Small Cap Value Report (31 Aug 2017) - RTN, TRAK, PRES, ESL, WEY, CHH

31st Aug '17 by Graham Neary

28 comments 15774 reads

Edit: This report has taken shape now, so I've removed the initial introduction and am replacing it with a list of what we've covered today:

Restaurant (LON:RTN)
Trakm8 Holdings (LON:TRAK)
Pressure Technologies (LON:PRES)
Eddie Stobart Logistics (LON:ESL)
Wey Education (LON:WEY)
Churchill China (LON:CHH)

Cheers!

Graham

Thanks Graham! It's Paul here. We're trying to write the same article in relays. What could possibly go wrong?!

As regards Restaurant (LON:RTN) - I woke up thrilled that it looked as if there had been a 240p bid for Revolution Bars (LON:RBG) but then realised that I'd got the wrong ticker! I'm actually short of Restaurant (LON:RTN) - so was not best pleased with an 8% rise in its share price this morning, in reaction to interim results.

It's about £700m market cap after today's rise. RTN operates the Franki & Benny's chain, and some other smaller operations. About half its estate are near cinemas. I'm short of the shares because the main format seems tired. People I know tell me that the food is awful - microwaved frozen stuff, apparently.

There is over-capacity, and cost pressures (especially wages) in this sector. Although judging from the share price (now up nearly 10% at the time of writing), it sounds as if investor worries might be overdone. Could there be opportunities in the hospitality sector, I wonder?

A quick look at interim results from

Restaurant (LON:RTN)

(in which I (Paul) have a short position)

26 weeks to 2 Jul 2017

LFL sales down 2.2%
Adjusted profit of £25.5m in H1 - down 30% on prior year - note how operational gearing kicks in on the downside - a small drop in revenues = big drop in profits.
Net debt of £19.3m, so company looks well-funded.
Balance sheet looks strong, with NAV of £190.5m, and NTAV of £164.0m
Interim divi maintained at 6.8p "as a sign of confidence in our plan"
Outlook - current trading in line.
Expect to deliver an adjusted…

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Zipmanpeter

31st Aug '17

Reasonably re-assured if not excited by Restaurant (LON:RTN) results. Recovery plan promised after crash steadily being executed well (last years cull of stores open/planned done; new menus rolled out; lower prices implemented; marketing specifically aimed at the right lapsed customers ie families). Believe there is a better slate of movies in the next 12 months to help pull in footfall.

Overall, not sexy and will take a minimum 12-18 months to have a real impact (just as overpricing took 2 years to really show before the mis-guided strategy cost the last CEO his job). Meal Volumes are up but LFL revenue not because of the price cuts (slide 3 in presentation - although lacked of numbered scale). Fixed price menus also up strongly and double 2014 level (slide 17) although there are no numbers on scale to see significance . This is all as promised/expected. Passes most of the FUL Chairman's tests of restaurant concept fitness now in my view

If early promise maintained, better value meals will see steady volume recovery/growth (especially whilst still comparing vs weak LFL) and total cash margin will gain and so justify the share price. Obviously, a big consumer recession would see ALL eating out places suffer but I think RTN may now do relatively OK vs competitor set.

RTN remains a quality operation with mature, well structured operations and a good balance sheet position. Critically, still relevant brands - now with execution improving again. (To Paul, you never went to an F&B for the quality of the food !! Proposition is 'good enough' food and young-family friendly ambience in convenient high traffic leisure parks. (Fortunately, my kids now maturing into real ale Gastro-pubs & go to the movies on their own).

Interesting RTN still seems to see scope to grow. Some 18-20 new sites this year (presumably already well underway and made it through review when it would have been easy to drop them. Dropping to 10-20 for year after so CAPEX need will then drop helping dividend cover. Since mgt will be excoriated if they open new stores whilst in turnaround that do not succeed after major review, they must be confident they will succeed. Perhaps same factor of reduced rents is helping offset other pressures (cf NXT, FUL) - critically, for those companies with financial strength, proven concepts and a long term view.

Also remember when it crashed: PE money was going to come and snap this up group. American operators are apparently not seeing good value in US casual dining chains. They may come to like the idea of UK expansion if $ stays strong vs £.

Modest Restaurant (LON:RTN) holder for steady income for now and long term recovery prospect.

james parratt

It's a bit off topic but I'd love to hear Paul and Graham's view on the current Bitcoin mania!?

Graham Neary

Haha, I love the suggestion James! Great idea. I will see if I can put something together.

Graham

Good questions FREng....

AlanJenkins2

Highly speculative !

runthejoules

Thanks Graham for looking at £WEY! I think it's a risky prospect sure but I dipped my toe in this morning. Should have waited for the dip I'm now stuck in, but I think it will come good in the end as too many kids are too precious to send to physical schools with real other kids these days. I second the bitcoin mania. I'm worried crap like this could tip the real economy over. Or would a flight from crypto boost real equities? Ta.

Aislabie

Some here may remember that John Harvey-Jones the original TV "Troubleshooter" had Churchill (CHH) as one of his subjects in the 1990 first series.
He was quite impressed with them then although suggested they focus on the bulk end of the market (hotels etc).
It is interesting to note that the other companies in that first series were Apricot Computers (disappeared into Mitsubishi), Copella Fruit Juice (now owned by Pepsi), Morgan Motor Cars (who refused his advice and survived) and Tri-ang Toys (collapsed, bits ending up in Hornby (HRN), with Meccano being made in France for a Canadian company)

FREng

Bitcoin is the best known of the cryptocurrencies - there are others. It is a compelling example of the power that distributed ledger technology can have, by removing the need for a trusted third party as the "clearing agent" for transactions. The Government Office of Science published a report on distributed ledgers some months ago - it's on their website at https://www.gov.uk/government/news/distributed-ledger-technology-beyond-block-chain.

Cryptocurrencies offer the possibility of anonymous transactions, if the owner is careful. (If careless, then one traceable transaction, such as buying something for home delivery, can make all your transactions from the same electronic wallet traceable).

At the moment, only cash transactions are untraceable, and Governments around the world don't like cash for that reason. I can see cash being withdrawn completely in many developed countries within two decades, to stop money laundering and tax evasion (and for political and security reasons). That may be a boost for bitcoin and other cryptocurrencies or it may lead to the issuing of national cryptocurrencies. I'd bet on the latter.

OsullivanB

Excellent stuff! Thank you. But I had been looking forward to your thought on Satellite Solutions Worldwide (SAT).

Economic_Literate

Hi Paul/Graham

Any chance you could comment on Alfa Financial after today's half year report?

Many thanks.
C

AnonymousUser226237

Paul you missed TRAK's contact update today.

AnonymousUser252054

I just got some Trakm8 shares a few days ago so thought what abysmal timing when pre-market opening I read this morning's RNS "Trakm8 and Intelematics Concludes Telematics Supply Contract."

What?! Oh no!

... It took a few readings to confirm it was actually good news. Trakm8 and Intelematics are in fact expanding/extending/upgrading/uplifting/enlarging/hiking/raising/augmenting/amplyfying etc. the current supply contract.

Yes what an awful wording, I agree. But bottom line is that it's a great contract :)

DarwenLad

Not sure what to make of the boardroom changes at Trak. James Hedges, the outgoing FD, is the second biggest individual shareholder after John Watkins, the chairman. Was he pushed or did he walk? What will happen to his 6.3% stake?

My biggest concern about Trak is the lack of Institutional investors. Quartix, its smaller but much more highly rated competitor, has three sizeable institutions on its share register - Blackrock (9.9%), Liontrust (5.4%) and Miton (4.7%) - and a chief executive and finance director who together own over 40% of the business. By contrast, Trak's website discloses just one reasonably well known institution on its register - Hargreave Hale (3.0%). If Trak has such potential why has it not attracted the interest of more professional investors as opposed to retail investors?.

I would be happier if Trak followed Quartix's example and recruited an outside non-exec chairman. The fact that John Watkins, who owns 17.3% of the equity, is executive chairman and Mark Watkins, his son, is chief operating officer is far too cosy. Admittedly, David Bridge, Quartix's FD who owns 5.5% of the company, has announced he is leaving next year but the transition has been flagged up a long time in advance rather than the rather abrupt way that Trak has announced the change of its FD.

Trak may turn out to be a great company but it could do with the appointment of a strong outside chairman not afraid to ask a few pointed questions of Trak's executive team of which the most pressing is why its main quoted competitor (Quartix), which operates in very similar markets, is so much more profitable.

AMD55

I have also been looking out for views on Satellite Solutions Worldwide ?

Paul Scott

1st Sep '17

Hi James,

Don't, just don't!!!

I've speculated on BitCoin several times, and got my ass served up back to me, on a plate, several times, both long & short. (i.e. huge losses)

So painful lessons learned, as usual, the hard way :-(

Regards, Paul.

P.S. As my mentor always says to me, stick to what you're good at. Speculating on crap like BitCoin is just gambling.

Sniggolb

Many of my errors have come about because I was bored!

French philosopher Pascal claimed that most of all our miseries come about because we are unable to tolerate sitting quietly tolerating our own company in our own room.

Great thought...most of my best bets are the ones I didn't make

Tom

peterthegreat

Thanks Garaham for the coverage of Churchill China and for pointing out that it is fundamentally different from most other companies covered as it is a company in which a family retain a major interest. I am unsurprised that there are so few comments on this company as family companies are often perceived as being boring but I have worked for one such company and invested in many more (such as James Halstead, Nichols & Latham) and they are often cash accumulating machines. The downside is unspectacular growth because the owners don't want to take any chances by branching out into othe areas or making major acquisitions. They often favour retaining AIM listings because of the inheritance tax benefits offered to the family and other shareholders and, more recently, I think this may be why many have become quite highly rated. I have never had an unsuccessful investment with any of these companies and they are ideal for buy and hold investors who enjoy inefficient balance sheets.

Ramridge

...most of my best bets are the ones I didn't make

Love it. Has a touch of Groucho Marx about it!

DMG2305

16th Nov '17

Does anyone have any ideas as to why Churchill share price is taking such a nose dive recently, seems to be down 15% since Grahams last update in August on no news. Its on one of my whatchlist after picking up some shares in Portmeiron. Lookd like a good solid long term hold.
D

Small Cap Value Report (31 Aug 2017) - RTN, TRAK, PRES, ESL, WEY, CHH

Restaurant (LON:RTN)

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Graham Neary

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