Small Cap Value Report (Mon 10 Sep 2018) - DEB, RBG

9th Sep '18 by Paul Scott

20 comments 10489 reads

Hello!

Graham's back from holiday, but I've volunteered to write Monday & Tuesday's reports, so he can ease himself back into things gently, with a 3-day week!

My public portfolio - BMUS

My first job of the day is to re-balance BMUS ("Beam Me Up, Scotty!") - my Stockopedia fantasy portfolio. A reader recently commented that it doesn't seem to fully reflect my current thinking on a number of shares, and that there seemed to be gaps - i.e. companies I've mentioned on Twitter as being big holdings, are not yet in BMUS. He's quite right, so I'm fixing this issue today - not that it's of earth-shattering importance, but the issue should be ironed out.

I haven't regularly reconciled BMUS to my real life portfolio. It was only ever meant to be an approximation to my real holdings, as it would be a nuisance & a waste of time to be constantly updating it, but I appreciate the point that it probably should match my real life portfolio more accurately.

I didn't particularly want to run a fantasy portfolio, but the boss here, Ed, challenged me to prove statistically that I'm a good stock picker, back at the start of 2015. Who could resist a challenge like that!

I feel that, in any field, people who set themselves up as commentators should be open to factual scrutiny, to prove that they out-perform the market at least most of the time. If that's not the case, why would anyone listen to their views?

Performance should be measured in a way which is completely open, cannot be edited, and is published in real-time. Otherwise it's open to manipulation, and hence cannot be trusted.

Anyway, just to clarify, the trades that I shall be putting through BMUS today are simply to re-balance the holdings to reflect my real world positions, for my top 8 holdings. There's also a tail of another 20 or so smaller positions in real life, but I need to keep BMUS manageable to update, so it's my top 8 holdings only.

It should be up-to-date by the end of today. EDIT: I messed up the calculations, and need to adjust it on Tuesday, so please bear with me on this.

Debenhams (LON:DEB)

Share price: 10.6p (down 17% today, at 08:32)

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MrContrarian

10th Sep '18

My morning smallcap tweet:

SysGroup (LON:SYS)1

System1 Group (SYS1) warns "current business revenues are stabilising, albeit at a slower rate than anticipated. As a result of lower operating costs a return to growth in operating profits vs H1 prior year (excluding new Ad Ratings service) is anticipated. WIll launch Ad Ratings subscription service later in FY.

runthejoules

Good morning! Thoughts on Revolution Bars (LON:RBG) 's planned takeover of Deltic would be much appreciated from the both of you plus readers. Having previous dismissed a merger, I don't really know what they're up to there!

LeoInvestorUK

UP Global Sourcing Holdings (LON:UPGS) Pre-close trading update

On an initial reading this looks rather bad with underlying EBITDA down 45% jumping out at me.

The revenue split was:

H1	£48.4m	55%
H2	£39.2m	45%
FY	£87.6m	100%

In their 12th February trading update in the way of reassurance over H2 revenues they pointed out that the historical H1 revenue was 53% in 2016 and 54% in 2015, and so 2018's H1 revenue split of 62% was abnormal. Broadly they seem to be correct in this and so there has been no deterioration at the revenue level since then. Likewise they forecast EBITDA of £6-7m and the outturn was £6,5m.

The "funding headroom" has been progressively improving from £6.2m in July 2017, £8.0m in January and £9.2m in July 2018, suggesting good cashflow. (Presumably this is not tested against EBITDA - I don't have time to look now).

The outlook is cautious, but could be interpreted quite positively. In their statement this time last year they expected revenues to be flat before a £5m hit for deferred payments. Now they said their order book is ahead of this time last year. So this could be interpreted as meaning a growth over 2017's result for FY2019. Additionally there may be an improvement in margins and possibly revenue due to the direct online operation.

FY2017 EPS was 10.9p (7.1p unadjusted, fully diluted) with a dividend of 5,1p. They closed their first day of trading at 148p.

tic_tac_toe

there isn't loads of detail to go on, Revolution Bars (LON:RBG), but it is surely topic de jour after Friday's release..

gus 1065

RPC (LON:RPC) has confirmed its in talks with two PE firms about a possible buy out. Interesting special situation. Shares have fallen heavily YTD as this acquisitive plastics packaging company has fallen out of favour due to general bad karma about the impact of plastics on the environment so now sitting on a low PE and PEG making it an attractive target. Acquisitions make it already quite highly leveraged but possibly even a break up play. Shares up about 22% at the moment but still well down on valuation at the turn of the year. Fold, stick or twist?

Gus.

mammyoko

Re Revolution Bars (LON:RBG) Can't see instis (at least one of whom holds from 200p) voting for an acquisition of Deltic. Although I can see potential sourcing synergies, I don't think this would be value-creating for Revolution Bars (LON:RBG) shareholders. It would stretch the balance sheet further at a time when they are struggling to demonstrate that they are cash-generative. Deltic's business appears to be of a lower quality than £RBG's so unlikely to be earnings-accretive from the last set of accounts. Finally, this appears to be a rather worrying inconsistent strategy given the way in which they said this about the Deltic approach last year:

The Board considers that Deltic's investment proposition, which focuses on late night entertainment with significant reliance on high volumes, is inconsistent with the strategy of premium cocktails and food offering and extending trading throughout the day that Revolution has pursued both before and since its IPO in 2015:

A merger of the two businesses would result in a significant increase in concentration of Enlarged Group revenue from predominantly late night entertainment, such as large nightclubs and student-led operations, which the Board regards as inherently volatile due to the nature of its customer base and trading patterns. The Board's view is that this is a fundamental misalignment of the two business models, which have different customer propositions. The Board considers that this would pose a significant risk to the market's assessment of value and strongly rebuts Deltic's belief that the merger proposal is exactly the type of transaction which Revolution's stated IPO strategy was intended to implement.

As a way of bringing Stonegate back to the table I would suggest that this isn't the cleverest move.

Howard Marx

mammyoko, you appear to have instantly dismissed the merits of a Revolution/Deltic deal rather than proportioning your belief to the evidence.

"It would stretch the balance sheet further" : what if Revolution Bars (LON:RBG) issued Equity?

"Deltic's business appears to be of a lower quality than £RBG's" : the last Deltic accounts show gross margins of 78.5% & ROE of 25.7%. High quality.

"so unlikely to be earnings-accretive from the last set of accounts" : do we know how much Revolution Bars (LON:RBG) is planning to pay &/or what synergies are feasible?

Finally, this appears to be a rather worrying inconsistent strategy : Revolution Bars (LON:RBG) have changed their CEO, so no inconsistency.

rmillaree

£ RBG

Ref the Deltic acquisition - presumably this would partly/largely be funded by the issue of new shares - i would guess this would work well for current shareholders if the shareprice is bouyant and less so if the share price is depressed - hmmmmmmm. Perhaps this is to be done on a notionally higher shareprice (shares to Deltic owners within lockin period) - in which case the overall package could be acceptable?. Perhaps this is a sign that both companies are struggling somewhat and see the savings from the merging of group costs as being more important than petty squables or short term share price issues . Main bods presumably always get their payday.
As other seem to be, i am skeptical as to how this would work and be good for current shareholders short term. Perhaps there is a cunning plan though.

otemple

UP Global Sourcing Holdings (LON:UPGS) too please Paul.

Sold mine for a small profit a few months back as didn't like the renewed share price drift, but feel they will pull through. Just doesn't strike me as a high quality business so perhaps best avoided....

TamzinPiworld

Just published, the Downing Strategic Micro-Cap IT AGM video (and podcast), where Judith MacKenzie introduces some of her team, and gives an overview of the IT.

https://www.piworld.co.uk/2018/09/10/downing-strategic-micro-cap-investment-trust-agm-meet-the-managers-event-july-2018/

This video gives insight to the Downing Strategic Micro-Cap IT investment style, and an in depth overview of Adept Telecom (LON:ADT), Real Good Food (LON:RGD) and Gama Aviation (LON:GMAA). A great insight to see how these Investment Mangers view investment. Plus some great audience questions.

Worth a watch, when you've got 45 mins to spare.

WhaleHQ

Ok Paul I know this is a small cap report and what I’m going to ask you to cover is the exact opposite of that but can you please cover Associated British Foods (LON:ABF) if news flow elsewhere is tight? Yes, it’s a very large cap and the only tenuous links I can find to this report are that you love a good roll out and you love a good fashion brand but it would be much appreciated.

DJCP

Paul, if you have time (lol !), a snippet on your thoughts about the latest Debenhams (LON:DEB) situation.

www.bbc.co.uk/news/business-45463870
Debenhams calls in KPMG to assess future options

The SP is 17% down today. With Mike Ashley as a (just under 30%) shareholder, I'm sure he has an end-game in mind. My initial thoughts are that with Debenhams (LON:DEB) and House of Fraser, he could be in a position to put pressure on landlords - CVAs or the threat to not renew leases unless at a substantial discount, as many of these are huge stores that would limit the companies that could move into them.

What about multi-concession stores - The best (or non-competing) parts of Sport Direct, H of F, Debenhams, Game/Belong etc. all under one roof ?

pgs501

Hi Paul,

I rarely comment on your (or Graham's) consistently excellent reports however your piece on Debenhams and the general department store sector is brilliant and had some things in it I had not considered before. Thanks!

Pete

doug2500

Unless there are particularly interesting small cap stories I love the macro ramble / book review / general commentary.

In fact I often prefer slow news days to get more of this type of commentary! But really I just think this is a quality blog which proves it's much more to do with the writer (whichever one of them it is) than the subject, and is always best when the subject is of interest to the writer, even when it deviates from it's remit.

danielbird193

Agreed, today's blog has been fascinating. Found the section I've quoted below hugely enlightening!!

"[Mike Ashley could] merge HoF and Debenhams, and stuff the landlords with brutal deals on rents, or hand back any shops that can't be retained on a much reduced rent.... In the long run this could revitalise the UK's struggling department store sector."

Gromley

Interesting piece on Debenhams (LON:DEB) Paul thanks for that.

Having written "I would ignore any future assurances from Debenhams in update RNSs, saying that everything is OK, because their previous statements have lacked credibility. " it's pleasing to see that the subsequent RNS didn't change your view ;-)

In fact I notice there is a bit of a naughty in the RNS imho.

They say :

we expect to report pre-exceptional pre-tax profit for FY2018 of around £33m, within the current market range of £31m to £36.5m1

Hidden away at the bottom of the RNS is the foot note

¹ Company-compiled consensus published on www.debenhamsplc.com

Hmm okay, but the last time the company gave us an update (19th June) they told us

We have reassessed our expectations for the balance of the year and now expect pre-tax profit for FY2018 to be in the range of £35m-£40m

So this reassuring note is actually another profits warning, admittedly perhaps not as bad a warning as some might have been expecting but a miss nevertheless.

EBITDA is also a miss £157m vs the previous range of £160-165m.

At least net debt is still in line at c. £320m!

The scale of the miss then is not that big, but it disturbs me the way that they appear to tried to gloss over it.

brucepackard

Just a comment to say very much appreciate you putting the BMUS portfolio for all to see. In some cases, having a portfolio for all to see can impair your performance, because you might be scared of looking stupid if you buy into a company where the risk / reward makes sense...but ultimately doesn't work out. Many fund managers are too risk averse because they get a hard time from investment consultants or their name gets in the papers when they own a company that fails.

As a specific example, I've spoke to a couple of professional fund managers who feel that they'd like to buy Burford Capital (LON:BUR) but can't, because it doesn't fit the process that they've sold to the world.

Good stuff

Paul Scott

Thanks for the positive feedback today, much appreciated. Graham & I are only human, so it's nice to get a pat on the back from the readers when you like our output!

Incidentally, I had a very quick look at 4 companies' results statements today. But as it's late, I've posted my thoughts into tomorrow's placeholder article here:

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

Many thanks for your comprehensive write-up on Debenhams (LON:DEB) and B&M retailers in general - Hardly the 'snippet' I was expecting, so I'll thank a slow-RNS-news day for that. Very interesting, and it appears your views/thoughts are along the same lines as mine.

One quote I'd like to comment on:
"How long before the staff in warehouses are replaced by robots? So the employment issue may be short-lived."

Being older (but not necessarily wiser ! lol), I've heard about the robots-taking-jobs-scare-stories so many times over the years, but it's just been a progression, not a revolution. Although warehouse jobs may dwindle (some youtube videos on warehouse automation are quite amazing), there will be robot design/engineering/building/maintenance jobs that emerge, so the net job-loss won't be drastic - until we get to the stage where robots are self-creating (Terminator-style).
There is a robot cocktail/drink maker btw :o) - A MUCH more useful creation ! lol

With regards to the high street. Would we ever get to the stage where the rents/rates reduce to the level that it's viable to use the majority of a large department store as warehousing ? Sort of going back to the Argos plan.

JohnEustace

Re Marks and Spencer (LON:MKS), I am reminded of the oft repeated Jeff Bezos quote after he had lunch with the founder of Costco. "There are two kinds of retailers: there are those folks who work to figure how to charge more, and there are companies that work to figure out how to charge less, and we are going to be the second, full-stop."

Marks looks to me like they spend their time figuring how to charge more, and that puts them in the wrong camp to survive and prosper.

Small Cap Value Report (Mon 10 Sep 2018) - DEB, RBG

My public portfolio - BMUS

Debenhams (LON:DEB)

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