Small Cap Value Report (Tue 15 Aug 2017) - RBG, CGS, MNZS, MMH, ALY

15th Aug '17 by Paul Scott

45 comments 17739 reads

Good morning, it's Paul here!

I have a diary note this week, written this time last year, advising the future me to book a holiday this week, as it's usually very quiet for results & trading updates. Accordingly, I'm jetting off to Spain tomorrow, just for 4 nights, having found a deal for only £300. Our Graham has very kindly offered to hold the fort here, so that I can relax on the beach for the rest of the week.

I'm hoping that newspaper reports of 8 hour delays to check passports at Barcelona airport may be false. It amused me that right-wing newspapers reported that the delays were due to industrial action. Whereas pro-remain journalists reported that the delays were deliberate punishment by Spain for the UK having voted for Brexit!

It all reinforces my belief that human beings are fundamentally irrational, and simply believe what they want to believe. That creates wonderful opportunities in financial markets, as many shares are frequently priced wrongly due to investors being so irrational.

Talking of which, the situation at Revolution Bars (LON:RBG) has just got a bit more interesting today, so let's start with that.

Revolution Bars (LON:RBG)

Share price: 181.6p (up 4.4% today)
No. shares: 50.0m
Market cap: £90.8m

(at the time of writing, I hold a long position in this share)

Merger proposal - there are 2 announcements relating to RBG today. The first RNS was issued by another company, Deltic Group, suggesting a merger of their company with RBG. That was followed by a response from RBG, which I will cover below.

Deltic Group is the phoenix company which rose from the ashes of overly-indebted nightclub operator Luminar, which went bust in 2011.

Deltic starts off its announcement today by describing itself like this;

Deltic (http://delticgroup.co.uk/) is the leading specialist late-night operator in the UK. Since it was acquired by its current shareholders out of the administration of Luminar plc, its predecessor firm, in 2011, management has refurbished the majority of its estate of 57 clubs, including those operating under the PRYZM, Bar&Beyond, Steinbeck&Shaw, ATIK, and Fiction brands.

It is a highly cash generative and growing business of similar size to Revolution, its major competitor in the UK late-night market. Trading…

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fwyburd

15th Aug '17

I totally agree this was foreseeable.

My point is that issuing a release like this, at this time of day, with such little detail and containing market sensitive information that they've known about for a while, is very poor. And no, I have every sympathy for PI's being treated like this by Laura Ashley Holdings (LON:ALY) (or any other company).

Thank you Paul for your review of Laura Ashley Holdings (LON:ALY), balanced as ever. Have a great holiday

Howard Adams

Hi runthejoules

Looking at archive SP threads.

There was a thread CAP XX (LON:CPX) in Oct 2010. Two/three people discussed it.

http://www.stockopedia.com/content/capxx-cpx-supercapacitors-for-mobile-phones-and-pdas-49040/

I also noticed someone mentioned it in a thread recently, but can't recall who that was nor which thread it was on.

I had quite a good look at their website. I've added it to one of my watch lists.

I haven't formed an opinion on it yet, other than if they do have something which has a competitive edge, can they protect themselves and capitalise on it before others swarm in?

EDIT - Oh it was discussed here on the 'I read the news today ...' thread 15 Aug. See post #5 and your own #9 post.

http://www.stockopedia.com/con...

Regards

Howard

bestace

A low PE in a cyclical industry is often a sign that we are at peak earnings rather than an indication of good value. In other words a classic value trap.

My understanding of the concerns around car financing (Personal Contract Purchase plans especially) is that the increasing popularity of these financing schemes has led to a splurge of car sales over the last few years so when all those vehicles come to the end of their lease plans, the market in second hand cars is going to be completely flooded which will push their prices down.

If the modelling of second hand car valuations which underpins the PCP payments has overestimated those residual values, someone is going to be on the hook for impairments and write downs at that point.

I think it is mostly the vehicle manufacturers rather than the dealerships who provide the actual financing, but even so the fall out from decreasing second hand values will have an impact on anyone who is holding significant inventory of used cars, which includes most of the dealerships.

You can already see the impact of this effect on the likes of Avis and Hertz in the US, although their holding periods will typically be longer than those for car dealerships.

That’s even before you consider the ability of already over-leveraged consumers to continue buying cars at the same rate as they have done in the last few years.

More generally, dealerships have a high fixed cost base and low operating margins, which is never a good mix at the best of times let alone on the cusp of a downturn.

Electric cars are a red herring in the short term, although it’s worth noting for the longer term that they have far fewer parts than vehicles with internal combustion engines, so their servicing requirements are likely to be much lower. That has obvious implications for aftersales, which tends to be where the dealerships have the fattest profit margins.

dgold

Thanks.

PPI refunds -where do you get this information from?

B of E - I can't imagine they would do anything to drastically reduce availabilty of finance, although of course I may be wrong.

Electric cars - this relates only to aftersales and it will be a long time before there are significantly less previously-bought petrol cars being serviced. And even with electric cars there will still be some repairs (and MoT tests).

Consumer confidence - agreed but all this could change quickly if the Brexit negotiations take a positive turn as they well could - it looks like the Government is accepting the need for an exit payment and wants to move to smooth transitional and (slightly less smooth) long term arrangements. When this becomes apparent (maybe within just a few months) I expect there could be a rapid improvement in sentiment (and indeed the pound).

clouds

Hi Graham,

Agree it's an interesting announcement from Thalassa Holdings (LON:THAL). I am attempting to work from the H1 17 balance sheet and estimate what value would be left after the sale completes, however it's a little tricky as I don't know the subsidiary level detail i.e. what's included in the sale and what remains.

It does look like if the deal goes through there is likely to be some upside here, but my initial estimates vary quite a bit. Do you mind sharing how you got to 150p?

Clearly you have between $20-30m consideration for WGP, plus the $2m for ARL giving an implied further $8m valuation for the remaining ARL stake. There isn't any significant debt, and given the USD Market cap. of around $23m looks interesting.

I could do with more information on the "Investments in associated entities" line on balance sheet around $8.8m at H1 17, the Loans line (appears to be to a related Trust), how much cash might remain at the corporate level, and operating information / potential for ARL. Welcome any insights you have.

Thanks

Thanks for your comments. About the second-hand prices, I do think the crux of the matter is as you yourself say that the dealers only own the cars for a short time thus mitigating the risk. The PCPs will end gradually so prices won't suddenly collapse. Also the dealers will see this coming so will know to only buy the cars for less.

I think the low operating margin is the best answer. But I'm still not sure why everyone is so convinced that a major downturn is coming. It just needs a bit of positive progress in the Brexit talks and things would suddenly look very different.

Howard Marx

All fair points dgold, I must have suffered a brain freeze on that last post

Another way of looking at the outlook for Vertu Motors (LON:VTU) is to consider the company's operational gearing:

Gross profit £314m
Operating profit £32m
Hence operational gearing = 314/32 = 9.8x

So a 10% drop in sales would eliminate virtually the entire operating profit (-10%*9.8=-98%)

Of course this is too simplified as:

1. you mention the company has a non-cyclical (?) service business

2. not all of the operating costs would be necessarily be fixed if the top line started contracting at a pace of -10%

GJR

CAP XX (LON:CPX) I've done a little research and been watching for some time.

It is an Australian company which develops and owns IPR for supercapacitors , any manufacture is put out to 3rd parties or they have license agreements.

An updated note was published to today http://www.allenbycapital.com/research/research-cpx_19_4014717326.pdf , it doesn't give a lot away - the company is roughly at break even and has enough cash to keep it going for the foreseeable future. In terms of expected earnings they haven't included anything that hasn't already been declared - rather cautious which has so far proven to be correct.

The MD Anthony Kongats regularly appears on Stock Tube - search for him on You Tube , he nearly always says the same thing - everything is going well and some large orders are just around the corner.

Todays announcement although good , it isn't a large enough order (for me) to get too excited about.

The market for supercapacitors (SC) is massive I believe , but there are obviously lots of different ones for different applications.
From what I can see there are potentially 6-10 competitors in this area - all look to be quite new and It's not clear if anyone has a competitive advantage and I'd expect that they might specialise ie.,SCs for wearable IoT , cards , phones etc will be quite different from those proposed to be used in the national grid.
There are also competing technologies - fuel cells , but I believe this some way off if ever being commercially available.

So all in all I think there's bags of potential but I haven't bought into this stock yet as I'd like to see some more orders first and that there is clear momentum, accepting that the price will be higher when that happens. but then I'm a cautious investor.

Deegee Eff

Hi Clouds,
To be honest I have forgotten how I worked it out. But ,there is cash of about $ 3 million there is about is the 24% stake in LSR which is in liquidation and currently worth £6m there is £400,000 stake in Papua Mining and then there is the hopefully $30 million proceeds of the current sale and nil debt. I suspect that the cash position will be higher to account for earnings and there is also a profitable FX position hedging the LSR investment.
I also am confident that the LSR liquidation will yield at least 36p per LSR share as against 31p currently.
I think all of the above will take us into the region of between £1.40 and £1.60
There is of course the question of what he will do with the proceeds.

JohnEustace

@dgold
The PPI effect on car sales has been reported quite widely - see this BBC report from 2013
http://www.bbc.co.uk/news/av/business-24397937/ppi-payouts-help-to-boost-uk-new-car-industry

That's a report from 2013. Surely PPI payments peaked some time ago, which means that buyers of recent years were buying without the benefit of PPI payments. It's hard to believe that a significant percentage of buyers in say the last year were using PPI payments for deposits. Do you have any more recent evidence?

ISAallowance

PPI repayments per year, per FCA website, in millions:

2016 2015 2014 2013 2012 2011

£3,623.60 £4,475.40 £4,475.00 £5,259.20 £6,281.20 £2,134.10

So yes, peaked in 2012, but still running at 3.6 billion pounds last year, latest monthly figures show about 250 million per month, so slowing but still huge.

I guess we can also expect a bit of a surge in 2019 before the August deadline.

cig

I like beaten up story stocks but this one is really hard to like:

- the company has lost 90 million AUD of investor money since inception and for all that a deal that may produce 1m annual revenue is news.
- CEO is passionately economical with the truth in interviews (about basic physics and basic economics).
- CEO is way overpaid for a 4m revenue company.
- every year seems transformational for the company. I expect that to be true for many years to come.

Their patents seem to have some value but not anything transformational that would make supercap a replacement for batteries. The problem with supercap with current tech is that the energy density is very low so they are constrained to niches. A supercap Tesla would probably cost a couple million dollars and have a battery in a trailer the size of a bus. It would recharge quicker though.

Someone may find a way to improve on that (many teams are trying) but somehow I feel it won't be the guys at CAP XX (LON:CPX).

HI cig

Nice summary, thanks for the input.

There's too many better options out there to put any money here at the moment. It's a story stock I feel, at this juncture.

Regards
Howard

The argument that car purchases have been boosted by PPI payments is interesting. I would be interested firstly to know by what proportion the present PPI payouts are effectively increasing average household incomes.

But it's not clear to me why PPI payments should have been used more for car purchases than anything else. Logically then this would be an argument that spending on virtually everything should decrease as the end of PPI claims means there is effectively a reduction in average incomes. So I still come back to the point that I can't see why car dealers' shares have been more affected than the shares of other consumer goods providers.

Beginner

16th Aug '17

Hi again dgold
I think the argument is simply that PPI increased available spend in many households, and cars were one area in which this was spent. Holidays was another.

Going back to the very slim margins, here is a tale I have posted here before, but it does deserve a second telling. A colleague's family ran a Ford dealership for three generations. They had a single site in a provincial town in the grim north. Their trade was generally good. However the manufacturer slowly began to take a greater role in provision and sales from the late 1980s. By the late-1990s my friend was effectively working for the manufacturer, with his ability to trade closely controlled in all possible ways. Terms and conditions were effectively dictated by the retailer, on pain of losing the dealership. The business is now closed, and the site turned over to three smaller businesses, one of which is auto-related. According to my colleague the only way to survive in the business is by benefiting from economies of scale, and lowering fixed overheads, like rents. To me Vertu Motors (LON:VTU) are doing this. The sector is NOT immune from inflationary pressures,very far from it, but there are worse places to be.
(PER = 6.6; Price to book = 0.7; PEG = 1.3 (not great); yield = c4%; ositive cashflow and low gearing)

sparkler

On the subject of Revolution Bars I have to say that I found yesterday's merger proposal from Deltic utterly bizarre. Who would ever wish to merge with an indebted unquoted nightclub operator that has been in administration once before? This proposal is worthless. I took the opportunity to sell my holding in RBG yesterday as the risk/reward looks unfavourable to me. If Stonegate bids at £2.00 I think that is likely to cap the upside since the share price of RBG has consistently told us that the City is wary of the company and that a rival offer looks unlikely. If they walk away I think the downside is greater than the 40p that Paul suggests. Remember that this company has been through three FD's in a few months and one profit warning. None of the directors bought shares when the price was decimated by a relatively mild warning and we all know how operational gearing can work in reverse in an economic slowdown.

It is also worth considering the implications if Stonegate walks. After all, on the face of it, RBG looks like a self-funded roll-out of a successful format with good cash generation. If this proves not to be the case then all bets are off. Remember that RBG was born out of a less than successful bar operator. I hope that the bid goes through for the sake of patient holders but I am simply relieved to have escaped a potentially nasty situation with a small profit.

beatingmrindex

Revolution bars have been a round for over 20 years....

I agree that its unlikely to be take private again as it was floated around the £2.00 mark - however I think its an attractive business that didn't need to be bought out to be a profitable share.

Indeed they have been around for 20 years and from time to time they have produced nasty profit warnings. If you search for 'Inventive Leisure' you will see one in 2003 (around the same time as Deltic was warning on profits under the guise of Luminar before going bust in 2011). Revolution Bars is a re-incarnation of Inventive Leisure with 'cocktail' rather than 'vodka' bars.

Small Cap Value Report (Tue 15 Aug 2017) - RBG, CGS, MNZS, MMH, ALY

Revolution Bars (LON:RBG)

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Paul Scott

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