Small Cap Value Report (Tue 2 Oct 2018) - RBG, TET, SCS

1st Oct '18 by Paul Scott

30 comments 10800 reads

Good morning,

This is what I intend reviewing today;

Revolution Bars (LON:RBG) (in which I hold a long position) - preliminary results

Treatt (LON:TET) - trading update

SCS (LON:SCS) - preliminary results

DX (Group) (LON:DX.) - preliminary results - sorry, I ran out of time, so didn't get round to looking at this after all.

Revolution Bars (LON:RBG)

Share price: 123p (down 1.7% today, at 10:16)
No. shares: 50.0m
Market cap: £61.5m

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

Preliminary results

Revolution Bars Group plc ("the Group"), a leading UK operator of 76 premium bars, trading under the Revolution and Revolución de Cuba brands, today announces its results for the 52 weeks ended 30 June 2018.

Where to start with this?! This is a classic case of a share where some investors will see negatives, and others (including me) see a turnaround opportunity, with the negatives already priced-in to the share price.

Larger competitor, Stonegate, tried to buy RBG last year, with a 203p recommended cash bid. Very unusually, RBG's larger shareholders then turned down this bid, as undervaluing the company. I'm struggling to think of that happening before, as recommended bids are not usually recommended, unless management has agreed the terms with major shareholders. So a very unusual turn of events.

Negatives

Why has the share price slipped so far down, from the 203p cash bid approach last year, to only 123p now? Partly it's the bid premium coming out of the price of course. But also, here is a list of the things that have gone wrong in the last year;

Management distraction from Stonegate (and Deltic) bid approaches - this is a perfectly valid point in my view - business is bound to suffer, if a small management team is spending a lot of time handling a takeover bid & other approaches.

Lack of leadership - the outgoing CEO (mark McQuater) left on 18 Oct 2017. The new CEO (Rob Pitcher) joined on 25 June 2018. So that's over 7 months without a proper CEO. Again, for a smallish business, that's bound to…

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HornBlower

2nd Oct '18

on Revolution Bars I think the new CFO has been quite aggressive in adopting much harsher accounting policies which have resulted in a number of negative restatements to historic numbers but will give a tailwind to profits for the next few years. the new financial disclosure is very good. remains to be seen if new food director can make a difference. although I don't like management blaming the weather generally the extreme cold and extended heat wave (and World Cup) must have been a headwind for their type of bar and no CEO for 6 months won't have helped. All in all operating profits flat on last year not a bad result. Share reaction looks like the market is giving the new CEO a chance to fix things. Long and happy to hold as potential upside more than downside from here.

Paul

did you see one of the restatements at RBG is the uncleared debit/credit card payments from last few days trading have been moved to receivables, previously classified as cash. £1.3m one off reduction in cash. Good example of new CFO putting in place robust accounting policies.

dscollard

on an apropos, notice that Funding Circle Holdings (LON:FCH) is down 10% today and below its IPO price: I have used them in the past as a bit of a bond proxy but wan't overly impressed with their practices and operations.... increasingly I don't opt into IPOs as price action in year one seems to follow a similar paths.
I prefer to see good signs of exits by the loose hands and bottoming of price action before taking positions.
One for the watchlist ... maybe

SundayTrader

Not familiar with the relevant standards myself, but I would have thought uncleared card payments should count as cash. Receivables surely is payments where you may not get paid if the debtor gets into trouble, while an uncleared card payment is one that has already been approved by the debtor's bank. Do Revolution Bars (LON:RBG) have a lot of card payments that the bank subsequently rejects?

barnetpeter

I am afraid I am not sure Paul is not looking at RBG as objectively as he does on other stocks. No criticism intended at all.....I just think there is much more downside risk here than is suggested. I think the business is not as robust as they say and resolving the dire food offer is not as simple as some think.

I did very well out of these on the bid...it roared well above the 203 price at one stage. I would def be a buyer towards the 100 pence level but I have a higher risk appetite than most.

garbetklb

National Milk Records National Milk Records (OFEX:NMRP) - irrespective of what one might think of the business, it's pretty academic as there is close to zero liquidity. It's just about the least liquid stock I've ever tried to buy!

I agree, a very high quality receivable as already authorised by card provider

rmillaree

Ref Tesla

production figures out today for 3 months ended sep and the numbers are bang on the money as far as the consensus estimates (50-55k model 3's slightly beaten) - model 3 deliveries in the period were double the level of all previous periods to date. so hopefully the extra sales will eat massively (but probably not entirely) into their ongoing cashflow negativity.

Interesting fact that the model 3 was the top grossing car in the US for August (and likely September too) - ignoring pickups - so the comments about the company not being able to mass produce cars will hopefully now slightly diminish.

finally they delivered more cars than they produced so the rumours about them not being able to sell the vehicles due to lack of buyers or the cars not being fit to be sold seem to be wide of the mark.

I guess none of the above will change the minds of the non believers one iota at present, in some respects till they are decently cashflow positive and profitable on sensible non adjusted silly adjustments profit and loss wise i would expect most bods not to be convinced the company justifies its premium rating.

Now if only Twitter would ban Musky then ..........

mmarkkj777

Paul,

A great report on Revolution Bars (LON:RBG). Thanks.

I'm sorely tempted to take a holding, as I can see value at the current price and the new CEO seems to be making elbow room for a damn good shot at delivering results over the next 6 -12 months.

I'm watching for a good entry point.

Beginner

Quite correct. I tried to purchase half a dozen times over the last two years. It is nearly impossible. (But a cracking niche business)

Effortless Cool

There's a certain irony in National Milk Records (OFEX:NMRP) having no liquidity.

Very good, EffortlessCool..........................!

Paul Scott

Hi BarnetPeter,

I am afraid I am not sure Paul is not looking at RBG as objectively as he does on other stocks...

Well, I tried my best, by starting the section on Revolution Bars (LON:RBG) with a massive list of every negative point I could think of!!! Headed, "Negatives" in large font!

The new food offering has already been launched actually. I've not tried it yet, but this might be a good excuse for me to pop down to my local and have a meal & a couple of pornstar martinis!

When I met the (fairly) new CFO, formerly from WalkAbout, he commented in passing that RBG makes "staggering returns" from its bars. I find that people often form their view on RBG based on what their local bar is like. Some of them are starting to look like they need a refresh, which the CEO mentions in today's report (e.g. Bournemouth, Brighton). However, if you look at the new sites, e.g. Reading Rev de C, it's fantastic. They're doing £1m fit-outs on the new sites, so they look the absolute business. And with time, the new sites become a larger proportion of the total.

With decent management, there's every chance performance could return to growth, in my view. Remember this company has basically been rudderless, in terms of management, for 7 months. It's actually quite surprising that it's managed to perform as well as it has, without key management.

Anyway, time will tell, nothing's guaranteed. I think risk:reward is leaning towards reward, on a turnaround. You don't. That's fine, it's what makes a market! But I don't think your comment that I'm not being objective is fair. I wrote about both the negatives and the positives, then gave an opinion. Which may turn out to be right, or wrong, we'll have to wait & see!

Regards, Paul.

Aislabie

The Revolution Bars (LON:RBG) summary is still that management - who know what is really going on - backed a sale at 203p.
The shareholders were wrong to reject the management advice, and getting back to 203p is going to be a prolonged struggle.

Hi Aislabie.

I don't mind prolonged struggles if I think the odds are stacked in my favour. A previous value of 203p per share means that currently the intrinsic value of the company could well be greater than the market cap, due to increased sites in-between times. The shareholders were, perhaps, wrong at the time to decline the offer, but the situation now looks like a buying opportunity, and with a revitalised exec team it could well go from strength to strength.

So I think the CURRENT summary is: was misguided, had a bad correction, now looks like value if the new management team can harness the potential.

Gromley

Hi Paul,

I had similar thoughts to BarnetPeter.. No criticism whatsoever of the way you very clearly laid out the pros and cons - excellent as ever, but when if came to your conclusion I was personally somewhat reminded of some of my own spirited defences of holding "value traps".

RBG escapes being given the value trap label by stock primarily because of the fantastic "Gross Profit to Assets ratio" contributing to the quality measure.(Although that might not be a great measure in this case given that the bar staff are really a variable cost rather than an overhead).

Perhaps though the thing that most struck me was your statement :

My view is firmly that this is probably a recovery situation, but we'll have to be patient to find out.

Somebody said yesterday (I think) that whenever they catch themselves using the word "hopefully" they realise it is time to sell in the current market - I have similar thoughts about the word "probably" at the moment.

As you say though we each reach different conclusions and yours and Graham's work here every day are a tremendous resource to help people make their own decisions, but they won't all be the same.

I'll keep my eye on RBG but I don't see the attraction right now.

mojomogoz

On National Milk Records (OFEX:NMRP) ....

I read up on this company for first time today as seems a little odd and interesting. Does anyone know it a bit?

Underlying profit improvement this year despite falling revenue is driven by an even bigger cut in Admin expense. From the data given its hard to understand why. There's a hint the 2018 report that it could be through a cut in R&D...if so that would be hefty and perhaps as much as £3m suggesting projects shelved.

Any light from anyone that knows a bit more?

abtan

3rd Oct '18

Paul,

Thanks for the very in-depth review of Revolution Bars (LON:RBG)

I couldn't agree more with everything you wrote, eg:

The CEO is saying all the right things (much better than previous reports), including areas for improvement.
I do believe the unusual summer distorted LFL's (a World Cup and they don't have TV screens is clearly going to have an impact)
I'm pleased that expansions are slowing down so that they can get everything in order.

Operating Cash flow (before changes in working capital) is c.£8.5m...which is great for a company valued at £67m and gives me confidence that the balance sheet is significantly protected, even if there were to be further LFL sales declines.

A further point to add is that I follow Revolution Bars (LON:RBG) on twitter. I did't realise I had been following them as they never actually posted anything. However, recently I started receiving tweets on their latest food offerings, which do indeed look appealing. Retweet and likes are still low, but I am seeing a clear improvement in these metrics over the last couple of months. Fingers crossed.

Yes, I hold

GLAH

Edward John Canham

10th Oct '18

Deltic off :-

https://www.stockopedia.com/share-prices/revolution-bars-LON:RBG/news/revolution-bars-termination-of-discussions-urn:newsml:reuters.com:20181010:nRSJ6544Da/

Hardly a surprise.

beatingmrindex

And a good thing - Deltic wanted to be bought then the would in turn run the company... No idea why the proposed merger with Stonegate was rejected.... Will be interesting to see what happens to the share price in the morning...

Small Cap Value Report (Tue 2 Oct 2018) - RBG, TET, SCS

Revolution Bars (LON:RBG)

Negatives

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Paul Scott

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