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

26th Mar '20 by Paul Scott

70 comments 9983 reads

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…

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FREng

26th Mar '20

That makes 10 year of austerity a political choice rather than a necessity. That may be true, but admitting that it's true could play into the hands of an opposition party at the next election.

mark1308

Paul , wonderful news to have you back with us , I hope you can see from the comments left how much you mean to us , your humble readers. Take care my friend.

Optimist always

Ah okay thanks

smatthews1

I cant help but think the general sentiment towards this crisis passing is massively under estimated. I keep seeing estimates of 3-6 months. If our country manages to get control of the spreading and are able to suppress it in 6 months then that is great. But that is only taking into account one country, data suggests the whole globe is out of sync when you consider where they are in the outbreak.

For example just today there are 6 countries in europe all posting 'new' cases above 1000, and this isn't even a true picture, its a lot worse. USA is climbing drastically as you would expect. China 'apparently' has increased 67 today, which on the face of it is enough.

But the point I want to get my head around is after a handful of countries have got it under control, and you are ready to reduce restrictions, what others are likely to reduce there's at the same time? I cant help but believe that the pain in world trade and travel just continues and I have come to the conclusion this is going to take a lot longer than we wish to believe.

I do hope I am wrong but I find it very hard evaluating stocks such as Dart (LON:DTG) and On The Beach (LON:OTB) even if there is huge pent up demand.

Source:https://www.worldometers.info/...

GrahamF

I think that the debt may be fine until you have to refinance it. Who can predict what interest rates will be when that happens? What seems absolutely fine now could be an extremely expensive millstone around our necks further down the road. The era of ultra low interest rates may not last for ever. So, we all better hope we’ve managed to pay it down before that happens.

However, in the current situation, I think we have little choice but to spend shed loads of money in the short term.

Ramridge

Hussman Funds monthly commentaries are required reading, but today's commentary titled Navigating Turbulence , covering COVID-19 and the stock market slide, is awesome.

Paul Scott

Hi adsyaw,

My latest thoughts on DISH (in which I have a long position) are that it makes sense to pause recruitment of restaurants during the current shutdown. I'm encouraged that the cash position should be OK until the end of 2020, which gives time to get through this crisis.

The way I see it, is that the telesales business model was (albeit briefly) proven in Jan & Feb, with a big increase in restaurant recruitment in many new towns & cities. The share price was rising again, and got to about 4p. The Chairman bought a decent load of stock at about 3.6p I think?

Due to coronavirus, we can now buy in the market at 0.8p, so personally I'm backing up the truck, and have accumulated nearly 10m shares. I think it could be a 10-bagger from here, that's just on pause. Once the economy starts up again, restaurants are going to be desperate to attract customers, ideal conditions for BigDish really.

Highly speculative, but we only have to look say 6 months forwards, and there's a clear case for it being worth a lot more than it is now.

Definitely not for widows & orphans, just my opinion.

Regards, Paul.

Hi Clissoldkid,

Interesting, thanks. Presumably then tenants would need to make sure they do pay the rents on their best sites, in order to prevent the landlord seizing the property? I presume that the landlord would have to serve some kind of legal notice, and give the tenant time to pay rent arrears, before they could seize the property?

cmpeckham

I know what you're saying about austerity, but that's not entirely true. What we're seeing now is exceptional one-off expenditures. That's a different issue to the austerity program which was focused on reducing recurring government expenditure.

Proponents of austerity argued that we needed to reduce the ongoing size of the state, in relation to the economy, and that this would increase the dynamism of the private sector. There is a kernel of truth in that arguement. It was never true to say simply that debt was too high, but that was probably the easier message to give.

If they had any sense, they'd reframe the austerity history as being about how reducing general spending allowed them to spend lots more on the NHS, because that's the essence of what really happened.

Hi jwebster,

Yes I did similar sort of calculations. I also think Rev Bars (in which I hold a long position) could survive quite a while in suspended animation. That would rely on the bank playing ball, but why wouldn't they? Debt is not excessive, there are other bars groups with far worse debt problems.

Another thing to consider with RBG is that it has some very profitable flagship sites. Its most profitable site (Manchester) makes a profit of £3m p.a. for example. Therefore it would be perfectly feasible for the company to agree with the bank that, once normal market conditions return, it would put its top site up for sale. That might raise say £10-12m at a guess, which would be enough to clear all net debt.

As a listed company, it also has the potential to raise fresh equity from the stock market. That wouldn't be wise now, but the price of bank support (under the Govt guarantee scheme) could be a side letter indicating that RBG would do an equity raise to reduce bank debt later this year, or next year.

Overall then I think it has options available, and should survive without too much difficulty. Management are very level-headed, and were demonstrating a good turnaround before coronavirus struck. Therefore I'm looking at this being potentially a 5-bagger from here, if things pan out alright. Not without risk, but personally I'm buying heavily around 16p. It could go wrong, but risk:reward strikes me as potentially very good. People are going to want to party like it's 1999 once all this is over. Coronavirus is going to be the defining thing for this era, like WWII was for our grandparents' generation.

2ShedSam

What evidence based solutions does this fella propose. He shouts lockdown, lockdown but offers no practical advice on how this could be implemented overnight in a non-authoritarian & democratic society. Let him explain what should have happened on January 26th and how he thinks the UK would have reacted in lockdown. What would this have even looked like. Army on the streets, Police on the streets, how would he have enforced his lockdown on Jan 26th? It's easy to lob bricks and claim my way is better when you are not accountable. The moment an author turns their argument into a personal rant against someone they clearly doesn't like, then credibility is lost.

Rusty2

Expert opinions in my experience are often wrong.

David Lamb

You’re not wrong...I should have put the word expert in inverted commas.

john652

I think there is probably a new thread here ‘option money’

Revolution Bars (LON:RBG) paul mentions 5:1 , its an asymmetric bet

One I've always followed but never invested in is Arena Events (LON:ARE) they set up the stands/tents etc for golf so many public events, golf masters etc. Was 10p, did a fundraising yesterday i think for £10m, either bust or big rise?

What else is option money? Any ideas?

I do think, ignoring the massive s&p bounce, this ain’t over till..., a lot of discussion here about companies surviving a few months, they should all be valued at option money if thats all they can survive.

Law of unforeseen consequences here, FRENG said about restaurants binning food, other bills etc, to think a whole world economy mothballed for months and wakes up like nothing happened... goes into the bucket of wishful thinking, surely ?

Just don't call me Shirley.

MH1

The Austrian government has already issued 100yr bonds which traded as low as a 39bp yield recently. The QE programs have been the main buyers. All governments will issue, all central banks will be the buyers. What will £1 trillion be worth in a 100years time on repayment ?

These are crazy times. Everything is built on an edifice of debt and the “solution” is more debt. I’m not sure how it ends.

Clissoldkid

27th Mar '20

Sorry for the delayed reply, which you may not now see. No, although a landlord has to give 7 days' notice before sending bailiffs in to collect rent they can nearly always forfeit (i.e. cancel) the lease at any time after the date for payment of rent has passed.

Forfeiture can take place by `peaceable re-entry'. This means that the landlord just waits till the property's unoccupied - at night or the weekends normally, but nowadays any time if the shop's closed - and just change the locks.

The tenant can apply to the court for `relief from forfeiture', and this would normally be granted if they pay all the outstanding rent and legal costs.

xcity

28th Mar '20

There's a problem with anti Boris/Cummings commentators saying anything to criticise government actions even if it means reversing their own views.
EG - https://order-order.com/2020/03/27/lancet-editor-slams-government-for-listening-to-his-advice/

(highly biased website but surprisingly good on evidence at times)

potter12

29th Mar '20

Having watched the interview you refer to, Emily Maitliss asked the right questions in a courteous manner.

The problem was that the government had made incorrect statements about having many more ventilators than the NHS actually had.

Yes, the minister squirmed at being asked direct questions and wouldn't answer them. He tried to avoid giving truthful answers.

In retrospect, Emily's questions were spot on. We need ministers who can deliver solutions and talk about facts, not waffle and make fanciful forecasts.

Zipmanpeter

4th Apr '20

(From 26th March) Yes I did similar sort of calculations. I also think Rev Bars (in which I hold a long position) could survive quite a while in suspended animation.

Paul, I have held my shares on Revolution Bars (LON:RBG) partly because I have made similar models/assumptions - except I am less optimistic at resumption. (Yes at end WW2 there were huge street parties - for a couple of days then it was back to powdered egg for 5 yrs I believe. Consumption missed in FMCg/F&B is consumption gone.) It will be a long road back - especially as I think premium pricing will be especially hard to achieve; from lots of high margin cocktails to fewer, lower margin drinks. I also think healthy living will promote non-alcoholic drinks and people drink less of these over an evening since the "beer goggles" effect is not so present at 1am in the morning.

Anyway, for me there are 2 calculations at he moment i) can the firm survive the first 6M and ii) what does the market look like after that. Presume you look at in in a similar way but I come from a FMCG Marketing point of view and am consistently too optimistic. I need a more rigorous tool.

Can you share what your (I assume) excel model looks like to evaluate this. In circumstances like this do you do full discounted multi-year cashflow models or something simpler to investigate a broader range of less certain outcomes. Will DYOR

When you are well, something like your Loungers IPO videos talking through HOW you model would be fantastic......but we all have plenty of time now to wait for you!

Another thing to consider with RBG is that it has some very profitable flagship sites. Its most profitable site (Manchester) makes a profit of £3m p.a. for example.

BTW Re DYOR, how do know these things? I read a lot but never seem to turn up such nuggets. Perhaps this is also something you could comment on to help educate and teach us how to DYOR better, By definition we all have access to Stockopedia.

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

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Paul Scott

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