Small Cap Value Report (Thur 14 June 2018) - RBG

Thursday, Jun 14 2018 by
66

Good morning all. I am writing to you from a secret location within Hever Hotel, in advance of presenting to the Mello conference. For obvious reasons, this report will be shorter than usual.




Revolution Bars (LON:RBG)

  • Share price: 136.5p (-13%)
  • No. of shares: 50 million
  • Market cap: £68 million

Trading Update

More issues at Revolution. As MrContrarian puts it, "excuses ahead of expectations".

  • "challenging and volatile trading conditions"

It's tough out there at the moment.

Total sales for the Group in the second half up to 9 June 2018 are up by 7.3%. However, like-for-like sales are down 1.7%. Adjusted EBITDA is now expected to be below market expectations and in line with last year.

Like-for-likes haven't been going far for Revolution. In H1, they improved by just 0.4%.

Full-year adjusted EBITDA, adjusted for pre-opening costs, is set to be around the same level as last year: £15.1 million.

Pre-tax profit was much lower: £3.6 million.

This company has a pattern of very complicated adjustments, forcing investors to make up their own mind about what the true level of profitability is.

The weather has been too hot and too cold, and we have a reference to 5 new venues this year, when 6 had been promised.

Bulls will find some hope in the reference to the new Food Director, hired "to drive a step change in Food sales and profitability".

I can't possibly agree with this, since the casual dining sector is widely acknowledged to be over-supplied.

Revolution doesn't appear to be differentiating itself particularly well as a drinks venue, so why should we expect it be able to differentiate itself in food?

There are no prizes for guessing that I'm not at all tempted to dabble in these shares.

On the positive side, net debt is likely to remain at a manageable level - last reported at £4.5 million in the interims - and the shares are superficially cheap against earnings. It's also conceivable that one of last year's suitors will come back with another offer, if they still believe that the EBITDA multiple is cheap.

The Price to adjusted EBITDA  multiple is now about 4.5x (perhaps closer to 5x on an enterprise value basis), and that does seem to be at the cheaper end of the normal range.

5b223f04237c0RBG_20180614.PNG

On the negative side, however, the company looks at the end of the day to be a somewhat ordinary bar chain, with weak…

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Disclaimer:  

All my own views. I am not regulated by the FSA. No advice.

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Revolution Bars Group plc is a United Kingdom-based operator of bars. The Company has a trading portfolio of approximately 60 bars located predominantly in town or city high streets, which operate under the Revolution and Revolucion de Cuba brands. The Company's bars focus on a drinks and food-led offering, and typically trade from late morning, during the day and into late evening. Revolucion de Cuba bars are characterized by their 1940s Cuban-inspired style, with dark woods, traditional bar counters, antique tiles, vintage furniture, Havana-style ceiling fans, and original Cuban artwork and photographs. Its bars are located in various places, such as Cambridge, Ipswich and Norwich in South East; Bath, Plymouth and Southampton in South West; Birmingham, Derby, Leicester, Loughborough and Milton Keynes in Midlands; Cardiff and Swansea in Wales; Blackpool, Chester and Huddersfield in North West; Sheffield, Sunderland and York in North East, and Edinburgh and Glasgow in Scotland. more »

LSE Price
125.4p
Change
 
Mkt Cap (£m)
62.6
P/E (fwd)
8.1
Yield (fwd)
4.5



  Is LON:RBG fundamentally strong or weak? Find out More »


47 Comments on this Article show/hide all

rmillaree 14th Jun 28 of 47
1

In reply to post #374164

Revolution Bars (LON:RBG)

RBG actually has 50m shares in issue. So at c.140p per share at the moment, the market cap is only £70m

Thanks for that Paul that makes much more sense i  - i had two screens  open and was looking at the wrong one of the two when i noted the figure - Useful that Stokopedia has the info if you can check the right page !

My posts were as often all a bit rushed, £70 mill is much more scope for upside, i would still like the company to be on the up though rather than the down and as you say its the annoying things this company doesn't probably do that a  well down company like JDW (hmmm they do also have queue's when busy). I did specifically when doing my company research notice the cocktail waiting time was an issue at Chester (only a  basic 2 for one PC) so a simple system to avoid long queue at the bar should be found. Thankfully my local bar charges less than £2 a pint for beer and the main bar man dude is of the Ninja spiderman type who can pour 4 pints at once whilst not forgetting what you didn't even need to ask for.

Anyway 


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Firtashia 14th Jun 29 of 47
7

With respect to Revolution Bars (LON:RBG) I'm as cynical as Graham, having been stung by it already last year. A lot of companies are pure plays on commodities or forex, the direction of which I personally find impossible to predict. If the authors of today's update are to be believed, the fortunes of this company appear to be a play on the British weather, (not too cold, not too hot), which I find equally impossible to predict. Therefore how is this company any less speculative than those miners and oilies?

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barnetpeter 14th Jun 30 of 47
1

RBG.....made a stonking profit on these last time having first been short and then going long as the nosy buying was obvious. A bid was made two weeks later. Crazy it was not accepted.

This morning was a buying opp I thought. I agree though that a new bidder will not pay 200p. 180p perhaps?

A sell of the business is definitely the way forward here.

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ricky65 14th Jun 31 of 47
2

In reply to post #374134

Hi Paul

I remember our Twitter disccusion on Revolution Bars (LON:RBG) in April where you said that RBG was "bullet-proof".

Link: https://webcache.googleusercontent.com/search?q=cache:5il-cnYyOKAJ:https://twitter.com/paulypilot/status/982611308548952065+&cd=1&hl=en&ct=clnk&gl=uk

Today's profit warning suggests otherwise! There are no guarantees with stocks.

Regards,

Rick

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rmillaree 14th Jun 32 of 47
13

ricky 65

in April where you said that RBG was "bullet-proof".

Nice bit of selective posting there - Paul clearly was clearly referencing the balance sheet strength with that comment.

A Pretty astute comment really as despite the poor performance and the profit warning - the shareprice is actually above the level at the time the comment was made. So the "Bullet-Proof" balance sheet has done its job at minimising downside risk when things don't go as as planned.

There are no guarantees with stocks.

I think we would all agree with this comment :)

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dscollard 14th Jun 33 of 47
4

Revolution Bars (LON:RBG) is also hampered by its poor liquidity , typically around 40-50K a day . That combined with its poor technicals made it a no-go for me. I increasingly observe the "nothing below a 200MA" maxim unless I am very deliberately in a reversal play with very fixed rules good (liquidity being one) or it is in an area where I have good expertise. We are late in a bull market so overreactions are becoming accelerated and more brutal as I suspect there is more crowding around the exits. 

That said, today's price action in Revolution Bars (LON:RBG) is interesting and should give holders some cheer as it reversed rapidly off the decline. I note the big volume spike on 7 June was Artemis taking a much bigger stake. Instis now hold almost 80% of the free float so price dislocations can ironically be more severe if it is the loose hands (PIs and small traders) that are the dominant source of liquidity. 

Today's reversal is oddly bullish despite the bad news.

I know Paul has deep sector expertise in this space and suspect this is one of his "special situations"

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ricky65 14th Jun 34 of 47
11

In reply to post #374239

I think people have missed my point - Paul was implying that the risk with Revolution Bars (LON:RBG) was low because it has a "bullet-proof" balance sheet. Over the years I've seen plenty of stocks fall heavily with what many consider good balance sheets. A company doesn't have to go broke for it to cause damage to a portfolio. This Minervini quote comes to mind - "If analyzing balance sheets were the Holy Grail for stock investing, accountants would be the world’s greatest traders."

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rmillaree 14th Jun 35 of 47
3

In reply to post #374264

I think people have missed my point - Paul was implying that the risk with Revolution Bars (LON:RBG) was low because it has a "bullet-proof" balance sheet.

I did indeed miss your point low risk isn't nil risk - it's simply less risk than higher risk that might be present with no decent balance sheet backup. We all know shares are risky don't we :)

Balance sheet ability to back up shareprice IMHO is very individual to the circumstances of that share. Good point for discussion of facts.



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cholertonandrew 14th Jun 36 of 47
2

In reply to post #374134

Hi Paul, re. RBG your suggestions to management- maybe a bit of Chaka Khan too on the hi-fi late in the evenings?

I think we’re lucky to have both Paul and Graham offering opinions and all the reader comments too- it gives us a lot to think on and help us make our minds up.

Best regards
Andrew

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daveinthelakes 14th Jun 37 of 47
1

In reply to post #374024

Hi Francis,

The Duke Royalty (LON:DUKE) model is well established in North America but I think unique in UK. I hold in my SIPP as although I believe there will be growth I expect a dividend of around 8% in 12-15 months when all the 'partners' interest payments hit the full annual run rate.

They will probably have another placing to raise funds but this is unlikely to be discounted, the last one wasn't. Most of the partners are long established private companies, often 50 years or more, with little or no other debt.

I see great potential for a little leverage but was somewhat dissapointed they have borrowed for this one at 9% albeit lending it out at 13%. I hope that in due course they can put a long term financing deal in place at a lower rate.

The company presentation is worth a read-

http://www.dukeroyalty.com/~/media/Files/D/Duke/documents/investor-presentation-may-2018.pdf?

Dave

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Paul Scott 14th Jun 38 of 47
3

In reply to post #374264

ricky65,

I think we're talking at crossed purposes here.

A mild profit warning today from Revolution Bars (LON:RBG) doesn't affect my long term view of the company at all. Especially as it's not had a CEO for some time, so a soft patch of performance is not much of a surprise.

I still see it as bulletproof, in terms of the great balance sheet & excellent cashflow - providing the economy remains reasonably sound. Obviously if we entered a recession, then profits & cashflow would deteriorate, but would not threaten solvency, even if you model a hypothetical large drop in revenues.

A 5-10% share price move today on temporarily soft trading, doesn't really bother me - actually it's rather encouragingly small. Look at how recent profit warnings have clobbered share prices far more than this, with other companies. Today suggests to me that the RBG shareholder base is now pretty robust - not a jittery bunch of traders, but committed long-term shareholders, who buy on weakness.

There are lots of quick & easy ways I can see for the new CEO to improve operational performance. So it's now all about better execution.

My position size on this one is far too large to even consider trying to trade in & out, so I'm in it for the long haul. Nothing said today by the company has altered anything, as far as I'm concerned, taking a long-term view.

Anyone who thinks RBG bars are not differentiated, should visit one of their newer sites - those £1m fitouts are a very good differentiation, and that shows in the clientele, who are seemingly happy to spend freely.

I'll be proven right on this one eventually LOL!  ;-)

Best wishes, Paul.

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Paul Scott 14th Jun 39 of 47
9

In reply to post #374324

Hi Andrew,

I think we’re lucky to have both Paul and Graham offering opinions and all the reader comments too- it gives us a lot to think on and help us make our minds up. 

Absolutely, I agree. Right from day 1, Graham and I agreed that we would never hold back on criticising shares which the other one owned. It's much better that way, and stimulates debate. Although I do sometimes get a bit cranky (temporarily!) when one of my shares falls out of bed, as inevitably happens quite often when you have 50-60 positions.

Regards, Paul.

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cholertonandrew 14th Jun 40 of 47

Thanks Paul, hope the holiday’s good.

Regards,
Andrew

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ricky65 14th Jun 41 of 47

In reply to post #374354

Hi Paul,

I note the points you made. As a long term holder I can see how a 7.4% drop isn't going to bother you. And I can see how a new CEO can inject some new life into the company. I can also see how new fitouts could make the bars more appealing.

The point I was making is that, sadly, a "bulletproof" balance sheet alone is not going to guarantee investment success.

As a Minervini trader there's not much to like here. The technicals don't satisfy Minervini's Trend Template and the chart is in a long term downtrend. It's got overhang of trapped investors stuck with a loss. That's the complete opposite of what I look for. I understand that your approach is different and of course there's more than one way to skin a cat!

As always, the market (or perhaps a bidder!) will decide if you are right!

Kind Regards

Rick

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TQ12 15th Jun 42 of 47
1

In reply to post #374264

As the majority of BS captions are judgments and NOT facts, that quote is little more than a meaningless soundbite.

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fwyburd 15th Jun 43 of 47
1

In reply to post #374349

Thanks Dave,
I worked with a hedge fund a few years ago who's business model was similar. However they ended up becoming a fully fledged bank three years ago so they could reduce their cost of lending by accessing wholesale rates and using depositor money for corporate lending. Perhaps that's the challenge Duke face?
cheers
Francis

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Zipmanpeter 15th Jun 44 of 47
2

In reply to post #374354

Paul,

Bit late to party in responding (story of my life!) but I bought Revolution Bars (LON:RBG) over 2 years ago as a long term roll out ie as an investor not a trader and was expecting to hold for 5+ years to near national roll out.  So also not particular disturbed by current trading weakness. Clearly the business isn't doing relatively great since other wet led / night time operators seem to be reporting better than it but equally not that bad.


Key phrase in RNS for me was:


  • New bars opening programme delivered to schedule and is performing in line with expectations.

I suspect the big, new bars in big urban centres are doing well whilst the old, small clubs are struggling (ie a continuation of trend requiring the provisions at interims). Understanding this is critical since my investment is based on the assumption that the new bars will be a bigger and bigger part of the estate and will be highly profitable. This is what they IPO'd to do and earlier mgt claimed a 38% ROCE employed on new bars from memory.  


In your correspondence with them (much more likely to be listened to than mine!), can you ask them to improve reporting in this area ie break out pre - IPO vs post or ROCE per cohort.  The (sensible) 5-6 outlet pa roll out plan makes this approach increasingly meaningful and would I think be positive.  (Equally, I would like to understand the emerging 'tail' better. Personally, I would be more supportive if more drastic action is required ie closure /sale to avoid loss of focus and weakening of the brand).

FWIW, personally I expect this share to become increasingly dull but rewarding in the next couple of years as I don't expect any new offers for a while and the traders will gradually fade away.  However, I  remain happy to hold.

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nicobos 15th Jun 45 of 47
4

In reply to post #374354

Re Revolution Bars (LON:RBG)

These types of businesses do have excellent cash-flow - usually it's possible to switch off roll-out quickly if there are problems and divert cash flow to re-investing in the current estate (a defensive move to protect existing profits) or enhancing shareholder returns in other ways.

As Buffet always alludes to - management should be expert capital allocators and if they are not generating a good return (20%+ ROCE in this sector required) from rollout, they need to find a more effective way of allocating capital to enhance shareholder returns. For example, if the shares are seen as 'undervalued', a share buy-back would enhance the EPS.

I would be weary though of describing any large leasehold business' balance sheet as 'bullet-proof' as the operational leverage inherent in servicing a large rent bill means that a small impact on LFL's can have a massive effect on profitability. It can also be difficult to exit sites that become loss-making.

Whilst the sector (wet-led) has held up well at the moment, you only have to look at what's happening with retailers (Carpetright, Mothercare, House of Fraser, Denbenhams, Dixons etc) and restaurants (Carluccios, Jamies, Byron, Restaurant Group) and the number of recent CVAs being issued to see the risks.

There other reasons why these Companies have struggled but you can see how if discretionary spending tightens the 'cheap' rating may no longer apply (if the E in P/E declines).

The sector and shares are generally unloved due to association with the Pubcos which have struggled in the past so there may be value, but in my mind they are potentially cyclical businesses which are at a discount for a reason.

The main catalyst I see for a re-rating is a takeover but with Stonegate the only consolidator (Deltic not credible bidder in my opinion) in the market (unless you own a craft beer microbrewery!) being rebuffed last year, I think that the 'value' could take a while to rise to the surface.

Nico

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Zipmanpeter 15th Jun 46 of 47
1

In reply to post #374554

Paul,

FWIW my only operational thought from a non-extensive site survey (but with a personal ex-P&G Marketing background, gone into General Management) is around product assortment & promotion and your comments around building day trading.

Evening audience target audience are above ave. income/spend young female biased - hence premium Sex in the city cocktail focus. Attracting them is already a big success - since men will naturally follow! However, I don't really know much about evening/night time trade.

To build a premium day trade, in addition to better food they also need to be more inventive and distinctive in the drinks they offer. Especially in the big sites in to town centres near to shopping/offices, need to provide attractive, distinctive, female friendly drinks that fit the brand.

This means non-alcoholic speciality teas plus I think there is an opportunity to promote alcoholic iced teas (eg Long Island) to refresh you from shopping (mostly female) and coffee+shot ideas (can be done both male and female executions) to attract the 'professional white collar crowd with a quasi-business offer at lunchtime.

Critically, these offers require training staff to systematically put out daily, differentiated A boards on the street outside and on the tables with relevant offers of the day by time part - again making the fixed asset sweat harder. Mindset needs to move from nightclub to all day bar!!

Finally, to change perceptions they need to new customers through the doors. Old school on the day flyers and leafleting of office blocks would work wonders in my view.

Lets hope the CEO really gets the thing going as I believe the potential is very good indeed.

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Zipmanpeter 15th Jun 47 of 47

Paul,

FWIW my only operational thought from non-extensive site survey visits (but with a personal ex-P&G Marketing background, gone into General Management) is around product assortment & promotion and your comments around building day trade.

Evening audience target audience are already winning with a bias to an above ave. income/spend young female biased crowd - hence Sex in the city cocktail focus. Attracting them is a big success since men will naturally follow! However, I don't really know much about evening trade.

To build a premium day trade, in addition to better food they also need to be more inventive and distinctive in drinks they offer. Especially the big sites coming to town centres near to shopping need to provide attractive female friendly drinks. This means to promote i)  non-alcoholic speciality teas  both hot and cold to refresh and indulge you after shopping (mostly female) plus ii) and iii) I think there is also an opportunity to push alcoholic iced-teas and coffee+shot ideas (can be male/female/neutral executions) to attract the 'professional white collar crowd' in the middle/end of the working day with a quasi-business offer. These kind offers require differentiated A boards and offers of the day by time part - again making the fixed asset sweat harder and making the offer seem very fresh.

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About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »

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