Small Cap Value Report (Thu 26 Mar 2020) - RBG, RTN, INCE, QUIZ, LOOK

Good morning, it's Paul here with the SCVR for Thursday. As usual, it's initially just a placeholder article, for readers to add your comments from 7am.

The article should be finished by 1pm. Edit at 11:58 - let's extend the timings, so I can get more done to make up for a late start. I'll keep going until about 3pm. Update at 19:10 - sorry, I couldn't manage any more today, so today's report is now finished.

I needed a lie-in today, so am running a bit late. I had a funny turn last night, and was struggling to breath for a while, but that passed after about half an hour. In all other respects, I feel much improved this morning. After the initial 5-day assault on my body, the virus had a second attempt to kill me in days 6-8, when things seemed to be getting worse. But I have to say this morning, it really does feel as if I've turned a corner & am improving considerably. It's all about getting plenty of rest.

Life is very different at the moment, as I'm sure it is for you too. I can hear lots of children playing in the flats & gardens behind us here in Islington, and I wonder how difficult it must be for the millions of parents who are forced to stay at home, and try to keep children entertained & happy, whilst restricting their movements. It must be a tremendous challenge, I certainly don't envy them.

UCLH are doing a wonderful job looking after John's Mum. They rang yesterday to say that she's now losing her kidney functioning, which together with only being able to breathe through a tube in her lungs, means the outlook is bleak. They're putting her on dialysis, but there's really only a glimmer of hope.

So my time is mostly being spent supporting John, reminiscing about the happier times, and preparing him for what seems like the inevitable, with lots of tears flowing. The statistics I see on the news each day were just numbers, but now we're likely to be in those statistics.

As regards the Government actions, I think they are right to throw massive stimulus at this. We're waiting for news of what help the self-employed are going to get. Most of my extended family are self-employed, and in all cases they've seen work completely dry up - e.g. beauty treatments stopped, all musical gigs cancelled, etc. One highly trained professional in my family has just applied to stack shelves at Aldi - and why not, if it keeps the wolf from the door?

I think we're heading for several months of massive unemployment, and real hardship for millions of people. I cannot see how Govt schemes can possibly get up to speed in sufficient size, to make enough difference. They're probably wide open to fraud as well.

BUT, when I do back of the envelope sums for e.g. Revolution Bars (LON:RBG) (I've been buying more of those), then I think the business should survive. I've also bought Restaurant (LON:RTN) for the same reason. Their biggest cash outflow is wages, and the Govt is going to cover 80% of that. The next big cash outflows are VAT and PAYE/NICs - again, those are effectively on hold for now. Business rates also on hold. Suppliers don't need to be paid, because there are no incoming goods needed. That just leaves rents. March quarter day occurred yesterday, and press reports indicate that even large & successful Primark is demanding a rent holiday from its landlords. In normal circumstances, landlords can send in bailiffs. But if a shop is not trading due to Govt edict, then the landlord has little power.

Put all the above together, and I reckon that many hospitality/retail groups should actually survive for say 3 months without trading. They'll probably need refinancing, but in the meantime, banks should step up, using the Govt guarantee scheme.

There was a very interesting announcement from restaurant group Tasty (LON:TAST) which confirmed this crucial point;

Even with these full closures, with the cash preservation measures previously announced, the Directors continue to believe that the Company has sufficient financial resources for the foreseeable future. [source: TAST RNS, 24 Mar 2020]

and the previous day it said;

The Company will seek to mitigate the revenue loss by implementing cost-cutting measures such as cessation of capital expenditure and seeking preferential terms from landlords and suppliers as well as relying on Government support for employees' pay and VAT and business rate holidays. Concurrently, the Company is taking measures to ensure staff retention where possible.

Given the Company's existing cash position with no debt, the Directors confirm that during the period of shutdown and assuming it is successful in implementing the cost cutting and cash preservation measures referred to above, it has sufficient financial resources for the foreseeable future.

[source: TAST RNS 23 Mar 2020]

This should have wider read-across, and is I think very encouraging. Some retail/hospitality shares have been priced to go bust, but could actually survive & recover in due course, for the reasons given above. It's obviously high risk though, but this is where some of the multi-baggers could be, in my view.

The key thing is to focus on cashflow now, not profits. It's a given that many companies are going to be reporting awful trading in 2020. All that matters, is whether they can manage their cashflow for survival and recovery once the virus is in retreat.

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I've just seen MrC's spectacular early doors reporting on numerous companies - bravo, can I add my thanks to him for this superb service.

I'll only be able to dip into a few of those, so will get cracking on that next.

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Ince (LON:INCE)

This financial services group withdraws profit guidance, and cancels the divi.

If you recall, this company did a bombshell fundraising at a deep discount earlier this year. I'd been warning about its badly stretched balance sheet last year.

This is a time to be picking up high quality companies at bargain prices. I don't see this share fitting that category, so it's of no interest to me.

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Quiz (LON:QUIZ)

As you would expect, business has been hit hard by coronavirus, with physical stores now closed.

The cash position is stated 1-day before rents were due, so this is likely to be falling now;

As at 24 March 2020, the Group had net cash of £8.3m. In addition, the Group has a £2.0m overdraft facility and a £2.0m working capital facility available (the "Facilities"). The Facilities are scheduled to expire on 23 April 2020 and the Group is currently seeking their renewal. There are no financial covenants applicable to the Facilities.

Given the Govt guarantee scheme, it might be possible to renew bank facilities.

Common sense cash preservation measures are being taken;

The Group is continuing to take steps to preserve cash by eliminating non-essential spend, postponing capital projects, substantially reducing stock intakes and deferring payments wherever possible.

Quiz is also a wholesaler, and supplies via Dept Stores (who collect in the cash & remit it onwards to Quiz). In the current circumstances, I imagine Quiz would be finding it very difficult, if possible at all, to collect in its receivables balances.

My opinion - neutral. I honestly don't know if Quiz is going to survive. The cash position suggests it's at least got some time to tread water. But its niche of special occasion wear is going to be dead right now, with no weddings or celebrations going on, there's no need for anyone to buy its garments. That doesn't augur well for the future.

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Lookers (LON:LOOK)

This car dealers has caught my eye, because its shares are up 36% today, despite a Covid-19 update.

Shares tanked on 11 Mar 2020 when it announced delayed results, due to discovery of possible fraud.

Covid-19 update - all sites are now being closed. Exploring options to keep some servicing & repair services going.

Govt support will help;

We welcome the measures announced by the UK Government to support businesses through this unprecedented disruption, including the Job Retention Scheme, the deferral of direct and indirect tax payments and a business rates holiday for retail premises. During 2019 the Group paid c. £16m in business rates across its portfolio. The Board intends to seek all possible government support in order to help protect our colleagues and the future of the business.

The Board has agreed (unspecified) temporary adjustments to their remuneration. I think it's generally important that Board members take pay cuts in the current circumstances, at all companies.

Financing sounds OK;

As reported in the Group's year end trading update the Board expects to report net debt at 31 December 2019 of approximately £62.0m (2018: £86.9m). The Group has a £250m revolving credit facility with five banks with a term to March 2022. In addition, the Group continues to enjoy the benefit of a strong property portfolio with a net book value of c. £317m (as at 31 December 2019) (81p per share).

Car dealerships generally have a lot of valuable freehold property, therefore these should be quite secure investments, despite difficult times.

Potentially fraudulent transactions - investigations ongoing

Outlook - too early to estimate.

My opinion - I can't see any particular reason why this share would be up 36% today.

Like everything else, business will recover in due course. In the meantime, heavy losses are likely to be incurred during the shutdown period.

In my view, valuations are now looking attractive. I started buying Vertu Motors (LON:VTU) shares yesterday. I like the fact that car dealers are crammed full of valuable freehold property. In my view, most should have the balance sheet strength to survive, and then there's likely to be pent up demand for new cars (which these days are sold on affordable leases) later in 2020.

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Apologies for today's report being sub-standard. See you tomorrow.

Regards, Paul.