Small Cap Value Report (Fri 12 Feb 2021) - FRP, JET2, FUL

12th Feb '21 by Paul Scott

100 comments 12389 reads

Good morning, it’s Paul here with the SCVR for Friday.

Timing - I’ll be focused on this all morning, so should be done by lunchtime. There’s not much fresh news, but I have plenty of backlog items to catch up on.

Agenda -

Frp Advisory (LON:FRP) (I hold) - Trading update looks good - ahead of expectations

Jet2 (LON:JET2) - another fundraising. I use this as an example to warn of the dangers of dilution.

Fulham Shore (LON:FUL) - Trading update from earlier this week. Takeaway/delivery doing well. Expansion resuming.

Frp Advisory (LON:FRP)

(I hold)

100p (pre market open) - mkt cap £240m

FRP Advisory Group plc, a leading UK professional services firm specialising in advisory services, today announces a trading update for the nine months to 31 January 2021.

That means it has an unusual 30 April 2021 year end.

It’s mainly an insolvency practitioner.

Exceeding market expectations - good news here -

The Board is pleased with the continued progress made over the first nine months of the Group's financial year, despite the significant levels of government support and reduced levels of both corporate insolvency and administration appointments across the market. As such, at current trading levels, the Board now expects to exceed current market expectations1, with revenues of at least £75 million and adjusted2 EBITDA of at least £21 million.

1. The Group believes that current consensus market expectations for revenue and adjusted EBITDA average £72m and £19.2m respectively for FY21

2. Adjusted for share based payments including deemed remuneration and exceptional costs.

That’s a good beat, about 10%, although why are they quoting adj EBITDA? I wish companies would report adj EPS, because that’s a much simpler number, which reflects reality, and means we can quickly work out the PER.

EBITDA is not a useful measure to me, because it ignores so many important, real world cash outflows (e.g. interest, tax, capex).

As Andy Brough pointed out in a recent PIWorld interview (a must-watch if you haven’t already seen it), he’s convinced that EBITDA was invented by Americans after Big Bang, to justify higher valuations! I don't think he was joking, maybe slightly, but it's difficult to tell. Here it is again -

Broker update - many thanks to James Fletcher at Cenkos, his…

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rmillaree

13th Feb '21

Very enouraging update ref the Pfizer vaccine from israel - its probably too soon for these stats to have any meaningful statistical significance with the time lag between infection and death and lack of age details of sample population used - but out of 520,000 people who have been given 2 doses of the Pfizer vaccine (in this specific sample group) there have been zero deaths - a quite staggeringly good outcome albeit it could be a statistical quirk at present. There does seem to be decent evidence emerging that even those that go on to get covid after being vaccinated seem to be less likely to end up in hospital or end up dying that than those who have not been vaccinated. So even though one may look at sucess rate of say 60% for some of the less effective vaccines or age groups and think thats not very effective hopefully its probable that those in the other % bracket that "failed" may still be getting some benefit from the vaccine.
https://www.businessinsider.com/pfizer-93-effective-israel-0-deaths-520000-maccabi-2021-2?r=US&IR=T

Caper4

If I wanted a punt on bars/public houses recovering earlier than most consider likely,then I would opt for Revolution Bars (LON:RPG)which is still at a huge discount to it’s pre Covid price.

Revolution Bars (LON:RBG)

err there is the elephant in the room here that shareholders from pre covid days have had their percentage onwership of the company shares massively diluted . On simplest lfl comparison i would say that you only have 40% (estimation please check) of what you had pre covid ref % ownership of your company - due to issue of 70 odd mill new shares!! - other than spike up in January/February 2020 shareprice is equal to or below the comparitor figure (40% of prior shareprice) for most of 2019 in that regard ! RBG were unlucky as they did seem to have turned the corner early in 2020 ref trading and shareprice trend.

I have just noticed directors gave themselves nice xmas present on 24th December here of 1 mill+ virtually free options - subject to themselves agreeing in future they are they are worthy of the freebies in the future - i am confident the "underlying" business will be doing fine in that regard even if the actual busines is doing pants at the relevant decision time :)

abtan

I have loaded up, especially in recent weeks, on an assumption that Revolution Bars (LON:RBG) will survive until May and then will be significantly undervalued, irrespective of the share dilution & debt load.

My workings from mid-December 2020:

Mid-December net debt: £19.5m
Burning £0.4m per week
Net Debt @ May 1st = £0.4m * 20 weeks (start of May) + £19.5m current net debt + £1.6m deferred PAYE = £29.1m
Current Market Cap = £28m, so EV will be £57m in May
Annualised cash generation expected c £8-£9m
x10 target EV/FCF = Target EV of c.£85m
minus £25m net debt I expect by the end of 2021,
gives me a 2021 Market Cap target of £60m (=£85m-£25m)
ie 100% upside to current valuation

The 3 main risks I can see with the above:

There are more deferred payments due in 2022 (eg VAT) so my estimates are over-optimistic, but not by much.
The market might not value the company as I have done (EV/FCF x10).
Bars don't open until later in the year, but with what looks like a successful rollout of the vaccine in the UK and good news coming out of Israel, I don't understand why this would happen.

Can anyone think of any reason, particularly quantitative, why my logic might be flawed?

Revolution Bars (LON:RBG)
Great stuff Abtan - the debt / other liabilities total is the other main part of the picture so nice to have some projections in that regad.

Personally i don't like the risk reward compared to the 50/60p range pre covid if debt will be up at £29 mill - it was only when it was getting down in the £10 to £15 range or less that i felt comfortable that they had the wriggle room to cover contingencies. Lucky for me i never bought back in here around the turn of last year. £30 mill debt again puts them back in the very little wriggle room zone - they will (presumably you will agree??) be in hoc to the bank until such time as they can get debt back down so they have a decent safety net ref planned reductions in debt etc.

On the plus side presumably the rents/unprofitable units issue has been mostly been resolved in their favour?? - not sure how much extra that should bring in compared to pre covid but if thats £1 mill plus a year they are better off thats a decent positive kitty of safety net from which to be working from.

As we know the road back to where they were pre covid from the poor trading days was a long hard slog of slowly improving metrics - i do worry that it might be similar here when they reopen.

I would say if hit the £8-£9 mill consistent cash generation per year then it wont take long for the market cap as you say to get closer to £50 - £60 mill per year you would think. My caution isnt that i don't think they will be there its just the cost if they arent there and need to do another fundraise.

Thanks for the quick reply.

In response:

If I was an investor with £60m lying around I would buy Revolution Bars (LON:RBG) for £30m + pay £30m to the bank to clear the debt if it looked like the company would make £8m-£9m per year.
In theory the business should be a cash cow in just a few months so the debt should be paid down very quickly creating more wriggle room within a matter of weeks/months.
The risk you mentioned is therefore if they need funds in the next 3-4 months, which leads me to...
I don't think Revolution Bars (LON:RBG) would have any trouble finding more money so close to the finish line; the last placing was open to current investors@20p (I applied) and I would hope they would follow a similar course if they needed, so any dilution risk to us little folk would be minimal.
I never saw the pre-Covid "poor trading" that others saw.
I saw a cash cow that was consistently incorrectly valued - look at any of the old cash flow statements, taking care to split out expansion/refurbishment capex (the former could have been stopped at any time), and this is quite evident.
The P&L always had non-cash adjustments making it look like the company was always performing badly.

Given my current position size I would urge any non-believers to please pray that my thoughts above are correct.

Cheers

timarr

Hi abtan

You're constantly in my thoughts :-/

Not least because I concur with the financial analysis, albeit only in a small way.

My worst case on reopening is now:

Bars / restaurants open at end May
Social distancing - and therefore capacity constraints - until spring 2022
Possible further limited lockdown, which would almost certainly target bars, next winter.

The main problem with this scenario is that it means pubs and bars don't really benefit from the pent-up demand because their ability to supply is artificially capped. However, at this point all I require is the ability to generate enough cashflow to limp through another year.

I agree that there's no plausible reason for the banks to call in the debt or that a further fundraise wouldn't be successful. For this to go south I think we're looking at a virus variant that escapes the vaccines - which is possible, but not forecastable.

Put it this way - I think Revolution Bars (LON:RBG) is a better bet than anything that requires overseas travel in the foreseeable future ...

timarr

Thanks Timarr

A good point and one I've thought about.

If they can open and then crawl along until society fully re-opens, then that's good enough for me. 100% upside in 1 year would be great, but if it takes up to 3 years then that still implies a decent return.

As an aside, I personally don't think lockdown will last that long, even with virus mutations. I think if covid looks like it will be sticking around, society will just learn to live with it; it can't stay inside forever.

Also note the following Israeli deaths by age (I can't find something similar for the UK) and contrast it with the demographics for a normal Revolution Bar.

Irrespective of the financials of a chain of UK bars, fingers crossed the vaccines work on all mutations and everyone can return to their normal lives as quickly as possible.

Boon

You're assuming the government treats all drinking places equally for COVID purposes.

When in fact, they've already shown that "late night" venues can still be shut while "day drinking" venues like regular pubs have been allowed to re-open.

If I could place a bet, I would say that J D Wetherspoon (LON:JDW) would be allowed to trade much sooner than Revolution Bars (LON:RBG) will be allowed to by the government this spring.

Amen to that.

As I said, it's a worst case scenario. My thesis is that if an investment works on that basis then if things turn out better that's just upside. It's worked out well for the last twelve months.

The age profile of CV-19 mortality is well understood - if that was the issue Revolution Bars (LON:RBG) would never have closed - but the real issue is hospital capacity. It's an existential issue for the government to not let the NHS collapse - and the last data I saw showed that nearly 40% of UK CV-19 hospital admissions were under 65. They mostly won't die, but they do block beds.

So overall we could still end up with a problem next winter if not enough younger people get vaccinated (take up is expected to drop off as the age groups fall) or if there's a mutation that the vaccines don't block. The prevalence of CV-19 around the world - which is likely to persist until 2024 - unfortunately means that such mutations are quite likely for the next few years.

I'm not saying any of this is highly probable - I don't think it is. But it is possible and I'm always anxious to avoid total loss of capital on any of my investments.

Zipmanpeter

Re £RGB (I hold) - to add to the discussion I think 2 factors not mentioned are

i) How much competitive hospitality actually goes under - so far it has actually this has been relatively muted ie the owners hammered but unable to re-open (promising the bank to clear debts over a boom in 2nd half). Ironically, a final cull from an extended lockdown may help RGB

ii) relatedly how much (at brand/outlet level) Revolution and Rev de Cuba have been able to prepare to re-orientate and add more daytime/early evening trade to the core Nighttime trade. (Where they should do well; their no 1 competitor Deltic went bust and closed outlets). This was a focus pre-Covid but I am not clear where it will emerge.

iii) I agree your point re nightclubs open after bars - here the question is how long after

FWIW I think point ii) will be enough to keep it ticking over through 2021 and do very well in 2022 .

Harry Hindsight

Boohoo - Top Shop - Burton 'on the button' Dorothy Perkins (maybe not?) - N Brown er - get a name change bro. N Brown (LON:BWNG) - and change the moniker £COOL

Hi Timarr and anyone else interested.

I'm sending the below for reference, which shows positive cases currently in a "Difficult Situation" by age, again from Israel.
(Israel Health Service is the source: https://datadashboard.health.g...)

It looks like about 1,000 people people fall into this category, of which c20% (about 200 people) are under 50.

Israel's population is 9m.

Logical David

Hi Breakout Trader, I always enjoy digesting your graphs and charts which try to predict a possible 'buy' entry point. However, reading Paul's excellent writeup and observing the increasing number of shares in circulation it is clear that £Jet2 is currently exhibiting the properties of a typical stochastic chart on this occasion.

14th Feb '21

I'm following the Israeli data but it's not telling anything the Pfizer trial results didn't - well, other than the Pfizer trial results were accurate, but that was never really in doubt.

There'll be two issues that drive future UK restrictions - how many people are unprotected in the over 65 group and the tracking of variants that reduce vaccine efficiency, particularly in terms of hospitalisation. UK government policy is being based on modelling commissioned by Sage:

Early relaxation of non-pharmaceutical interventions (NPIs), before sufficient immunity has been established is shown to precipitate a large wave of infection with resultant hospital admission and deaths; a similar impact is predicted from any final release of NPIs if herd immunity has not been achieved.

https://www.medrxiv.org/conten...

Broadly - keep social distancing and mask wearing in place until we reach herd immunity levels, which will be sometime in the summer, assuming younger cohorts take up the vaccination in sufficient numbers. In the meantime we need better data on the effectiveness of vaccines on the various mutations in circulation.

In terms of variants, the question that's keeping scientists awake at the moment is what exactly is going on in Manaus, which is experiencing a serious CV-19 outbreak despite having apparently achieved herd immunity. There are multiple theories but the worrying one is that the P.1 variant has evolved to evade antibodies. This article gives a good overview, but note it's journalism, not research, although it links to the underlying science:

https://www.bmj.com/content/37...

Mobility data in Manaus shows a gradual increase in people going out to socialise, shop, and work after the first wave of cases. Activity peaked at Christmas shortly before hospitals buckled. Careless behaviour from the local community, which did not appear to adhere to social distancing, and insufficient action from the state governor, have been blamed.

This behaviour was at least partly driven by a belief that herd immunity had been obtained - and it's very easy to translate that to the UK, post-lockdown, this summer.

Based on the above I think it's realistic to assign a reasonably high probability to hospitality businesses seeing restrictions until the end of winter next year. That's not the worst case, of course, the variant in Manaus has triggered our own government's doomsday scenario of a healthcare service collapse.

The government will come under huge pressure to release all restrictions as soon as the over 50's are vaccinated. If they do then the probability of greater restrictions later in the year would increase. The route back to normality will be a tricky one and not just for investors.

Breakout Trader

Hi David, yes, I would agree - the fundamentals aren't there now on JET2, and the dilution is a red flag.

It needs to re-build, but I suspect the chart will be moving sideways or downwards for a while. It will likely take time to present an actionable setup, but I'll be staying clear of it for the time being.

Plenty of other setups out there.

Michael Herington

Jet 2 Thank you for the information early last Friday so that I was to promptly take appropriate action. Regards Michael

Thanks for the Manaus link; I know you've mentioned it earlier, but I didn't get a chance to read it before now.

I wonder whether the UK would consider going down the NZ route, if it is able to get domestic cases under control, but mutations continue overseas?

Well, I have an opinion, but I'm not sure that counts as evidence?

I can't see that the UK, as an international hub, can isolate itself without doing permanent economic damage so we need to figure out how to do the opposite - to find a way of safely managing international travel while protecting ourselves from subsequent CV-19 waves. The limited evidence on reinfection is that immunity lasts 5 to 8 months and even people who have been infected and recovered can be carriers, so this is going to require a rolling vaccination program, an effective track and trace system and world beating gene sequencing of variants.

Fortunately we now have the platform for all of these. I think it will take until next year to deliver all of it, but we have to figure out how to because CV-19 isn't going away. New Zealand has done a fantastic job of protecting citizens but a zero Covid strategy is unsustainable in the long run. How do they move on?

On a different note I was looking hard at Everyman Media (LON:EMAN) on Friday for the obvious reopening inspired reasons. But I'm struggling to see how the financials work - it was running negative FCF before CV-19, so it's not obvious to me that a recovery will turn this into gold. But you clearly think differently - so what am I missing?

"I can't see that the UK, as an international hub, can isolate itself without doing permanent economic damage"

Perhaps this would be the lesser of 2 evils? A well-structured quarantining regime would surely be better than locking down society?

We're in very deep speculation territory here, so I'll move onto some thoughts on Everyman Media (LON:EMAN)

Survivability

At Dec 31st 2020 net debt was £8.5m (at interims, net debt was £4.3m)
Current £20m debt facility
Current portion of leases = £5m, which should be their biggest expense with furlough scheme support
Only 18 employees were not on furlough during lockdown 1.
Directors basic remuneration was c£0.5m in 2019.
So in theory, it looks like it can easily survive until May/June, and most likely much longer.

Future Cash Generation

The negative FCF you are referring to almost definitely includes new site openings. I prefer to look at cash generation excluding expansionary capex as it gives me an idea of what would happen if they stopped expanding. I'm aware that not everyone does this.
The company generated £14m operating cash flow (before working capital movements, which were minimal anyway) in 2019.
I think their annualised cash generation (excluding expansionary capex) will exceed this in the next couple of years, because seat numbers have gone from 7,914 to 9,714 at the start of 2019 to today (+22%).
Even accounting for lower average ticket prices to account for many of these additional seats being outside London, I would hope for underlying cash generation of c. £17m-£19m.
I can't quite figure out what the exact lease cash outflow will be (there are new lease "incentives" that are muddying the cashflow statement + things have of course changed since 2019), but, including some maintenance capex, at the most I would expect £4-5m pa, so underlying cash generation should be between £12m-£14m.

Valuations

Current Market Cap = £120m
Current EV = £128.5m
Let's assume EV = £135m by the time this lockdown eases
I assign a reasonably high cashflow multiple of x15 for this sort of business as it's so niche - it's more of a night out than a place to solely go and watch the latest movie release
- Note 1: In 2019, 45% of revenue came from beverages, advertising and sponsorships.
- Note 2: I see a company like Netflix purchasing or setting up a company like Everyman Media (LON:EMAN) in the future to try and grab a share of the offline market - these are my own thoughts.
- Note 3: it was valued closer to x20 pre-covid

Based on my x15 multiple I get a valuation of at least somewhere between £180m (£12m*15) and £210m (£14m*15), but hopefully higher.
Based on the x20 multiple the valuation is somewhere between £240m (£12m*20) and £280m (£14m*20).
There's also of course some assets on the books.

There are understandably a few assumptions in there, but assuming things start to re-open this year, the downside looks limited, with big upside.

Fingers crossed as always.

Small Cap Value Report (Fri 12 Feb 2021) - FRP, JET2, FUL

Frp Advisory (LON:FRP)

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Paul Scott

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