Like for Like Sales Disappoint - Revolution Bars

Friday, Jan 20 2017 by
22

588257fca782dRevolution_logo.png

Revolution Bars (LON:RBG)


Share Price 204p                       Today -9.5p (-4.4%)

Market Cap €123.1 million         Bid/Offer 202p - 206p

Normal Market Size 2,000 shares


About the Company

Revolution bar operates 66 premium bars across the UK. The bars trade under the Revolution and Revolución de Cuba brand names. My back of the envelope calculations shows circa £1 million of turnover for each bar.  Pretty impressive turnover as business starts late morning for each bar and then trade continues until late at night as expected.

The company only rolled out four new Revolución de Cuba bars in H1 FY17 in Harrogate, Aberdeen, Reading and Glasgow.   Their fifth development this year in Southend on Sea is due to open in H2 which will bring the number of units to just 67.  

Challenges Ahead

(i) Results showed LFL sales only up 2% for H1 17.  Given the likely increases in running expenses including wages, drinks supply costs etc suggests that some margin pressure will occur in the 2nd half of the year.

(ii) The Revolution and Cuban bar concept may fade in fashion as the concept becomes tired and other theme bars move into that space. 

(ii) The group is only adding a half dozen extra bars a year so far. The actual percentage Increase in earnings will be getting smaller as part of a large number of existing bars.

(iv) A number of the best locations for the concept are already in place leaving more riskier and possibly less rewarding locations in the future to select. 

Concerns

The initial IPO price in March 2015 needed to be reduced substantially to get it away at a £100 million market cap. The company was promoted as a go-go growth stock in many respects. The single digit unit openings each year suggests only a pedestrian rate of growth.

All of the £86 million of money raised in the IPO was used to cash out existing investors who sold their 86% holding in the company. The fundraising was at 200p in March 2015.  The share has ebb back and forth and effectively gone nowhere.

The company is dependent on a limited number of suppliers and distributors and the price they charge. In particular, one key service provider, provides all of the Group’s logistics, warehousing and distribution services in respect of drinks products.

The new institutional investors who bought in at the IPO are reducing their stock exposure this stock, so they can invest their funds in alternative growth stocks.  Organic growth is too slow.  Only new investors are buying the old growth story.

The company's target of 100 Revolution Bars and 40 Cuban bars is just too far in the distance to imagine. The share price fall from IPO price and the recent share price faltering is suggesting that management may need to do a rethink on the self-funding roll out strategy.  A roll out of 20 units extra per year is required which either needs additional equity or a substantial lending facility on tap. 

Why The Two Brands?

"The Group’s management believed that the distinguishing features of the Revolucio´n de Cuba bars would allow them to be located near to existing Revolution bars whilst limiting cannibalisation. In addition to the distinct offering of the new Revolucio´n de Cuba bars compared to the existing Revolution sites, the new brand had (and has) a different target audience, with its customers being on average six years older than those of Revolution bars. The new brand was therefore intended to appeal to a segment of the UK’s working population which has a relatively high disposable income, is less price sensitive than other potential customers and which values quality and atmosphere over discounted prices."


Positives

(i) The bars are self-financing to date. No debt. The concepts are new and are working well.

(ii) The marketing of the bars through websites and social media looks to be top class. It looks the in-place to be for party nights and celebrations for free-spending customers which offer a good experience.

(ii) The bar design, table service, hand-made cocktails and freshly prepared food attracts the sort of customers willing to pay a premium.

(iv) The concept can be transferred to many more locations in Britain and Ireland and move later on to international locations.


Short Term Market Reaction to the Trading Statement

The share price sank at 8:00 a.m. after investors first take on the trading statement.  The price drop was mainly due to the disappointment in the 2% growth in LFL sales. I suspect the initial 4% or 5% share price drop knocked the share price through some investors stop loss positions.  This had the effect of further pushing the share price down another 5%. Later in the day, the share found support and the share rebounded back up to the 216p mark.

Back in April 2016, the share price was back down at the 150p level.  Since that low point, investors have become increasingly aware of the company’s obvious merits. Investors see the company as a reasonably valued growth stock and have bought in.  

The pessimists will point to the slight reduction in the profit forecasts for the end of this year and next year.  Any bad consumer spending news, inflation concerns, changes in consumer tastes are more likely to cause upset to the share price negatively. On the bright side, more tourists visiting the UK fashionable areas on weaker sterling may help somewhat.

Forecasts

Net Profit

EPS

DPS

Net Profit

EPS

DPS

(£)

(p)

(p)

(£)

(p)

(p)

Consensus Estimate

8.00m

16.3

5.37

9.20m

18.6

6.01

1m Change

-150k

-0.20

-

-100.0k

-0.050

-

3m Change

-150k

-0.20

-

-100.0k

-0.050

-


The company's price-earnings forecast is 12.63 for the 2017 results and after that, the company is on a  forecast price/earnings ratio of 11.07 for 2018.

Charts

The candle chart does look a bit worrying. Lots of red candles to be seen from late December 2016.

58827133e917fRevolution_bar_candle.png

Purchasing Decision

This share was on my watch list before the end of the year.  The company deserves a spot in my portfolio for diversification reasons only.  

Slowly, slowly I took an opening small position before the year end.  I took advantage of the Thursday drop below 200p.  I topped up once again late Friday afternoon on the negative tape.  Buying in separate lots on different days has now given me a more attractive average price entry point.

Around £800K worth of stock was traded today, so there are some determined sellers applying pressure to the share price.

My Future Expectations

I have only reasonable expectations for the share.  The company, if it grows its yearly earnings by 10% with a 10% increasing dividend would be nice. The business with a slow roll out of units as presently constructed, trades between a 10 and 12 times price earnings multiple. I think that is about right.

The current share price looks to want to trend down to the 180p-190p range where it may find support. The upside resistance level is at the 220p.  No need to rush to buy the share. 


Regards


Dearg Doom


PS (For entertainment purposes only.  No investment advice ever intended.)

Here is are individual links for all my comments to date.

May 22nd, 2017- After a Weekend of Reflection

My 2nd comment on Friday 19th May after the RNS profit warning.  

1st comment on May 19th, 2017 - My Profit Warning Initial View

My 2nd Comment on March 2nd, 2016 in reply to query RBG as a growth stock

My 1st comment to sell RBG March 2nd, 2017 






Filed Under: Stock Picks,

Disclaimer:  

All articles and comments are for general information only. No investment advice intended.

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Revolution Bars Group plc is a United Kingdom-based operator of bars. The Company has a trading portfolio of approximately 60 bars located predominantly in town or city high streets, which operate under the Revolution and Revolucion de Cuba brands. The Company's bars focus on a drinks and food-led offering, and typically trade from late morning, during the day and into late evening. Revolucion de Cuba bars are characterized by their 1940s Cuban-inspired style, with dark woods, traditional bar counters, antique tiles, vintage furniture, Havana-style ceiling fans, and original Cuban artwork and photographs. Its bars are located in various places, such as Cambridge, Ipswich and Norwich in South East; Bath, Plymouth and Southampton in South West; Birmingham, Derby, Leicester, Loughborough and Milton Keynes in Midlands; Cardiff and Swansea in Wales; Blackpool, Chester and Huddersfield in North West; Sheffield, Sunderland and York in North East, and Edinburgh and Glasgow in Scotland. more »

LSE Price
106.54p
Change
-1.3%
Mkt Cap (£m)
54.0
P/E (fwd)
8.2
Yield (fwd)
5.0



  Is LON:RBG fundamentally strong or weak? Find out More »


61 Post on this Thread show/hide all

Paul Scott 21st Jan '17 1 of 61
6

Interesting to hear your views, and you've clearly put a lot of thought & effort into this post.

I think we need to be a little careful about reading too much into short term share price movements in a fairly illiquid stock. Just look at the ridiculous spread on this share most of the time, and the way quite small trades move the price all over the place.

This is a surprisingly illiquid share, because it floated with big, Institutional shareholdings, in Mar 2015. Since then it's had very little interest from private investors. So liquidity is a big problem when any Instis want to exit.

If you look through the Holding in Company RNSs, there seem to be 3 large shareholders all gradually selling their positions in recent months. So it's actually quite surprising that the share price has risen at all from the lows from Aug to Oct 2016. I find this quite encouraging - because it shows that a lot of Institutional stock is being absorbed by the market, and being gradually distributed amongst smaller shareholders.

So once that process is completed, and all the Instis who want to exit have exited, then I think we could see a very significant re-rating here. I think you're being way too pessimistic about this company. You won't find any other decent quality, debt-free retail roll-out on anything like a PER this low (12). The more normal level is 20 or more.

As for 2% LFLs - it's not spectacular, but it's not too shabby either. I think we have to remember that managing a roll-out takes up much, maybe most, of management time, that was certainly my experience back in the day. This can lead to the existing sites perhaps being a little neglected, in terms of senior management time. So problems are not always spotted as quickly, compared with if there had been no store expansion going on.

Bottom line, I wouldn't read too much into the recent price moves. It's just supply & demand, and illiquidity, making price movements erratic for now. Once the overhang of sellers is cleared, you could see a big & rapid move up, I reckon - the fundamentals clearly support that. And of course if I'm right about that, then it won't be possible to buy in any decent size without pushing the price up against yourself.

We might get a nice surprise one morning too - this stock is perfect for a private equity buyout, since it generates tons of cashflow, and has a debt-free balance sheet. So a PE buyer could load it up with cheap debt, fund the interest cost from cancelling the divis (which would save £2.4m p.a. - enough to pay the interest on say £60m of new debt). That would mean a bidder would only have to find £90m to buy the company, and pay 300p per share - i.e. £90m cash, plus £60m debt = £150m buyout price (300p per share). Then they would just need to continue the self-funding roll-out, and probably accelerate it (I agree mgt are going too slowly now), and re-float it back on the market in 3-5 years at double or triple the price, being a much bigger business by then.

It's a bit of a no-brainer for the PE boys, I reckon.

Regards, Paul.

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