in either direction: coupled wit that it has a relatively low float and trades less that 100K on usual days. ( I had trouble getting a quote and fill 5 minutes after open on high liquidity this am and it wasnt a big position (relatively)). Finally most fo that float are with big institutions who can move the price either way very rapidly given their relative volumes

For a swing position (days to weeks) a minimum of 3xATR is needed just to avoid getting whipsawed out of a position because of intrinsic volatility. 10% S/L at current price sets a stop at 12 points away from the entry. The 10 day ATR is 13 so a realistic minimum stop loss is 39 points or around 30%.

There are much more liquid and better behaved trading opportunities out there: trading reversals are hugely problematic and require enormous discipline and rigid risk management.
Revolution Bars (LON:RBG) could easily gap down or up on open missing any stops or targets

truegent

thats a bit rich coming from someone who calls themselves 'expecting value'. theres nothing wrong with setting price targets. and before you say it, yes i am a 'true gent' in real life ;)

I meant to add that you can still risk manage for the same "target " absolute monetary loss by modifying stake size to incorporate ATR based assumptions of volatility.. i.e. buy a smaller amount of stock that is scaled according to likely ATR based potential loss

23rd May '17

Dscollard... not sure who your comments are directed at but personally my stop is based on ichimoku support levels. That could mean that the stop is 12% or 5%. Whichever it is I'm looking for a price target of at least 3x the stop distance.

Indeed a small stop might mean I'm stopped out quickly but that will be because the price has broken a significant point of support plus I'm looking for breakouts and if the price has turned south I've probably got my timing wrong.

Best of luck
Phil

it was a general observation on using very tight stops in highly volatile situation. Ichimoku is essentially based on moving averages which are by definition lagging, it works well in strongly trending markets : in a scenario with a huge price dislocation such as Revolution Bars (LON:RBG) then even the fastest EMA will struggle to allow for a 40% drop in one day.
All systems are good until they are not and the physics of price action tend to prevail, I am more of a fan of price, volume and time as they are the only absolutes and are free from dogma

Expect but never deliver, maybe :)

steviej

I too use ATR, along with price channels. One thing I would add in relation to Revolution Bars (LON:RBG) is the spread, so me personally I would add 5% to my opening stop loss (say 10% + 5%) and then double it to set my absolute minimum for a short - term trade target (30%).

That equates to a c.160p target for Revolution Bars (LON:RBG) . I don't think it has much chance of that in any reasonable time scale, so wouldn't trade.

(just musing, I never trade shares with a spread over about 2%, usually less).

For the poster aiming for 15%, on an issue with a 5% spread that really is wasting your time, but each to their own.

Monty9

30th Jul '17

Forgive me a political tangent, that struck me reading your analysis of RBG. The apprentice levy will, as you indicate, incentivise well run businesses to do with less staff, which will tend to be the less experienced. A classic socialist policy own goal from the Tories. Hmmm. What they should better have done instead, is encourage businesses that actually hired apprentices in some way. That would be financed from reduced social security payments.

What they have actually done is cynically introduce yet another backdoor tax, which will raise far more than will be contributed to apprentices. Unfortunately this will also reduce GDP growth.

Small Cap Value Report (Fri 19 May 2017 - Part 1) - RBG, G4M

Revolution Bars (LON:RBG)

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Paul Scott

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