Small Cap Value Report (Tue 25 Jul 2017) - RBG, FEVR

Tuesday, Jul 25 2017 by
83

Good morning, ladies & gentlemen! It's Paul here.

I appended some brief additional comments to Graham's report yesterday, on 4 more companies, to kill some time at Glasgow airport. The full article is here.

I had a wonderful weekend in Glasgow. Despite its reputation, I found it a smashing, and very friendly city. The occasion was an Aussie friend, who has lived & worked in London for about 10 years, applying for permanent leave to remain. I was happy to offer moral, and financial, support for a deserving friend. The only place with any Home Office appointment vacancies was Glasgow, so off we went.

Sorry if this is controversial, but the hoops that my Aussie friend was required to jump through seem ridiculous. This included numerous abortive attempts to pass a citizenship test that most of us would find difficult to pass (he's now something of an expert on Henry VIII and Mary Queen of Scots). Why are we putting such obstacles in the way of people who are a natural fit here? Whereas any old random can just wander in from Eastern Europe and seamlessly set up home here. How does that make sense? It clearly doesn't make sense.

Admittedly, my Aussie friend's ancestors must have done something untoward in the 17th or 18th century, to have ended up in a large and sunny penal colony. However, just as I don't feel any guilt for the Boer War, or any other human rights transgressions of the British Empire, his only crime now is singing to Kylie too loudly & out of tune, every weekend between the hours of 10pm and 3am. It used to alarm me, but now I find it amusing, and it gives me licence to sing to Chaka Khan in a similarly tuneless style. There are few things more effective at relieving stress, than howling to your favourite 1980/90s female vocalist, of a Friday night.

Anyway, I upgraded our group to business class, to celebrate the granting of UK permanent leave to remain to a very deserving antipodean case. A familiar refrain from the BA stewardess occurred, just as we passed over Birmingham, "I'm sorry, we've run out, you've drunk all of it!" Well, you've got to get your money's worth. Also, I was celebrating having accumulated enough tier points to move up from bronze to silver. So you have been alerted - a…

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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
175p
Change
-1.3%
Mkt Cap (£m)
87.5
P/E (fwd)
11.8
Yield (fwd)
3.1

Fevertree Drinks plc is a United Kingdom-based holding and investment company. The Company is a developer and supplier of premium mixer drinks. The Company's premium mixers consist of a range of all natural carbonated mixers, including Tonics, Ginger Ale, Ginger Beer, Bitter Lemon and Lemonades. The Company sells a range of products under the Fever-Tree brand, which include Indian Tonic Water, Naturally Light Tonic Water, Elderflower Tonic Water, Mediterranean Tonic Water, Ginger Ale, Ginger Beer, Naturally Light Ginger Beer, Bitter Lemon, Sicilian Lemonade, Lemonade, Spring Soda Water and Premium Cola. The Company caters to hotels, restaurants, bars and cafes, as well as supermarkets. The Company sells its products to a range of markets, such as the United Kingdom, Europe and North America. more »

LSE Price
2130p
Change
-1.6%
Mkt Cap (£m)
2,455
P/E (fwd)
56.6
Yield (fwd)
0.5



  Is Revolution Bars fundamentally strong or weak? Find out More »


66 Comments on this Article show/hide all

bestace 25th Jul 47 of 66
2

In reply to Paul Scott, post #19

Very kind of you to say so Paul, coming from you that is high praise indeed!

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AstonGirl 25th Jul 48 of 66
11

Fevertree Drinks (LON:FEVR) How lovely to get a namecheck in a SCVR, you have quite made my year Paul, thank you
I may have to frame the page ;-)

Off to have a gin & Fever-tree to celebrate

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the0ni0nking 25th Jul 49 of 66
5

In reply to Gromley, post #44

I think it's important to note that "short life assets" are the subject of a specific accounting definition such that to allocate items into such a category would require the view of mgmt to be that they fall within critieria.

If we assumed this short life asset had a "life" of 9 months and cost £900 with a 0 residual value then the monthly depreciation charge would be £100.

If this expenditure related to a contract that had a life of 9 months and cost £900 then the monthly opex charge (assuming they accrual account for it rather than cash account) would also be £100.

If it spreads over financial years both principles result in the same amount of expenditure in each financial year. The only difference is the type of expenditure - one would be depreciation and the other would be OPEX.

I am not a tax specialist (it's only really boring people who do tax; us accountants are just moderately boring) but I suspect there are tax benefits about short life assets whereby you can accelerate the capital allowance you get which wouldn't apply with bog standard OPEX.

I am speculating on this point - since I qualified I've only had involvement in partial exemption VAT from a tax perspective and nothing to do with capital allowances.

If they had done something aggresive on the short life assets then it could have impacted profit but they explicitly rule out this point.

Regarding the supplier discounts - this is aggressive accounting (or poor estimating of usage) - either way it's not good but I feel it is the new FD getting stuff out of the woodwork which he didn't like / thought imprudent. Fortunately for him, he was able to bury that in a message which also improved LFLs over the last 6 weeks which given the market tends to look forward rather than back he has managed to get it out in the open without hitting the SP.

Cheers
0inK

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Samsgrandad 25th Jul 50 of 66
1

In reply to Paul Scott, post #35

No mystery Fishcake, hovering my cursor over the message shows that Matylda grassed you up.
Maybe it was an accident, I'm always accidentally touching something on my phone screen.

Reading further, Matylda has appointed herself as moderator but posts on stuff of limited interest. Live and let live Matylda, just an idea. :-)

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Samsgrandad 25th Jul 51 of 66

In reply to

  

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alpha2 25th Jul 52 of 66
11

Paul, I would still tread carefully with RBG, my sources in the trade in Central London were all experiencing very tough trading conditions up to the start of the Summer Hols, let's hope the tourists come.

As for the food, this type of operation is caught between a rock and a hard place in terms of labour cost and margins. To have chefs, you need to be doing sufficient volume on enough days of the week to support a small team which doesn't happen in most units because they are night time targeted. The alternative is to de-skill the kitchen and use minimum wagers you train yourself and food which is ready prepared and simply needs heating.

The first option is too expensive in terms of labour and wastage, the second results in your lamentable food offering. It is not a soluble problem in the UK marketplace other than at the top end or in exceptional locations.

The root cause of this is the upward only rent review system, ludicrous establishment costs and red tape plus a tradition of landlords taking advantage assuming that there will always be a bigger fool coming along after the present one has gone bust.

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jonesj 25th Jul 53 of 66
2

Another well written article.
Not only is the stock commentary informed & very direct, but the holiday stories are even witty and amusing.

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Gromley 26th Jul 54 of 66

In reply to the0ni0nking, post #49

Thank you for that Oink,

I wasn't aware of it as a defined term, I thought it was just a description they had chosen.

From what you describe it does sound though like something I've used in project accounting and could therefore relate to measuring the monthly progress of start ups. I wasn't though aware that there was any tax treatment implication.

I'm also confused when you say "If it spreads over financial years both principles result in the same amount of expenditure in each financial year." Surely if you depreciate the "asset" over 9 months you could see £400 in Year 1 and £500 in Year 2; whereas if you expense it you'd see £900 in year 1 only?

As you can probably tell, I'm not an accountant and have left the task of consolidating project accounts into the P&L to others!!

Anyway as you say this and the other issue are essentially a case of the new FD - tidying everything up from the situation he inherited.

Probably irrelevant to the investment case, but I'm still intrigued as to what these assets are and in particular whether the whole of the adjustment is really proper to 2016 or whether they are effectively dumping the whole of the discrepancy in 2016 - given that it is not Profit affecting per se maybe that is acceptable?

As I noted, total depreciation (including this misclassification) was £6m in 2016 and £6m in 2015 - I can't immediately think why it would be £5m in 2016 but still £6m in 2015. I guess we may know a little more when we see the detailed FY accounts.


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Cjenkins8 26th Jul 55 of 66
4

Regarding the ex CFO of RBG, I read this recently (from Wikipedia):

"In the field of psychology, the Dunning–Kruger effect is a cognitive bias wherein persons of low ability suffer from illusory superiority, mistakenly assessing their cognitive ability as greater than it is. The cognitive bias of illusory superiority derives from the metacognitive inability of low-ability persons to recognize their own ineptitude"

I don't know any psychology but perhaps this explains why it is easy to get fooled by some peoples over confidence!

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timarr 26th Jul 56 of 66
11

In reply to Cjenkins8, post #55

Or in other words, they're too stupid to know they're stupid. D-K sufferers never adjust their view of themselves regardless of feedback - so, for instance, consistently being in the bottom quartile in exam results never changes their opinion that they're better than most of their peers. Unsurprisingly they're terrible investors but come across with utter certainty.

One useful way of recognising D-K on bulletin boards is that they're not very good at punctuation; theyTend to, randomly Capitalise words for NO apparent Reason! Debating with these people is an Exercise in Utter FUTILITY!!!!

But can be very amusing if you like winding people up ... not that I'd ever do that, of course ;-)

timarr

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hayashi22 26th Jul 57 of 66

I tend to downgrade the value of comments of posters who can't spell. But that is now seen as old fashioned and some excuse it by pointing out that it may reflect haste and maybe easily made errors on a smartphone.

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the0ni0nking 26th Jul 58 of 66
2

In reply to Gromley, post #54

No problem.

I think there is a misconception here that because something is not CAPEX it has to be expensed in the month it is incurred.

Using one example to illustrate the point - rent. This is paid quarterly in advance so in Company A case the following happens:

1st Jan XX: pay £250k rent (for Jan to Mar)
1st Apr XX: pay £250k rent (for Apr to Jun)
1st Jul XX: pay £250k rent (for Jul to Sep)
1st Oct XX: pay £250k rent (for Oct to Dec)

Total paid in the 12 month period from 1st Jan XX to 31st Dec XX = £1,000k

If the company has a financial year end of 30th April then the accounts need to reflect 4 months of rent costs only

Cash paid by the company at 30th April = £500k
Actual expense in statutory accounts = £250k (Jan-Mar) + £250k/3*1 (for Apr) = c£333k

Prepayment taken to the balance sheet = £250k/3*2 (for May-Jun) = c£167k

While rent is an obvious example (and more likely to be material), most finance depts will apply the same logic to costs above a certain de-minimus. The auditors will also need to satisfy themselves that the deminimus is set at a level appropriate to the organisation to ensure the accounts reflect a true and fair view.

I have worked in one organisation that did cash accounting (i.e. when things are invoiced/paid) for a certain product line and everything else was accruals based. Each year we had to show that the accruals basis didn't produce a materially different result to cash basis. As this area of the business grew, we eventually were no longer able to show that and had to take a hit to the P&L to align the methodology with the rest of the business.

I think the point I'm ultimately making is just because something is OPEX doesn't stop it following the accruals principles (i.e. match the cost with the revenue or match the cost over the time that it is epxected to benefit the company - for things like a 12 month IT contract or where there are defined dates this is obvious; for others it can be much more down to mgmt judgement).


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Nothingventured 26th Jul 59 of 66
1

Hi Paul,

Any chance of giving Tarsus (TRS) a look over? The half-year results are out today.

What's interesting about this business is that they have a year on and then a year off, which makes the Stockopedia metrics look odd. For this reason the share might not present on many people's screens.

I'm not sure about the balance sheet though, which is an area where your expertise is useful.

Thanks for your help.

Jim

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Fangorn 26th Jul 60 of 66
1

In reply to Paul Scott, post #9

"Sorry if this is controversial, but the hoops that my Aussie friend was required to jump through seem ridiculous. This included numerous abortive attempts to pass a citizenship test that most of us would find difficult to pass (he's now something of an expert on Henry VIII and Mary Queen of Scots). Why are we putting such obstacles in the way of people who are a natural fit here? Whereas any old random can just wander in from Eastern Europe and seamlessly set up home here. How does that make sense? It clearly doesn't make sense.

Admittedly, my Aussie friend's ancestors must have done something untoward in the 17th or 18th century, to have ended up in a large and sunny penal colony. However, just as I don't feel any guilt for the Boer War, or any other human rights transgressions of the British Empire, his only crime now is singing to Kylie too loudly & out of tune, every weekend between the hours of 10pm and 3am. It used to alarm me, but now I find it amusing, and it gives me licence to sing to Chaka Khan in a similarly tuneless style"

One of the main reasons why some of us voted Brexit - UK Immigration policy discriminates against NON EU migrants, many of whom we have a far closer affinity to than EU countries such as Germany,or France, or Spain.

Not sure about the Chaka Khan drivel but everybody loves Kylie's rocket!

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Fangorn 26th Jul 61 of 66
6

In reply to Paul Scott, post #34

"supercallafragalistic, expecalladocious!"

Nice try!

Always CALI, not CALLA
FRAGil not Fraga
Expiali not Expecalla

Always plump for the CALLA myself . Sheeesh

https://en.oxforddictionaries.com/definition/supercalifragilisticexpialidocious

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Gromley 26th Jul 62 of 66

In reply to the0ni0nking, post #58

Thanks for being patient 0ink,

I'm very familiar with accruals, prepayments etc. (I annoy my charity treasurer no-end by insisting on using them in my part of the organisation) but I just allowed myself to be blind-spotted by the conviction that "inappropriate" depreciation rather than opex means advanced booking of profits.

Which seemingly isn't always the case.

On balance, whilst I think it is all very odd (£1m of £6m depreciation was misclassified , but possibly only in one year and something that on balance doesn't appear possible within the depreciation definitions in the R&A) and will be very interested in being told (or trying to find out from the results) what went on, it doesn't seem like a big issue going forwards and we do seem to have a competent CFO in the chair.


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kbkb 27th Jul 63 of 66
6

Totally on a non-scientific basis.....I bought RBG on the back of the sharp fall as it seemed overdone. Prior to going ahead I checked out the Cambridge Bar, which has been at that site formally years now...and it was very busy...and no background concerns came up in chats with bar staff.
I like the fact that they are growing at 6 new sites a year and the lack of borrowing just made it a relatively risk free purchase for me.
I bought more on the second fall for my ISA...and they are showing a pleasant 25% return.
A takeover bid would not surprise me in the least, so another potential gain.
I always look into companies which have what appears to be an over reaction to a profit warning, and whilst they were on my radar, and I would have bought them anyway after following DYOR ....the fact that Paul is able to give such honest (as in he will give his actual view) and detailed comments on such a stock is very helpful indeed.
So thank you for that Paul

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vik2001 31st Jul 65 of 66
2

that's some madness was up 44%. Paul Scott salute to you sir

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MarkStanton 31st Jul 66 of 66
1

Excellent analysis as always Paul - i bought RBG based on your comments and suspect i owe you a few drinks........

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for Stockopedia.com on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »

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