Good morning, it’s Paul here with the SCVR for Thursday.
Timing - update at 13:00 - I'm back from lunch now, so will do a few more companies this afternoon, Revolution Bars (LON:RBG) (I hold) is next on the agenda. Then possibly Safestyle Uk (LON:SFE) & anything else interesting-looking. Please remember I can't cover everything, so am trying to focus on things that (a) I understand, and (b) look interesting. Update at 23:53 - RBG section finally finished, that was challenging! No time for any more, so see you tomorrow. Today's report is now finished.
Christmas
There’s still plenty going on in the markets, and of course last-minute Brexit negotiations, despite us being barely a week away from Christmas.
My family usually have a get-together in Cheshire, about a dozen of us, from 6 households around the country, but we’ve decided to cancel it this year. Since the vaccine roll-out for the vulnerable has already started, why on earth would we want to potentially risk anyone’s health (or even life), just to have a get-together a few months before it is safe to do so? As an investor, I constantly weigh up risk:reward for my portfolio. Hence it was an easy decision to cancel Xmas - the upside wasn’t worth risking anyone’s health. My idea is that we could have a deferred Xmas in summer 2021, and pretend to be Australian!
As regards coverage here, I’ll be on hand to write SCVRs every day the market is open for trading over Xmas/NY, including half days. Sometimes there are profit warnings, and erratic price movements on low volume, creating occasional buying/selling opportunities, so I find it pays to keep an eye on things. Plus of course deal or no deal, unrelated to Noel Edmonds.
I usually do an end of year review, covering what has & hasn’t worked for me. It’s certainly been a rollercoaster of a year, so I’ve got enough material to write a book! Although the SCVRs, over the past 7 years, have effectively been dozens of books, in terms of word count! No wonder I can now touch-type, without ever having consciously tried to learn.
We did once try to make a book out of a year’s worth of SCVRs, summarising them, and looking at what happened next with the key shares, but it was such a mammoth task there was no way I could do that on top of the ongoing workload.
I do want to re-read the SCVRs from Jan-April 2020 again, to remind myself how the covid situation developed, and the extraordinary market gyrations. Anyone whose portfolio survived this year reasonably intact, has done well.
Obviously for all of us who’ve had bereavements this year, that’s always on our minds still, but life has to go on, with a focus on the future, whilst fondly remembering happy times from the past (and quietly forgetting about the arguments lol!).
Boohoo (LON:BOO)
My favourite share (and by far my largest personal holding, recently increased even more).
Many thanks to GloucesterBob for posting a link (here it is) into yesterday’s comments section, of the video of the Parliamentary proceedings, where The founder & Exec Chairman of BooHoo, Mahmud Kamani, along with 2 colleagues to assist him on the detail (it’s a very big group now), offered to appear as witnesses to the Environmental Audit Committee follow up meeting (online) on the subject of Fixing Fashion.
This is riveting for BOO shareholders, highly recommended you find the time to watch the video. The BOO part starts at 16:23, and lasts just over an hour. I can’t embed it, as it’s not in youtube or vimeo format, the only types that work here.
I’ve taken detailed notes on the whole thing, and will write up a summary when time permits, maybe over the weekend?
I found some of the early answers a bit scripted/evasive, but once they got into their stride, the BOO team make a great job of explaining in detail the extensive steps they’ve taken to sort out the supply chain ethics, and ESG stuff generally.
The main thing from my point of view, is that it’s clear the Chairman is now fully onside, 100% onside, with making the improvements necessary. Whereas a few months ago, I think he was more focused on rebutting accusations, and defending the company from what he saw as a personal attack on him & his family. Now he’s clearly bought-in, big time, into the whole “agenda for change”. Maybe this could be a turning point, who knows?
Agenda
Please note that I added a section on Frp Advisory (LON:FRP) late afternoon, into yesterday’s report. There seems a lot of reader interest in that one, judging from the thumbs ups in a comment relating to it. It looks quite good, as a value/income/contra-cyclical share.
Today I’ll be looking at;
Goodwin (LON:GDWN) - Half year report published yesterday - shares fell almost 10% (Paul, done)
Focusrite (LON:TUNE) - AGM trading update - only mentions revenues, not profits, so of limited use!
Fireangel Safety Technology (LON:FA.) - Encouraging signs emerging from this serial disappointer?
J D Wetherspoon (LON:JDW) - Tim Martin rants about covid/lockdown at his AGM
Revolution Bars (LON:RBG) - Preliminary results & another rant about Govt policy
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Goodwin (LON:GDWN)
Share price: 3075p (down c.9% yesterday)
No. shares: 7.36m
Market cap: £226.3m
This is an engineering group, with a controlling family shareholding.
Here are my previous notes, reviewing Goodwin’s FY 04/2020 results, worth checking to set the scene. The confident outlook comments in August don’t seem to have followed through to the interim results, which seem lacklustre. The Chairman’s statement summarises H1 well -
The pre-tax profit for the Group for the six month period ending 31st October 2020 was £5.8 million (2019 £7.4 million) a 22% decrease on revenue of £62.6 million.
The Group cash flow and banking headroom are in line with the Board's expectations, and the order book remains robust at £174 million as at 31st October 2020 but caution is needed with the Covid-19 uncertainty delaying some capital projects and the downturn in the oil and gas industry, which is now likely to be a permanent feature and so a smaller percentage of our targeted business going forwards.
Hmmm, I’m rapidly losing interest.
Outlook - clear guidance here -
With the upcoming completion of several radar systems in East Asia, the commencement of manufacturing works across our nuclear contracts and, hopefully, an improving Refractory Engineering Division performance, we expect the second half year pre-tax profits to be similar, if not improving on, the first half of this financial year…
Balance sheet - looks OK overall, but is dominated by large fixed assets. There’s a fair bit of interest-bearing debt too.
My opinion - on a very quick review, I can’t see anything interesting in the numbers. It achieved 55.4p diluted EPS in H1, and says it should manage the same or more in H2, so FY 04/2021 looks set to be at least 110p EPS - a PER of 28 times - why so high?
I think the market must be pricing in higher future profits, maybe from the nuclear boxes contract? This looks like the type of share where you have to really get into the detail of its products & prospects, because there’s nothing obvious in the numbers to justify a valuation of 28 times, in my view. So I’ll move on.
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I’m going to experiment with putting up briefer comments, then adding in the detail & hyperlinks later, to see if I can cover more ground, without getting bogged down. So here goes:
Focusrite (LON:TUNE)
AGM Trading Update
"Since the year end demand for most of our products has continued to be strong. Consequently, revenue in the first quarter was substantially greater than the equivalent period in the previous financial year.
As mentioned at the time of the announcement of the final results for the year ended 31 August 2020, the Board remains conscious of global factors that could adversely impact our operations, which it will continue to monitor."
Focusrite has a 31 August year end, so it’s about 3.5 months into FY 08/2021.
We need information about profits in trading updates, which isn’t given today. Surely they could have said that we’re comfortable with full year forecasts, or something similar?
I can’t find any broker updates today, so cannot really take this any further.
On the existing broker consensus figures on Stockopedia, note the lovely upward trend over the last 18 months, no doubt helped to some extent by lockdowns - although other parts of Focusrite have been hurt by lockdown (e.g. the subsidiary that supplies large speakers for events) -
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My opinion - at a share price of 1020p currently, and 28p forecast EPS this year & next, then the forward PER is 36 times - clearly investors must be banking on it beating forecasts to justify such a rich rating.
The group’s track record has been superb since it floated in 2014.
Probably not for me, purely on valuation grounds.
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Fireangel Safety Technology (LON:FA.)
13.75p (up c.30%)
Trading Update
It has appointed a new Interim CFO with an impressive CV. Orderly handover underway.
Strong trading in November - this all sounds good:
Following the Company's announcement on 5 November 2020 in which it commented that October had been its highest revenue month in the year to date by some margin, the Board is pleased to announce that this positive trading momentum has continued. Group revenues for November were significantly higher than October and up 20 per cent when compared to the same month the prior year.
This performance has been driven by the Company's Trade and Retail sectors with both business divisions delivering revenues in November which were materially higher than any other month this year. The Group's Trade sector made particularly strong progress, delivering the highest level of monthly revenue for three years.
Overall, higher sales and improved product mix have driven a recovery in gross margins in Q4 2020 which are now close to pre-lockdown levels.
My opinion - I had a quick look at this earlier, and looked at its interims for the 6 months to 30 June 2020. This showed losses, underlying operating loss of £(2.7)m - in addition to heavy losses in 2019. So the group looked to be in the last chance saloon, although it successfully refinanced with a £6.1m equity raise, and a £3.2m CLBILS loan. Therefore I think it looks as if survival should be possible, especially now trading seems to be improving. Inventories are too high.
For me, the company's poor & erratic track record means that I don't trust in its ability to have a seamless recovery. Having said that, it's looking better today (or less bad!) than it has done for a while, so there might be a (risky) opportunity here maybe?
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We’ve got two ranting landlords today, Wetherspoons & Revolution Bars (I hold)
J D Wetherspoon (LON:JDW)
This is quite strange, even by Tim Martin’s usual standards. The entire announcement is a rant about Govt policy on covid, and how it’s been based on incorrect information, in his view. He says that lockdowns do more harm than good, and provides sources which he’s relying on in appendices.
"The situation for pubs is dire. All pubs in the UK (as at 16 December), apart from a handful in remote areas, are effectively shut.
"Less than half are able to open as restaurants, only serving alcoholic drinks with a meal - but that is not what pubs were designed for, and is not usually profitable.
"Since the government often relies on false information, rather than truth, its outcomes will inevitably be poor.
"The sources of government information, especially SAGE, in which academics predominate, have often been faulty.
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At the end he does actually mention Wetherspoons -
"Due to the conscientious efforts of its employees, bankers and shareholders, and to the loyalty of millions of customers, Wetherspoon may be in a better position than some companies and individuals.
"However, 70% of our premises are shut today, despite expenditure of many millions in compliance with health regulations. In addition, over 50 million pub visits have been registered, using the track and trace system, and there have been no outbreaks of the virus reported to the company."
My opinion - I don’t want to get into a discussion about Govt policy on covid, but the bit above that I've bolded, re track & trace, is surprising. I can understand the frustration, given that JDW strenuously implemented all the measures required by Govt (as I confirmed from visiting 4 sites near me), nobody has been reported to the company as having been involved in an outbreak, yet they're forced to shut again.
It’s interesting that hospitality bosses are now pushing back against Govt policy in stronger language than I’ve seen before. Which brings me on to…
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Revolution Bars (LON:RBG)
Share price: 22.5p (up 10%, at 13:20)
No. shares: 125.0m
Market cap: £28.1m
(I hold)
Further liquidity secured; well positioned to emerge stronger
Revolution Bars Group plc ('the Group'), a leading UK operator of 74* premium bars, trading under the Revolution and Revolución de Cuba brands, today announces its preliminary results for the 52 weeks ended 27 June 2020 ('FY20'). The Group's bars were closed throughout the last 14 weeks of the trading period.
*Bars as at 27 June 2020. The Group currently operates 67 bars.
Blimey, these accounts are quite complicated, due to so many unusual things happening during, and post FY 06/2020. It’s taken me hours to plough through all the commentary & figures, nightmare!
I’ll just summarise the main points, and flag up any new things below;
Trading well before covid hit, with H1 adj EBITDA up on last year
Covid/lockdown had large negative impact in H2, and in the current financial year, as expected
Statutory loss of £(31.7)m, mostly caused by £21.9m in exceptional costs - relating to lease & fixed asset write-offs (non-cash) - NB no covid-related costs have been classified as exceptional.
Trading figures really don’t matter at the moment. All that matters is cash burn, and available facilities, and if the group has enough headroom to survive? It looks like it does, which is the same conclusion I came to at the last trading update, we’ve just got more detailed numbers today.
Most important new information - NatWest yesterday relaxed the loan facility, so that an £8.5m reduction scheduled for June 2021 will not now be required. This is excellent news, as it means the bank facilities are now mostly available until end 2021 - by which time trading should have been back to normal for a while, we hope.
Net bank debt as of now is £19.5m.
Cash burn is running at approximately £0.4m per week. Therefore, assuming all bars are shut after Xmas, until Easter, then I make that 15 weeks to end Mar 2021. That’s £6.0m in additional cash burn until end March 2021, taking (my) forecast net debt to £25.5m by the time sites are forecast to re-open. That looks comfortably within the available facilities, which are now;
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Refurbishment programme - new information provided today shows an improved return on investment (ROI) on the refurbs done in FY 06/2020, delivering a 58% annualised ROI - improved from 45% ROI achieved in FY 06/2019. This is good news. 3 new refurbs are planned for H2, again good news, and implies that the group has some cash flexibility.
Going concern note - as you would expect in the current circumstances, there is a going concern note, but it’s not a severe one, as management has a reasonable expectation that it has enough liquidity.
Bank covenant - pleasingly, there is only one covenant - cash headroom has to be adequate for the next 6 months. This sounds like a covenant designed to flash red if cash is likely to run out within 6 months. That’s sensible, but of course it would need to rely on forecasts, since it’s forward looking. So I might raise a query with the company, to get a better understanding of how this would work in practice.
Base case - scenario planning is provided, which everyone owning or thinking about owning this share should read carefully. The base case scenario looks prudent to me - sales from Jan-Mar 2021 of just 16% of historic sales, so that's assuming most sites are closed. Then re-opening forecast in April, with some restrictions, achieving 75% of historic sales, improving to 90% in July & August 2021.
Personally I would be looking for dramatic upside on this base case after April 2021, because I reckon pent-up demand from a young customer base, could see revenues & profit go through the roof once restrictions are lifted. The Govt has already indicated that April 2021 is expected to be when enough vulnerable people have been vaccinated, to lift restrictions, hence that is the timescale RBG is planning for, sensibly.
Furlough is expected to benefit the group until end Mar 2021, and it’s just been announced that there’s a further month extension to end April 2021, which could give a bit more leeway. The lowest point for covenant compliance is March 2021, with £2.5m headroom under this scenario.
Severe but plausible scenario - even worse assumptions, with zero sales in Jan-Mar 2021 (makes little difference to profits though, as would be loss-making anyway under base case), and only 60% of historic sales from re-opening in April-June 2021.
In this severe version, the Mar 2021 covenant is tight, with only £1.2m headroom. The company’s modelling seems to imply a lot less headroom than my figures of using the £0.4m per week cash burn suggest. So I’ll raise a query with the CFO to clarify. There must be something I’ve missed.
If you think the situation will be even worse than that, then clearly this share is not for you!
Overall then, it looks as if the bank covenant position could be quite tight at end March 2021, which raises the possibility that a small top-up placing of say a couple of million quid might be needed to push it over the line. With bars about to re-open, I can’t see that would be a problem. But if bars are not likely to be allowed to re-open in April 2021, then we could have a problem. Not insurmountable though. For that reason, if progress with vaccines is slow, and covid remains a major problem in spring 2021, then we have to be prepared for the possibility that RBG (and many other pubcos) would need to raise more cash from shareholders. At this stage then, I wouldn’t say we can rule out a small additional placing in the spring, if there are further delays. It’s possible, albeit not likely, I think is probably a fair assessment.
Balance Sheet - this is also complicated! It looks awful at 30 June 2020, with NAV negative at £(33.0)m. However, of that, the IFRS 16 entries relating to property leases are;
Lease assets £70.7m
Current lease liabilities £(10.2)m
Long term lease liabilities £(103.0)m
Net leases impact on NAV £(42.5)m
Therefore writing off all the IFRS 16 entries, which is the way I (and many other investors, analysts & banks do it), NAV turns from £(33.0)m to positive £9.5m.
You can also add on another £15.0m (say £14.0m less costs) from the equity fundraising which was done after the year end. That would bring NAV up to £23.5m - reasonably OK.
Three factors need to be taken into account;
- Post period end, the company did a CVA (in Nov 2020), and with other lease surrender deals, this means that when normal trading conditions return, there shouldn’t be any significant loss-making sites remaining. Therefore the next balance sheet at the interims as at 31 Dec 2020 should show an improved picture. The balance sheet by 30 June 2021, providing trading has returned to normal, should also then dramatically improve, as the lease asset is revalued upwards to reflect that there shouldn’t be any significant onerous leases by that stage. For these reasons, we should probably be viewing the June 2020 balance sheet as a temporary aberration, not representative of how it will look in future.
- Re-gears have been used in some cases, to achieve lower rents by agreeing to a new, longer lease. This is good for RBG, as re-gears are only done in situations where a loss-making site can become profitable, due to a rent reduction. Hence although the lease liabilities go up, due to the longer term, the commercial reality is an improvement (lower rent each year, hence higher profits), which would be reflected in a higher lease asset once trading returns to normal.
I’m going to run through all this with the company shortly, to solidify my understanding of the situation.
Tax losses have increased, so future profits on re-opening won’t be taxable for a while.
My opinion - sorry, this section is rubbish, I might re-write it tomorrow, but I’m too tired to do it now.
Overall I’m happy with the situation -
Insolvency looks highly unlikely, but we can’t rule out a small top-up placing, in a downside scenario in the spring of 2021 - that doesn’t bother me, as the amount would be tiny, and easily raised.
Vaccinations happening now is a game-changer, and should allow pubs to trade normally by Easter (hopefully before), those that survive until then anyway.
I think there’s huge pent-up demand amongst young people, who’ve been deprived of late night drinking/dancing for a year, by the time re-opening happens hopefully in April 2021. I don’t think the public are likely to tolerate continued restrictions by then. So expect an absolute bonanza for RBG, with reduced competition too (e.g. Deltic has just been bought out of administration, but only 42 out of 53 sites will re-open), plus sadly numerous independents possibly won’t survive until April 2021. I think this should give RBG an opportunity to generate big cashflows in 2021, and get debt down quite rapidly - remember this business is highly operationally geared.
I remain of the view that this share could be 40-50p within 6 months - based on it being able to produce say £15m EBITDA pa, and assuming about £30m net debt, put it on an EV/EBITDA of 7 times, and that’s £105m EV, less £30m debt, so £75m equity, with 125m shares in issue, arrives at 60p per share - which more than supports my 40-50p price target.
Remember also that RBG is going to emerge a better business - they’ve got the rents down, ditched the loss-making sites, reduced overheads, and have battle-proven management & staff, probably with a much closer bond having been through this shared experience together.
Put that all together, and I see a good future in the pipeline. Then the remaining sites can be refurbished, not a huge cost, typically about £200k each, driving further growth with a high ROI now proven. They allude to being able to pick up other new sites at low rents in the coming months too, so maybe deals could further add to future growth & profits? The next 3 months is the best time to be picking up bargains, after all.
For investors, this is not a time to be mired in negativity about case numbers, deaths, etc. , sad though they are. Equity markets look forwards, and there seems a very clear road map to a post-covid world within 3-4 months, at least as far as it affects RBG. Hence I’m excited about the outlook for this share, for the above reasons.
Management are terrific too, by the way - hard-working, hands-on, and ambitious. Plunged into a crisis quite soon after joining, CEO Rob Pitcher (supported by his CFO) have handled things very well. It must have been a helluva job to keep the show on the road, with stretched finances, bars closing, re-opening, re-closing, etc.
I've not copied it here, but Rob has some highly critical words in today's commentary about Govt policy. Clearly sector bosses are at the end of their tether with the way the sector has been treated. It is appalling really. Look at Deltic - a decent, profitable business, said to have been worth c.£100m before covid. Now it's bust, with the shareholders losing everything, because of Govt edict that they couldn't trade. Doesn't seem fair to me. There again, should the taxpayer compensate every owner of every failed business? that's not very palatable either.
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All done for today, see you tomorrow!
Regards, Paul.
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