Small Cap Value Report (Fri 2 Mar 2018) - Snow, RBG, G4M, PCF, IHP, HVN

2nd Mar '18 by Graham Neary

75 comments 22731 reads

Good morning! Thanks for the suggestions so far.

Stocks on my radar are as follows:

Revolution Bars (LON:RBG) - interim results
Gear4Music (LON:G4M) - trading update
PCF (LON:PCF) - AGM trading statement
IntegraFin Holdings (LON:IHP) - admission to Official List
Harvey Nash (LON:HVN) - trading update

This list is subject to change!

Cheers,

Graham

Snow - a quick word on the brutal weather conditions, which have caused travel chaos and business disruption across the UK & Ireland.

It has personally affected me, as I was supposed to be flying to London today instead of writing this report! But I got a text message from Ryanair Holdings (LON:RYA) late on Wednesday evening, informing me that my flight would not be going ahead.

It would be risky business to trade shares based on short-term weather patterns, but I would guess this is going to have an effect on many companies - insurers and retailers spring to mind.

Anyway - take care, wherever you are!

Revolution Bars (LON:RBG)

Share price: 163p (-4%)
No. of shares: 50 million
Market cap: £81.5 million

Interim Results

Many of you have already left insightful comments in the thread below, discussing this premium bar chain.

My views on it are as follows:

Like-for-like sales: I am ok with the company adjusting LFLs to include New Year's Eve, to get LFLs of +1.9% instead of +0.4%. I discussed this at the trading update last month.

New sites: site opening is on track. Four new sites opened, including three just before Christmas. Six planned for the full year, taking the estate to a total of 74.

Adjusted Operating Profit: this is where it gets interesting, as the company claims to have achieved an adjusted operating profit of £6 million, versus a reported operating loss of £3.7 million.

This is what the "exceptional" items look like. You'll notice that there were £2.3 million of exceptional items during the entire previous year.

Professional fees: "legal and corporate advisory fees, and registrar and virtual data room…

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ken mitchell

2nd Mar '18

Surprised that Revolution Bars are still paying a dividend. Better to invest that money in the business, and perhaps via modest price increases? Someone posted earlier that a pint of beer can cost less than at Wetherspoons. If their bars are up market can they get away with charging a bit more without hitting sales too hard? .Agree competition makes this hard to achieve but upmarket customers can afford to pay a bit more, and anyway these days, with ever fewer using cash, some seem to have little idea what they are paying for anything. Some I know haven't even noticed how the fall in the £ against the Euro has meant higher costs on their European holidays!

I'm dithering about selling. Have never had a chance to go to see for myself as there aren't any of their bars near us, but have seen regular reports of plenty of customers.Perhaps if better financial management (including cancelling tie dividend) along with other efficiencies, things could soon look up; And if they can't do it a bidder might well be able to. So holding for a possible bid for now.

Gromley

Nice one Graham (and apologies to HornBlower - for missing the fact you'd already made my point!)

Going forwards they will arguably now be 'overstating' profits but not counting all of their rents - which will make their accounts all the more difficult to really understand. I'd say that cash generation possibly becomes are more important (or at least understandable) metric going forwards and as Graham rightly points out they are in fact borrowing to pay the dividend.

So not really very compelling imho at this stage. My position here is only small, but I'll be thinking over the next few days whether it's worth holding onto for the potential bid premium.

AnonymousUser192020

re Beaufort Securities - looks to have been at the bargepole end of small cap brokers
http://citywire.co.uk/wealth-manager/news/beaufort-securities-charged-with-fraud-by-us-prosecutors/a1097638

dustyie

GavSmith01
Yes I see your point on it debt . but it asset are 2.3 billion approx and book value per share is 147p and RBG book value per share is 80p

Going on the market prices today the market have factor in a 20% drop Marstons business for the coming few years . Only time will tell .
I wonder whether brexite uncertainly is affecting consumers spending .
p.s. i have a small holding in Marston and recently sold my RBG holding

Catstycam

Good evening Graham,

thanks for your comments today. I have had PCF (LON:PCF) on a watchlist for some time, occasionally looking into it when there has been a RNS and/or share price movement that has caught my eye. Possibly a reason I have baulked at investing is that it only has a stock ranking of 35; do you see that being a concern?. I do not invest solely on the ranking within stockopedia but it does seem to have a bearing on how a company is likely to perform and am inclined to invest more with a ranking of 80+. All subject to far more indepth research of course.

Regards

CM

xcity

3rd Mar '18

I'm surprised that so many people are still keen on Revolution Bars (LON:RBG)
Over the period I read Paul's coverage the story kept changing. At one time it was very low short-term rentals with initial inducements. Then various issues about management capability, and who could be believed, and accounting practices. And then there are all the question marks about the sector. Does it really seem to be the time to invest heavily in food, which is what Paul thought they should be doing.
I can't say it's not cheap - just that I have no idea what it is really worth or how to access reliable information that will allow me to value it. And my experience has taught me to avoid companies where the management seem dodgy, unreliable or untrustworthy. Better to pay more when you can trust management to do a good job, headwinds or not.

Carcosa

Is not the best time to invest at the maximum pessimism? Are we there yet with Revolution Bars (LON:RBG) ?

Never sure how to identify maximum pessimism or optimism.
But I can decide whether I think something is investable for me. Usually goes along the lines of, 'if I can't sell, would I be happy to be in for the very long-term?' That involves a judgement about the people as well as the business model.
And, with hindsight, even enormous pessimism can sometimes prove insufficient.

Tortoise investor

Can I thank Graham and readers for the excellent dissection of Revolution Bars (LON:RBG) ? As someone with a busy full-time job it's just hard for me to make the same level of analysis about accounts, which aren't my strong point anyway. When reading the RNS I missed, for instance, mammyoko's point that the write-downs on leases are against currently trading sites which doesn't seem like a good sign.

The new CEO can't start soon enough to tidy the business up and make some changes to the product offering to simplify it and increase margins.

Fangorn

"I wonder whether brexite uncertainly is affecting consumers spending . "

Brexit Certainly isnt affecting spending at Wetherspons.

"Shares jump after Wetherspoons serves up rise in profits"
https://www.ft.com/content/6070d688-99de-11e7-a652-cde3f882dd7b

Trident

4th Mar '18

I am puzzled by the Revolution Bars (LON:RBG) onerous lease provision treatment. It could be quite correct that it's a more zealous move to use an IFRS requirement for impairment to be recognised, but it isn't clear (to me) how far forward in future periods they have gone (they have obviously gone back). It would seem this is where the rigorous view of the auditor about the principle, and a management seeing an opportunity to trade-off a non-cash impairment against reporting better future profits may have met in the middle.

it seems to violate an older principle of the old accounting of 'matching' revenue to accounting periods. A bit like using an accounting time machine by accelerating the depreciation calculation. Supposed to make for prudence, but actually ends up confusing where the reference baseline is or was.

Be interested in Paul's take, as well a having Graham's helpful analysis

shipoffrogs

It's come to something if the accounting rules allow such confusion over cost recognition in a business as simple as running a chain of bars.

bestace

A couple of points on Revolution Bars (LON:RBG):

Looking at these interims, they generated £7.1m of operating cash flow and spent £6.6m on capex, but the capex consists of 4.3m for the fit out of new sites (so is expansionary capex) and £2.3m of maintenance capex.

That means free cash flow was £4.8m for the half year (£7.1m OCF less maintenance capex of £2.3m), which compares to £3.8m in the prior half year. Granted, part of that was due to favourable working capital movements, but it’s also net of the one-off cash costs of the M&A activity.

So I think pointing to the increase in debt to suggest the roll out is failing or is not self-funding is stretching the point a bit.

On the point about whether they are funding the dividend payment from debt, I can see how this argument can be made, but it could equally be argued that the £4.8m of free cash flow is sufficient to cover the £1.65m paid out in dividends nearly three times over, and that it’s really the £4.3m of expansionary capex that is causing the increase in debt.

They could scale back the number of openings if they really wanted to stay debt-free, but why would they, if they believe they have multiple opportunities to expand new sites at high rates of invested capital, and if they have the financial firepower to do so?

Onerous leases – yes it could be argued the existence of loss making sites is evidence of poor capital allocation, but to an extent this is just a ‘to be expected’ part of doing business in this area. Both Stonegate and Deltic carry a provision for onerous leases for example, while a quick Google reveals that Marston's (LON:MARS), J D Wetherspoon (LON:JDW), Punch Taverns, Greene King (LON:GNK), EI (LON:EIG) and Mitchells & Butlers (LON:MAB) also all carry provisions for onerous leases (or property provisions, as they are called in a couple of instances). So it’s not really credible to point to the provisions at RBG and claim poor management on their part, unless you are going to claim the same for everyone else who carries onerous lease provisions, which is pretty much all of their listed comparators.

Unless RBG are planning on closing those sites which are subject to an onerous lease provision (and I’ve not seen anything to suggest that is the case), it can probably be assumed that the sites are trading well enough to cover their variable costs but not all of their fixed costs, which I would imagine is primarily rent and business rates. If the provisions did relate to sites which were being closed, it could be inferred those sites were not even covering their variable costs, which would be a much worse situation.

rhomboid1

Hi Bestace good points but...I think the issue is Revolution Bars (LON:RBG) is a relatively new format rollout (listed from March 2015) & has previously stated that they had no tail of underperforming bars. The comparisons you’re making with established pubco’s are interesting/relevant only if they relate to provisions made to bar openings within the last few years?

Yes, clearly they do now have a tail of non-performing sites, so things have deteriorated in that regard. Given the size of the provision I thought it was rather poor to provide so few disclosures that could have provided some context. How many sites are we talking about? what's the length of the remaining lease for these sites? in what way has their new methodology changed from their previous methodology for calculating these provisions? what assumptions are they using on discount rates, inflation, turn-around plans etc. We don't know the answers to any of those questions because they did not see fit to tell us.

I had put together a comparison of each of those other companies' onerous provisions compared to their overall lease commitments, but I'm not posting it here because I think the ratios are pretty meaningless as comparisons - each company has differing methodologies and assumptions and the disclosures are wholly inadequate (not just from RBG) to provide any meaningful read-across. However I did think the mere existence of onerous provisions at all those companies was worth noting.

abtan

5th Mar '18

Morning Bestas et al,

I couldn't agree more with the points you've made and my biased view as a holder is that there still remains significant hidden value here. Some additional thoughts:

Cash Balance after Dividend, Expansion and Fees

Net increase in cash was reported to be +£1.6m. Adding back +£1,2m for monies from NY that would have ordinarily been included*, and removing the -£3m increase in borrowings, implies that cash balances would have been relatively flat. Not bad given that this was after:

dividend paid,
4 new venues opened (c.£1m each);
ridiculous amounts were spent on professional fees/recruitment/resignations (my only real worry - are they hiding anything?)

(* "...it should be noted that had New Year's trade fallen in to the current reporting period and consistent with the comparative period, net debt at the period end would have been 1.2m lower than reported and therefore is broadly unchanged over the period.")

Onerous Leases

It's quite hard to work out the impact of the onerous leases going forward, given the seemingly unlimited number of restatements, but I've made an attempt.

14 years rent remaining per venue (£145m lifetime lease commitments/£10.5m annual rent expenditure in FY2017)
There is an onerous lease provision of £9.3m on the balance sheet (£3.7m in the last accounts + £5.6m provision just announced).
£9.3m/14 years = £0.66m per year rent being paid from loss-making, or break-even venues (A)
c£10-14m OCF pa. c.£5m spent on refurbishments pa, so OCF minus capital expenditure on current properties = £5-9m (B)
If loss making venues removed, Free Cash Flow before dividends and new openings (A) + (B) = £5.66-£9.66m pa. Seems fine to me.
Significantly (B) already includes cash being lost from loss-making venues

LFL

LFL sales up to and including New Years = +1.9%

LFL sales after New Years to Feb 24th = -2.0%

So overall LFL relatively flat? Doesn't seem disastrous, especially as it excludes sales from new venues.

Conclusion

Still a growing, cash generative business, paying out a dividend.

My only hesitancy is with the high recruitment/resignation/professional fees, which continue to make little sense.

Hi Abtan

‘I couldn't agree more with the points you've made and my biased view as a holder is that there still remains significant hidden value here’

If that is so why have mgt so effectively hidden this value?

Multiple restatements & anemic LfL figures ...after a lot of faffing to get them to look + do not suggest successful rollout to me .

One final thought ...refurbs are undertaken when trading at a given outlet weakens unacceptably..all sites currently subject to refurb are excluded from LfL.

My working theory is Revolution is a so so to poor format, Revolution da Cuba much better but only in high traffic locations, unfortunately they have a number of sub scale secondary locations with Revolution which cannot move to the more successful format..I suspect on zero evidence that that is where the onerous lease provisions come in.

FWLIW I have noticed that one Revolution outlet closed with little clarity as to what was occurring https://www.macclesfield-express.co.uk/news/revolution-bar-temporarily-closed-13185900 ..that site was not in any LfL figures for a long time...but has now reopened.

..best of luck but it’s value is too hidden for me!

Thanks for the reply and on-going discussion.

Some thoughts in italics below:

‘I couldn't agree more with the points you've made and my biased view as a holder is that there still remains significant hidden value here’

If that is so why have mgt so effectively hidden this value?
I didn't get the impression that they had hidden its value. When I read the last interim report, I found their main points relatively well explained. The only real negative I saw was the 2% LFL sales drop and would have appreciated an 8-month LFL update. Even with regards to the onerous leases, a bit more detail would have been useful, but they stated that there was no cash impact that hadn't already been accounted for, which makes sense. I do not expect every venue to be profitable, whatever the business.

"Multiple restatements & anemic LfL figures ...after a lot of faffing to get them to look + do not suggest successful rollout to me ."

I don't fully agree with this comment, but I can understand why many would. One thing I would add is that it is quite difficult to manipulate Cash, and Cash does not seem to be an issue for reasons previously mentioned.

One final thought ...refurbs are undertaken when trading at a given outlet weakens unacceptably..all sites currently subject to refurb are excluded from LfL.

I'm not surprised refurbs take place at weakening venues. This applies to every player on the high street. I'm honestly not sure whether to include refurb stored in LFL comparisons.

My working theory is Revolution is a so so to poor format, Revolution da Cuba much better but only in high traffic locations, unfortunately they have a number of sub scale secondary locations with Revolution which cannot move to the more successful format..I suspect on zero evidence that that is where the onerous lease provisions come in.

Not sure why they would they keep opening both formats if this were true.

FWLIW I have noticed that one Revolution outlet closed with little clarity as to what was occurring https://www.macclesfield-express.co.uk/news/revolution-bar-temporarily-closed-13185900 ..that site was not in any LfL figures for a long time...but has now reopened.

..best of luck but it’s value is too hidden for me!

Revolution Bars (LON:RBG) - Sharepad shows negative FCF
That puts you back into believing the ever shifting numbers. Or not.

Hi abtan

Re obfuscation compare the clarity of J D Wetherspoon (LON:JDW) recent trading update

‘For the first 12 weeks of the second quarter (to 21 January 2018), like-for-like sales increased by 6.0% and total sales by 4.3%. In the year to date (25 weeks to 21 January 2018), like-for-like sales increased by 6.0% and total sales by 4.3%.
As a result of better-than-expected sales, year-to-date underlying profit before tax is slightly ahead of our expectations. Similar outperformance in the second half will be more difficult to achieve.’

..by comparison Revolution Bars (LON:RBG) are a) underperforming b)far less clear c)far smaller so should be clearer

As to the point about the onerous lease provisions not impacting cash...well they wouldn’t because they never do.

My point on refurbs was if say your 10 worst performing sites are subject to refurbs they drop out of the LfL ..and they’re most likely to be sites where the model is called into question (hence the onerous lease provisions) ..and that is doubly true as some of them were unplanned refurbs as per an earlier RNS explanation for a profit shortfall iirc

My view is the formats age more quickly than was planned and that vicious circle of Capex is why bar/nightclubs quoted businesses have always imploded in the past..this looks v high risk for that reason ..the warning signs are clear imho ..good luck anyhow!

Edited to add I’ve just spotted this excellent post that covers the ground from an analyst point of view

https://www.stockopedia.com/co...

Small Cap Value Report (Fri 2 Mar 2018) - Snow, RBG, G4M, PCF, IHP, HVN

Revolution Bars (LON:RBG)

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Graham Neary

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