Multi-bag Or Bust? RTN, MAB, RBG, And OTB

14th Apr '20 by Jack Brumby

18 comments 7687 reads

My usual targets are high quality companies that are aligned with shareholders, because these can be compounding investments. This is the best kind of long term portfolio to build but right now I feel like there could be some pretty exceptional investment opportunities out there that justify a widening of the remit...

There is a long way to go in this lockdown, with a great deal of uncertainty remaining even though we are seeing early signs of peaking curves. The stock markets have rallied, but there is still plenty to play for. The Government must balance the length of the lockdown against its economic impact.

Amid the daily news flow of dividend cuts, equity placings, and administrations, it is possible to pick a profitable path. This lockdown isn’t happening in a vacuum. Companies are pulling out all the stops to survive and I feel that the majority of those that were good operators before the lockdown will remain good operators after the lockdown.

The downside risks to investors in this market are clear, however: the really big opportunities right now carry with them the risk of permanent capital loss. So pick wisely and understand your risk exposure. The shares I look at below pretty much all carry the risk of permanent loss of capital… But if they pull through they could be extremely lucrative investments.

Last week Restaurant Group’s shares jumped by more than 40% in a single day. Revolution’s shares are up 20% today. When all is said and done and we look back with the benefit of hindsight, the big winners will have come from the areas most at risk. I think it is worth covering these opportunities.

How long does a lockdown last? And how long is a piece of string?

Wuhan is tentatively coming back to life, with a lockdown period of 76 days. Italy’s lockdown began on 09 March, meaning it has been in effect for a month so far. France’s lockdown began on 17 March. The UK’s started on 23 March.

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Bear, base and best cases

Assuming a ten-week lockdown seems like a pretty reasonable base case if we take Wuhan as the precedent.

Given the body language and rhetoric of various experts, I do not think the best case will be significantly better. We will be in lockdown for at least another month…

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Leebod

14th Apr '20

Thanks for the research. I don’t get how £RTN is only burning just under twice the cash per month of £RBG. 55 sites costs £1.6m p/m against 650 (current) sites costing £3m p/m. Maybe it’s not directly comparable but something doesn’t sound right.

Michael Taylor

Another great article Jack - always good to read about your thoughts.

Agree with you on RTN - it's no longer the same company and investment proposation as it was two weeks. I'm not a buyer, but I can see the attraction.

For me RBG is the most attractive IF lockdown ends end of June or not long after. Speculative as you point out.

Doggy100

marstons is way to cheap!!

Bullsnbears

Jack, thanks for a really informative article and useful ideas.

Would you be able to help a newbie out? Just joined the platform and new to investing in general so on a steep learning curve....

For Restaurant Group you mention that you'd like to do a 'lot more digging'. Would you be able to advise what you'd be looking to satisfy yourself with what sources you use to help with that?

Cheers Antony

bryans1311

One small anecdotal point regarding Restaurant (LON:RTN) Part of the Wagamama concept involves long bench-style seating. Personally, I was always put off having people sit so close. I imagine this might need a bit of capex to correct, if social distancing is to become the new normal.

GrahamF

Regarding On The Beach (LON:OTB)

Given that they hold no inventory of their own, whose inventory are they selling particularly in terms of hotel rooms?

Surely it cannot be they deal direct with the hotels because they wouldn’t have the buying power to get attractive prices. So, is it possible these rooms are actually inventory held by other travel companies? The same companies that may be going bust in the crisis? If so where does that leave their business model for after the crisis?

It would be interesting if any industry experts on the board could clarify where OTB get their inventory.

No position myself. The sector seems uninvestable for now to me.

robmahan

This is good analysis, but the point it misses is that even if lockdown is until June, if the virus is still around then many people will not go and socialise. Even if it is say 30% of patrons, this may well mean nothing is made for the best part of 2020 at best.

At worst, it might not be worth reopening, even if formal lockdown is ended.

Personally, I wont be going out until there is a vaccination / everyone else has had it. The virus has a 5-20% hospitalisation rate (which is what should be focused on, not the death rate). To me it isn't worth the risk, when I can wait 12 months and get vaccinated.

MrGeorgeJones

I think you underestimate the British public's commitment to drinking. I don't expect people to be flocking to the airports for holidays but I do expect the pubs to be full once they are reopened -especially if that's in the Summer.

Many who frequent pubs and bars owned by listed companies will have more disposable income to spend. However you're right that it may not be worth doing if another breakout of the virus is inevitable without a vaccine

Jack Brumby

15th Apr '20

Thanks Michael,

Speculative seems a good word for it... I think the key takeaway here is: understand the risk exposure and uncertainty involved. For most of these companies, there is no silver bullet. They have to fight to survive. Many investors will ultimately decide that this area is not for them.

Others might take a position but the blunt truth of the matter is we just don't know how it all shakes out right now. If you understand that and want to take a speculative position, then that is one thing.

I think there is plenty of share price movement to come in this lockdown and there is no harm in being patient, having certain price levels in mind, and watching from the sidelines.

I haven't moved to buy any of these companies (perhaps for now they are better suited to trading?) but I do want to keep a watching brief as these risk:reward tradeoffs are evolving all the time.

Hey Anthony,

For RTN, given the exceptional conditions, the group faces not just the systematic market risk of the lockdown but also non-systematic, company-specific risk in that it has for a long time underperformed due to putting pretty mediocre brands into hundreds of badly located sites.

I'd want to find some management commentary on average site EBITDA of the 200 units to be disposed of and from there take a stab at what the 400-strong RTN might trade like in more "normal" conditions (if we ever get back to that). This might be found in the latest COVID update but I have not had time to check. If not then they would probably give more detail in a later update to the market.

RTN could double - but it could also easily go bust in this environment. That risk profile will rule it out for a lot of investors and is something we all need to consider. Losing all of your money in an investment is not a good feeling!

If you are starting out it might be better to focus for now on something like 1) high quality-momentum companies with business models unaffected by the lockdown that have 2) strong balance sheets - things like a high Piotroski F-Score and net cash.

This way hopefully you avoid companies that go out of business in this environment - which, sadly, is a risk for a lot of consumer-facing companies. The above are worth covering as the situation is changing all the time, meaning there could be opportunities, but the risks and uncertainties are also material.

The QM Screen linked above might be a good jumping off point for some more stocks to look at.

john652

Hi Graham,

Re On The Beach (LON:OTB) & hotel inventory, this is from their annual report, ie 70% direct contracted. This was another reason this was a great business, was.

What if social distancing is mandated, one person for every 3 seats in a plane, bus, train, restaurant, cinema etc. - All these businesses are toast, they might survive with more debt but at some point more debt is just too much.

''Despite the increasing proportion of sales into Eastern Mediterranean and longer haul destinations, the investments we have made into our supply resource and technologies has helped us to deliver more than 70% of total hotel buying through direct contracting in FY19. The increasing proportion of directly contracted product has continued to support the improved customer satisfaction scores as complaint ratios on directly contracted product are significantly lower than third party sourced product. Our continued focus to strengthen our relationships with key overseas suppliers is giving us increased access to exclusive rates, ring-fenced capacity and OTA exclusivity while maintaining our no risk, lightweight business model.

Many thanks. Interesting to know.

Leaves me somewhat confused. It suggests that they have enough buying power to get hotels to agree contracts with them at attractive prices without those contracts including an obligation to take the rooms (perhaps they can just release the rooms 10 weeks before they are due if they are unsold, or something like that). And you then wonder why the main tour operators don’t have a similar deal or at least get a much larger price discount for committing to take the room allocation come what may.

Thanks for the detailed reply, Jack. I think I'm staying clear of the speculative punts for now!

Simon Rowan

RTN have probably put off the curtain call for now with their latest placing. Wagamama which was to be their saviour has cost its shareholders dearly. When there was possibility of big global roll out it looked a bold and creative move, but once that ambition was removed I stopped trading it. Ironically its been an even better trading stock on the edge of bankruptcy, but I would never have guessed they could find more investment again (considering most investors didn't like the Wagamama deal in the first place) for a terminally declining business. Too much old baggage they can't shift and have to write down at some point namely the 'leisure arm' and redundant leases . The new baggage was just too expensive. Was it £2 million per Wagamama site? Multi bagger? You are joking. Survival at best as the management of these situations are very skilful at prolonging their salaries.

thepiman3

Interesting analysis. But aren't you assuming that after the lockdown punters continue to spend money at these businesses as they did before the lockdown? If so, that is unlikely. These companies' customers tend to be middle and working class punters and students. Apart from students, those punters are likely to be strapped for cash, having had to take pay cuts/furloughs. As for students, those international students who weren't able to leave before lockdown will probably leave as soon as air travel recommences, since most universities have closed down and won't be back to normal till September/ October at the earliest. As for domestic students, will they have the same level of disposable cash, or readiness to spend it? As for workers, whilst there might be an immediate attraction of going to the pub/out for dinner as soon as lockdown is lifted, those punters cash constraints will be under pressure from the pay cuts/furloughs, possible redundancies and general anxiety about the future of the economy. Once the novelty of a Wagamama or night out at one of RBG's bars wears off, they might realise that having coped fairly well on lockdown it makes sense to save money and stay in until their finances are on a surer footing.

Trident

Without resorting to be a tip sheet, it would be useful to examine less precarious options that are being undervalued by the market.

That would be interesting.

LumpedOn

Another great article Jack, again providing an interesting and informative read.

There is of course another aspect to this which is looking from the position of existing holder which needs a subtly different analysis to that of taking a chance on a multi-bagger.

As posted previously I hold Mitchells & Butlers (LON:MAB) and Revolution Bars (LON:RBG) and am wrestling daily with my feelings which swing from "bin them and run" to "hold" to "double / treble up" to find a possible way out. I don't imagine I am the only subscriber here who with the benefit of hindsight would have sold out of everything and then be tactically re-buying - but I didn't, so have to wrestle this one.

I bought into these as part of my portfolio diversification and re-alignment to embrace a post-election and post-Brexit expectation of buoyant consumerism and growth in UK centric leisure businesses. Not too sure what I feel about that any more. Survival is one thing, and bounce-back to prior levels another. I am continuing to hold for now, but am increasingly thinking about selling out of these, and other losing positions in order to rebalance again around more likely growth areas.

It's a tough one.

LongValue

A very good analysis. However, much seems to rest on a return to the status quo in terms of consumer behaviour when the lockdown ends. But this may not be the case. I would suggest that the longer this lockdown continues, the more likely that attitudes and behaviour will change. For example, drinking alcohol at home rather than in bars may become more prevalent. From what I can understand, changing an environment is often a good cue for changing a habit. With people spending more time at home, there could be profound changes in how they spend their money. The most obvious example is the more widespread adoption of digital commerce. Maybe people will opt for food delivery services and choose a type of restaurant experience at home.

There now seems to be a wide selection of “Bargain” stocks available. But their success is largely predicated on a reversion to the mean in terms of consumer/client behaviour. It’s quite possible that there is a huge amount of pent-up demand and it will be business as usual but I would prefer to see that happen before investing. It may mean that I miss some of the upside but it also probably means that I will miss the downside and that could be 100%.

Multi-bag or bust? RTN, MAB, RBG, and OTB

How long does a lockdown last? And how long is a piece of string?

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Jack Brumby

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