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

14th Jun '18 by Graham Neary

54 comments 15344 reads

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.

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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rmillaree

14th Jun '18

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.

cholertonandrew

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

daveinthelakes

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

Paul Scott

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.

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.

Thanks Paul, hope the holiday’s good.

Regards,
Andrew

ricky65

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

TQ12

15th Jun '18

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

fwyburd

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

Zipmanpeter

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.

nicobos

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

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.

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.

7th Sep '18

Morningstar quote " Revolution Bars Group PLC on Friday confirmed that it is in the "very preliminary stages" of considering an acquisition of nightclub owner the Deltic Group Ltd."

Start of something????

vik2001

No doubt the price action will be crazy Monday am as people try to get in.
Im still not sure but think this must have been leaked early before the official rns release after 5pm today.

Mark Simpson

No doubt the price action will be crazy Monday am as people try to get in.

Surely people buying on the Betaville rumour today were expecting Deltic to make an offer for Revolution Bars (LON:RBG) and therefore to make a quick profit by selling their shares to Deltic. Instead they risk getting a potential big dilution or capital raise so Revolution Bars (LON:RBG) can buy Deltic - a company that Revolution Bars (LON:RBG) publicly disparaged during the stonegate offer don't forget - and a long recovery as they wait to see if the combined group can deliver synergies of operation.

I suspect that the Monday rush may be for the exit not the entrance.

tic_tac_toe

8th Sep '18

I think given most shares are held by institutions then it won't be a stampede exit but RBG will have a big job on their hands to convince institutional support. If the stonergate offer was rejected how would this get voted through?

I think people will hold to see what happens. Stonegate coyld also come back to the table.
Plys a deal with deltic could make RBG and them a powerhouse. Have to learn what the proposal is...

Howard Marx

"RBG will have a big job on their hands to convince institutional support. If the stonergate offer was rejected how would this get voted through?"

Two different events, surely?

The Stonegate cash offer of 203p was rejected by institutions due to perceived undervaluation.

Whereas Revolution Bars (LON:RBG) aquiring Deltic draws attention to this perceived undervaluation only to the extent that Revolution Bars (LON:RBG) finance the acquisition with shares.

Not sure what you mean by 'powerhouse' vik2001, but the problem for the pubs/restaurant industry is that's it's not really scaleable.

A Revolution Bars/Deltic combination would have 130 venues & £130million of revenue.

By contrast, J D Wetherspoon (LON:JDW) has 930+ venues & £1,700million of revenue.

Yet J D Wetherspoon (LON:JDW) earns net profit margins of less than 5%.

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

Revolution Bars (LON:RBG)

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Graham Neary

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