Small Cap Value Report (Fri 5 Jan 2024) - NXT, CKN, RBG

Good morning from Paul!

All done for today!

Please note I've added permanent links to my spreadsheets & podcasts in the explanatory notes below, which some readers might find helpful.

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Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to review trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty. We are analysing the company fundamentals, not trying to predict market sentiment.

We stick to companies that have issued news on the day, with market caps (usually) between £10m and £1bn. We usually avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to.

What does our colour-coding mean? Will it guarantee instant, easy riches? Sadly not! Share prices move up or down for many reasons, and can often detach from the company fundamentals. So we're not making any predictions about what share prices will do.

Green (thumbs up) - means in our opinion, a company is well-financed (so low risk of dilution/insolvency), is trading well, and has a reasonably good outlook, with the shares reasonably priced. OR it's such deep value that we see a good chance of a turnaround, and think that the share price might have overshot on the downside.

Amber - means we don't have a strong view either way, and can see some positives, and some negatives. Often companies like this are good, but expensive.

Red (thumbs down) - means we see significant, or serious problems, so anyone looking at the share needs to be aware of the high risk. Sometimes risky shares can produce high returns, if they survive/recover. So again, we're not saying the share price will necessarily under-perform, we're just flagging the high risk.

Links:

Live prices tracking spreadsheet for Paul & Graham's 2024 share ideas (2 separate tabs at bottom),

Frozen SCVR summary spreadsheet for calendar 2023.

New SCVR summary spreadsheet from July 2023 onwards.

Paul's podcasts (weekly summary of SCVRs) - search on any podcast provider for "Paul Scott small caps", or web link here.

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Quiet again today -

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Summaries

Next (LON:NXT) - Up 6% y’day 8550p (£10.9bn) - Trading Statement - Paul - AMBER/GREEN

As usual, Next delivers the goods, with ahead of expectations peak trading. 2.3% increase in PBT guidance for FY 1/2024, to £905m, a staggering 19% PBT profit margin. Macro comments are encouraging - buoyant outlook for consumers, and no further selling price rises. Although some risks, eg Suez Canal may cause delays. Shares look fully priced for now maybe?

Clarkson (LON:CKN) - up 9% to 3555p (at 08:59) £1.09bn - Trading Update [ahead exps] - Paul - GREEN

Another positive update from this shipping broker. Broker upgrades leave valuation still looking reasonable at 12x PER (pre-market rise today), despite a strong recent rebound in share price in late 2023. I have no sector knowledge, hence no idea what the future holds, but I'm viewing the performance, and valuation as of today positively. 

Revolution Bars (LON:RBG) - Down 22% to 4.25p (£10m) - Trading & Estate Update - Paul - AMBER/RED

Reports OK peak period trading (4 weeks to 31 Dec 2023), with LFL sales up 9%. However, H1 (Jul-Dec) is still negative. No mention of performance vs mkt exps, so I assume in line (broker leaves forecast unchanged). This is a high risk special situation, and I think it could go either way. 8 loss-making sites being closed, could result in an exceptional cash cost to exit the leases I wonder?

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Paul’s Section:

Next (LON:NXT)

Up 6% y’day 8550p (£10.9bn) - Trading Statement - Paul - AMBER/GREEN

Strong performance in Nov & Dec 2023 means that this fashion retail leader once again raises guidance - PBT for FY 1/2024 is upped by £20m to £905m (only +4% vs LY though, so limited profit growth).

Note this is a 19% PBT profit margin - astonishingly high, demonstrating yet again that it’s the sector leader.

EPS guidance is 570p, so the PER is 15x - up with events I’d say.

Sales growth came almost entirely from online (up 7.7% H2 to date), with retail flat vs LY. Note there was logistics disruption online LY, giving a boost to this year's comparative.

Cash generation - £100m more “surplus cash” than expected in FY 1/2024.

Net debt at 1/2024 expected to be c.£700m (fixed rate corporate bonds [3.0% to 4.4%] totalling £800m, repayable 2025-28), down £97m in the year.

Remember Next also has a large store card receivables book of £1.26bn (Jul 2023), which more than covers this net debt, so overall its financial position is very good & safe.

Outlook for FY 1/2025 (bear in mind guidance is usually set prudently at the start of each year) -

Sales forecast up 6.0% vs LY (2.5% organic, 3.5% acquisitions like Joules, Fat Face & [partial] Reiss)

PBT guidance - up 5% on FY 1/24.

Macro comments are the main reason to read Next’s announcements, here are some key points -

On the face of it, the consumer environment looks more benign than it has for a number of years, albeit there are some significant uncertainties.

Readers flagged this point below, where NEXT rightly condemns EBITDA! Music to my ears of course, well done NEXT! We need the rest of the city to fall into line behind NEXT, in ditching the absurd focus on often misleading EBITDA figures. Or just give us both! Real profits, and EBITDA, what's wrong with that?

EBITDA? 
We will, of course, be including the depreciation and amortisation of other assets with a limited life. For clarity, we will not be joining the companies that quote 'EBITDA' as a key measure of success. Capital spent on assets or technology that decline in value, and ultimately require replacement, must be accounted for in any reasonable assessment of financial performance.

Paul’s opinion - as regulars know, I’ve been a long-term fan of NEXT as by far the best operator in its field, and also brilliant in its communications to investors. Hence its statements are always essential reading (and reporting here) for me.

Everything NEXT has said confirms my positive outlook for retail, hospitality, and consumer spending generally, which is reassuring given how NEXT has vastly more knowledge, data, and experience than me! Hence I'm always guided by its reporting, even though it can sometimes be too cautious.

Shares hit a new all-time high yesterday, and I can see why. However, for me, the PER of 15x FY 1/2024 earnings is high enough, given that profit growth is fairly sedate now, and boosted by share buybacks.

You can see from the long-term chart below, that the best time to buy NEXT shares is when some kind of minor disappointment has occurred, or the market does a general panic sell-off. They always rebound, given time, as nothing seems to be able to knock NEXT off track for very long.

Hence I’ve given it a mildly positive view of AMBER/GREEN - great company, but price probably up with events for the time being maybe?

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Clarkson (LON:CKN)

Up 9% to 3555p (at 08:59) £1.09bn - Trading Update [ahead exps] - Paul - GREEN

Clarkson PLC, the world's leading provider of integrated shipping services, today announces that following strong trading throughout the final quarter, particularly from the Broking division, results for the year ending 31 December 2023, are now anticipated to be ahead of current market expectations.  

Clarksons' underlying profit before tax, subject to audit, is now expected to be not less than £108m. 

Clarksons' results will be reported on 4 March 2024.

It’s good to have revised guidance, but why can’t they mention what the previous guidance was? This is a problem with many companies' announcements. Instead we have to search for that info, which Liberum has provided in an update note this morning, many thanks.

Liberum raises PBT forecast by 5%, but points out it was already at the top end. So I’m guessing that means other brokers might be putting through a larger % rise. Ah yes, here we are - Liberum says consensus was £100.5m, so “not less than £108m” PBT is a c.8% rise in guidance today. Good stuff, although the share price has been very strong in the everything rally of Nov-Dec 2023, so we need to see good performance - as we saw yesterday with JD Sports Fashion (LON:JD.)  , any under-performance is brutally punished after a bull run in share prices.

Valuation - normalised EPS forecast is upped from 251p to 266p. That gives a PER of 12.3x - which is lower than I had imagined (Edit: will need to be revised up after this morning's 9% share price rise, I wrote this pre-8 am).

Forecast for FY 12/2024 is almost flat, and then a small 3% rise for FY 12/2025 - so it looks as if Liberum is not forecasting any structural growth, although it’s impossible to say what results will be even 1-2 years in the future, nobody knows. So I see broker forecasts as just a best guess, and nothing more.

As you can see below, CKN is in a lovely pattern of raising earnings forecasts, with today’s out-performance coming on top of some big previous increases - proving the point that sometimes companies which out-perform continue to out-perform, hence the importance of momentum statistics -

Paul’s opinion - checking my previous notes, we’ve liked CKN before, but pointed out on 6/3/2023 review of FY 12/2022 results that a vast provision for staff bonuses stands out like a sore thumb on its balance sheet, so make sure you check out that issue when considering this share. 

Liberum notes this point in its forecasts, where net cash of £373m becomes £113m after taking into account accrued staff bonuses! So if you use Enterprise Value, you very much need to adjust for this, as it's material to the valuation. The costs are expensed through the P&L though, so earnings numbers should be fine to rely on.

Other than that, this share looks very good. Although I don’t understand anything about its sector, so have no idea what the future holds, that’s for you to figure out!

We’ve tended to be amber in the past, due to lack of sector knowledge, but I think we have to move up to GREEN on today’s latest upgrade, and what seems a reasonable PER valuation too. Remember that's just a view of the facts, figures, and forecasts on today's date. We're not trying to predict the future.

Good long-term share price appreciation, plus a reliable 3% yield on top -

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Revolution Bars (LON:RBG)

Down 22% to 4.25p (£10m) - Trading & Estate Update - Paul - AMBER/RED

(for the avoidance of doubt I do not currently hold this share personally)

Revolution Bars Group plc, a leading operator of premium bars and beautiful gastro pubs, trading mainly under the Revolution, Revolución de Cuba and Peach Pubs brands…

We’ve regarded RBG here as a risky special situation for some time now, covering it 3 times in 2023, each time emphasising the high risk from a bizarre management decision to max out the overdraft to buy Peach Pubs.

SCVR here on 26/7/2023 at 5.85p, I concluded that RBG shares are a “Special situation, only for risk-takers”. Amber.

SCVR here on 18/10/2023 at 3.2p, I flagged the material uncertainty going concern statement, and concluded, “This could go either way, for risk-takers only. Best avoided for most investors I think”. Amber/Red.

I wanted to get those facts in, as sometimes reader comments seem to mistakenly imagine that I’ve been a perma-bull on this share, which is not correct.

On to today’s news - the market’s initial reaction is negative, with the price now (09:53) down 21% to 4.3p, but only 2.2m shares (£95k) printed so far. That’s despite the company saying it has “traded positively” over the seasonal peak festive period.

My summary -

Peak period (4 weeks to 31 Dec 2023) - LFL sales up 9% vs LY - pretty good I think, but it needs to be at this sort of level to absorb additional costs.

Best festive period since 2019.

The core chain is still dragging down the average (as mentioned before).

Smaller brands, Rev de Cuba, and Peach Pubs “performed well”, but no figures given.

H1 (July-Dec 2023) revenues are LFL down -2.8%, but improving trend as was last reported at -5.5% on 18/10/2023.

Nothing is said about performance vs market expectations today, although Cavendish updates us today leaving forecasts unchanged until a more detailed update is issued near end Jan 2024.

Wage rises - a big sector headwind, as we know, because wages are about 35% of revenues -

…the prospect of the statutory 10.8% increase in the national living wage in April 2024 increases the challenge.

Site closures - 8 bars out of 67 (excl. Peach Pubs) are being closed, to stem the losses. Negotiations underway at 5, no indication of terms (likely to be an exceptional cash cost, as I'm guessing that disposals may well require RBG to fund the new tenant with a reverse premium and a rent-free period).

Net debt - all-important, as this is a major risk, although the bank has been remarkably accommodating in 2023 (see SCVR 18/10/2023 for more info). At 4/1/2024 net bank debt was £18.3m, down from £23.2m at 15/10/2023. Although just after New Years will likely be a seasonal high for cash. Remember though that RBG has a large depreciation charge, so with close to a capex freeze in place now, it should be cash generative - hence why I think the bank is giving it time.

Customers - once again, RBG says its young customers are being disproportionately squeezed on incomes, which I personally question. I suspect they’re spending money on other things, and at competitors which offer a broader experience (eg the boom in experiential leisure such as XP Factory (LON:XPF) [I hold]). Recent press reports also indicate that younger people are less keen on alcohol overall, and are just drinking less (unlike the over-50s).

Paul’s opinion - no change. I still see this as a high risk special situation, which could go either way. The bank debt remains uncomfortably high, but the only covenant is a minimum liquidity one.

I’m worried that the core format is now tired, although the fit-outs were refreshed quite recently with refurbs. Although it’s noticeable from my sample of 1, the Bournemouth site, how quickly customers have trashed the place after its refurb about 2 years ago. There’s really an ongoing need for maintenance capex, which is what Loungers (LON:LGRS) does, rather than letting sites gradually deteriorate in between major refurbs.

Staff at Bournemouth joked to me about the last refurb, saying “We were meant to get a video wall, but all we got was that bloody shark thing!” (pointing to a jaws-like model stuck onto the wall) - because the budget had to be curtailed.

Equity is really difficult to value. It could end up worth nothing, or very little (if another emergency placing is needed, although no indications that is likely). There again, someone might come along and bid for RBG (if a larger group, they wouldn’t need to repay the bank debt), with the aim of refreshing or changing the format. It's chicken feed £10m, to get a chain of gastro pubs, and at least some decent bars.

Consumer spending is likely to rise well in 2024, with real incomes set to rise sharply, that could help improve trading, but there again a big hit is coming with living wage rising c.10% in April 2024.

Overall, I don’t have a strong view either way.

Since it is undoubtedly higher risk, I think sticking with AMBER/RED makes sense. Again to emphasise, this is a special situation for risk-takers only, so would not have any place in a regular portfolio. My only interest here is for relatively short term trades, when it gets oversold. It's not something I'm interested in holding longer-term at all.