Small Cap Value Report (Thu 6 June 2019) - LGRS, RBG, AMO

7th Jun '19 by Paul Scott

57 comments 10968 reads

Hi, it's Paul here.

Loungers (LON:LGRS)

I have just published part 2 of my video review of the Loungers AIM Admission Document. Thank you for the kind comments on part 1.

Here is the link to part 2. It is 27 minutes long. I hope you find it useful/interesting. Please don't share that link publicly, as it's intended for Stockopedia subscribers, you after all are paying my (modest) fees.

Good news, it has recorded in high definition this time. So you can read everything clearly. If it's not clear, then go into settings, and you can increase the definition right up to 1080, how exciting! Then full screen it, and all is clear. The idea is you can then pause the video at any time, to inspect my notes on screen.

If people like my videos, then I'll make some more. If people like them, it's appreciated when people leave a thumbs up, as it indicates to me that it was worth the effort.

7-8 am quick views

Just realised I've got the hygienist, then the main man, so the morning will mainly be dentistry.

Good luck with everything, I hope there aren't any profit warnings.

Main report, after 8am

Loungers (LON:LGRS)

Share price: 226p (up 2.5% today, at 11:19)
No. shares: 92.5m
Market cap: £209.1m

Trading statement

Loungers, the operator of 148 café / bar / restaurants across England and Wales which trade under the Lounge and Cosy Club brands, announces a trading update for the 52 weeks ended 21 April 2019.

As mentioned above, I recorded a video review of this company's AIM Admission Document, for Stockopedia readers only (please don't post the links anywhere else);

Part 1 (37 minutes, medium definition)

Part 2 (27 minutes, high definition)

My main findings from reviewing the Admission Document, are that;

It's a good business, growing strongly both in LFL sales, and from new site openings
This is a great time to be doing a roll-out, as there are plenty of good sites available at modest rents & with incentives (e.g. long rent-free period, and/or landlords contribution to fit-out costs, called a reverse premium)
However, it has far too much debt - the IPO only…

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JamesrWilson1989

6th Jun '19

I'm noticing a couple of small caps I own down by good solid chunks on no news (-5 to -10%). None have Woodford down as a holder but I wonder if other fund managers are either:

1 - Thinking about re-risking themselves by exiting non-liquid stocks.
2 - Woodford in the news, other funds are suffering from people withdrawing from them too. My mum for example today was saying she felt really sorry people lost all the money with Woodford, with maybe people who don't follow stocks too heavily thinking that their 'safe investment' might not be so safe and getting out.

Just some ramblings, or I might be making excuses. Anyone else seeing something similar?

JohnEustace

One other thought if you ever talk to management at Loungers (LON:LGRS) Paul would be to dig into the way they calculate like for like sales growth, in particular the way that newly opened sites are treated.
I don't have any reason at all to question Loungers treatment, but based on previous experience I would want to check the way that turnover from newly opened sites during their start-up period is treated and when they begin to be counted in the like for like numbers. Essentially will the like-for-like stay the same when the new store opening music stops?

Snoo

I have to agree, I would think Loungers have their hands full at the moment.

If anything it could be the case that some RBG sites could become available. As they have noted already they have a number of problem sites which could be more suitable for a restaurant rather than a nightclub. This would be a win-win for both.

Ultimately I do wonder if they could end up being some kind of competition? If Loungers gets a late licence and clears some tables away it could end up being a nighttime venue of sorts. Others like Slug and Lettuce seem to do this. If you look at the price of a cocktail relative to its ingredients it is a lucrative enough niche.

Loungers do trade into the evenings already. They turn the lights down and put some candles on the tables. They serve food until 10 p.m. Different demographic to RBG though from what I have seen and different locations. More families and less lads and lasses from work on a night out.

aflash

Only the intellectually discombobulated ones survive ..........

Needs to be acknowledged while it is fresh.

One of the more plausible/pertinent posts.

'You are not going to persuade me that Protectionism is better than Free Trade' (quote = Stan in the video).

Since this is a mish-mash forum I can switch to micro concerns, then investor psychology, then psycho-social observations.

I have taken advantage of the spike to liquidate my position in K3C (K3C Capital). Not saying you on one side or Stephen English on the other are right, I am saying when we fail to do our own homework and let someone else's thinking become our guide, our results will never shine.

The moment one passes from thinking for oneself to trusting someone/something outside oneself, one is taking a tip.
No matter what one reads, studies or absorbs, one has to choose the time to execute personally.

This is why I resist this column but there are a lot of smart posters. My starting point is market price action, RSI overbought and oversold states and volume. After that I look at two datebases, one of which is Stocko. Then I look at commentary which is a short cut for homework and my weak point but not that of many here. Deferring to their wisdom/authority is a psycho-social investor bias to be watched.

Lastly Stan has daughters who are not materialistic and have independent careers. He gives full credit to his wife. Talk about role-model(s). Another psycho-social bias? Kylie Jenner has done O.K. too.

garbetklb

A flurry of Holdings RNS this afternoon - Woodford selling stakes of :
Countryside Properties (LON:CSP)
PayPoint (LON:PAY)
Taylor Wimpey (LON:TW.)
Proton Partners International (OFEX:PPI)
Watkin Jones (LON:WJG)
Provident Financial (LON:PFG)
Kier (LON:KIE)
E-Therapeutics (LON:ETX)
Purplebricks (LON:PURP)
Newriver Reit (LON:NRR)
Card Factory (LON:CARD)
To be honest, I've not read them all - but it would be a bit of a surprise if any were for increased holdings......

Vsihv

Just clicked through and there isn't a single increase (no info for PPI)
Question for those that understand market structure - are these announced same day or post settlement - would expect a notable downmove when 5% is offloaded, even with clever order execution. Credit to his traders and the market makers - seems they have certainly earned their bonus with good execution.
Also, were some of these not held in focus only - as per my comment earlier in the week - focus has probably had a lot of redemption since suspension (and I expect redemption was already in full flow prior to suspension, but the fund doesn't have the same liquidity issues other than the size of holdings).

A long way to go for the fall out from this - he will have material redemptions to deal with when the fund is no longer suspended - call me a cynic but suspending dealing seems not too different to burying your head in the sand - this is not a 07/08 fund being mismarked by prime broker on illiquid assets (as has been suggested given the comparison to Dr Burry of Big short fame) nor is it a hedge fund with institutional investment who understand side pockets / gating.
Also, post gating, funds rarely live to tell the tale even when they deliver a 500% IRR - something I expect Dr Burry will testify to.

Having a similar investment style, I do have a few holdings in common including income focus (now sold). Never considered fund managers in the dominant shareholding space (other than thinking substantial institutional backing is a green tick), but I think that is something to look out for going forwards.

Cisk

There seems to be much panic setting in and folk getting very concerned about the macro picture - yes you have to take note but as long as you believe in your positions and aren’t leveraged these times of uncertainty are good times to invest...

Or maybe my wishful thinking!

Gromley

Re Woodford

Question for those that understand market structure - are these announced same day or post settlement - would expect a notable downmove when 5% is offloaded, even with clever order execution. Credit to his traders and the market makers - seems they have certainly earned their bonus with good execution.

I thought I knew the answer to this question, but the numbers don't seem to bear this out, so I too am a bit confused.

The RNS regarding PayPoint (LON:PAY) indicates that Woodford disposed of 2.6m shares with the transaction completing yesterday 5th June. I would therefore have expected to have seen this volume of shares in the market volumes, which with only 82k shares recorded on the 5th of June does not stack up.

Even if this order was 'worked' over several days and the RNS only released once finished (which I am lead to believe if permissible), you would have to go all the way back to April for this volume of shares to have been transacted in aggregate, which doesn't seem credible.

I had thought that even if the trade was "off market" directly between two peers, it still had to be reported in the market volumes. (Certainly the 15m GAME Digital (LON:GMD) shares that Sports Direct bought 'peer to peer' yesterday show up clearly in the market volumes.)

Given that I thought I knew how this worked, I am very puzzled - does anyone else have the answer?

Moving on to how this is being managed

he will have material redemptions to deal with when the fund is no longer suspended - call me a cynic but suspending dealing seems not too different to burying your head in the sand

If I am joining the dots correctly, then he really had no option. Kent County Council [KCC] asked to withdrawn £263m which if I'm comparing the right numbers represents c. 7% of the funds value. No way did he have the liquidity to meet that redemption.

I really hope though that I have those numbers wrong. To me it would seem inadvisable for KCC to let itself become such a big part of the total fund, it is surely obvious that liquidity becomes an issue at that point?

But if that's not scary enough as a resident of Kent I just had a quick look at KCC's accounts all 182 pages of them (and that appears to the length of the 'Accounts' , not the 'Report and Accounts' that us stock pickers are used too).

Whilst the experience has probably frazzled my mind, I was somewhat panicked to see from the balance sheet (page 21 for anyone sad enough to look) Total Long Term investments roughly equal to the Woodford investment.

Once I picked myself off the floor, I actually thought to search the document for the word "Woodford" in the document, there is actually one mention in the whole 182 pages (page 148) and this suggests that the investment is actually from the KCC pension fund and represents (/ed) "only" 4.2% of the scheme assets. So not quite as dramatic as I thought.

Phew!!

Sorry - that was a gross diversion, but possibly of interest to any fellow Kent residents. And perhaps moreso if any KCC pensioners are reading - although having caught up now with the story (warning link may contain Brexit) I do agree with the KCC line that this is not a cause for panic.)

That little interlude though has depressed me with how interlinked and fragile the system can appear.

AnonymousUser192020

This clearly wasn't in anyway intended as a swipe on Loungers (LON:LGRS) but quite an interesting comment in a car forum yesterday by a well-respected eloquent yet cynical city trader:-

"In addition to the model there is a premium model which is far more common than many probably realise and that is that the business can never be self sustaining and this was known from the start but wasn’t the objective. The objective was to steal market share from an incumbent industry by undercutting, using the cheap debt and funding to drive in this market share wedge with the specific aim of being taken out by a cash generative incumbent player before the funds run out and the business collapses.

This latter model is what you see most prevalently in somewhere like the retail chain restaurant segment. You load up a vehicle with cash and then use that to secure prime rental locations at huge expense, massive marketing and discount your pizzas or burgers against the incumbents. You aren’t in it for business profits because by discounting the product against the incumbents but having higher costs because you are so much smaller you can never make a profit. You will take half a million a year out in salary but the real reward is to get taken out by dumb money from pension fund that will overpay because it’s not their money and they need to be seen as doing something. Or failing that, Hugh Osmond.

In the good times these firms are referred to as ‘disruptors’ by the media and are thought of as being good but in the bad times the mantle slips, the vision clears and people begin to realise that ‘disruptor’ is merely a rebranding of the word ‘dick’ and that these dicks are just the dicks you had at school who were given too much money by their parents and ran around being complete dicks doing damage to themselves and those around them. Dicks just fk it all up for everyone else and usually walk away with a load of money to go and fk it up for another bunch of normal people. "

Actually it was written as commentary on the Woodford fiasco. For my part, I've never been a fan of these "fad and fluff" food/ drink chains. I can't believe most will demonstrate longevity. Someone else will come along and eat their lunch surely? There's few real barriers to entry, to someone with sufficient capital. That said, niche chains like Bills seem to have grown hugely in popularity in recent years. None of them though would I see as a true disruptor in the sense that Joe Lyons, Wimpy or McD was in the day.

dscollard

Ok, 35 upticks probably meets an action standard ... I'll crank up the spreadsheets

Lion Tamer

7th Jun '19

Hi Paul

Re Loungers (LON:LGRS) and the Admission Document videos.

Many thanks for taking the effort to produce these. So far I've only found time to watch part one. I will view part two later (you've no idea how busy it is being retired).

Whilst I have a general rule to avoid all IPOs, I still found the video great. Also if you felt inclined to cover other topics (other than IPOs) in this fashion, particularly when there are circulars regarding corporate action etc, I can see them being equally as appealing.

I wanted to give a thumbs up on the you-tube page, but it requires me to log-in first which would mean disclosing more of my data to £GOOG and who wants to do that. Therefore please accept this post as a virtual thumbs up.

mojomogoz

aflash

Agreed on macro.

Some clarity on the micro...

I'm an investor in £K3C K3 Capital. I think you are referring to me on K3C and just for clarity I am on the same side as Stephen English and am an investor in the company. I bought 2/3 months ago when spiked down and got in low 130s.

I bought a partial position (near half) at the time as I had to do more work and speak to management plus my feeling was that it would be hard for the price to sustain much headway absent some very significant commission news from big corporate finance deals - say at least 2 big fish pulling in £1m extra for them. But I think its a really good quality company with a good process niche within its niche sort of thing and lot of opportunity to grow into over the years without need for expensive fixed costs.

So I do think their recent trading update is really quite a disappointment and I'm very perplexed by the share price response. Its a disappointment as they only reached dialled back conservative guidance. H2 results indicated that even if the client gathering machine is going full pelt and pulling in more than ever so building non-contingent fee base, the cream on top that is contingent fees (ie closed deals from small to the huge) is stuttering at the moment. This is not their business model failing rather just a reflection of environment. If you are going to buy a business (large or small) and you see the order book weakening then you hold off from purchasing and/or look to negotiate down the price....and the deal slips as the seller has got themselves psyched for, say, £20m and not £15m (I've been involved in this sort of situation and it all gets a bit irrational).

Full results in Sept will bring clarity on underlying. My guess is that they will report higher numbers of customers but completions slipped and so did the level of transaction prices so double whammy on contingent.

So, like I said, I really like this little business. However, I feel that investors ain't processing information very well at the moment. At today's 150p ish share price the FY19 p/e is pushing close to 20x at 17-18ish my estimate. This is with a very large drop in eps YoY. Consequentially there's a hefty dividend cut coming too....unless management through their payout policy as they have spare cash and/or see the deals flood in.

A hot H1 FY20 with high value completions puts rocket fuel into the price again and its shoots off into the 200s. This is possible but is currently un-forecastable and only a position to take if you have real good knowledge of the space and can see something happening that others can't.

So, on balance, I'm sitting to the side happy to have a partial stake and believing that there will be negative surprise to expectations in the share price. Even if they bag a big deal or two they need to show momentum in more volume coming through and that is still a high hurdle...so even if I don't get to buy in low 100s I might get the chance to buy at this sort of price a year from now with a lot more value in the business.

I'm a bit inexperienced compared to some in the ways of micro caps coming from a bigger stock/market background. The way the price in this and other stocks moves surprises me and catches me out. It may be me that needs to change my ways!

Ciao

hayashi22

Totally concur with that last post Lion. I was about to do the thumbs up on youtube and ended up on some google page requiring login. anyway its another thumbs up.

Re Woodford reducion in PayPoint (LON:PAY) RNS I have partially answered my puzzle.

Re-reading the RNS I see that the reason for notification is Other : "No trading in the stock - voting control interest over stock transferred to new manager"

However, this still makes no sense to me. The person subject to the notification obligation is "Woodford Investment Management Ltd" and their reported stake is shown to have decreased by 2.6m shares (3.86%) with no indirect holdings.

So who is this "new manager" this apparently not part of WIM Ltd? And if they are not part of WIM then how is this not a trade?

Does anyone have any clues?

sharw

8th Jun '19

Gromley - I noticed the same thing at Redrow (LON:RDW) where the reduction is from 5.07% to 0.27%.

My only suggestion is that these represent a ceding of control over certain assets to either Link Fund Solutions Ltd. or Northern Trust Global Services SE, both mentioned by the FCA here as the FCA gets out soap, water and towel to show us how clean its hands are:

https://www.fca.org.uk/news/statements/update-lf-woodford-equity-income-fund

Link Fund also get a mention here:

https://www.bbc.co.uk/news/business-48552660

A had not heard of an authorised corporate director before and am still not sure of the powers or obligations thereof.

Thanks sharw, I actually spotted a view over on the ADVFN Allied Minds (LON:ALM) board along similar lines which seems credible and to explain all the know fact; in this case though citing St James Place as the fund.

Putting it in terms simple enough for even me to understand, the possible / probable explanation is :

That aside from hist own retail funds, Woodford (through WIM Ltd) was also managing specific portfolio(s) on behalf of other funds.

One or more of these funds have taken back control of these portfolios, hence the 'change of manager'.
(If any of these recovered holdings become notifiable in their own right, we should find out who it is).

Whilst this has just been a matter of curiosity for me, there are a couple of important points for anyone sharing holdings with Woodford to consider.

If you are feeling relatively unbruised so far, that would be because Woodford (probably) hasn't actually started liquidating yet. If and when he does, you might start to feel the pain.
Rather than these (what looked like disposals) increasing Woodford's liquidity, the loss of management fees may actually increase his urgency to liquidate. (Unless he gets any cash compensation for breaking the management contract).
The fund manager taking back control, may decide to sell off these shares - If they were happy with what Woodford was doing, why take back control.

I had previously been short of at least two of Woodford's longs (for reasons nothing to do with him), had I not already closed those shorts I would be tempted to let them run for longer in case of "dumping"

9th Jun '19

St. James’s Place has removed Woodford as manager of the funds he was running for them. He was restricted to holding FTSE 350 companies in their funds.
“St James's Place has handed the mandate for the £1.4 billion St James's Place UK High Income, £1.5 billion Income Distribution and UK Equity funds to Richard Colwell of Columbia Threadneedle and Nick Purves of RWC.”
https://citywire.co.uk/funds-insider/news/st-jamess-place-drops-woodford-on-3-5bn-funds/a1236130

stephen bunn

30th Jun '19

loungers would never buy revolution they are two totally different markets and revolution is going nowhere.

5th Aug '19

Does anyone know why we've heard nothing from RBG since March 1st? In 2018 there was a mid June trading update which has not been repeated this year.

Small Cap Value Report (Thu 6 June 2019) - LGRS, RBG, AMO

Loungers (LON:LGRS)

7-8 am quick views

Main report, after 8am

Loungers (LON:LGRS)

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Paul Scott

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