Small Cap Value Report (Thu 3 Sept 2020) - RBG, HEAD, MPAC
Good morning, it's Paul here with the SCVR for Thursday.
Estimated timings - I need a lunch break now (at 12:57), but will get a new section on MPAC up by 5pm. Update at 17:05 - sorry it took so long, but today's report is now finished.
Results webinars - I've watched 2 webinars/conf calls today, which eats up a lot of time, but is very useful in expanding my understanding of businesses that are already in my "looks interesting" tray;
Mpac (LON:MPAC) is 11am, courtesy of Equity Development, signup link here.
Headlam (LON:HEAD) (I hold) is a conf call, not a webinar, sorry I got that wrong earlier. I'll feed back anything interesting to you.
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Companies being covered in today's report are;
Revolution Bars (LON:RBG) - (I hold) - trading update on re-opening of its bars
Headlam (LON:HEAD) - (I hold) - Interim results, 6m to 30 June 2020
Mpac (LON:MPAC) - Half year results
That might be all there's time for today, since it will involve me looking at 2 webinars, in addition to going through the results RNSs. But as always, do flag up in the comments below, if there's something really good that I might have missed.
If you're new here, just FYI, I try to focus my time on shares that seem to have good potential upside, not on poorer quality, or over-priced things. After all, my main activity is investing my own money, with report writing here really being a sideline to recycle research that I would be doing normally anyway.
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US markets - euphoria
I see the relentless rally in US markets is continuing, with the most remarkable V-shaped rebound in markets that I've ever seen. It seems obvious to me that the markets across the pond seem to be in something of a speculative frenzy. Valuations generally don't make sense to me, and I'm braced for a big correction at some point. When significant parts of the market begin to completely disregard valuation, and instead valuations of growth companies are based on their story alone, then you know you're close to the end of the bull run. It's 1999 all over again, in my view. Whilst acknowledging that the top tech stocks are remarkable businesses, it's the next tier down that worry me in valuation terms.
UK small caps
These seem a lot more grounded, and UK small caps in general look priced about right to me. Valuations of UK small caps have correctly reflected the decent economic recovery that is underway. Many companies I look at each day, are showing strong rebounds in current trading, hence that strengthens the case for disregarding the covid period, and valuing companies on the level of business they are getting back to. Hence PERs should be applied to likely 2021 earnings, not 2020 earnings.
Second wave of covid?
Possibly, but the economic risk seems to be receding, because treatments are getting better, and the death rate is now very low. This is because vulnerable people are locked down, and most healthy people are adopting social distancing. The combination seems to work well. Cases may be rising again (more testing?), but daily deaths are now just in high single digits, which is statistically little more than a rounding error, and more damage is being done with lockdown measures. Of course, as I've experienced twice this year, every death is a tragedy to family & other loved ones.
This has always been a virus that overwhelmingly (over 99% according to data from PHE) kills sick & elderly people, not normal weight, healthy people. Therefore I feel the risk of another national lockdown is very low, now we understand covid better, and treatments have improved so much. I could be wrong of course, nobody can be sure - our job as investors is to weigh up probabilities, based on the facts we have, and you don't have to be a medical expert to make a decent job of that. It's not necessarily about having an effective vaccine any more. The death rate is now so low, that stringent lockdown measures cannot possibly be justified any more.
Overall, in strategy terms, I remain fully invested, and think there are still plenty of opportunities for UK small cap shares which have not properly recovered, despite trading gradually getting back to normal. So very much pockets of value around, that could be good purchases at current levels. It's strange how UK investor sentiment is lagging so far behind US investor sentiment. As I always say, they can't both be right.
Resumption of divis
I particularly like shares which have previously paid out good divis from strong cashflows, which have temporarily stopped paying divis. As those divis come back, then it makes sense that such shares would re-rate upwards, since income seekers are likely to be buying up shares that should once again become high yielders. Hence a good area to sniff around in, is resumption of divis being paid. We could lock in a strong future yield, and get a (say) 50% recovery in share price too, from current levels, with some overlooked smaller cap shares.
When the growth shares bubble pops, then value shares often recover nicely as money rotates from the frothy areas into the overlooked cheap shares.
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Revolution Bars (LON:RBG)
Share price: 14.5p ( pre market open)
No. shares: 125.0m
Market cap: £18.1m
(I hold)
Revolution Bars Group plc ("the Group"), the leading operator of premium bars trading across the UK under the Revolution and Revolucion de Cuba brands, is today providing a trading update for period since it commenced the reopening of its bars on 6 July 2020.
Bars have been re-opened on a phased basis. The specific problem RBG has, is that it previously made the bulk of profits from Fri & Sat late nights. That trading has reduced now, due to licensing restrictions (the bars have to shut at 11pm for now), and of course social distancing measures required, reducing capacity.
Most bars are now open again, or about to open.
Trading since re-opening;
4 weeks to 1 Aug 2020 LFL sales down 40% on last year (LY)
4 weeks to 29 Aug 2020 LFL sales down 22.5% on LY - boosted by EOTHO* scheme
Combine the above, and the 8 weeks to 29 Aug 2020 - LFL sales down 27.5% on last year (LY)
(* = Eat Out To Help Out - the Govt subsidy for Mon-Wed dining & soft drinks. This boosted Mon-Wed sales by +88.4% of LY. Due to its success, the company is extending this scheme at its own cost in Sept, and possibly further extend after that)
These figures are better than expectations given in the fundraising announcement, on 5 June 2020, which assumed a;
... base case scenario of venues reopening in August and delivering 55 per cent of prior year sales with only marginal improvement in September and October...
Rents - some progress seems to have been made here, with about half landlords being co-operative. One site in Liverpool has been surrendered back to the landlord.
Remember the company had already done & announced a deal to sort out its onerous leases, by surrenders of the non-viable sites, and re-gears on the viable ones. That reduces future cash outgoing by about £1m p.a..
Costs -
The Group remains focused on reducing costs whilst trade is constrained by social distancing restrictions.
Remember that business rates (a substantial cost) is not being charged. Plus there are considerable costs associated with the late night trading (security guards, DJs, dancers, etc.) which are not currently required. Plus staffing rotas can be reduced by about 10%, I am told.
Outlook -
Overall, the Board's expectations for the year ahead remain unchanged.
My opinion - the re-opening trading figures are reassuring, rather than good. I was worried that losing Fri & Sat late night trade could mean sales down 50% or more. So being down 27.5%, on a reduced cost base, should make it better to continue trading, than being closed and on furlough.
Management here are experienced, good, hands-on operators, who know what they're doing. Hence it's just a question of seeing if the business is able to adapt to new circumstances long enough, to survive into the post-covid boom that they're likely to see next year.
It's such a pity that covid happened, because this share would have been probably 120-150p by now, if covid hadn't happened - the business was undergoing a good turnaround, with LFL sales turning positive, and profit beginning to rise. It was highly cash generative, and self-funding a refurbishment programme delivering good ROI.
I've looked closely at the bear arguments, and they're just not accurate. I think people who never liked the share in the first place, like to invent reasons why the share has done so badly. When the truth is very simply - it's covid that did the damage. Then of course a dilutive fundraising at 20p which now means we have an increase in share count from 50m to 125m, which limits the upside on the higher number of shares. Still, once we're post-covid restrictions, then there's no reason this couldn't get to 50p with a bit of patience.
Debt should reduce over time, because add back the depreciation charges, and RBG would be cash generative even if trading at a loss on the P&L.
Overall, given today's reassuring news on trading, I think this is worth holding on for a recovery. It's not a share I want to hold forever, but the current valuation could look very appealing to anyone looking at it from say 1 year in the future. The main risk is obvious - a serious covid resurgence in the autumn/winter, leading to bars being forced to close again.
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Headlam (LON:HEAD)
Share price: 306p (up <1%, at 10:12)
No. shares: 84.9m
Market cap: £259.8m
(I hold)
Headlam Group plc (LSE: HEAD), Europe's leading floorcoverings distributor, today announces its interim results for the six months ended 30 June 2020 (the 'Period') and an update on current trading.
I'm not really interested in results covering the covid period, as it's not representative of how businesses are likely to perform in future (which is what matters for valuation purposes). My main criteria for assessing covid period results are that;
- Losses are not too bad, breakeven or a small profit is better, but I'm looking through any modest losses
- The balance sheet & debt are robust enough to make a future equity fundraising unnecessary/unlikely
- Current trading & outlook are positive, showing a decent recovery underway & likely to continue
If those boxes are ticked, then I'm interested in investing, if the valuation (based on reasonable forecasts for 2021) is sensible, or attractive.
Remember that in an economic recovery, broker forecasts are often too pessimistic, just as they are too optimistic going into a downturn. We don't know at this stage what lingering economic effects there are likely to be from covid. It's likely to vary from sector to sector, and depends very much on what action the Govt takes. Withdrawal of support & over-eager tax rises would conceivably shatter economic confidence, and be counter-productive if it pushes us into a prolonged recession.
I loved Rishi Sunak's obviously pre-arranged "gaffe" of very prominently holding a memo with the key bits even highlighted for the press to catch with their zoom lenses, today. He's way too clever to be that stupid, do they think we were born yesterday? Quite funny though! Sorry for straying into politics slightly, but I think Sunak is one of the few politicians that has emerged from this with credit - making fast, and generally quite sensible decisions. Although with hindsight we can quibble over the wisdom of various policies, at least he took action that has saved the day. And of course it's all been paid for with funny money so far (£200bn of QE). Sorry, I'm rambling off the point, or in danger of losing my HEAD! (badoom, tish!). Sorry.
Interim results key points -
Obviously heavily impacted by covid/lockdown
H1 revenues down 30.6% on LY, at £242.1m (still a substantial business)
Underlying profitability: H1 LY was £17.0m profit, H1 TY fell to a small loss, of £(1.2m) - that's fine by me, a small loss ticks box number 1 in my list above
Revised bank covenants, and going concern statement seems fine to me, so I don't have any concerns about solvency. Loads of headroom on facilities
Balance sheet is strong by my usual tests. Note that receivables & inventories are well down, but trade creditors also sharply down - hence no evidence of stretching creditors, which is good
Current trading - all important - July 2020 was above LY, and August only marginally below LY. There could be an element of re-stocking, and pent-up demand here, so current trading is reassuring rather than spectacular
Properties - this is interesting. I've just had a look through the 2019 Annual Report, and land & buildings (which I think are freehold) are in the books at a net book value of £88.5m. These properties are owned by the holding company, and leased to its subsidiaries (intra-group transactions which would normally be eliminated on consolidation of the group accounts, I assume). The notes show that £7.1m of property was long leasehold, so the rest could be freeholds? [Edit - yes, confirmed in the webcast]. Buried at the end of note 10, it says that market value is well above book value;
The Company obtains a valuation triennially, and this is always by an external valuer. Investment properties were last valued by an independent professional valuer on 9 January 2020. This valuation of the investment properties, not including those under construction at 31 December 2019, was £101.4 million, however the Company has chosen to hold them at cost. .
Why does this matter? It means the bank won't be a problem, as the group has plenty of property assets to underpin its bank borrowings. Also, it means there's hidden value for investors, with almost 40% of the share price backed by property. Some people argue that this is double-counting, since the property ownership boosts earnings, since it doesn't have to pay rent on properties it occupies. That's a fair point. But I'd still rather have a load of property on the balance sheet than not, even if it is ignored for valuation purposes.
My opinion - difficult to value at the moment. The question is whether profit is likely to return to pre-covid levels? It may take some time, as I imagine commercial property demand for floor coverings is likely to be subdued for some time, due to the work from home trend, which may or may not reverse partially, who knows? (Edit: confirmed with management that it has little exposure to commercial or housebuilding. Average order size is tiny, at £136, dispersed over large number (70k) of small customers).
I think we can probably assume, that in say 2 years, earnings should return to historic levels of say 30-40p. Therefore, at 306p, the future PER might be between about 7.7 and 10 - which looks a bargain, for a decent business with good cashflows, and a strong balance sheet that is stuffed full of property.
Going back to my theme above about divis, I reckon a purchase now, could lock in a future divi yield of 6%+, which is very attractive in a zero interest rate environment.
Overall then, this could become a nice long-term investment for income seekers. I think it looks quite cheap at the moment.
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Mpac (LON:MPAC)
Share price: 282.5p (down 10.3% at 16:02)
No. shares: 19.8m
Market cap: £55.9m
Mpac, the global packaging and automation solutions Group, today announces its unaudited results for the six months to 30 June 2020
The PR title given to the announcement is this;
Resilient performance with strong cash generation in headwind of the COVID-19 pandemic
Whilst that is true, it doesn't tell the full picture - the cash generation was considerably helped by the reduction of receivables in H1. The CFO said that some of this will unwind in H2, so I think it's stretching things a little to put that as a main feature in the summary.
Key points -
H1 revenues down 20% to £36.8m - due to project deferrals re covid (not cancellations)
Gross profit only down 14%, due to improved margins (driven by improved sales mix, especially increased sales of higher margin spare parts)
Underlying profit before tax (PBT) down 45% to £2.5m - due to operational gearing working in reverse
Order book - this is good, at £45.4m (was £39.9m this time last year)
Dividends - paused for the moment, will revisit end 2020. I think mgt is being too cautious. With pots of cash on the balance sheet, it could have paid an interim divi
Balance sheet - a strange item is the £25.7m asset shown re the pension scheme. This needs looking into, as accounting surpluses are often not real. There's also a pension liability shown separately, and a deferred tax creditor which might relate to the pension scheme(s). Note 7 says it is making £1.9m p.a. pension recovery payments - that's a big chunk of its cashflows, so it looks like pensions are a significant issue here, that needs more work (no time today to look into it, sorry). Additional contributions would be required if profits rise above £5.5m - see note 7, this is a very important point, hence me flagging it.
The £23.4m cash pile is impressive, but there are some quite hefty liabilities, including "contract liabilities" of £10.9m, which could be up-front deposits from customers, hence the overall position is healthy, but not quite as impressive as that cash pile suggests, i.e. it's not completely surplus cash, and could partially unwind in future, depending on working capital timings. It sounded like the CFO is on top of the situation, as he outlined his focus on getting customers to pay on agreed terms, etc, music to my ears.
Tax - the company benefits from R&D tax credits, and b/fwd tax losses being utilised, this is expected to benefit the company for the medium term.
My opinion - the figures look alright to me. It ticks my 3 boxes mentioned above with Headlam - i.e. H1 results are fine in the context of covid, resilient actually. The outlook is positive, with a strong order book. Finally the balance sheet is strong, with no need for any fundraising.
In my call today with management, I was impressed - they seem on top of the business. In particular I liked all the stuff about digitising the business - i.e. eliminating travel, and instead having engineers doing stuff remotely to manage customer equipment. Working from home, obviously, and it had previously (before covid) installed remote communications equipment. Customers can see, test, and approve equipment remotely now too. It sees competitive advantage here by being ahead of things, and implementing a fast recovery plan. CFO indicated cost savings of about £0.5m achieved from eliminating travel & other wasteful costs. Reducing UK staff numbers by 40, mainly an efficiency drive, but will also reduce costs further.
Acquisitions - with cash and an unused £10m borrowing facility, the company has capacity to make acquisitions.
Re-shoring - seeing a strong trend for American companies to bring back production to the USA. CEO used phrases, "Absolutely", and "Racing ahead" when talking about this re-shoring issue.
Overall - I like it, worth a closer look. I need to spend more time looking at the pension deficit & cash outflows associated with this, as those look material to the valuation.
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Sorry this last section took time to gestate. Following 2 webinar/calls simultaneously late morning fried my brain a bit!
Jack's taking the helm tomorrow, as I'm off to Warsaw for a long weekend, visiting extended family who has just had stents fitted, so needs cheering up! I'm hoping to visit a couple of museums too, fascinating but horrific WWII history of course, especially the Jewish uprising. I still find it so astonishing that such atrocities happened in living memory. It just shows what a thin veneer of civilisation human beings really have, a warning to the future.
Best wishes, Paul.
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84 comments
US Correction.
We might have a correction going on in NASDAQ but the 'buy the dip mentality' , with the Fed clearly having your back, is ingrained generally in the market, and... the Nasdaq stocks are amazing businesses. I'd exclude Tesla, but that's now down 20%, even Apple down 8% today.
But, this correction still leave Nasdaq at 11,400 higher than only two weeks ago!
But, if we get more falls to 10,000, id be buying, at 9000 i'd be buying a lot of WT CLOUD COMPUTING UCITS ETF (LON:WCLD) Polar Capital Technology Trust (LON:PCT) so how far down this corrects is to be seen, as these businesses are not going away and a very strong argument that if you bought the nasdaq at 10k & held for 5 or 10 years, or even 1 year, you would beat Warrens S&P buy a mile.
Brilliant write up on MPAC. Perfect balance of information and education. Not everything on the plate but pointers and directions. No need to have all the answers, let's work together to form the details.
Brilliant update on MPAC Paul and well worth waiting for. Thanks.
There is a large notice on the inside of Number 10's door warning those departing that Downing Street is a public highway and warning that documents that are taken out are not made visible to photographers.
Mpac - late lunch Paul?
Sorry, I've been absolutely swamped today, and following US markets big moves, etc.
I got there in the end, MPAC section is now up. It's very difficult to switch off everything else going on, to focus on report writing sometimes I just get overloaded.
"Valuations generally don't make sense to me, and I'm braced for a big correction at some point."
FANG down 5% today
Must be a combination of Paul’s analysis and today’s newsletter from John Authers at Bloomberg! Alternatively it may have been the news reporting of Apple’s market capitalisation exceeding the combined value of the FTSE100! I struggle to understand the logic of the following. The relative out performance of Nasdaq and S&P 500 , both up YTD (until today perhaps ), versus the FTSE 100 & FTSE 250 (both down 20%+ YTD) is attributed to the the absence of billion/trillion dollar technology stocks in the UK indices which are dominated by Covid-19 damaged banks, insurers/investment managers, oil companies, property and retailers. . Yet on a day when the NASDAQ is down 5% the UK markets follow it down and will probably slump further tomorrow. It seems we have much bigger problems than a lack of high flying technology stocks.
For those of you currently on line now .... a "big correction" is going on in US tech stocks right now. Especially amongst the "smaller" players.
Not really surprising, they had to stop going up in a straight line at some point :) Will be interesting to see what happens next. Will get the popcorn out.
Bit of a surprise there. A quick scan of my "canary"portfolios at lunchtime suggested everything was ticking along quietly. Had another quick look after the markets closed and I was surprised to see them all at -2% or so.
Hi Paul,
I know its getting late in the day - but I for one am still very interested in your comments on Mpac (LON:MPAC) if it is still on your radar.
Whilst we are on the topic of Covid - our good friend Dr John Campbell has done a nice update this week (youtube) with regard to vaccince progress - he is very optimistic in this regard that there could be real progress in here before the end of the year (give or take).
rmillaree
Not sure why he (retired nurse teacher Dr John Campbell) would have any greater insight into this than someone who is an expert in vaccines, which he is not. As far as I can see, his forte is just reviewing the news in a way that is clear to the layman. Because he speaks clearly and in a manner that is easy to follow people seem to think he has some special insight. I cannot see why that should be the case.
We have known this for many months - in fact there was a report some months ago suggesting that in Italy < 1% of deaths were amongst the healthy. (Actually was extremely dodgy statistics, but we do know the general message to be correct,)
However, I think these observations are misconstrued by some. The range of comorbidities considered is pretty broad and I have seen no analysis of how many of these comorbidities would be likely to be life threatening on their own within, say, a decade.
For example obesity is one of the factors considered and the fact that over 40% of the US population are obese needs to be taken into consideration.
Certainly the old or unhealthy are at substantially more risk than the young and healthy, but that is actually true of most potential causes of death.
Gromley - I think that the lesson is we simply mustn't have another lockdown of the young and healthy because this does not make sense from any point of view. I worry about schools and universities in particular. It is so unfair to trash children's education because of something which is unlikely to make them (or most of their teachers) dangerously ill.
But I'm straying from the investment theme unless I think of a way to make this relevant!
I think the link back to the investment theme, is that whilst we have an opinion on what is the 'right' course of action, we also have to be aware of what could happen. FWIW I don't think a major lockdown on the young should or will be on the cards, but I would not rule out some additional restrictions particularly on the pub sector if events warrant it.
Anyway on the subject of education and how precarious 'normal' is these days, I have a bit of 'an anecdotal' to offer.
My youngest son had been shielding since March (owing to having been born with three holes in his heart). He was back at school for the first time yesterday (and is thoroughly enjoying it), today we got a call to say that one of his class mates has suspected symptoms and is getting tested. We are now awaiting to see whether his bubble is about to be deflated for 2 weeks! I had planned to be away next week, so that is on hold too. A lesson not to take anything for granted.
Hi all,
On the topic of webinars and conference calls, I have a much better perception of a company if they're presenting using the likes of Zoom or Investor Meet Company. This shows to me that management are interested in new or innovative approaches and accepting of change. I find the conference call experience stale and painful, and it gives me a poor perception of the company. If that's how they're happy to work with shareholders, then I also assume the lack of innovation is probably acceptable in their internal ways of working. As Peter Drucker (a world-leading management consultant) famously declared - "innovate or die".
Cheers :)
CentralNic (LON:CNIC)
From yesterday but i have just read through the half year reports and this little bit of information hidden away somewhat jumped out....
The Monetisation segment has one customer that represents more than 92% of the segment's revenue during the period amounting to USD 45.0m.
So that's 40% of total revenue reliant on one customer, any fellow CentralNic (LON:CNIC) holders know anything, i don't recall seeing this before so must be from an acquisition.
I don't think Revolution Bars (LON:RBG) is for me even at this level (I think it is cheap for a reason and Stocko puts it in the Value Trap category).
To some extent your view on RBG will depend on whether you think that the new IFRS 16 rules on the treatment of leases in accounts is reasonable and presents a true and fair few of the company's financial situation. Phil Oakley's two articles on this over at IC convinced me that it was right that IFRS 16 was introduced and therefore RBG is too highly leveraged. All IMO of course and I believe that Paul has a different view on IFRS 16.
Oakley's articles are at:
https://www.investorschronicle..
https://www.investorschronicle...
Regards
Michael
Talk to anyone who's actually run multi-site retail or hospitality, and they'll all tell you the same thing. Lease liabilities are only a problem if a site is trading at a loss, because you can't exit from it. Profitable sites, you actually want a longer lease (hence the liabilities are irrelevant). IFRS 16 totally ignores this, the commercial reality. And it's screwed up cashflow statements too, and operating profit is now useless, plus we have to cross out entries on the balance sheet. It's a diabolical mess, and should be scrapped!
Yes that is exactly what I used to do and because I couldn’t sleep at night I negotiated to change all my leases to turnover based leases.
I couldn’t tell from year to year which was going to be profitable and which wasn’t but whether a site was making money or not did not absolve me of my obligation to pay rent.
I will have to study “And it's screwed up cashflow statements too, and operating profit is now useless, plus we have to cross out entries on the balance sheet.” because I don’t understand.
Anyway we will have to agree to disagree but IFRS 16 makes sense to me. :-)
Regards
Michael.
"This has always been a virus that overwhelmingly (over 99% according to data from PHE) kills sick & elderly people, not normal weight, healthy people."
Not that you would realise that if you listen/watch the media (which i no longer do).
More hard evidence that this is correct:
From the USA Centre for Disease Control. Search for Comorbidities:
'For 6% of the deaths, COVID-19 was the only cause mentioned. For deaths with conditions or causes in addition to COVID-19, on average, there were 2.6 additional conditions or causes per death.'
That means 94% of the people who have been recorded in the USA as dying with Covid-19 had an average of no less than 2.6 other conditions and/or causes of death.
Remember, the 6% figure doesn't mean that 6% of the population have died from it. It means that of the people who have died and have had Covid-19 mentioned on their death certificate, only 6% were healthy before they got the disease.
Thank you for this and very interesting.
I was in Milan on 23rd February and having read the BBC web site at 4 in the morning I got the heebie-jeebies and wanted to leave immediately on Monday morning (I didn't I had a fab breakfast at Coya!).
But as I garnered more information I changed my views. Media and government seem to be set in a late March mindset. It is all very odd and perplexing.
Oh, that's alright then!
I must be immensely dense as I cannot for the life of me understand why Bluesky Ventura qualifies for so many thumbs down. The arbitrariness of the whole thumbs up / thumbs down policy stops me posting anything other than very occasionally.
As an occasional poster and not a great technical guru (But on here to learn) - May I suggest that it is a thumbs down for breaking the good behavior etiquette of ramping another topic post here on the very widely read SVCR thread (Yes I am old skool)
Speaking generally here, and not aimed at any specific individual posters, I've noticed that comments tend to get lots of thumbs downs here if they are ;
Therefore, one would assume that people consistently getting lots of thumbs downs from fellow subscribers might want to question if they're getting the tone and content right in their posts for this particular audience?
The good news is that I don't see thumbs downs for my articles at all any more, as they don't show on the new site. So everyone who thinks you're winding me up by giving me a thumbs down - you're wasting your time, as I don't see them at all. Mwahahaha! ;-)
Regards, Paul.
dammit - I spend hours clicking those little buttons on your posts :D
Codswallop!
Hi Andrew
You'll find my most important posts gets red downs. I can only imagine the truth hurts.
Kind regards,
BSV
BlueSky Ventura has form on here. I’m not going into details, but some of us have very long memories.
Really Bryans1311,
you should go into detail.
BSV
Paul: "... UK investor sentiment is lagging so far behind US investor sentiment"
I see it a little differently. From my perspective, the issue is not so much US / UK differences. It seems more to me about the differences in valuation beween the Growth / Quality / Tech nexus on one hand and traditional value businesses on the other.
Look at say JP Morgan, Verizon and Pfizer. Most people would be happy to own businesses of this quality in a long term portfolio and you can pick them up on a forward p/e ratio of about 12. That's not bubble pricing.
On the other hand, look at UK listed tech / growth stocks such as Frontier Developments, Kainos and AVEVA. These will have their fans and there is nothing wrong with these businesses, but you have to stomach a forward p/e ratio of about 50 to buy them. I wouldn't say they are suffering from poor investor sentiment.
The difference in performance betwwen US and UK indices can largely be explained by the industries that these indices are exposed to. If UK indices were dominated by our tech companies instead of banking and cyclicals, they would be flying high like the US.
The US market deserves a premium over the UK for domestic focused shares (sorry to offend all Brexit voters, but for the moment that is one reason why) and I think there are still some bargains to be had in the US. Meanwhile the UK shows exactly the same bifurcation between sectors and, for a lot of it, where it is cheap it is cheap for a reason.
10 ten 10 Bagger Potential - CMCX Markets
https://www.stockopedia.com/co...
Thanks as always Paul, really enjoy reading your thoughts.
Hi
For anyone interested, this weeks CV19 economy and society survey has, IMO, some quite encouraging trends. Worth a scroll through the various graphs - footfalls, shipping, modes of travel, health of business, and several others.
Seems to add data to Paul's comments (above) about the increasing robustness of some of the UK business sectors.
https://www.ons.gov.uk/peoplep...
Regards
Howard
Yes - the Split data came through late from Refinitiv. We are expecting the new US batch data to come through within hours. AAPL & TSLA should be updated then.
Yes - the Split data came through late from Refinitiv. We are expecting the new US batch data to come through within hours. AAPL & TSLA should be updated then.
Personally, the much bigger issue here is that David didn't seem to question the numbers he was quoting. Apple on a forward PE of 10? Really!? You should always question your data source and cross check using multiple sources wherever possible. Most of all it's really important that anyone here does it before they put false information into the public domain - there's quite enough of that elsewhere on the Internet.
All the best, Si
I second that Si
If you give them a couple more hours they might make it down that far...
Or not as the case may be...
Hi Paul, re the US market, you mention, ‘Whilst acknowledging that the top tech stocks are remarkable businesses, it's the next tier down that worry me in valuation terms‘, what options are there to get exposure to this by way of a short as and when the correction comes?
I think I read that the Robin Hood US trading app has 10 or 11 million users. This reminded me of what I’ve read about the Great Crash 1929/32 where leveraged trading went through the roof too in the US prior to the melt-down.
I agree that Robinhood is not good for the market or true price discovery but are Robinhooders leveraged?
Regards
Michael
Apparently a lot of Robinhood traders are using options, and doing their conkers that way.
Would be interesting to know if there are other figures out there from other operators for the comparable periods for Eat out to Help Out.
Anecdotally from my point of view, a lot of restaurants have been incredibly busy. Some, you could not get in without a booking. Out of the high street chains, Wagamama had the biggest queues - always quite bemused at that, you can cook similar at home (they have even been giving out their recipies on Youtube.
Also anecdotally people spent more (before the discount), either trading up to more expensive meals which they wouldn't have gotten before - a steak instead of a burger for example, or adding a starter and/or dessert which they wouldn't normally have got.
Do these Revolution figures include the government rebate? If the same number of people ate there as last year I would expect sales to be increased anyway due to the factors above.
Snoo - Wagamama is a successful part of the Restaurant (LON:RTN) group as are the Brunning and Price pub restaurants. The group is an overall disaster because of Frankie and Benny's and Chiquito's. If you are bemused by Wagamama you would be even more bemused by the fact that in the pub restaurants my wife orders ham, egg and chips without the ham. I believe it is feasible to cook the balance at home but she thinks it is nicer to drive out and have someone make it for you!!
Paul, you say that COVID did the damage to RBG, but the share had been in a down trend for over 2 years previously?
Yes, that's right,RBG did have problems pre-covid, but it was turning around.
RBG rose to about 90p just before covid struck, because its turnaround was demonstrably working, if you check the last results before covid. LFL sales were rising, profits began rising slightly, and the first few refurbs generated a c.40% ROI from increased sales. That was more my point. Hence why, without covid, that recovery would have continued, and the price would be 120-150p by now. Hope that clarifies.
Hence why revisionists, who are now saying that it was always a terrible business, are clearly wrong, if you follow through the newsflow & figures pre-covid. This matters, because the original investment case did make sense, and it would have recovered, without covid.
I think the conclusion from this whole covid crisis, is that many business models we thought were rock solid, in that demand would continue indefinitely without interruption, are actually a lot more risky than anyone imagined - e.g. travel, esp airlines & cruise ships, bars, restaurants, shops, etc. Which does make me wonder if it's best to avoid consumer-focused shares, unless they're ridiculously cheap?
Basically RBG is not a share you hold for immediate returns. I hold RBG and the risk reward here remains very attractive for investors with a timeline of say about a year to give management the time it needs to recover. They’ve done their part - raised funds to rein in debt, opened in phases considering all stakeholders and managed a LFL of -28% which I think is good considering their business post 11pm is zero and also shows the brand remains attractive for consumers as well.
Sure covid restrictions can be reenabled or a vaccine could come in earlier than expected - but then thats what risk-reward is all about.
I could have written similar (and probably did) about many shares I have held in the past.
You're effectively counting on getting in before the market wakes up to the future opportunity. But in the meantime you are also bearing the downside risk - it is not inconceivable that in the event of a winter uptick in Covid infections in the winter , further restrictions might be applied to the pub sector. (Was it Chris Whittey who suggested that it might come down to the pubs or the schools?)
For my money I think it is best to wait for that future opportunity to become more proven and for the market to start to wake up to it.
That's more a general point than specifically an observation on Revolution Bars (LON:RBG) .
Interesting comment Paul re consumer-focused shares in general. Bears a bit on the Lindsell Train type approach of looking for strong, consumer-focused brands, as opposed to B2B operations with, so the theory goes, less pricing power. Personally, I have always favoured business models that provide things that people will always want, even if the heavens fall.
I think what we have seen in this high speed recession is the riskiness of business models dependent on discretionary spend. So the biggest victims have been businesses like Revolution Bars (LON:RBG) - none of us, not even those many decades younger than I am, actually have to go out every Saturday night and drink more beer than is good for us. (May, or may not, still be a good recovery bet.) But B2C operations supplying stuff that people are always going to need have, even at worst, continued to do OK. Creightons (LON:CRL) anyone? £TSCO?
I posted in reply to a request of the negatives on RBG previously but I do want to agree with Paul's comment above. RBG was a good business, just unfortunately like the rest of the bar trade found itself front and centre facing the COVID steamtrain.
I thought their trading statement was actually better than I was expecting for a non-food focused pub chain. I have always liked the business pre-covid and thought their Revolucion de Cuba brand particularly had the potential to remake the company moving them out of the value category to the more premium end of the market. I should point out I have never owned or shorted the stock.
The issue for me is one of timing - we just don't know who the winners and losers will be yet. However, as I said in my last post the time to look at this sector is March next year and believe me I will be looking then. Why wait?
1) UK Policy - government support for bar sector has been eye watering as they attempt to protect employment of young people. It mostly runs out by February next year however. If they find themselves in an "unemployment rising" crisis, they may be forced to extend more support (it may be cheaper to do that in a limited way rather than paying benefits to 1.1m disgruntled barmen). They also may decide enough is enough - we will know this by February next year.
2) Banking sector - the big risk here isn't that RBGs bank pulls the plug. The great thing about the bar trade is that it is so cash generative that normally they let pubs try to trade out of issues - this isn't great for the shares as now it is effectively "working for the bank" rather investing in growth. However, there is a much worse possibility for share holders - the dreaded "bad bank". Banks have issued a huge amount of questionable debt into the UK system over the past six months under government instruction and if we want to get the economy moving again we may need to exorcise this debt from the system. One way of doing this is by creating some vehicle and allowing banks to dump their poor quality loans into it and flogging it off - in this scenario, RBG would be a prime candidate and it normally is a disaster for owners/ shareholders.
3) Christmas - Bars traditionally generate 35%+ of profits in the 6 weeks around Christmas. For that reason, restructuring/ bankruptcies etc. tend to happen in January or February. I have no idea what trade is going to be like in October/ November/ December right now but all the talk in the industry right now is about Christmas and what will happen. If it is a dud, it will be a major blow for companies like RBG.
4) COVID - nuff said, everyone has their own views here on what will happen. I would say however that by February next year, we should know about the reality of most of the major vaccine candidates and when we can expect actual needles to appear - remember, even without a lockdown bars are likely to have significantly less trade until a vaccine has actually been distributed.
There is no hurry to get involved here - I don't think there will be a significant recovery in the share price of any of the UK pub co's until there is much more clarity on the situation. Of course, if Donald Trump announces he's found a vaccine tomorrow, I'll probably have missed the boat. But barring that, I think there will be plenty of time to jump onboard in March next year when the risks will be much easier to quantify.
I don’t own Revolution Bars (LON:RBG) and never would but it really looks like it will be a casualty of the crisis unless there is a much more rapid back to normal. It was disheartening to hear Matt Hancock on the radio simultaneously peddling the fear of a second wave whilst trying to be reassuring that the government has everything under control. The half price dining is now finished and furlough ends soon but restrictions and local lockdowns continue.
I saw that BooHoo read Paul’s column. I hope Alok Sharma does too.
I am riding the US bull market, with appropriate stop losses in place. Actually some US stock prices still appear reasonable. For example, Apple, with a forecast PE ratio of 8.7 and a trailing PE of 10.2, and a forecast PEG of 0.5 and a trailing PEG of 1.12.
there must be an error here post stock split - AAPL is approximately 40x earnings... in old share price terms it earns/earned about12-13 USD a share and is @ 520+..
Your right - sorry! Stockopedia hasn't updated yet. I was puzzled, but it does not change my general observation about there is still some value in the US market.
Hi David, I'm certain Apple is NOT even close to 8x earnings! Last time I looked it was in the 30s. I just checked the Stockreport and wonder if the split 4:1 has not been accounted for in the valuation? That would then place it on circa 32x.
I am riding the US bull market, with appropriate stop losses in place. Actually some US stock prices still appear reasonable. For example, Apple, with a forecast PE ratio of 8.7 and a trailing PE of 10.2, and a forecast PEG of 0.5 and a trailing PEG of 1.12.
I think you need to check your data if you're "riding a bull" using such basic metrics. There has been a 4:1 stock split and your numbers look a factor of 4 out to me. Current forecast PE for Apple is now over 40. I have been selling into the rise and may sell out completely soon. I agree with Paul, there seems far too much speculation driving prices higher and higher. There is better value with more downside protection elsewhere.
All the best,Si
I think the FAAANT stocks have become tokens, like Bitcoin or even gold and people aren't buying them on any valuation basis. They are being bought because people would rather hold those stocks than dollars. Simple as that. It's almost become "buy at any price", and of course there was the recent "stonks only go up" meme.
A real problem now for holders. When, exactly, do you sell?
Some big falls today, so looking a bit better value now.
If you have read 'Reminiscences of a stock operator', he talks about the San Francisco earth quake of 1906. Here there was major damage done to infrastructure, yet after an initial correction the bull market continued. This continued till the railroad companies began to try to raise more funds later in the year. (I am going on memory here)
Perhaps once the real cost of covid becomes apparent we will see a second correction (particularly in the US).
The book is well worth a read.
Revolution Bars (LON:RBG) model updated. on link
Small Cap Dog of the Day Revolution Bars, RBG
https://www.stockopedia.com/co...
Hello Paul, Do you think you'll get the chance to look at the MPAC half yearly results? Thank you, Simon
Yes, I intend to look at MPAC results later this morning. There's a webinar at 11am this morning, on Zoom, open to all, which I shall be attending. Signup link here;
https://research.equitydevelop...
Thanks for link Paul I had missed that.
I think todays fall on small volumes might be quite a nice top up point (I am long). I suspect a few knee jerk small sellers this morning has caused the MMs to knock back the price.
Net cash is over 100p of the share price and even with the Covid earnings hit underlying eps should still be circa 23p this year. A current multiple of 8* earnings + cash doesn't feel expensive to me. There is hidden asset value on the balance sheet too.
Pension is large but surplus actually went up over the covid crisis to £25m in the UK. Granted the US deficit also grew but at £4.8m this all feels easily manageable.
I don't think the market is really paying enough attention to Mpac (LON:MPAC) longer term growth opportunities, particularly the recurring service model. Order book is up 14% too.
I consider 375-400p fairer value for where the business is right now so I'm content to hold and maybe buy more as risk/reward looks pretty favourable over a 12-24 month view to me.
I find Rps (LON:RPS) intriguing. A fund raise today but at a premium so assume it has decent institutional support. 15 years ago it was a cracker, in growing markets and nicely rated on a high teens PE. Its hard to come up with a decent forecast at the moment but £500m Revenue on 7% margin wouldn't be a historical stretch. So even after todays fund raise its pretty cheap....has been for a while. Question is obviously will recovery come...or perhaps more importantly when? Which is the crux.. if the worst of Covid is behind us and 2021 is a year of progress then this could be a high quality recovery play. Worth keeping an eye on.
Severfield Severfield (LON:SFR) trading statement looks good on the face of it. Nice to see the clear statement " All PAYE liabilities and other discretionary tax deferrals are now fully up to date, except for VAT payments of £3m which have been deferred by HMRC to March 2021."
Interesting article on Vertu Motors (LON:VTU) noting the owner of another (smaller) car dealer bought £3.3m shares in the company yesterday and speculates about the possibility of a tie-up. It also notes Vertu Motors (LON:VTU) said 'September could be a record month for car sales.' Of course this may be temporary pent-up demand before going into the winter with higher unemployment, but Vertu Motors (LON:VTU) has looked on the cheap side recently.
https://cardealermagazine.co.uk/publish/stoneacre-dealer-group-owner-richard-teatum-invests-3-3m-in-vertu-motor-group-but-is-a-tie-up-likely/201607
Shanta Gold (LON:SHG) update today on its mining reserves, it all reads postively to me, but Im no mining expert. The bit that stands out is the amount of mining potential within the current licence that they have not set up yet and its close to the current operations. This share has been discussed before and they are working hard to pay of debt which I think is a good thing. Good stockopedia ranking and are improving.
I hold this share and have done for some time now, also follow the mining sector somewhat but I’m by no means an expert! From the RNS, I’ve taken it that it’s good news... after a pretty great rise this year, the update to mining reserves, available at low cost (AISC) to the company, for me, it kind of underpins the rise, hopefully for the next leg up! I think also, that Shanta have actually just recently become net cash positive, so mine life extension at similar cost structure is ideal. Forward hedging also appears to be around one quarter of annual production, so they should benefit more from the higher gold price towards the end of the year too.
Revolution Bars (LON:RBG) I find disingenuous today for lack of actual detail. Lots of positive numbers with regard to revenue over the short period since re opening. Reality however is its impossible to tell what it means and where the shares should trade since we have no hard numbers regards profit, debt and cashflow etc Delays to publishing results are at best unhelpful.
Thsnks for this. It helps to give a novice information on what to look for in results.
Re. Revolution Bars (LON:RBG)
I disagree. Trading updates on re-openings would normally mention sales, and expectations, which we are given today. It says that re-opening trading is ahead of expectations given in the June fundraising, giving the actual figures, and we can see these are well ahead of what was previously anticipated.
It would have been helpful to get an update on net debt, I do agree with you on that point that you make. But given that trading is ahead of expectations, then by implication, net debt shouldn't be any worse than expected - why would it be, when all the variables are well known & it's a very simple business?
Also they say that the outlook is unchanged. So actually it gives us everything we need to form a judgement, in my view.
The trading updates that drive me up the wall, are ones where it's all waffle, with no figures at all! RBG cannot be accused of that.
As a holder of RBG who added a lot more in the open offer as scale back was much lower than I had anticipated, I was disappointed with the update today. It seemed odd that the share fell so far below that 20p Open Offer price on top of previous very heavy falls, but doesn’t this update show why?
So the eat out scheme has helped a lot. But why were so few of their bars opened in time to take advantage? They had ages to prepare during the blanket lockdown. And now with a lot more bars open they are paying for continuing with the offer instead of the Government.
It’s reassuring that Paul reckons Management know what they are doing, with perhaps that extraordinary failed bid even though it was recommended, a one off mistake. But is there a good reason why their bar openings have been so slow compared with other Chains? If only they had had those bars up and running in time to take advantage of the huge numbers eating and drinking out during August.
How much is reduced capacity going to hit profits? Or is their bars being so spacious a big plus from that angle?
So trade is only ahead of expectations in the too few bars that were operating at a bonanza time.
Agree though that as long as there is not another severe covid outbreak (could that be terminal for RBG?) the worst could be over with the share so bombed out. IF Paul’s opinion of Management is correct then others won’t do it any better. But maybe the extreme share price fall could tempt a biddder to have a try?
I too also take the opposite view from Paul on £RBG
I suppose this is the problem.
However, in their June statement they said they expected bars to re open in August and their base case was for revenues to be 55% of the prior level with only a marginal increase in September.
When one read todays statement that they are operating at 72.5% and ahead of management expectations, you could conclude all is good. Except only 53% of bars are open. 15% potentially will never open.
This statement applies to "these bars" that are open. Overall though one could conclude they are behind the base case, since 73% of 53% is less than 55%. However they have renegotiated rent on 23 bars which would improve the operating dynamics from the assumed base case. Clearly running EOTHO themselves may be a cry for more help from the government.
Whilst it is most encouraging that those bars that have opened are trading well, -28%, the impression that the group is ahead of expectations is I think, disingenuous. Actually its impossible to tell since we don't know what percentage of revenues the bars that have opened did represent.
Revolution Bars looks good to my novice eyes. Gives further insight into how the hospitality sector is doing.
£HEAD looks a mixed bag profits wiped out to a small loss, gross margin maintained at 32.5%, costs reduced by nigh on 16 million, net debt 22.4 mil but has tad over £88 mil headroom in banking facilities.
Strong revenue recovery in June2020 as all distribtution centres now reopen, builders were up yesterday so possibly worth an opening position on it being a play on the builiding sector recovery.
(Not sure why the ticker not pulling through)
I’ve been keen on Headlam (LON:HEAD) since the big dip in March, however some nervousness on whether their French and Dutch business will be quite so smooth post-Brexit has kept me away. Can anyone convince me of a bull case for cross-channel trade in 2021? (Beyond what they read in the Telegraph)
I own Headlam (LON:HEAD) - what's the concern re Brexit? just trying to clarify..
I don't know that it's a widespread concern, but c.15% of their revenue is from continental Europe. Ordinarily I'd say that's great as it provides quite the growth opportunity, however uncertainty around Brexit makes me suspect that growth opportunity may not come to pass, and indeed European revenue might reverse.
To be honest i'm probably overthinking it, Headlam is a distributor not a manufacturer - there's no reason a boat full of carpets couldn't dock at Rotterdam instead of Harwich.
Exactly. The current duty they pay in the UK is the EU rates so no change there, and we know the UK duty (outside food) is likely to be the same or much lower. Some revenues in Euro is nice diversification