Small Cap Value Report (Thu 16 April 2020) - RBG, WGB, DNLM, VLX

Good morning, it's Paul here with the SCVR for Thursday.

It's busy for updates today. I'll start with 3 companies in which I have long positions, as obviously I read the updates that affect me personally first thing. Newer subscribers may not be aware that I'm primarily a professional investor (since 2002), doing writing as a sideline.

Today's report is now finished.

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Revolution Bars (LON:RBG)

Share price: 20.4p
No. shares: 50.0m
Market cap: £10.2m

(I hold a long position in this share)

Completion of banking documentation

You might recall that this operator of 74 town centre late night bars, surprised on the upside 2 days ago, with an update that its bank (Nat West) is being supportive, thus eliminating (for now anyway) the need for an equity raise. Being long of the shares myself, (this is now my biggest position in my trading account), I'm delighted that it seems the company won't need to dilute me at this stage, thanks to bank support.

Today RBG confirms that the bank paperwork has all been finalised;

Revolution Bars Group plc (the "Group"), a leading UK operator of 74 premium bars, trading under the Revolution and Revolución de Cuba brands, confirms that it has now executed final documentation with its lending bank, Natwest to increase its revolving credit facility to £30.0m until 31 August 2020, as further detailed in the Group's announcement of 14 April 2020.

Here at Stockopedia we've provided a range of opinions on this share this week;

• Graham - sounded very negative here
• Paul (me) - positive, whilst acknowledging it's risky, in the same article, in the reader comments section
• Jack - seemed middling, leaning to slightly positive, in his excellent article here

It's good to have confirmation that the increased overdraft documentation has been executed, which should make the necessary larger facility available. This buys RBG time to tread water until the lockdown is lifted, hopefully soon.

As mentioned in yesterday's article, after reading the OBR report on the likely cost of lockdown, I am increasingly convinced that the Govt has little option but to phase in a lifting of the lockdown relatively soon. That's starting to happen in other countries too. Hence there are really 2 unknowns with RBG at the moment;

1. When will lockdown be lifted for bars? Currently RBG is generating nil revenues, but has costs of £0.4m per week (I assume that's on a cash basis)

2. How strong/weak will trading be, once its bars are allowed to re-open? Opinions differ on this. Some people think customers are likely to be cautious, and stay at home. Others (including me) think that the 18-25 customers that RBG mainly serves, may want to go crazy and party hard, after being cooped up at home in lockdown. Don't underestimate the impact this is having on many people's mental health. Hence why I see it as a pressure cooker, waiting to be released.

If the positive scenario plays out, then I think it's perfectly possible this share could be a 5-bagger. Hence why I've bought up nearly 3% of the company. If lockdown is not lifted for bars, or is re-imposed if a further virus outbreak follows in the summer/autumn, then the shares could be diluted heavily in an equity fundraise, or worse still, even go bust. Although to be fair, you could say the same thing about many other hospitality/retail sector shares. RBG's finances are not particularly bad when you look at other, often much larger, businesses in the same sector. Therefore everyone looking at this share, needs to have their eyes open about the considerable risks facing the whole sector.

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Walker Greenbank (LON:WGB)

Share price: 44.5p
No. shares: 71.0m
Market cap: £31.6m

(I have a long position in this share)

Results date & Covid-19 update

A very unsatisfactory update today, from this soft furnishings & wallpaper group. It doesn't give us enough information, hence is fairly useless in assessing how to value the share. The limited amount it does say can be summarised;

• Results delayed from 23 April, to 30 June - blames the FCA's (rather bizarre to my mind) instructions to delay results due to Covid-19.
• "Vast majority" of employees furloughed under Govt schemes
• 20% pay cuts to preserve cash, including Directors (good)
• Some (reduced) licensing income being received
• Company "has headroom" under its existing £12.5m bank facility, and has agreed a £2.5m overdraft. There is also a £5m accordion facility. No figures given on cash, nor amount drawn down on bank facilities. Hence we're in the dark about headroom - very poor, this is key information that shareholders need
• Positioned to resume operations swiftly when circumstances permit
• Obvious, and sensible measures taken to preserve cash;

Measures have been taken to preserve cash including suspension of the final dividend and of capital expenditure plus very tight controls over operating costs. Wherever possible, the Company is accessing government support mechanisms both in the UK and overseas.

My view - this announcement is general, but doesn't give any specific figures. That makes it largely useless. Compare this with the very much better information given below, by retailer Dunelm (LON:DNLM)

As with most shares, it's impossible to value WGB until we get some clear information on trading, and updated broker coverage. I'm assuming heavy losses are likely in the short term. Then a recovery in earnings once lockdown is lifted. It's a very strange situation, which I've not seen before, where we simply have no idea what 2020 earnings are likely to be, nor how much of a recovery is likely in 2021. That applies to almost everything, not just WGB. That's why I'm looking for bargains, and am not paying top whack for anything. Remember the starting point when Covid-19 started, was that shares looked very expensive generally. Hence if something is only down say by a third, is that enough of a discount to make it a bargain? Maybe not.

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Dunelm (LON:DNLM)

Share price: 859p (up 4% today, at 08:20)
No. shares: 202.3m
Market cap: £1,737.8m

(I have a long position in this share)

This is a homewares retailer. Checking my previous notes, I was very impressed with its last results, and wrote about it here on 12 Feb 2020, saying that it's a good company but too expensive at 1326p per share, but I would buy on a pullback. The current crisis enabled me to do just that, buying at 702p average, in late Mar & early Apr. So far so good.

Business & liquidity update

I'm very happy with this update, because it provides the information investors need. Let me summarise it;

Online business Dunelm.com has re-started, after extensive health & safety work, and approval from Trading Standards

Since reopening, we have been able to satisfy a high level of online customer demand, with recent online order levels significantly higher than those seen prior to the onset of Coronavirus.

Stores remain closed, but preparing for re-opening. Store staff furloughed, others working from home.

Liquidity - £165m RCF drawn down in full [very sensible]. Net debt £40m as at 11 April. Hence it has plenty of cash available.

More borrowings potentially available from Govt;

In addition, we have now received confirmation from the Bank of England that we are eligible to access funding under the Covid Corporate Financing Facility ("CCFF").

Crucially - this is a very strong statement, highly reassuring;

The Board is confident that the Group has access to sufficient liquidity, even in the event of a prolonged store closure period.
Currently, we would only anticipate the need to issue paper under the CCFF scheme in the event that our stores remain closed for a period greater than six months.

Belt and braces then, very good indeed. I think it's very important that all companies spell out how long they can tread water for, during lockdown.

Pay cuts - CEO, Chairman & NEDs showing real commitment to the business here, even if it is only for 3 months (which is normal). We're all in this together, so I see it as a litmus test that Directors take some pain personally, at all companies;

We continue to focus on reducing operating expenses and tightly managing our cash flows.
The executive management team have taken a voluntary 20% pay reduction. Nick Wilkinson, our CEO, has taken a voluntary 90% pay reduction, and our Chairman and Non-Executive Directors have waived 100% of their fees. These reductions will be in effect for the three months from April to June.

My view - this is how a well managed business handles a crisis. Very impressive all round.

This crisis has allowed small cap investors like me the opportunity to move up the food chain, and buy some mid caps at knock-down prices.

I'm very pleased with today's update. It demonstrates clearly, and with figures to back it up, that the business has plenty of liquidity for 6 months and beyond. Being large shed type of shops, I think these could be allowed to re-open sooner than places like bars, where people are in close proximity to each other. We've seen in other countries how large retail sheds are trading, with customers spaced apart well, and wearing masks. Perhaps something similar might be adopted in the UK?

Hence I see this share as lower risk than my position in Revolution Bars. The compensation for that is Dunelm won't be a 5-bagger! But equally it won't be going bust either. I could see this share being maybe 50% higher, once trading has (hopefully) returned to normal - no idea on timescales for that though.

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Volex (LON:VLX)

Share price: 138p (up 11% today, at 09:47)
No. shares: 151.8m
Market cap: £209.5m

Trading update

Volex plc (AIM: VLX), the global provider of complex assemblies for performance critical applications and power products, issues the following trading update ahead of the announcement on 18 June 2020 of its full-year results for the year ended 5 April 2020.

This update reads positively, hence the 11% rise in share price. There's been a very impressive turnaround at Volex in recent years.

Reiterates guidance for FY ending 5 April 2020. Impressive, since Feb-Mar could have had an impact from Covid-19, but doesn't seem to have done so.

Forecasts - there's an update today, available on Research Tree. This gives 16.6p adj EPS for FY 03/2020 - a PER of 8.3. Obviously the PER is low, because the share price is factoring in potential future damage from Covid-19. For long term shareholders though, looking through the current crisis, this valuation looks attractive.

A modest increase to 17.2p adj EPS is pencilled in for FY 03/2021, but it's clearly finger in the air stuff, given the unknown extent of the global recession that appears to be starting.

Liquidity & divis - this looks really strong, I'm impressed. Paying a divi when many other companies are running for cover and scrapping divis, is a powerful statement right now;

Net cash as at 5 April 2020 of $31.7 million compares with $7.9 million reported at the half year. We intend to declare a final dividend of 2 pence per share based on our full-year results

Therefore, it seems investors should be able to sleep well, without fearing insolvency.

Outlook - the most important part of all trading updates, especially right now.

Looking ahead, it appears likely that economic activity and consequently trading will be impacted by restrictive governmental measures put in place to contain the spread of Covid-19. However, the quantum and precise impact will depend on the length of time such measures are in place and their severity, offset against our defensive exposure to medical devices and data-centre products, which make up approximately two-thirds of our complex assemblies division...

However, despite this 'perfect storm', Volex's business has proved remarkably resilient, continuing to produce a solid performance in both sales and operating margins. Our strategy to diversify our products, customers and geographic footprint, together with our exposure to medical devices (and high-speed data centre products, which are in even greater demand as much of the world's population works from home), has resulted in continued growth and strong cash generation, despite significant headwinds.

It's possibly a little early to declare remarkable resilience, given that the crisis has only recently started.

In the first paragraph above, it does acknowledge there's likely to be some adverse impact, so we shouldn't get too carried away with the positive commentary.

My opinion - this is an impressive announcement - one of the best I've read in recent weeks, and I think the share looks quite interesting.

Whilst acknowledging the positives, one look at the chart below shows that the rebound in price from panic selling lows recently, has already been extensive. Given the uncertainty, I'm struggling to imagine why anyone would want to chase the price any higher in the current environment? I'll certainly add it to my watchlist though, and monitor newsflow. I'd like to see a few more months trading information before deciding to buy any, if at all.

Well done to shareholders who held their nerve, and didn't panic sell at recent gut-wrenching lows.

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That's it for today. I hope you're all surviving these very difficult times.

Best wishes, Paul.