Small Cap Value Report (Mon 7 Mar 2022) - VARE

Good morning, Paul & Jack here with Monday's SCVR.

The futures are pointing to another bumpy day, following on from another panic sell-off last week. Absolutely hideous market conditions.

Agenda - 

Various Eateries (LON:VARE) - results for FY 10/2021 shows losses, but the year was impacted by covid. Also, it's quite an early stage business, with only a small number of sites, but more in the pipeline, so there's not much financial track record yet. Despite big fall in share price recently, it still doesn't strike me as a bargain.

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Various Eateries (LON:VARE)

57p (Friday’s close) - market cap £52m

Final Results

Various Eateries PLC, the owner, developer and operator of all day club, restaurant and hotel sites in the United Kingdom, announces its results for the 53 weeks ended 3 October 2021.

The share price here has been dropping relentlessly, but that doesn’t necessarily mean there’s anything wrong with the company - it’s an increasingly unpleasant bear market, so practically everything is falling, often irrespective of the company fundamentals.

VARE is too early stage to analyse meaningfully from these accounts, which are also impacted in part by covid. Although they do remind us that this is still quite a small business, and not yet profitable -

Revenue £22.3m

Adj EBITDA £1.2m (which ignores a lot of real world costs, so is not meaningful)

Loss before tax £(3.7)m

Benefit of £2.5m insurance claim, so loss would have been £(6.2)m without it

Net cash of £7.3m, and gross cash of £19.7m should provide enough cash to roll out more sites

Share based charge of £844k strikes me as highly inappropriate, and perhaps indicates whose benefit this company exists for!

Balance sheet NAV: £24.3m, less intangibles assets of £12.8, gives NTAV of £11.5m - adequate for now, but it might need another fundraising to roll out many more sites.

My opinion - I like the Coppa Club format - I’ve not yet mystery shopped it, but the website pictures show aspirational sites, tastefully (and expensively) fitted out. Also, the all-day format looks a winner, and works well for more mainstream competitor Loungers (LON:LGRS)

The problem is, in this sector expensive & attractive fit-outs pull people in for a few years, but then require either expensive refurbishments, or business tails off once each site begins to look tatty, and/or goes out of fashion.

Therefore it’s easy to end up over-valuing companies like VARE in the early stages, based on high performing new sites.

Also, the market cap is almost 5 times NTAV, which means a lot of growth is already priced-in.

Current market conditions are throwing us all sorts of bargains. Therefore I think there are much better situations to put fresh money into than VARE.

Longer term though, it looks a good format, with experienced management. Maybe they could stop helping themselves to share based payments, and build up the business first, before taking the rewards?

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