Small Cap Value Report (Thu 14 Mar 2019) - RBG, DEB, IPEL, DFS, SDRY

Thursday, Mar 14 2019 by
93

Good evening/morning, it's Paul here.


Revolution Bars

Here are my overdue notes from a recent meeting with management of Revolution Bars (LON:RBG) (in which I hold a long position). The meeting covered the points in the recent interim statement, with a bit more detail, and also some Q&A. It was also a get-to-know-you session with the new CEO, Rob Pitcher, who started in late June 2018.

The original reason I invested in RBG, several years ago, was that it was a self-funding roll-out of highly cash-generative bars, combined with takeover potential. Sure enough, we got a 203p cash bid in 2017 from Stonegate, which bizarrely for a recommended offer, was turned down by shareholders at the last minute. I can't remember that ever happening before, so it was actually a rational (but ultimately incorrect) opinion to wait for either the 203p cash bid to finalise, or a higher competing bid to come in. Sometimes things don't pan out as we hope.

Since then, the share price has collapsed, to only 63p - suggesting that the stock market thinks that the business is going down the pan. Therefore, in assessing this share today, it is a given that performance has disappointed. The question now is simply whether the share price has overshot on the downside, and what upside there might be from here if a turnaround takes place?


Revolution Bars (LON:RBG)

Share price: 63.5p
No. shares: 50.0m
Market cap: £31.8m

Interim results 

Oh no, what's gone wrong now? As management admitted, "we've just hit the market with 4 negatives";

1) Dividends suspended - widely expected (I suggested that it might be wise to suspend the divis, here in Oct 2018). Also, broker notes had floated the idea that divis might be suspended, due to heavy expansionary capex on new sites.

So for anyone paying attention, the divis being suspended should not have come as a surprise at all. My only complaint here is that management could have been more savvy, and slashed the divis to something nominal, say 0.1p per share. That would have suited some institutions, which are mandated to only hold dividend-paying shares.

Management are clear that the company will return to the dividend list in the not-too-distant future - so this should be…

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Revolution Bars Group plc is a United Kingdom-based operator of bars. The Company has a trading portfolio of approximately 60 bars located predominantly in town or city high streets, which operate under the Revolution and Revolucion de Cuba brands. The Company's bars focus on a drinks and food-led offering, and typically trade from late morning, during the day and into late evening. Revolucion de Cuba bars are characterized by their 1940s Cuban-inspired style, with dark woods, traditional bar counters, antique tiles, vintage furniture, Havana-style ceiling fans, and original Cuban artwork and photographs. Its bars are located in various places, such as Cambridge, Ipswich and Norwich in South East; Bath, Plymouth and Southampton in South West; Birmingham, Derby, Leicester, Loughborough and Milton Keynes in Midlands; Cardiff and Swansea in Wales; Blackpool, Chester and Huddersfield in North West; Sheffield, Sunderland and York in North East, and Edinburgh and Glasgow in Scotland. more »

LSE Price
73.7p
Change
1.5%
Mkt Cap (£m)
36.9
P/E (fwd)
11.9
Yield (fwd)
6.8

Debenhams plc is a United Kingdom-based company, which is engaged in multi-channel business. The Company’s brand trades through approximately 240 stores in 27 countries. The Company's segments are UK and International. The UK segment consists of stores in the United Kingdom and online sales to the United Kingdom addresses. The International segment consists of international franchise stores, the Company-owned stores in Denmark and the Republic of Ireland, and online sales to addresses outside the United Kingdom. The Company's stores trade under the name of Debenhams other than the Danish stores, which operate under the Magasin du Nord banner. Its stores offer customers a range of services, including restaurants and cafes, personal shopping assistance, hairdressing and beauty treatments, nail bars and wedding or celebration gift services. Its Debenhams Direct (www.debenhams.com) offers a range of products and services for online customers. more »

LSE Price
1.59p
Change
-45.2%
Mkt Cap (£m)
19.5
P/E (fwd)
n/a
Yield (fwd)
n/a

Impellam Group plc is a holding company that provides strategic planning and management services to its portfolio of subsidiaries. It is engaged in the provision of staffing solutions, human capital management and outsourced people-related services in the United Kingdom, Ireland, North America, mainland Europe, Australasia, New Zealand, Singapore and the Middle East. It’s segments include Managed Services-UK, Europe and Australasia; Specialist Staffing-UK, Europe and Australasia; Managed Services-North America, and Specialist Staffing-North America. It operates various supply models within its Managed Service Programs (MSP), including Neutral vendor, Master vendor and Hybrid vendor. It also offers Recruitment Process Outsourcing, which refers to the outsourcing of permanent, temporary and contract recruitment. It offers staffing services for specialties, such as Healthcare, Legal, Engineering and technical, Construction, Catering, Driving, Office and Industrial. more »

LSE Price
495p
Change
 
Mkt Cap (£m)
243.6
P/E (fwd)
8.5
Yield (fwd)
4.9



  Is LON:RBG fundamentally strong or weak? Find out More »


65 Comments on this Article show/hide all

matylda 14th Mar 46 of 65

In reply to post #457993

Buffetology Fund buying is probably the reason you're looking for.

Blog: Briefed Up
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gsbmba99 14th Mar 47 of 65
5

In reply to post #457893

I've held the shares for a few years. Jarvis Securities (LON:JIM) earns far more interest on the cash balance than the base rate. I believe that the rules permit them to "ladder" the placement of the customer deposits to attract a better rate associated with term deposits. My impression from attending an AGM was that not all of the customer cash is immediately liquid. Some is, say, 90 days, some is 60 days and some is 30 days etc. If all the customers wanted to use all the cash, they would have to make good on this by breaking the deposit arrangements. They said that they have never had to break any deposit arrangement.

The placement of the deposits was said to have always fallen exclusively under the remit of the CEO. The CEO and other members of his family own a very considerable portion of the shares so you would expect that he would be ultra careful here. I take comfort from that but there have been statements in prior results from Share (LON:SHRE) that criticised "risky" practices from other market participants when noting how little Share earned in interest income. This was presumably aimed at Jarvis and probably to deflect from their own performance.

My estimate for cash under administration as at 30 Jun 18 is £229m. This is based on the last reported cash balance from 30 Jun 13 (I think?) and using the subsequently amended KPI of growth in cash under administration (which was 8.3% as at 30 Jun 18) to roll the amount forward. The term deposits attract higher interest rates. If we take interest earned of £4.081m for 2018 and divide it by the 30 Jun estimated cash balance (assuming it is representative of the average for the year) you get 1.78%. Using this same basis, the interest earned on cash has progressed from 3.87% in 2012 to 2.88% (2013) to 2.12% (2014) to 2.06% (2015) to 1.90% (2016) to 1.80% (2017) to 1.78% (2018). Despite the compression in interest rate, the interest earned has still grown at a CAGR (5 yrs to 31 Dec 18) of 5.4% while cash under admin has grown at a CAGR of 16.1% (5 yrs to 30 Jun 18).

The growth in the cash balance to 30 Jun 18 was 8.3% so a 7% increase in interest earned is not out of line.

If you look at Hargreaves Lansdown (LON:HL.) and others, cash looks to be fairly consistently about 10% of customer assets.

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fwyburd 14th Mar 48 of 65
7

In reply to post #458033

Hi Matylda,
If you are referring to the Revolution Bars (LON:RBG) RNS today, I think they were selling not buying. And two weeks ago, shame on them for declaring this so late.
https://www.investegate.co.uk/revolution-bars--rbg-/rns/holding-s--in-company/201903141605579357S/
cheers
Francis

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MBFP 14th Mar 49 of 65

In reply to post #457983

Paul,
Thanks for the reply.

Michael

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ricky65 14th Mar 50 of 65
11

Revolution Bars (LON:RBG) great example of why I never argue with the market on a downtrending chart.

I remember having a robust debate with Paul about RBG in June 2018. Its down over 50% since then. I was bearish as the chart was in a terrible downtrend - it still is. He mentioned he would be "proven right on this one eventually" https://www.stockopedia.com/content/small-cap-value-report-thur-14-june-2018-rbg-373939/?comment=38#38

He may well be proven right eventually but so far it's been a tremendous opportunity cost when you consider that other stocks have done well since that time. Personally, I don't trade stocks to be proven right, I trade stocks to make money.

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thirty fifty twenty 14th Mar 51 of 65
5

Revolution Bars (LON:RBG) great debate for the benefit of all.

Just to clarify... my point was not that Revolution Bars (LON:RBG) need a RIGHTS issue, or that I cast any doubts on the opportunity - if the sites can make as much money as they do when they have been badly run for so long then there is very obviously an opportunity. I don't have an opinion as to how successful the CEO is likely to be.

My cynical observation was that current institution shareholders who did believe the new CEO might turn the company around would naturally want to buy shares to average down, as Paul as others have stated they want to do. The easiest way for them to buy shares, in bulk, at the cheapest price would be if the company issued NEW shares. My argument was thus that some major stake holders - shareholders, banks and a new mgt team have an incentive to have a RIGHTS issue or PLACING and extra money could certainly be used.

Does anyone know the average daily net debt? Trade payables are up 3m in the last 6 months?

I don't know. I know that CASH outflow in the last 12 months was at least £10m and that is a tough tanker to turn around. Extra sales are very possible with good management but naturally that comes with investment in refurbs and also marketing promotions and price cuts.

The lack of buyers to break the strong chart downtrend (50d at 84p) also make me hesitant.

I have no position and have considered buying but decided not too as there too much risk for my strategy.

Good luck to all

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clarea 14th Mar 52 of 65

In reply to post #457983

Hi Paul,

Any chance on getting your thoughts at some point on yesterdays French Connection update with the dream of a bid still alive and the possibility there might be more  possible bidders in the mix than the four parties who were initially in discussion with the board.

Thanks Andy

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Paul Scott 14th Mar 53 of 65
7

In reply to post #457993

this morning when Paul 1st posted about RBG, it was over 1% down, its now 2.2% up.

I hate that type of thing, and we need to avoid it as much as possible.

This column is not a tipping service, and we want everyone to use the Stockopedia tools, and DTOR. That's why Graham and I only ever give our personal opinions, and emphasise that sometimes we're right, and sometimes wrong. I tend to get it about 60:40 right:wrong in an average year.

Although I do think we're very good here in the SCVRs at warning people about dodgy accounts & balance sheets, which helps people avoid losses. Probably the only insolvency that we didn't spot in advance, was CAKE, and who could have predicted that?

I have no idea whatsoever, what the share price of RBG is likely to do, short term. However, I'm pretty confident that if the turnaround works, then it should be usefully higher in say 1 year.

Regards, Paul.

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Paul Scott 14th Mar 54 of 65
5

In reply to post #458063

Hi Andy,

Any chance on getting your thoughts at some point on yesterdays French Connection update with the dream of a bid still alive and the possibility there might be more  possible bidders in the mix than the four parties who were initially in discussion with the board.


Sure. I've looked closely at the French Connection (LON:FCCN) (in which I hold a long position) results, and I'm positive about the future. A few key points;

  • Balance sheet is amazingly strong, such that the market cap is equivalent to just the group's working capital (it has no debt)
  • Sale of Toast has boosted cash, but trimmed back retail profits by about £1.5m
  • Wholesale division is doing really well, including very positive trading in the USA, to Dept Stores - this is a surprise on the upside
  • Retail division still incurring gigantic losses - so a surprise on the downside. This is concentrated in a small number of major problem shops, I believe. Short remaining lease terms means that these losses should reduce significantly in the next 4 years - giving a big boost to profits in coming years
  • Licensing doing OK, and things like the DFS sofas range, demonstrate lots of potential here
  • Sale of the business still live, news expected in next 3 months. Brexit can't have helped, so I think the stock market is sensibly not anticipating anything here
  • Breakeven now, which is a major turnaround from a few years ago, yet, share price unchanged - doesn't make sense


Very few investors seem to understand the opportunity here - that the retail losses are about to reduce significantly, as problem leases expire. Meanwhile, wholesale is going great guns, and licensing is pretty good too.

This share is worth 100p+ in my view.

Downside is minimal, as it's now profitable, and has a rock solid balance sheet.

I reckon it should make £3-5m profit this year (2019), due to cost savings, and reduced retail losses from closure of heavily loss-making sites.

I'll be buying more, when funds permit. Trouble is, at the moment, I don't have any spare cash, more's the pity.

DYOR as usual.

Regards, Paul.

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Garry Hawthron 14th Mar This post has been moderated
Paul Scott 14th Mar 56 of 65
3

In reply to post #458058

Hi thirty fifty twenty,

Thanks for your clarification, but I still think you're wide of the mark.

My cynical observation was that current institution shareholders who did believe the new CEO might turn the company around would naturally want to buy shares to average down, as Paul as others have stated they want to do. The easiest way for them to buy shares, in bulk, at the cheapest price would be if the company issued NEW shares. My argument was thus that some major stake holders - shareholders, banks and a new mgt team have an incentive to have a RIGHTS issue or PLACING and extra money could certainly be used.

My City sources tell me that there's very little appetite for fundraisings generally, in the small caps space. Some small caps funds are facing redemptions, so the last thing they want is companies coming to them and asking for additional cash. Market conditions have completely changed. Anyway, as I explained before, it's not an issue. RBG is paying down (fairly modest) debt from its prodigious cashflows, and a fundraising is not relevant here at all.


Does anyone know the average daily net debt? Trade payables are up 3m in the last 6 months? 

Again, just no relevant. This is not a financially distressed situation at all. Why are you trying to insinuate that it is?


I don't know. I know that CASH outflow in the last 12 months was at least £10m and that is a tough tanker to turn around. Extra sales are very possible with good management but naturally that comes with investment in refurbs and also marketing promotions and price cuts.

The previous cash outflow was due to a big roll-out of new sites, which cost about £1m each. That was discretionary, expansionary capex, which has now stopped. Combined with suspending the divis, the cash outflow will now turn into a cash inflow.

I think your fears seem misplaced, but as always, time will tell.

Regards, Paul.

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abtan 14th Mar 57 of 65

In reply to post #458038

Thanks for your post. Truth be told, I was actually hoping you would make a comment on Jarvis Securities (LON:JIM) as I too was using your previously assumed £229m cash under management figure as part of my calculations.

You mentioned an interest rate of 1.80% for 2017.
I was assuming 1.76% for 2017, so pretty close and a good starting point for my next point.

Given that:

  • the average Bank of England base interest rate in 2017 was 0.29% (10 months@.25% + 2 months@0.5%), and
  • the average Bank of England base interest rate for 2018 was 0.60% (7 months@0.5% + 5 months@0.75%)
  • so average interest rates have doubled from 2017 to 2018 
  • and assuming that cash under management stayed, at the very least, constant at £229m, 
  • then the interest revenue vs 2017 should have increased by far more than 7%.


You make an interesting point about term deposit rates though. Perhaps the company got stung by vast withdrawals in the last quarter of 2018? But that would still indicate a drastic decrease in interest income given a doubling in the average interest rate across the last 2 years.

In any case, something just doesn't seem right, and it would have been useful for management to provide a more thorough explanation on, as I see it, the lack of growth in interest income, especially if cash really has increased in 2018.

This is really something that should be quite simple to understand.

Cheers

A

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Paul Scott 14th Mar 58 of 65
4

In reply to post #458008

That's right. RBG venues are generally very successful late-night party venues, which do a roaring trade on Friday & Saturday nights. Every site is different. My view is that they should probably close on Mon & Tue, and trade from Weds evening onwards. There's no point in having a large bar, open all day, every day, with hardly any customers in the quiet times. It just loses money.

Years ago, I was asked to troubleshoot a central London nightclub, that was losing money, hand over fist. I (wrongly as it turned out) urged the owner to find ways of utilising this large space during the day, and Mon-Weds. He politely listened to me, and replied that I was completely wrong. He went on to close the site for most of the time, and arrange amazing party nights, with top DJs, just for about 3 nights per week. He made a fortune from it! I think RBG should probably go down the same route.

P.

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Paul Scott 15th Mar 59 of 65
4

In reply to post #458003

Re the specific point about Revolution Bars (LON:RBG) having two locations in the same town (often close together). This has reminded me of a discussion point from the meeting.

My own retail experience (from the 1990s, so admittedly now a bit dated) was that having multiple locations in one town was a disaster. Pilot had a tiny store in Oxford. Then our CEO opened another one, which became cost centre OX2. Then, a new shopping centre was built, and we opened OX3. All this did was cannibalise sales, and all 3 shops became loss-making. It was then a multi-year struggle to exit the stores.

The same thing happened subsequently in other towns.

Returning to Revolution Bars (LON:RBG) it does not have this problem. It has 2 successful formats, which can operate side by side. Why? Because they target different demographics. The core Revolution sites target 18-30 people, who want a banging night out, at the weekend. The secondary, Revolucion de Cuba format, is aimed at 30-45 year olds.

Management explained how the 2 formats actually work really well together, close together, in the same towns, such as Reading, Huddersfield, Southampton, and others. It doesn't cannibalise sales at all - the customers like it - youngsters in one bar, and not-quite-middle-aged in another, doing a bit of salsa, and not being bothered by the yobs.

P.

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gus 1065 15th Mar 60 of 65

Sorry - posted on the wrong thread.

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thirty fifty twenty 15th Mar 61 of 65
8

In reply to post #458093

thanks Paul for your views. I do hope that my scenario suggestion is helpful to the overall debate.
I have no position and unusually decided to contribute to the debate as I am been very tempted by the potential turnaround at Revolution Bars (LON:RBG) and thought it useful to share my doubts as to why, for me and my strategy, I've decided not to press the buy button today.

whatever happens in the future I don't see it as me being right or wrong. I see different scenarios for the future for Revolution Bars (LON:RBG) - the RIGHTS scenario is maybe only a 20% probability in my eyes but it is a scenario that I want to avoid being invested through, and if anything take advantage of if it happens by buying at that point. The cause of it might be a factor outside of mgt control. I fully appreciate that it is not the most likely scenario and re-iterate again that the reasons for it would not be negative but be because investors wanted to invest fresh funds into the potential turnaround story.
anyway it feels like repetition on my part. I've made my decision on it and will maintain on my watchlist. good luck to you and others holding.

just one specific point to reply on.....

"[sorry i don't know how to get text from a previous post in italics]
[my comment] Does anyone know the average daily net debt? Trade payables are up 3m in the last 6 months?
[your reply] Again, just no relevant. This is not a financially distressed situation at all. Why are you trying to insinuate that it is?
"

I think your analysis and contributions are amazing and invaluable to others but did feel this was a little harsh! I'd hope my lengthy posts explained my position and my views. I expressed many times that there is potential in the turnaround. I am not trying to "insinuate" anything.
I feel it is a relevant question to ask 'what is average debt?' rather than balance sheet date debt,
and it is factual that Trade Creditors are up £3m (c.15%) when trade is c.flat.
I think for a company to stop its roll out programme, and to stop paying its dividend is under some sort of financial pressure. It might very well have the potential to reverse that situation, and to reverse it quickly, and materially, but that is the future and thus an opinion about what will happen. I think it is fair to say that factually, until recently, it was over expanding and CASH negative and thus under financial pressure, and thus it is reasonable to ask questions. I have not had the benefit to meet the CEO and form an opinion based on trust in him, or visibility of broker forecasts of CASH flow, so thus I use the numbers as presented and try to see what the downsides might be.

*this debate has made me realise I should get Research Tree subscription! - thanks!

I hope the above does not seem either critical or overly sensitive - it is intended as analytical debate. We are all trying to be successful in own ways and you certainly have a fantastic track record, so whatever happens (and my 80% view is that they trade their way out of the current situation) it doesn't show anything - it is one share in a portfolio, or in my case one that I decided not for me for now.

best wishes

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john652 15th Mar 62 of 65
1

In reply to post #458113

I hope that’s not from the interview

‘ the customers like it - youngsters in one bar, and not-quite-middle-aged in another, doing a bit of salsa, and not being bothered by the yobs.’

A Gerald Ratner torpedo! for those that remember.

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gsbmba99 15th Mar 63 of 65

In reply to post #458098

They're quite protective of the rates they achieve. My numbers are only guesses. Eyeballing the chart in the annual report with the average annual cash balances, I suspect that the horizontal lines are at £100m, £200m and £300m. If so, that looks a bit more like the average annual balance was about £250m in 2017 and about £275m in 2018.

Either way, if deposit rates are flat, then you would expect interest income to grow at the rate of growth in cash. The 30 Jun KPI says it was 8.3%. Eyeballing the annual report chart looks like it might be 10%. I'm reasonably happy with 7%. I just don't think that movements in the base rate is a good guide as they earn vastly more than that.

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xcity 15th Mar 64 of 65
2

One of the problems I have with Revolution Bars (LON:RBG) is that I find it hard when I look at the balance sheet to understand what gives rise to some of the numbers sufficiently to trust the figures - eg prepaid expences. I think I'd need a lot more detail to reassure me even though Grant Thornton aren't the auditors.
The Guardian piece on Patisserie Holdings (LON:CAKE) today - https://www.theguardian.com/business/2019/mar/15/patisserie-valerie-accounts-black-hole-94m-say-kpmg - naturally increases concern. Not only do we have the cash problem we knew about, but also discrepancies in asset valuation, understatement of debt and overstatement of amounts owed (I think this must include the prepayments).

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Paul Scott Tue 1:08am 65 of 65
1

In reply to post #458053

Hi Ricky,

Personally, I don't trade stocks to be proven right, I trade stocks to make money.

Aren't you a little smart arse! We won't mock you, when you inevitably fall flat on your face.

Just remember that pride comes before a fall.

Paul.

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for Stockopedia.com on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »

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