Small Cap Value Report (29 Apr 2016) - RTN, FFY, FLOW

Friday, Apr 29 2016 by

Good morning!

Sorry I didn't get round to doing any more updates to yesterday's report. I was too tired after a 5-hour drive home, in heavy traffic.

Today is one of my "it's not a small cap, but it is a retailer, and it's interesting" days! I'm talking about this company:

Restaurant (LON:RTN)

Share price: 290p (down 22.5% today)
No. shares: 201.0m
Market cap: £582.9m

(I am actively trading this share today, and at the moment am long, but this may change throughout the day)

Trading update & Board change (profit warning) - key points:

The long-standing FD has left with immediate effect - so clearly some kind of Board Room bust-up has occurred. Not good - and suggests that there could be more problems ahead.

Current trading has been weak:

Since we updated on current trading with the preliminary results on 9th March, we have seen a further deterioration in trading conditions, with our Leisure business, in particular, continuing to be impacted by the structural and business challenges referred to in the March Preliminary results statement. As a result for the 17 weeks to 24 April, total sales are up 4.7% and like for like sales are down 2.7%.

Clearly that's bad news, but it's hardly a disaster. LFL sales down 2.7% over 17 weeks suggests to me problems that are probably fixable.

However, note that the company last reported LFL sales were down 1.5%, for the first 10 weeks of this financial year.

I want to quantify what the LFLs were for the last 7 weeks (not specifically stated today), so have created a very simplistic spreadsheet (see below) which calculates approximately what the LFL might have been in the last 7 week period. Note that I have ignored seasonality, which will skew the figures somewhat, since I do not have any data on the seasonality of the business on a weekly basis.

Here are my workings, which suggest that LFL sales down c.4.5% in the last 7 weeks - so a deteriorating trend.


Sales guidance given today for the full year, is LFL sales down between -2.5% to -5.0%

Revised profit guidance is given today of £74-80m profit, at the PBT level. So still a very substantially profitable business, on an excellent margin too.

Valuation - I've not seen any revised broker forecasts yet today, but using the old figures, and taking them down…

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The Restaurant Group plc is a United Kingdom-based company, which operates multi-brand casual dining restaurants, pubs and Concessions business. The Company operates over 500 restaurants and pub restaurants. The Company's principal trading brands include Frankie & Benny's, Chiquito, Coast to Coast, Brunning and Price, TRG Concessions, Firejakcs, Garfunkel’s, Joe’ Kitchen and Wagamama. The Company's Frankie & Benny's brand offers classic American and Italian style food and drinks. The Chiquito menu offers a range of authentic Mexican and Tex-Mex dishes. The Coast to Coast offers classic American food, such as double burgers, stone-baked calzones, distinctive steaks, amazing seafood dishes and South-West American specials. The Company also operates a concessions business, which trades principally at the United Kingdom airports. more »

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Fyffes plc is a marketer and distributor of tropical produce. The Company operates through Tropical Produce activities segment. The Company operates through two divisions: Tropical Produce and Property activities. Its Property activities include its investment in Balmoral International Land Holdings plc (Balmoral), an international property company. Its Tropical Produce division is a distributor of tropical fresh produce, comprising three product categories: bananas, pineapples and melons. The primary activities of the Tropical Produce division include the production, procurement, shipping, ripening, distribution and marketing of these products. They are produced in Central and South America and distributed to the Company's customers in Europe and the United States. It owns and leases over seven banana ripening centers in the United Kingdom, Germany and Ireland and a melon distribution center in Florida. It offers product under Fyffes Blue Label brand. more »

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Flowgroup plc and its subsidiaries are focused on the creation of shareholder value through the provision of a range of energy technologies, energy supply and energy services. The Company's segments include Flow Products and Flow Battery. Its Flow Products segment provides products for distributed generation and load shifting. Its Flow Battery segment provides compressed air battery products. Flow Products offers heating and microgeneration products and delivers them into the market through a national network of installers-Flow Brand Ambassadors. The Company's product range include Flow boiler, which is the domestic microCHP boiler that generates low carbon electricity while it uses gas to heat a home and Hybrid system that combines heat pump technology with a system boiler. Its subsidiaries include Flow Products Limited, Flow Battery Limited and Energetix Europe Limited. more »

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

47 Comments on this Article show/hide all

ChristopheBassons 29th Apr '16 28 of 47

In reply to post #129660

Sorry, but a lot's changed since the 70s! Every house in the street already has a boiler, it's not as if this is a radical concept. Given this is the case, mCHP totally makes sense on both cost and efficiency grounds. It's Friday night now, but I'll do some sums for you over the weekend - this "doesn't scale" and "superficially seductive" claim against mCHP doesn't stand up to scrutiny.

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herbie47 29th Apr '16 29 of 47

In reply to post #129684

I did ask Flowgroup (LON:FLOW) for a quote but when they saw my energy consumption they said you need to use far more gas, lol. They said you need to use about £1,300 per annum of gas to make it viable. Anyway its been so delayed I bought a normal one instead. Not keen on the finance plan either.

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rjmahan 30th Apr '16 30 of 47

In reply to post #129615

I agree debt looks manageable now - but what happens if food commodity prices fall more generally?

These things can happen - and are very hard to predict.

I agree the management are high quality, unfortunately the historic record of acquisitions adding value for shareholders is not a good one.

Best of luck anyway.

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cig 30th Apr '16 31 of 47

In reply to post #129654

The problem is they're competing against condensing boilers which are pretty efficient. Basically they're converting exhaust energy from the main heat production process to electricity while a condensing boiler is reusing the same exhaust energy for more heat. The product is worth something from a law of physics viewpoint if if the sum of primary heat + electricity (flow) > primary heat + secondary heat (condensing) per unit of energy input, and economically you need to include the lifetime amortised manufacturing/maintenance cost difference if any. For some reason Flow seem a bit shy about giving numbers that would prove that...

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ChristopheBassons 30th Apr '16 32 of 47

In reply to post #129702

"The problem is they're competing against condensing boilers which are pretty efficient. Basically they're converting exhaust energy from the main heat production process to electricity while a condensing boiler is reusing the same exhaust energy for more heat."

No, this is wrong, and this is the heart of the misconception. You're right about condensing boilers; the Flow boiler is generating electricity and using the waste heat to produce hot water - it's a subtle difference, but your law of physics statement needs to also include the power station energy/efficiency, which is where the gains are made - the Flow boiler is, in effect, replacing the power station, not the boiler (though it's physically in place of a boiler!). I'll do the sums for you later...

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zho 30th Apr '16 34 of 47

I had a quick look at FLOW roughly 18 months ago, when the price was in the 40s. I didn’t make notes so my recollections may be faulty, but my thoughts were along the lines of:

i) Boilers vary in their reliability. I wouldn’t fit a boiler that my plumber didn’t recommend, and I would have guessed that plumbers would avoid recommending a boiler without a track record of reliability.

ii) Okay, that point may be redundant because if you buy a FLOW boiler you have to use a FLOW installer, but I wouldn’t be happy with that. I only use people whose work I know and I imagine other people might agree.

iii) The price of the FLOW boiler was something like £4,000 (or maybe £4,000 + VAT) including installation. I recently bought a Vaillant combi boiler (for a 4 bedroom Victorian house, top recommendation from Which, plumber gave it the thumbs up) for £1,000 inc. VAT, and my plumber charged AMUNDI SP 500 ETF (LON:500) for installation (neat job, and thorough). Okay, there will have been an element of mates’ rates but even without these we’d have been talking something like £2,000, half the price of a FlOW boiler, or less.

iv) I seem to remember the FLOW boiler is a combi. Fine, most people have those, but I’ve noticed that people in the know (builders, plumbers) choose a hybrid system (indirect or non-combi boiler with Megaflo hot tank operating at mains pressure) for themselves, and some of their clients follow suit.

v) FLOW boilers are only recommended for larger properties e.g. a 4 bedroom Victorian house. If they’re not suitable for smaller Victorian properties then they’re probably not suitable for larger modern properties with decent insulation. Points iv) and v) suggest the addressable market is not that great.

vi) My new boiler is supposed to be 92% or 93% efficient. If that figure is correct then that places a bound on maximum savings from a FLOW boiler, and even allowing for a high feed-in tariff I couldn’t get my arithmetic to agree with FLOW’s figures on savings.

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herbie47 30th Apr '16 35 of 47

In reply to post #129729

I think the Flow boiler inc. installation is more than £4,000, the last figure I saw was £5,475.

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zho 30th Apr '16 36 of 47

£5,475! That's very expensive. Even British Gas don't charge that much.

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herbie47 30th Apr '16 37 of 47

In reply to post #129753

Yes but its not a normal boiler. They claim you will get the money back: "a FIXED reduction in your home energy bill, irrespective of how much electricity your Flow boiler generates, that means your Flow boiler pays for itself in just 5 years – so you effectively don’t have to."

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Disco Ball 30th Apr '16 38 of 47

I went to a Frankie & Benny’s last weekend located on a depressing retail park in Stoke for my missus little brothers birthday. I skipped a starter and went straight for a soggy and oily peperoni pizza. Woodfired in a clay oven this was not. My other half went for a veggie burger which she said was “edible” . Other members of the party had “rubbish” burgers and dull and insipid olives. Would I go again? – of course not it’s absolutely awful. But I guess it’s not aimed at me. The families with kids seem to love it, especially when they blast out Happy Birthday followed by Congratulations at full whack every 5 minutes. Would I invest in Restaurant (LON:RTN) ? – maybe. They seem to have a lot of competitors now, most of whom offer far superior food, many of their outlets are located on retail parks which seem old fashioned and themed restaurants are all a bit 90s. On the other hand, the debt is small and manageable, the shares look very cheap and I’m expecting a decent short term bounce – can this be sustained though? I don’t think so.

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Samsgrandad 30th Apr '16 39 of 47

I remember a quotation along the lines of "If you have to explain, you've lost the argument". People can't be bothered with a technical evaluation of a boiler. Guaranteed savings like solar panels and they'll take notice, but this sounds an expensive complicated solution to saving CO2. Reminds me of a company called Vphase which made domestic voltage regulators which were hyped to a dizzy height to enable an exit for early investors.

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ChristopheBassons 2nd May '16 40 of 47

In reply to post #129714

So, here are my calcs. The current boiler is only suitable for large/high consumption properties (i estimate break even at 27500 kWh gas consumption) - Flow estimate there are 6 million properties in this category in the UK.

Some baseline figures.
Cost of gas 3p/kWh
Cost of elec 14p/kWh
CO2 per kWh (Defra figures) 0.185kg for gas, 0.527kg for electricity
Gas consumption 27500 kWh
Elec consumption 5000 kWh (Although the electricity side of this is not relevant, I'll include for completeness)

The normal boiler situation:
Cost of gas = £825 pa
Cost of elec = £700 pa
Total = £1525
CO2 = 7723 kg

With a Flow boiler
A good condensing boiler and a Flow boiler have similar thermal efficiencies, so this drops out and we can ignore. (Though not strictly true, this is a fag-packet calc!)
The flow boiler produces hot water and electricity in the ratio 7:1
Electricity generated = 27500 / 7 = 3929 kWh
New gas total = 27500 + 3929 = 31428 kWh
New electricity total = 5000 - 3929 = 1071 kWh

Total gas bill = £943 (this goes up)
Total electricity bill = £150
Total bill = £1093

Saving = £432 per annum

Additionally, you get a 13.45p feed in tariff which is fixed for 10 years and is inflation linked. This is then worth £528 per annum

Total saving = £960 per annum or £4800 over 5 years (which is the Flow energy offer), and then the boiler still goes on saving money and attracting the feed in tariff for a further 5 years.

The CO2 situation with flow is 6378kg or a reduction of 17%, which is why the feed in tariff exists.

This works because you've replaced a significant proportion of your electricity with own-generated electricity at a far lower cost, and far lower CO2 production level. The underlying reason is that centrally generated electricity from fossil fuels is something like 40-50% efficient at the power station doors, and incurs a further 10-15% transmission loss. This bumps up to 94% efficient in the Flow boiler with no transmission loss.

apad, again, I'm not sure why a 40yr old paper is relevant to these sums when technology has moved on so much. E.g. Condensing boilers only really hit the market 30 years ago. Do critique my sums, it's obviously central to my investment case that the product has merit!

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ChristopheBassons 2nd May '16 41 of 47

In reply to post #129765


Quite! But we're investors... if other potential investors don't understand the product then this is good reason why the company might be under-valued. From a product sales perspective, absolutely, but this is then an issue for sales and marketing (which is a business risk, I totally agree) but Flow have done a good job or making a clear customer proposition for their boiler, and they're selling into their existing customer base, who are enthusiastic about the brand, which is half the battle won. And, also should be noted that because they have customer energy consumption data, they can be very targeted in their sales effort.

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apad 2nd May '16 42 of 47

1: the age of basic principles is not relevant.
2: pound coins are not relevant - costs and subsidies can and do change all of the time
3: CO2 can be a very misleading, single parameter. We are creating systems that use more energy from cradle to grave than they produce.
4: Where you draw the boundary in an energy accounting system is critical - e.g. do you account for mining, manufacture and disposal. Doing energy accounting in this way is extraordinarily time consuming.
5: if you want a decent, modern primer I recommend the free download of David MacKay's "Sustainability without the hot air".
6: Ask yourself what information would change your mind.
7: This company will not survive, but if the principles were sound a system would be produced somewhen, somewhere in the world.
8: Don't hold your breath.

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herbie47 2nd May '16 43 of 47

In reply to post #129798

Does this not assume that electric usage is when the boiler is using gas? I would say over 90% of my electric is used when the boiler is not heating water.

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ChristopheBassons 2nd May '16 44 of 47

In reply to post #129804


Yes, but this energy accounting argument misses the point: it's a boiler, you need a boiler, whether it's boiler A or boiler B, you still need a boiler. The Flow boiler is a direct substitution; when boilers give up the ghost, they need to be replaced - arguing that you're not cradle-to-grave accounting doesn't magically make the need for a new boiler disappear!

I assume, by the way, that because you haven't poked a hole in them, my sums add up. In this instance, pound coins are relevant, because I'm an investor, so as long as there is a sound economic case I'm happy! Point taken about the subsidy though; do note that given the nuclear power replacement saga, there will be pressure on the government to keep carbon emissions in check, and a 20% saving (however imperfect the CO2 measure, I agree with you on this too!) this should continue to attract a subsidy (it is, of course, a business risk).

Note too that it's not just FLOW doing mCHP: the Japanese have gone for fuel-cell based mCHP units in a big way; other players (e.g. Baxi) have larger sized units using Stirling engines but they're more than double the cost. I'd read MacKay's book a few years ago - interestingly, just looking at his chapter on CHP again, he doesn't come out against them, he just states that while they're better than a condensing boiler, they're not as good as a heat pump. Fine, they're still better than a condensing boiler! (My main reservation here from an investment point of view is that it's not a no-brainer better product, i.e. it doesn't necessarily sell itself, if ever there was such a product!).

I'll change my mind on FLOW as an investment (rather than energy accounting as a superior way of looking at the world!) when either a) the sums don't add up; b) they don't make money or they can't sell the boiler. The point is, the share price of FLOW currently attributes zero value to the boiler - when I was buying (in the 12-14p range), the value case was compelling. At ~21p I still think these are ~50% undervalued (e.g. fair value of the whole business at this stage is about 30p).

Again, I don't disagree with you main points but, despite being an engineer too, we live in a real world and, with an investment hat on, you can argue all you like about the imperfections of the product w.r.t. e.g. energy accounting, feed in tariffs, emissions, but if it can make money, it can make money, and if the company is selling for cheap on the stock market, I'll buy it. 30-40p a couple of years ago was very clearly too expensive, I suspect we've now gone through the hype stage and, certainly last year, went into "it's doomed" mode, whereas the reality is somewhere in the middle.

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ChristopheBassons 2nd May '16 45 of 47

In reply to post #129807

Yes, that's true, though you then export back to the grid and get paid for it. The take-home point of the sums should be that the savings/environmental benefits come from using more lower-priced and lower-CO2 gas in place of higher-priced, higher-CO2 electricity, rather than the erroneous conclusion that there's not net benefit because the overall efficiency is similar to a condensing boiler.

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thelagerkhan 2nd May '16 46 of 47

Like Danpollard I also went to Frankie & Bennys last weekend at Stansted Airport, on my way back from Masterinvestor, I can honestly say that it was the worst meal I have had in years and it took about six pints of lager to get rid of the taste.
I would never go to one again and I am sure that I am not alone, I am surprised that sales are only down 4.5% and am sure that there are plenty of new chains who will do better, I would also think that they will suffer from the new wage regulations.
I just wish that I had realised that they were listed and put a short on last Monday.

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ridavies 3rd May '16 47 of 47

Always interested to read your comments. I have been reviewing the future and relative value of the key UK airlines. The one that always stands out as under performing is Flybe (LON:FLYB). You always seem to have interesting discussions with senior management, Would you be able to have a one to one with the CEO to ask him to explain what is going on? Your discussion with the Brady guy was very interpreting though I accept that he asked for the chance to reply. How about inviting the CEO to take the opportunity to get his defence in first!

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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