Small Cap Value Report (Fri 17 April 2020) - BOWL, FOXT, Red Flag Report, GYM, SRT

Good morning, it's Paul here with Friday's SCVR.

Today's report is now finished.

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Jack has written up this section, thanks Jack!

Hollywood Bowl (LON:BOWL)

Share price: 157.5p
No. shares: 150.0m
Market cap: £214.5m

Proposed placing to raise £10.9m

Hollywood Bowl (LON:BOWL) has reported that it is raising £10.9m at 145p per share via an accelerated book-building process.

The group says “had traded well in the five months to 29 February 2020 ahead of the prior year period” but now, of course, units are closed, the company “has implemented extensive cost saving initiatives”, and the H1 dividend payment has been scrapped.

The impressive news is that “as a result of these extensive cost saving initiatives, non-employee overheads (excluding property costs) are expected to reduce from approximately £1.1m to approximately £0.1m per month whilst centres remain closed.”

That really isn’t a lot so perhaps bowling alley operators like BOWL and TEG can hibernate quite effectively?

The group says:

As a result of these extensive cost saving initiatives, non-employee overheads (excluding property costs) are expected to reduce from approximately £1.1 million to approximately £0.1 million per month whilst centres remain closed. The Group expects a total monthly net cash burn of approximately £1.6 million whilst centres remain closed (once pre-COVID-19 liabilities have been paid). If all centres remain closed and the furlough arrangements under the Coronavirus Job Retention Scheme are available throughout the closure period, and including trade creditors unwind, the Group expects to maintain a positive cash balance until the end of October 2020.

That’s quite clear. Planning for no store openings until the end of October is prudent compared to some other Leisure and Retail operators that are banking on the lockdown getting lifted in June. This might be the most likely possibility, but planning for longer if possible would be very sensible.

For what it’s worth, BOWL’s trading was impressive before the lockdown: in the five months to 29 February 2020:

• Total revenue was up 12.5% year-on-year,
• Like-for-like sales were up 9.4% year-on-year (6.8% growth in game volumes and a 2.4% increase in spend per game to £10.08),
• Group EBITDA was up 17.7% to £20.7m
• Operating profit margin increased from 24.5% to 25.8%, and
• Free cash flow during the Period was £9.03m.

The increase in average spend has been underpinned by the Group's focus on improvements and innovation in the customer experience, including the enhanced food & beverage and amusements, as well as the extension of its dynamic pricing technology.

Initiatives including 'Pins on strings', now in 15 centres, and its new scoring system continue to be put into new sites. The former certainly is an important example of how BOWL has been driving like-for-like growth by upgrading its units with better tech.

Financing and liquidity

This is some useful colour from the company.

As at 31 March 2020, the Company had approximately £15.6m of cash and £30.25m of debt, drawn from its £35m facility.

This takes into account full rents paid to all landlords for the March quarter and team member salaries paid up to the end of March 2020.

Since then, lenders have agreed an extension to the RCF of an additional £10m, amended the leverage covenants and waived the cashflow covenants for the rest of FY2020.

As at 8 April 2020, the Group had £11m undrawn under its facility.

The Group has committed capital expenditure of £1.7 million and it concludes that cash requirements remain within its initial bank facilities under all scenarios which have been modelled - presumably including the scenario of sites being completely shuttered until the end of October.

Thoughts

I don’t suppose anybody is particularly thrilled by the idea of bowling alleys right now, but BOWL has proven itself to be a high quality operator.

It has been a while since I followed the group, but it looks like it has been steadily executing its roll out. It has always scored well in terms of quality. The business model (under previous conditions) was cash generative and it has maintained a strong financial position.

Even now, it scores a Quality Rank of 96.

BOWL has always generated strong returns on capital, and we can see from the F and Z Scores that this has typically been a sensibly and profitably-run outfit:

It has a clear strategy of adding value through opening new sites, increasing secondary F&B and amusement revenues, more flexible pricing, and tech upgrades.

If it really can keep overheads at just £0.1m a month and keep its monthly net cash burn at £1.6m, then BOWL might be able to ride out the lockdown without even having to dip into its drawn down debt.

If you assume life will eventually go back to normal and appetite for group leisure activities like bowling will return to previous levels, then that suggests annualised free cash flow of just under 12x or a free cash flow yield of 8.3% - attractive for a proven quality operator, if you expect a relatively swift rebound.

There is a roof to the UK bowling market though. BOWL is already a big fish in a small pond. There is probably room for its estate to double in size but beyond that it might have to find other ways to drive sales.

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Paul: that sounds interesting, thanks Jack. I might buy some BOWL, once I've done my own research of course.

FYI everything from this point is now written by me.

Foxtons (LON:FOXT)

Share price: 43.4p (up 13% today)
No. shares: 275.1m existing + 55.0m placing shares = 330.1m
Market cap: £143.3m

Q1 trading, COVID-19 update and proposed placing

This share has been on my watchlist for a while. I tried to buy some c.27p in the recent panic sell-off, but my order didn't get filled, which is a pity. That happened quite a bit around that time actually - i.e. prices were marked down savagely by the market makers, but often there weren't actually any serious sellers. As is so often the case with small caps, the prices on our screens are not necessarily the price you can actually deal at, especially if you want decent size.

For anyone not aware, Foxtons is a mainly London (but also South East) estate agent & lettings business. It has a year end of 31 Dec 2020.

As expected, it's been hit recently by the Govt lock-down;

As noted in the update provided on 20 March 2020, financial performance in the first 11 weeks of the year had been in line with the Board's expectations. Although strong and steady growth in the Company's sales commission pipeline during the first two months of the year had started to flow through to revenues in March, the necessary defensive measures taken by the Government to suppress the Covid-19 pandemic inevitably impacted trading in the final two weeks of the first quarter and our outlook for the remainder of the year.

Impact of lockdown -

Whilst demand and supply side indicators of performance in both sales and lettings have been negatively affected since the lockdown was announced, it is too early to forecast the exact impact the lockdown will have on business performance. Commissions earned in the first three weeks of the 'lockdown' period were down 47% on the prior year.

It's not clear from that if the company is referring to all revenues, or just sales & mortgage broking commissions? Also, I wonder how much of this reduced income will be replaced with new orders? (which I imagine must have ground largely to a halt by now). So perhaps things could get worse before getting better when lockdown is lifted? (who knows when)

Cash conservation - is similar to what we're hearing from most companies reporting now -

Overall, the actions taken during the three week period following the "lockdown" are expected to reduce the average monthly cash outflow of the business from c. £9m to c. £3m by the end of April.

That's excellent, giving us the actual figures, which investors need to know. £3m monthly cash outflow sounds fairly modest. Although bear in mind that the P&L impact is likely to be worse - because rents to landlords of its offices might be deferred but ultimately will have to be paid, along with other deferred costs.

Business continuing - this is very interesting, and shows that technology is allowing some degree of business to continue -

... all branches were closed on 23 March 2020 but the Company's technology systems and web applications have enabled it to continue to support customers online and over the telephone and to conduct virtual viewings and valuations

As with so many sectors, this does raise the question of whether offices are really necessary? Offices are a huge cost, yet many (even very large) companies are discovering that staff working from home, using appropriate technology, can work just as well. Once this crisis is over, we might see a fundamental re-think of many business models. I certainly wouldn't want to be long of any property companies owning office space.

Majority of staff furloughed, others working from home. Temporary 20% pay cut for most staff & all Directors. More detail is given, see the RNS if you're interested.

Cashflow & placing - available cash could run out in the worst case scenario. Hence the company has decided to raise fresh equity. Sounds like the bank are not happy, as it refers to repaying the RCF in full with some of the proceeds.

It's good to get some detail on what Foxtons sees as the worst case scenario -

...along with the management actions described above, enable Foxtons to retain a net cash position whilst weathering a reasonable worst case scenario period of lockdown restrictions in London until the end of August 2020 where the Company has modelled a reduction in revenues for Q2 and Q3 2020 of 78% lower than the same period last year, with a slow recovery in the sales and lettings markets in London by April 2021. For context, commissions earned by the Company during the first three weeks following lockdown were only 47% lower year on year.

This is great stuff, all companies should be publishing information on their scenario planning.

Interesting to note that it says if the out-turn is better, Foxtons would consider returning some cash to shareholders.

Proposed placing - the detail is in this second RNS.

New shares to be issued: 54,993,367
Price: 40p (a 4.2% premium to last night's close)
Gross proceeds (before fees): £22.0m
Broker: Numis

My opinion - this looks a good deal, and will leave Foxtons in a financially very strong position - ideal in a tough market. It could gain market share once the crisis is over, as competitors might go bust.

Obviously the numbers for 2020 are going to look awful, but this share is now all about recovery in 2021.

I think it looks potentially interesting, especially now the downside risk has been sorted out with this placing.

As an aside, there is a refinancing boom underway at the moment, and likely to continue for some time, as companies repair their balance sheets. That's likely to see a boom in fees for the brokers. Although they'll also be losing fees from not having IPOs. Overall though, it could be worth looking at shares in Numis (LON:NUM) and other listed brokers.

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Begbies Quarterly Red Flag Report

This is always an interesting read, issued by listed insolvency practitioners, Begbies Traynor (LON:BEG)

As you can imagine, it's a sobering read, given the current crisis.

Key points;

• Highest ever (for this report) number of companies in significant financial distress, at 509,000
• Figures likely to be "tip of the iceberg" as impact of Covid-19 worsens
• SMEs chiefly affected
• Problems accessing Govt funding
• Many companies likely to run out of cash at end April, and be unable to fund payroll
• Many businesses were already "cut close to the root" before CV19 crisis began, hence now likely to fail - owners not having appetite to borrow money they will never be able to pay back
• Expecting material increase in number of companies in financial distress as 2020 continues

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Gym (LON:GYM)

Share price: 164p (up 2% today)
No. shares: 138.2m + 27.4m = 165.6m
Market cap: £271.6m

Results of placing

Yet another fundraising has completed.

New shares to be issued: 27,512,181
Price: 150p (discount of 6.8% to last night's close)
Gross proceeds (before fees): £41.3m
Broker: Numis & Peel Hunt

Clearly this makes shares in GYM more attractive, with fresh funding buttoned up.

Directorspeak -

"We are grateful for the support in these unprecedented times and are confident that the business now has sufficient liquidity to weather the Board's most pessimistic trading scenario.

We continue to believe in the long term attractive fundamentals of the low cost gym sector and our strengthened balance sheet will enable us to take advantage of growth opportunities that arise in the immediate aftermath of the crisis."

My view - I'm in two minds about this one. Yes the shares are much cheaper, but it could take a long time for business to recover. Do people really want to congregate in a sweaty gym, with everyone spraying saliva in all directions with every deep breath? The damage from Covid-19 could be quite long-lasting, I suspect. Hence it's probably not for me.

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Srt Marine Systems (LON:SRT)

Announces that it has secured a new £2.5m loan under the Govt scheme, in addition to a recent £2.8m placing.

The loan is interest-free, and fee-free, but has to be repaid in one year, under the Govt CBILS arrangements (Coronavirus Business Interruption Loan Scheme).

I wonder if that might require another placing, in order to raise more cash to repay this loan?

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I'll leave it there for today. Have a lovely weekend, as best you can!

Regards, Paul.