Small Cap Value Report (Fri 5 June 2020) - RBG, SOM

4th Jun '20 by Paul Scott

122 comments 11907 reads

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

Estimated timings - I have to stop for a zoom meeting at 1pm.
Today's report is now finished.

Revolution Bars (LON:RBG)

(at the time of writing, I hold a long position in this share)

Fundraising & move to AIM

Key points (written before 8am market opening);

Raising c.£15m (before fees)
Price of 20p per share, a deep discount of 42%
Firm placing: 45.0m new shares
Open offer & placing: 30.0m shares - this is the most important part for existing investors to understand. Existing shareholders are entitled to apply for 3 open offer shares, for every existing 5 shares held. The open offer makes up 40% of the total fundraising - one of the largest I've seen. This is really good news (in a bad situation), as it means that we existing holders can stand our corner and apply for cheap shares ourselves, thus not being diluted as much as if it was just a placing.
The key thing is that the share price should, theoretically, settle somewhere between yesterday's close of about 33p, and the fundraising price of 20p. This should mean that investors have a loss on our existing shares, but a profit on our new shares. The two have to be seen together. Whether the market will see it that way, remains to be seen, when the market opens. Remember if you sell before 7am on 9 June, then you lose your entitlement to the 20p open offer shares - that's the ex-entitlement date. [Edit: NB check everything with your broker, I'm not 100% sure about this specific point, my apologies]
Moving from main market to AIM, mainly because that enables cheaper fundraisings. Otherwise, it would have had to go to the considerable time & expense of preparing a prospectus for this fundraising. I like this move, as it will enable IHT portfolio buyers to get involved. AIM is a more appropriate market for a micro cap.
Main use of funds - to reduce gearing, which I'm sure everyone agrees was going to be too high.
Bank facilities will reduce by half the fundraising amount, at £7.5m, but not until March 2021 - so it should now have tons of liquidity headroom for the foreseeable future.
Board investing £132k - a worthwhile amount - I get the impression they are ordinary people, not wealthy people, so this is…

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Rodgers63

5th Jun '20

Ben,

For once the retail investor comes out ok from so far from this fund raising. If you work out the value of your holding at close at 34p yesterday and assume you intend has taken up the 3 for 5 offer at 20p, then the weighted average cost/value of your holding is 28.75p. The market price is 29p, so just about even (so far) but with the significant benefit of having a stronger balance sheet.

The rise in market cap from yesterday (50m shares at 34p = £17m) to today (effectively 125m shares at 29p = £36m) reflects £17m 'enterprise value' yesterday plus £13.8m 'new funding' = £30.8m, so the market cap is effectively up c£5.5m (to c£36.2m) reflecting the stronger balance sheet and lower risk of insolvency.

In summary, RGB has money to pursue a path out of COVID, retail investors value (so far) has been preserved (and not forgetting the real short-term winners in the deal are those institutions that subscribed at 20p today - a discount of 9p per share at the closing price - effectively they negotiated a 9p times 45m shares = £4m discount).

Bottom line is that us small retail investors are better off than we were 24 hours ago. Hope this makes sense... Richard

ps you had rights to subscribe for share numbering 3/5 the holding you sold today at 29p for 20p - value that will be hoovered up by other investors in the upcoming offer. However, you locked in 29p whereas the rest of us holding will continue to ride the rollercoaster. Best of luck.

Your write up today on RBG and SOM is a stunning performance

The Open Offer is only for 'Qualifying Subscribers' i.e. those on register at close 4 June. Anyone buying today misses 7am 9 June cut-off as the purchase doesn't settle till T+48 (i.e. after 7am 9 June). So today's share prices already reflects the 3 for 5 open Offer. Not to say that the share price won't decline in coming days. Nonetheless, based on the market close today and the fully subscribed placing, the discount to yesterday's close was a little too deep - but only hindsight tells us that.

ken mitchell

Are you sure about that Richard?

I thought the last day to buy was this coming Monday.

Momoko Miyamoto

"Never bet against America" - Warren Buffett

NeilS

6th Jun '20

I thought Howard Linzon captured it nicely:

Mark Penney

Superb write-up Paul on Rev Bars.

My take on things, if my little island of Guernsey is anything to go by (and we now have no Covid-19 cases on an island population of 60,000), last night the clubs and pubs were mobbed (the joys of having a 20 year old son...)... Based also on Friday closing prices the sell off was not anywhere near as bad as it could have been. I think you have much support in the Stocko community and your detailed insight gives me confidence to take up the writes issue and hold.

Keep up the excellent work

Mark

RDHOWARTH

Richard, I’m sorry friend but you could not be more wrong.

1000 shares at 34 = 340

3/5 = 600 at 20 = 120

1600 shares for 460 = 29p

So what’s wrong ? This is just an x rights price so I guess firstly you have to ask was your in price 34 ?

Secondly - the shares are still trading with entitlement to the open offer. Next week you will see how they trade without this.

The thing is the company have actually issued 75m shares, that’s 1500 at 20p in the above example for £300. So to not be diluted you must buy 1500 shares and the average price ends up 26p. But these shares now don’t trade until end July ! Their value is fixed at 20p. They entitle you to a share in a business that is closed. So you have £15m fixed value plus 50m shares floating value until end July. Next week we will see how they trade.

Make no mistake - if a company has to raise 100% of its market cap by issuing 150% new shares - it went bust. I’m not sure how that is a good outcome. For new investors at 20p maybe.

Pre covid the shares were mid 60s -

1000 at 60 = 600

600 at 20 = 120

1600 for £720 is 45p. I guess this could be a more accurate in price for existing investors who did not average down.... to judge against next weeks price .. which I think will be 20.

That’s not to say it won’t be a good investment now, it’s a different beast now. At some cost though.. the company had no assets and borrowed against EBITDA — so when that disappeared — it went bust.

I hope that makes sense - it’s a bizarre situation.

GavSmith01

Lots of misunderstanding here. As the post above states, ex date for the open offer is Tuesday. You’ll see the price fall to reflect this on Tuesday morning.

Yesterday’s fall was because the market took the news badly - rightly or wrongly.

Thanks for confirming the ex date is Tuesday.

I thought the post saying otherwise was wrong, but thought it worth checking, especially as I and probably others here too, bought back yesterday morning so as to be able to take up the offer.

Edinburgh Investor

Ben316 Dart (LON:DTG) is still down 50% from its pre coved level of around £20

Paul Scott

Very kind, thanks Vader!

Where I've been bullish on a stock, I feel an obligation to keep readers properly updated, especially when things are going wrong, and need explaining in detail.

It helped that I was primed & ready when the announcement came out, having had an opportunity to have a confidential chat with management beforehand, obviously subject to the strict rules of being made an insider.

It really annoys me when information leaks out about fundraising deals. I think it's highly irresponsible for some journalists to publish market rumours about fundraisings. The current system is flawed, but only works if everyone who knows about the placing keeps totally silent.

Paul, thanks for this morning report on RBG, do you expect the SP to fluctuate on 9th June as shareholders take up the offer? Will the majorty of the volatility in price happen today?

I've no idea, each situation is different. Sometimes the share price drifts down, or even below the placing price. In other situations, the placing price puts a floor under the share price, and it recovers nicely.

My feeling is that a successful re-opening of bars could reinforce confidence in the future outlook. The market generally (especially in USA) is getting super-bullish about the economy re-starting, and investors seem to be looking through 2020 numbers as not representative of the future, and instead focusing on 2021 and 2022 numbers. I'm not sure we're quite that forward-thinking in the UK though!

The other thing to consider is that with interest rates probably at zero forever, with bouts of QE to hoover up unwanted Govt bonds, then equities could still be seen as cheap. After all, a PER of 20 is an earnings yield of 5%. If you can only get 0% (or even less!) on Govt bonds, and nothing from bank deposit accounts, then equities or property suddenly look a lot more attractive.

7th Jun '20

Thanks Richard, very kind!

James98UK

This is a massive gamble. For RBG to come through there can be no second wave. Also, if they do open as planned they need a high number of paying customers. Risk/reward not worth it. If you are a gambler and fancy a punt - there should be lower entry in the near future

I agree, even if social distancing drops to 1.5m or less hard to see how Revolution Bars (LON:RBG) will restore previous levels of trading. Younger clientele also more exposed in the coming jobpocalyse.

It's only a a bubble when everyone has stopped calling it a bubble. Still a lot of doubters left to capitulate .

See below extracts from the Offer Document. It says that Qualifying Shareholders are those holding shares at 5pm on 4th June (the afternoon before the announcement to the Stock Exchange).

Many of you have said my post is ‘wrong’. It may well be, however, my understanding is that any shares traded on 5th June (Friday) are not ‘settled’ until Tuesday 9th (T+2 working days'), that is, after the ‘ex-entitlement date for the Open Offer’ and therefore are not entitled to the Open Offer.

As 'Yorkshirecurlew' states in a thread much further below, the ex-entitlement date is synchronised with the above.

Therefore the shares traded on Friday effectively ‘ex-entitlement’ and therefore reflect the dilution.

As I said above, I may be wrong but it is my understanding, but might be flawed.

Richard

“Principal terms of the Open Offer”

The Directors consider it important that Qualifying Shareholders have the opportunity to participate in the Fundraising and the Directors have concluded that the Open Offer is the most suitable option available to the Company and its Shareholders.

The Open Offer will provide an opportunity for all Qualifying Shareholders to participate in the Fundraising by both subscribing for their respective Basic Entitlements and by subscribing for Excess Shares under the Excess Application Facility, subject to availability.

"Qualifying Shareholders"

Holders of Existing Ordinary Shares on the register of members of the Company at the Record Date with the exception (subject to certain exceptions) of Excluded Overseas Shareholders.

"Record Date"

5.00 p.m. on 4 June 2020.

8th Jun '20

Typically with an open offer the initial "Record Date" relates to "Record Date for the purposes of mailing ("Mailing Date") entitlement under the Open Offer for Certificated Holders" (I have lifted this text from another open offer document).

I agree that without this wording, RBG's RNS is ambiguous/arguably misleading.

The Ex-entitlement date is clear in RBG's RNS though - Tuesday pre-open. This is a trade date entitlement, not a record date entitlement, so your T+2 explanation below isn't relevant here.

I am almost certain you are incorrect in your assumptions here, and we will see the fall tomorrow; it would pay for any readers following this thread to double check with their broker.

ben316

No it's not.

Mkt Cap at its peak of about £19.50 per share (Pre dilution) was around £2.7B.

Mkt Cap (Post dilution) is now £1.8B @ £10 per share.

Do the maths

Small Cap Value Report (Fri 5 June 2020) - RBG, SOM

Revolution Bars (LON:RBG)

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Paul Scott

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