Small Cap Value Report (Thu 16 April 2020) - RBG, WGB, DNLM, VLX

16th Apr '20 by Paul Scott

77 comments 9592 reads

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

It's busy for updates today. I'll start with 3 companies in which I have long positions, as obviously I read the updates that affect me personally first thing. Newer subscribers may not be aware that I'm primarily a professional investor (since 2002), doing writing as a sideline.

Today's report is now finished.

Revolution Bars (LON:RBG)

Share price: 20.4p
No. shares: 50.0m
Market cap: £10.2m

(I hold a long position in this share)

Completion of banking documentation

You might recall that this operator of 74 town centre late night bars, surprised on the upside 2 days ago, with an update that its bank (Nat West) is being supportive, thus eliminating (for now anyway) the need for an equity raise. Being long of the shares myself, (this is now my biggest position in my trading account), I'm delighted that it seems the company won't need to dilute me at this stage, thanks to bank support.

Today RBG confirms that the bank paperwork has all been finalised;

Revolution Bars Group plc (the "Group"), a leading UK operator of 74 premium bars, trading under the Revolution and Revolución de Cuba brands, confirms that it has now executed final documentation with its lending bank, Natwest to increase its revolving credit facility to £30.0m until 31 August 2020, as further detailed in the Group's announcement of 14 April 2020.

Here at Stockopedia we've provided a range of opinions on this share this week;

Graham - sounded very negative here
Paul (me) - positive, whilst acknowledging it's risky, in the same article, in the reader comments section
Jack - seemed middling, leaning to slightly positive, in his excellent article here

It's good to have confirmation that the increased overdraft documentation has been executed, which should make the necessary larger facility available. This buys RBG time to tread water until the lockdown is lifted, hopefully soon.

As mentioned in yesterday's article, after reading the OBR report on the likely cost of lockdown, I am increasingly convinced that the Govt has little option but to phase in a lifting of the lockdown relatively soon. That's starting to happen in other countries too. Hence there are really 2 unknowns with RBG at the moment;

1. When will lockdown be lifted for bars? Currently RBG is generating nil revenues, but has costs…

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Doggy100

16th Apr '20

I bought novacyt @105p

Nebraska1977

June 30 2020 covenant has been waived. And yes EBITDA for bank covenant is trailing which will obvs be low but no government owned bank is going to impose a recap at those debt levels otherwise they will have to force entire sector (public and private) to recap which means wiping out thousands of small businesses. Yes, there is risk, but if they can get to cashflow breakeven then I think that will be enough. Cashflow breakeven is about £12-15k per bar per week versus their normal run-rate of c£40k per week. Do-able in my view. But buyer beware etc.

john652

Hi Doggy100,

‘Breweries already looking at late May for some action’’

Why do you say that, as a owner of three pubs you probably have more insight here. Is that anecdotal, or multiple breweries acting the same way?

Paul Scott

17th Apr '20

This comment is under review

We've noticed quite a few pubs in London that are obviously doing lock-ins - lights on, curtains closed, laughter inside.

I'm sure it's the same across the UK.

We cannot hide from this virus forever. Appreciate all the health aspects, but anyone who is financially literate, and has read the OBR report, must surely realise that lockdown is a disastrous & unsustainable strategy.

Life is full of risk. 1,000+ people die in car accidents each year. We don't eradicate road travel until we can stop these deaths. They are part of the risk involved in normal life.

The OBR report gives no evidence to suggest its assertion that inaction would cost more than action.

The reality is that we all face risk, all the time. This cannot be eliminated. Covid-19 is NOT the worst risk in living memory. Nazi bombers overhead, pebble-dashing our cities, was a far greater risk, numerically in terms of deaths.

The lockdown is likely to cause thousands of hidden, deferred deaths - from suicide, alcohol/drug abuse, people losing their homes, businesses, depression, etc. We'll be feeling the effects of the lockdown for years. So to pretend that saving a relatively few, end of life, lives, is a good price to pay, for wrecking the lives of millions of working age people - I think that is an honest discussion we should be having. I don't know the answer, but it should be discussed, not suppressed.

History may judge that an almost total risk aversion approach that we now have, could be wrong. But who knows? I just think it's interesting to discuss.

Yes, I had a close look at J D Wetherspoon (LON:JDW)

The Govt has to let pubs re-open, or we'll be looking at unimaginable disaster.

JDW didn't look cheap enough for me. I'm a higher risk investor, so I want a 5x return, for taking a bit more risk. JDW doesn't seem to offer that. It's got plenty of freeholds, and I like the robust Chairman. Hence a bit like Greggs - lovely business, but the shares are not cheap enough at the moment to reflect the risk. For me.

Re Revolution Bars (LON:RBG) - the way I look at it, is that it's my money, and I'll do WTF I want with my own money! It's very kind of others to proffer their views, which I will take into account possibly. Actually I won't, I'll ignore them & do what I want with my own money.

It's an entirely different matter for fund managers, who handle other peoples' cash. That's not my bag. Tried it briefly, it's horrible.

jgunnsm2

Paul excellent update thank you. I had the IPO of RBG fortunately sold early on albeit for a small loss at around 200p. A friend who owns a few Independent bars in London who is extremely worried about his livelihood spoke with me. Above all else was saving lives and he added that he also expects a similar thing as you with youngsters and especially the pink pound customers young and older will return hard and fast. Regulars too he felt will return quickly to help his business start up again.

RDHOWARTH

Ok, £12-15k per bar per week looks low to me, id have said between £24k and £30k ... staff/bar and how you manage that is awkward, more staff less queue etc at the bar... is it that easy to run RBG on 50% staff.... if you can run at cash breakeven with revenue down 60% then I agree, its doable.

unwise2

Covid-19 is NOT the worst risk in living memory.

I have been making this point on another thread, there is evidence now available that the real mortality rate is likely to be somewhere between 0.1-0.5%. 50-66% of those deaths are estimated to happen anyway during 2020.

Nazi bombers overhead, pebble-dashing our cities, was a far greater risk, numerically in terms of deaths.

For publicity purposes this situation was referred to as this generations world war 2. There is no way you can logically compare the loss of 450,000 (majority in their 20's) U.K lives to Covid 19.

threeputt

I'm particularly offended and shocked by that response, and expected better from you Paul, isn't it Robbie Burns who is always telling us that the boring companies are well worth buying ? I would have thought a company Tp (LON:TPG) developing a product that will assist hospitals was very interesting and topical personally, and not a "rubbish" company either (although Revolution Bars (LON:RBG) at £12m mcap and a terrible chart could fit that tag) I am going to reflect on my subscription if that is the sort of blanket response I get to what I believed was a fair question/comment, I just lost a load of respect for you right there

Caper4

love it Paul. It’s refreshing to read your response to various comments on here . Am also a shareholder in RBG,and will continue to acquire on weakness. Thanks for your candour and professional expertise.

timarr

I have been making this point on another thread, there is evidence now available that the real mortality rate is likely to be somewhere between 0.1-0.5%. 50-66% of those deaths are estimated to happen anyway during 2020.

There is evidence for all sorts of rates, people can find any estimate they want to back up their prior beliefs, but that's not the point - it's the total number of hospitalisations that determines the overall death rate.

If the NHS was overwhelmed then it wouldn't be a small number of old people dying - you'd also have significant increases in death rates among younger people because they couldn't get treatment for otherwise survivable illnesses or accidents. You'd have women dying in childbirth, young men dying because of drunken accidents, middle aged people dying because of heart attacks, not to mention an increase in younger people dying from cancer and strokes.

We can get a flavour of this now by the jump in non-Covid-19 deaths caused by people with life threatening conditions staying away from hospital.

It'll be a long time before we have the data to show whether this is an overreaction or not, but realistically the government isn't about to change course now. It has a big majority, opposition backing and is nearly five years away from an election. As investors it doesn't matter whether they're right or wrong, it's what they're doing that matters and which should govern our investing decisions. Anything else is just wishful thinking.

hp01

The lockdown isn't about hiding from the virus nor saving everyone from the virus. It's about preventing healthcare capacity from getting overwhelmed. Granted there is risk everywhere and we can't lockdown forever, but the usual risks from daily life like driving cars doesn't have the possibility of overwelming the healthcare service.

[Angela Merkel put it nicely recently: In Germany, they have a R number of around 1, so 1 person infects 1 other. If that was to increase to 1.1, healthcare capacity will be reached in October. An increase to 1.2 would lead to healthcare capacity being reached in July. R of 1.3, June. The margin is thin, so it is time for caution rather than overconfidence.]

Yes, I agree we have to get businesses going again and not to do so will have dire economic consequences, but we'll have to do so in a way that maintains some kind of social distancing. Perhaps of the kind that is now seen in supermarkets. This would allow businesses to open but with measures in place to limit contact.

I'm not sure what the consensus is, but social distancing of some form will probably need to remain until either a vaccine is available for the masses or until we have herd immunity, neither of which will be possible until next year.

andrewdb

If you like that sort of thing:

BOE Speech - Monetary policy during pandemics: inflation before, during and after Covid-19 16 April

Key bit for me

"The key conceptual challenge is that there have been large shifts in spending patterns, which will change the
representative household consumption basket. Spending on social consumption has stopped almost
completely, for example, while spending on essentials from supermarkets has increased markedly. These
changes will be largely temporary, but while they persist, interpretation of the data will be particularly difficult."

Tuffty

Re discussion about risk to life.

There are about 26,000 premature deaths in the UK per year from type 2 diabeties (source .www.diabetes.org.uk). The majority of these are avoidable given certain lifestyles 'choices'. As a society we haven't done much about this and yet it 'overwhelms' the NHS in treatments. The response to Covid19 deaths is not in line with our response to type 2 diabeties deaths ( i.e. the Govt is putting more value on someone likely to die from the covid pandemic than type 2 diabeties).

The only explanation is timing, deaths from pandemics come very rarely but all at the same time so it looks shocking v. other premature deaths which happen year after year 'below the radar'. Humans eh!!

xcity

Not the only explanation at all.

This will be my last post on this thread re: Covid, any further comment will be on the Lockdown thread.

If the NHS was overwhelmed then it wouldn't be a small number of old people dying - you'd also have significant increases in death rates among younger people because they couldn't get treatment for otherwise survivable illnesses or accidents. You'd have women dying in childbirth, young men dying because of drunken accidents, middle aged people dying because of heart attacks, not to mention an increase in younger people dying from cancer and strokes.

If this is true there should be a large jump in deaths in Sweden, assuming they don't buckle under political pressure. We should know in a few weeks. An article in the Economist suggests otherwise:

"An uptick in the number of pneumonia admissions has been more than balanced out by an enormous fall in the number of people coming in with other problems."

https://www.economist.com/britain/2020/04/08/a-sharp-drop-in-accident-and-emergency-admissions-worries-medics

That's because the government are trying to scare everyone into house arrest and the media are publishing fatality rates of 13% for the U.K which is complete rubbish. Only testing people that are ill enough to be hospitalised is massively underestimating the real number of infections and overestimating the mortality rate.

https://news.sky.com/story/coronavirus-the-infection-numbers-in-real-time-11942138

dmjram

"If the NHS was overwhelmed then it wouldn't be a small number of old people dying - you'd also have significant increases in death rates among younger people because they couldn't get treatment for otherwise survivable illnesses or accidents."

Actually the NHS is worried about the opposite - significant numbers of deaths because of the disproportionate allocation of resources to covid.

“NHS England analysts have been tasked with the challenging task of identifying patients who may not have the virus but may be at risk of significant harm or death because they are missing vital appointments or not attending emergency departments, with both the service and public so focused on covid-19.
“A senior NHS source familiar with the programme told HSJ: “There could be some very serious unintended consequences [to all the resources going into fighting coronavirus]. While there will be a lot of covid-19 fatalities, we could end up losing more ‘years of life’ because of fatalities relating to non-covid-19 health complications.”
https://www.hsj.co.uk/policy-a...

It's concerned about both. It's barely coping now but remains open for other business - some of the concern is that patients aren't being referred in or prefer not to risk going to hospital. If it's overwhelmed then everything else would be squeezed out and other admissions would become very risky because of a much higher cross infection risk. The ideal for the NHS is keeping the peak as low as possible.

Small Cap Value Report (Thu 16 April 2020) - RBG, WGB, DNLM, VLX

Revolution Bars (LON:RBG)

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Paul Scott

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