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

29th Apr '16 by Paul Scott

47 comments 21196 reads

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 9^th 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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imranawan

29th Apr '16

Hi Paul,

Thanks for the write-up of Restaurant (LON:RTN). I'm intrigued about your comment that you're actively trading the share and at the moment you're long. Are you buying in small chunks and then selling for a small profit. Just curious that's all.

From Twitter I picked up the conference call wasn't well received, and I guess three bad trading updates, coupled with the FD leaving and the "strategic review" have hammered the share price this morning.

Best wishes,
Imran.

Paul Scott

Hi Imran,

Re Restaurant (LON:RTN) - I sold at the open for about 320p, then intended waiting until it got to about 250p before buying back in. However, on digesting the information, and listening to the Conf Call with management, I then decided to buy back in in various tranches at 283-289p.

In all likelihood, I'm probably going to hold now for the duration. However, if it did spike up to say 310p or more, then I'd probably bank some profit, and run the balance.

So given that I'm actively trading it today, and possibly in the next few days, I thought a specific disclosure to that effect would be better than just saying I am long.

Regards, Paul.

P.S. I'm not claiming to be especially good at trading this type of situation, and in fact I usually buy too early, and often make a mess of them! However, the ones with strong balance sheets usually recover, and end up in profit. It's just a game of averages. Last year my win:lose ratio on trading was 60:40, which resulted in a good outcome for the year.

andrea34

Re. FFY, the revised guidance looks like they are going to report somewhat above expectations...? On the other hand, I always get scared when a company says they are trading "overall" in-line... because this implies that at least one division is doing worse than expected and there is something wrong... which could get worse.

Hi Paul

Thanks for the reply and explaining your thought process on buying back into the stock. I think the fall looks overdone, but am wary of falling knives and I suppose the market is punishing it for the three poor updates they've issued since the start of the year. Best of luck with the trade.

In terms of Fyffes (LON:FFY) the Stock report for the company already listed as the EPS forecast for 2016 as 14c - so I assume the updated figures in the trading update are already factored into the price - hence the reason we've seen no real movement in the share price. As normally you would expect to see an uplift in the shareprice when guidance is raised?

Best wishes,
Imran.

xcity

Re Restaurant (LON:RTN), the statement was all about footfall and yet the Finance Director is leaving immediately. Unwanted resignations will usually have a notice period - they even had/have one at Lakehouse when the departure was inevitable - so looks more live a shoving. When a finance director is ejected with immediate effect, and there is a 'strategic review', it suggests a suspicion that a couple of skeletons may have been buried in the numbers. But nothing in the statement to help understand.

mammyoko

Very unimpressed with the handling of questions on the analysts' call. No LFL by brand is appalling and he made a complete pig's ear of the question over the dividend - at one point saying that it would fall if eps fell and then implying it would be retained due to good cash generation.

I'm an accountant and the numbers are actually quite well presented which will be, at least in part, down to the departing CFO (whose background looks impeccable for the role). The CEO sounded (and looks on paper) a bit of a lightweight. He absolutely floundered on the call.

But, as you say, well backed by assets and now on a low multiple. Yield of nearly 4% just with the final div alone.

Presumably at least some of the footfall issues here and at other retailers are down to the fears of an IS attack on shopping malls. Good news for Boohoo.Com (LON:BOO).

John Cannadine

FFY has a history of conservative guidance that they often raise later in the year. It is a fantastic company, very well run with both room to grow organically, bolt on acquisitions and potentially a takeover target itself. Part of the reason for the low divi yield is the rise in the share price over the past year. Deserves a much higher profile with UK investors. Forms a core part of my long term portfolio.

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

Restaurant (LON:RTN)

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Paul Scott

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