RBG Fall

Revolution Bars (LON:RBG) mentioned in Mark Brumby's newsletter this morning, which may be of interest

http://www.langtoncapital.co.uk/daily-notes/langton-capital-2017-05-22-rbg-over-supply-longer-term-trends-other/

Paul put me (via SCVR) on this a while back. It is excellent and should be required reading if you invest in the liesure, restaurant, pubs etc sector but TBH if you invest in stocks at all.

Herbie, Good information. I feel your observations support the 'wait and see' view that I have current have, no need to take a risk of more down side for limited upside. I could well be wrong, by being over cautious but that OK,

Regards,

SG

Thanks Herbie,

For my reference from a quick google for population - maybe a some errors but gives an order of magnitude,

Reading 232K, Liverpool 467K (multiple bars),Stafford 133K, Cheltenham 116K Swansea 242K, Torquay 65K Wilmslow 30K

I wonder if this is an indication of the problem. Are there enough customers to support some of these locations? In fairness I did not look at all locations listed in the 'reservations drop down' on the revolution bar site just those I thought looked strange.

I think I will wait for more finance results before considering a purchase.

Regards
SG

This gives some details of new sites: http://www.iii.co.uk/research/LSE:RBG/news/item/1931339/new-site-pipeline-update?context=LSE:RBG

So Liverpool, Reading and Stafford in 2016.

Torquay is the latest new site, opens next week.

Any one know where the most recent sites opened are? For the matter where the next 2-3 are due to be opened?

My concern is that cheap rents may not have a catchment area of customers for this 'high-end' bar.

SG

Bit of a faux pas by the resigning FD perhaps? None of the subsidiary management accounts for the Revolution Group have been filed, and have a red flag at Co. House.

An admin error probably, but I could add up to a £3-4,000 fine from Co. House (£1K for each non filing). Sometimes it helps to see under the bonnet in subsidiary filings.

Who do you think would buy RBG, and why?

I believe RBG is still a solid opportunity but top management grip on business has to be questioned :
- McQuater ( bean counter by trade) recently dismissed cost pressures citing their great 2year vodka deal( biggest seller) & majority of staff under 25 as positive mitigations
- they aborted a VERY expensive Edinburgh acquisition at the very last minute ( Brexit weekend)
With a skilled operator at the helm rather than someone who ' gives good deck' this company will thrive. Good brand, good locations, strong balance sheet, predictable demand. Large institutions that own most of the shares TAKE NOTE & fix.

The funny old thing is that it fell about 7% a couple of days before this, which makes me wonder "Who knew it was going to happen" ? Sounds like some dodgy dealing going on....

I bought in today at just under 129.00 hoping the big drop today is a bit of a knee jerk .
Let's hope these shares bounce back , although have to say the U.K. Can be so fickle when it comes to bars not a share I would normally buy.They can be in fashion one day and out the next. I live abroad but have a home in Bournemouth and could not believe the number of new bars that have sprung up recently in the town .

According to 4-traders, the top 10 holders account for c36m shares (of the 50m total), and RBG has traded c5.5m shares today (per HL), which seems to imply that either a pretty big holder is dumping them, or a huge amount of the free float (those outside the top10) are trading them.

I personally just dont think the story or the numbers is as good as they make out. I had a conversation with Paul Scott on this back on March 23rd

http://www.stockopedia.com/content/small-cap-value-report-thu-23-mar-2017-nxt-rbg-spe-trcs-sis-wyg-sfe-177264/?comment=42#42

Though I accept that my understanding maybe have been poor and or muddled, I read the accounts and could not understand how they were accounting for CAPEX. So I sold my minute holding for a small loss.

Additionally I think in the current enviroment cocktails are the sort of thing that people seek to cut back on.

I still subscribe to the Mungerism of replacing EBITDA with the word bullshit when you read it.

I would take Carcosa's advice (comment 13) and sell and wait for the dust to settle.

This is an excerpt from Canaccord's piece on the profit warn which I thought you all might be interested in,

"Today's profit warning from Revolution Bars has been caused by (1) poor cost budgeting,(2) the closure of two key units for refurbishment (poor budgeting - is this a surprise to management?), and (3) the longer than expected time for the new Cuba sites to reach maturity (over confidence, poor budgeting). . The timing of the news has been promptedby a new (interim) finance director who joined at the start of the month. The stock is now in 'Spec Sit' and Recovery territory - we believe Revolution is still a good business with very strong FCF. However, pending further updates, we move to a HOLD (from Buy) given we see a risk of more warnings (old city adage 'bad news comes in threes')."

"We attribute 70% of the profit warning to poor budgeting rather than operational issues. If this proves to be right, then we view the profit warning as an irritating blip that can be sorted quickly. About half the hit for 2H17 is extra wages exacerbated by the knock-on effect of differentials and the maturing of the work force pushing extra staff up through the wage bands. Placing the blame on two closed bars for a contribution to the warning is crass, in our opinion. The trading concern centers on the Cuba brand where the new units are taking longer than anticipated to mature. Given that five of this year's six openings are Cubas and half the planned FY18 openings are Cubas, it's an issue. The combination of a slower build to maturity and high staffing levels in the early period accounts for the rest of the downgrade. If it's just a matter of time, then expectations can adjust; if it's more serious, then we would think the second leg for growth is in question. L4L sales are +1.7% YTD (interim 2.0%) with gross margins remaining as expected."

Son-in-law number 2 worked for them up until recently; he has been extremely bearish about them for some time. From memory, some of his concerns were to do with stock control and accounting practices.

The summary seems to be that RBG was priced as a high growth company. It has now declared that it is a lpw growth company (with uncertain cost control).
It has been repriced accordingly
Check for myself is to take a very squinty-eyed look at the prospects for my companies that are rated for growth.

Excellent post Bestace, thanks.

I only have a small holding here, and I'm staying in for now. As you argue the fall seems overdone on likely headline figures alone. But there's no doubt that management have lost credibility in my eyes - and many others - over this. And that will impact on what I do from here.

Peter

Let's say adjusted EBITDA is the same as for FY16, so that's £15.6m.

Deduct:

• 41% for depreciation (last year was 40.1% and the ratio has hovered around the low 40s % for the last few years)
• Opening costs of £700k (based on previous run rate)
• £0.25m for interest charges (finger in the air; last year was £129k but we know they've taken on a bit more debt)
• Tax at 20%

This gives PBT of £8.3m and PAT of £6.6m, assuming no other exceptionals (I wonder if the previous FD got a payoff?)

Divide by 50 million shares gives a new EPS of 13.2p per share, which compares to the 16.6 average of previous broker forecasts (Canaccord had 14.2p pencilled in; the other three were in the range 16.3 - 17p).

So that's a reduction in EPS of 20%. As I write, the share price is down 32%, which seems like an overreaction compared to my EPS calculations.

Clearly there are other considerations to bear in mind though:

• Is this the first evidence that the slowdown in consumer spending in the wider economy is affecting £RBG? in which case, there could be a lot more downside to come before the final shakeout.
• Is this evidence that the rollout or even the entire business model is broken? I would suggest not; LFLs are still positive 1.7% which is not out of whack with other operators in the hospitality sector. Is the fact that management have reaffirmed the rollout will proceed as planned evidence that they are burying their heads in the sand?
• Drawing comparisons with Crawshaw (LON:CRAW) is misguided in my view. In their case when trouble first arose, LFLs were a stonking -4.4%, they were loss making and they cut the dividend. Revolution Bars (LON:RBG) is nowhere near that sort of situation, they are still likely to be making a profit after tax north of £6m per my calculations above.
• Is management credibility impaired by citing the effects of business rates, wage growth, apprenticeship levies etc. as causal factors given that these should have been relatively easy to forecast? Yes, quite possibly.
• On business rates, Paul reported from the 2nd March analyst meeting that they had quantified the increase as £0.6m. My own 'back of fag packet' calculations (posted back in February here) was for an increase of £0.9m,  so the £0.6m figure looked a bit light to me.
• On the apprentice levy, their gross payroll last year was just under £31m, so the 0.5% levy charge of around 155k really isn't making that much of a dent in their profits and should be pretty difficult to mis-calculate to any material degree.
• On living/minimum wage growth, the rates are publicised ahead of time and although this is mentioned in the risks in the annual report, it is played down somewhat as being something they can address relatively easily.
• The two site closures for refurbishment would have been planned and the effect on trading easy enough to forecast.
• So on balance I think citing these issues (business rates, payroll factors and site closures) is a figleaf and the real cause of the shortfall in trading is down to the new sites not coming up to speed as quickly as they anticipated. The concern is that as they roll out new sites, they are now reaching the limit of towns where the premium charging model works as well as it does at existing sites. Maybe historic patterns of how quickly a new site gets up to speed are not applicable to sites which will be opened in future, in which case they may need to rethink the roll out plans.

Are these factors enough to justify the share price falling by more than the implied EPS reduction? I am not sure yet, based on the evidence available.

I hold a middling position in Revolution Bars (LON:RBG) and on reflection I am going to continue holding for now until further evidence emerges. So I'm neither adding nor selling today. Perhaps that makes me a rabbit where I should be acting as an assassin or a hunter, but in defence of my leporine status I'm trying to base it on a structured thought process.

I find this statement that they have made galling:-
"The Company is experiencing the well-publicised sector cost headwinds from the impact of the living wage, the double increase this year in minimum wage, the new apprenticeship levy, as well as the above inflation increase in general business rates. These increased costs will be more than anticipated in the current year."

Compare it with the end Feb Interim statement they made:-
"The strong first half performance reflects determined execution of our operating model. Whilst certain cost headwinds are expected in the second half, the strong first half performance, together with on-going mitigating activities mean the group is meeting expectations."

The living wage and apprenticeship levy changes were known about back in 2016! I also believe that the business rate changes were known by the time of the February statement.

So, was the Feb statement a display of incompetence or something else?

The sell off may be overdone, but I think until they can demonstrate that their figures are going in the right direction again and in accordance with their statements it is too risky to hold on, so I've sold.

I'm fully sold out now, but I wish holders and the business as a whole well. They are in for quite the ride, I expect!

Agree it is a huge risk taking a position on falling knives..

snippet from Ed's Slides : Only consider holding (or buying) after a profit warning if it’s a high Quality Share (Quality Rank 75+) and in this case it is 80+....

Guys - take note of the following tweet a few minutes ago

"
-? @gud2bheard 24m24 minutes ago
More
Replying to @BottyFisherBond
#RBG - bigger issue is with roll out of new pubs not generating income as forecast... saw what happend with #CRAW when rollout goes wrong.
"
Food for thought.

sorry.. got it @139...

Ed Croft's research study into 245 small cap profit warnings showed the basic rule of thumb is to sell at the first profit warning no matter how tempting other actions would appear to be.

Since that piece of research I have taken heed of that research and sold my 'profit warning' shares immediately and saving, on average, the humiliation of seeing an average 18% fall in the share price over the following months.

So if anyone is languishing at today's low prices and can't hit that 'sell' button then Stockopedia research may convince you otherwise.

But of course, this share is 'different', right??

Carcosa

i took the risk of falling knives @143...I rememberr Ed saying that as long as the quality rank is greater than 80, that could be a winner... Only time will tell my fate :-(

be interested to see what Paul writes on this today

For me there are two issues in the update. The first is the slow maturing of the new bars - this can have many reasons, and should be expected. It's a shame, but wouldn't impact the results hugely, unless the whole 'De Cubas concept isn't gaining traction.
The second point, and the one I see as the bigger issue is the affect of costs (business rates, apprenticeship and min. wage). For them to say these have been higher than anticipated would suggest they've taken their eye off the ball. These should have been easily calculated and expected - they've been highlighted for months (if not a year).
I sold half my holding at a loss as soon as I could this morning, but couldn't sell my other holding. I will see what the day brings and then decide on what to keep/sell.
At this level, I think they could be a buy. But I am aware of Ed's research on profit warnings, and that clearly says sell and stay out until they show better results and clearer management confidence.

Average trading volume over a 6 months period  = 160K .
Trading activitiy on 17/5, couple of days ago:

- total 310K
- buy 34K
- sell 136K
- indeterminate 140K

Leak? insider dealing? Never.

Paul, I'm not a holder of Revolution Bars (LON:RBG) but, reading the March 2 report of your meeting with their management, one could ask whether they were selling you a pup or, alternatively, whether they are really on top of their game. The update today might well also raise questions for investors about the CFO's leaving.

Annoying! Perhaps the fall earlier in the week was based on leaky information...

Is it fair to assume adjusted EPS may be similar to last year? If so this trades on a p/e of 10 so I tempted to buy more but don't like catching falling knives and all that. The underlying business is still growing. A little bit concerning the Revolucion De Cuba format is less profitable than expected as that's really where I expected growth to derive from.

Some insider info earlier in the week perhaps !!!!!

Text of trading update below. Somewhat down beat commentary IMO which may take some of the wind out of the "great growth story" bulls's sails.  Seems slightly out of kilter with the very positive mood music reported by Paul in his meeting notes of March 2nd although possible adverse market reaction today might be a good buying opportunity for those keeping the faith....

Gus.

-----------------------

Revolution Bars Group PLC

("Revolution" or "The Company"

Trading update



Revolution wishes to update the market on expectations for the 52 weeks to 1 July 2017. 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 and gross margins remaining as expected.

The Company is experiencing the well-publicised sector cost headwinds from the impact of the living wage, the double increase this year in minimum wage, the new apprenticeship levy, as well as the above inflation increase in general business rates. These increased costs will be more than anticipated in the current year.

The Company has opened five new Revolucion De Cubas in the last twelve months (and one new Revolution Bar) and whilst the underlying sales performance of these bars remain on track with an average weekly turnover of £43k (net), these bars are taking longer to mature to full profitability than originally anticipated. Additionally, two key sites were closed for just under two weeks for major refurbishment (Blackpool in March and Cardiff in May). All these sites will make a full profit contribution in our next financial year.

Consequently, due to the timing of profit maturation at the new Revolucion De Cubas and the industry-wide cost headwinds, the Company believes that the adjusted EBITDA (pre-opening costs) out-turn for the year is expected to be broadly at the same level as last year.

The Directors remain confident in the underlying strength of the business, its brands, the strong customer proposition and the business's capability to deliver high returns on invested capital. Consequently, it remains the plan to open six new bars in the next financial year.

My crude calculations say:

If adj EBITDA is same level as 2016 (£15.6m) then assume net profit is likely to be same order which is £6.07m.

Current broker net profit forecast is £7.75m So drop from current market expectation is 22% .

All rough and ready. Assumes conversion from EBITDA to net profit remains unchanged.

Trading update & profits warning today.

I would hazard a guess at a fallout from the MAB results this morning (-4.6% at the mo).