Small Cap Value Report (Tue 26 May 2020) - CLBILS, RBG, SCS, FOXT

Good morning, it's Paul here with the SCVR for Tuesday.

Estimated timings today - I've started early, so the bulk of the report should be published by 1pm official finish time. Update at 14:46 - today's report is now finished.

Edit: somehow I missed this earlier, but it's important so here we are;

I've been forced out of my index shorts again over the weekend, with a thumping loss. I might leave that alone for a while. Still, I suppose when you make a loss on a hedge, that means it's worked. That's what I'm trying to convince myself of anyway! I wonder if, with the re-opening trade now gaining momentum, maybe people might be tempted to bank profits on their over-priced tech shares? (see interesting discussion in comments section below).

Judging by how busy Bournemouth beach was over the sunny long weekend, it looks as if the public is tiring of lockdown. That could have nice read across for when (some) retailers re-open shortly, and for the hospitality sector next (from July). Some people seem gung-ho about being able to shop & eat out again (I definitely am), whereas others remain cautious. We don't know the split. Opinion polls are useless, because in a situation like this, I think people give an answer that they think they should say, which can be very different from what they subsequently actually do! I'm very interested in what attitudes readers are experiencing in your network of family/friends/colleagues?

It will be fascinating to see how it all pans out. I'm not convinced that enough people would head for the shops & restaurants again to make them financially viable, at least in the short term, and if there are social distancing restrictions (which takes all the enjoyment out of shopping or dining out). If revenues are down say 30%+, then hardly anything on the High Street would make any profits. Leaving sites mothballed & staff on furlough could work out cheaper, particularly for sites which were marginal in the good times. Hence I reckon we might see a tentative re-opening by some retailers, of only their best sites to begin with. That could leave smaller towns as wastelands that potentially never recover. Especially as so many anchor stores (M&S, Debenhams, etc) are closing in marginal towns.

If re-opening goes well, with no significant increase in Covid infections, then investors could be in for some decent gains. If a second covid wave starts, and restrictions need to be re-imposed, then we're in a big mess. I have no idea which it is more likely to be, it's unknown at this stage. I'm trying to plan for both, by keeping a close eye on everything, spreading my risk over several stocks. and being prepared to dive out of the exit promptly if it looks like I've got it wrong.

We should be keeping a close eye on the countries which were hit by covid earlier than us. There do seem to have been some fresh outbreaks in China & S.Korea, so I remain nervous about this.

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Coronavirus Large Business Interruption Loan Scheme ("CLBILS")

It occurred to me over the weekend, that I hadn't covered the Govt support schemes for businesses in these reports. This is highly neglectful, as it could make a big difference to risk:reward for investors. Some companies which might otherwise fail, could survive this crisis if able to access Govt-backed loans.

That would remove the need to raise equity on a distressed basis. Equity could be raised at a later date, once trading has (hopefully) returned to normal in 2021 or 2022. So it's a big deal for investors, because the Govt (i.e. taxpayers) is taking on the downside risk, leaving us with the potential upside. Very nice, I like it, and this might persuade me to push the boat out a bit, and consider investing in higher risk shares.

See below for my comments on Revolution Bars (LON:RBG) which coincidentally reports today that it has taken up a Govt-backed loan via CLBILS through Nat West.

The Govt webpage to see if a company can apply for support is here. I'm encouraging a couple of the private companies that I'm invested in, to see if they can get funding this way.

Here are the key points for the CLBILS. I'll be checking through it, and trying to find listed shares where a successful application might be announced soon.

• Provides support to medium & larger businesses that are losing money & suffering disruption to cashflow, due to the CVOID-19 outbreak
• Turnover over £45m (below this, support is via the CBILS)
• Loans are provided through accredited lenders
• Loans can be up to £25m (turnover £45-250m), or £50m (turnover over £250m)
• Loans can be in various forms: term loans, RCF, invoice finance, or asset finance
• Govt backed partial guarantee against default of 80%
• Applications are via the lender (bank), who then make a decision - based on the business being viable, had it not been for the Covid-19 outbreak, and that providing the finance will enable the borrower to trade out of any short-medium term difficulty

[Source: British Business Bank. I have a feeling that the the £50m maximum might have been increased to £200m, but this is not reflected on the BBB's website. If anyone knows, please let me know, and I'll amend this]

Who might this scheme benefit? Let's put our collective thinking caps on, but the obvious sectors are struggling retailers & hospitality companies. Plus pretty much any other business that needs some extra funding & fulfils the criteria. Importantly, I can see how this scheme reduces risk for banks, hence why they would be keen to use it for decent companies. An 80% Govt guarantee dramatically reduces the bank's risk of a bad debt. This is shown very clearly by Nat West's support for RBG below.

I think this scheme looks highly significant for us, and more work is needed on it. Perhaps the delay in processing claims might have opened up a good opportunity for us?

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Revolution Bars (LON:RBG)

Share price: 21.0p (up 17% today, at 08:44)
No. shares: 50.0m
Market cap: £10.5m

(I'm long at the time of writing)

Banking Facilities update

This is an operator of 74 premium bars, where profitability is heavily biased towards Fri & Sat late nights. Its customer base is primarily 18-25 year olds at peak times, but broader at other times (and in its Revolcion de Cuba branded sites).

Background - after a turbulent couple of years, the business was getting back on track, with improved interim results & a positive trend in LFL sales getting established, driven by site refurbishments. Then Covid-19 struck, and trading ceased from all sites. Management put 99% of staff on furlough, and slashed all other costs. This brought the cash burn down to £0.4m per week. Nat West were supportive (there's a genuinely strong relationship with its bank, given that new-ish management have done what they said they would do, with tangible results), giving a (short-term) increase in bank borrowings. This would only tide the company over for a few months, so it looked as if the bank was keeping its options open. My main worry was an emergency equity fund raising, at a low price, leading to heavy dilution of existing holders.

Update today - in my view the announcement today dramatically improves risk:reward, and I'm surprised at the muted share price movement so far today. This is the most important point;

... pleased to announce an extension to its debt facilities, which the Board is confident will provide the Group with sufficient liquidity for the foreseeable future.

In other words, the risk of insolvency, or heavy dilution, has just gone. That's massively important. for investors, and I think it dramatically improves risk:reward. The company now has time on its side, even if sites are not able to re-open any time soon. Although the longer that goes on, then the more its debt accumulates. Although as time goes on, more smaller competitors are likely to throw in the towel - hence greater market share for Revs. Moreover, I reckon the younger generation is like a coiled spring, and likely would want to party like its 1999 once allowed.

Here's the detail;

New term loan of £16.5m under Govt-backed CLBILS, with an 80% Govt guarantee, and Nat West taking the residual 20% risk

New loan is until 30 June 2023 - 3 years. That should be plenty of time for the business to recover, one hopes.

Repayments are very modest - only £1m p.a., starting June 2021.

Existing RCF reducing to £21.0m (from previously agreed £30.0m until 31 Aug 2020, and step-down to £24.0m). It's reverting to the original £21.0m. Extended by 6 months to June 2022.

This looks like a net increase in bank facilities of £7.5m over the peak period to 31 Aug 2020, and a £16.5m increase over the original £21.0m RCF (which was due to £18.0m at 30 June 2020, before covid struck)

Anyway, it doesn't matter, because the company now has enough liquidity to manage;

Net debt is currently £22.0m. This is up from £17.8m on 11 April 2020. That's about 6 weeks, so at the previously announced £0.4m per week, I would have expected net debt to rise by £2.4m. It's actually up £4.2m over the last 6 weeks. I'm wondering if the excess might be funding the deal with the landlord over restructuring/surrendering leases on loss-making sites?

With the Revised Facilities in place, the Group will have total debt facilities of £37.5m until June 2021 then reducing to £35.5m until at least June 2022. The Revised Facilities are being provided on normal commercial terms.

We've been previously told that cash burn is running at £0.4m per week. Hence the debt headroom of £13.5m equates to nearly 34 weeks, or into January 2021. If the bars are able to re-open pre-Xmas, then the business should survive, albeit with a lot more debt to repay. If bars remain closed into 2021 (very unlikely, in my opinion), then things would look considerably more risky.

Covenants - based solely on cash headroom, set at a level based on the Group's downside scenario (I'm not sure they have published what this is? Previously they assumed a re-opening date of 1 July 2020, which is looking a tad ambitious now, based on Govt publications).

My opinion - this dramatically improves risk:reward for investors. Although clearly it's not out of the woods yet, but could survive into early 2021, even if revenues remain at zero - hopefully an unlikely scenario.

Space furlough scheme? This is another support scheme that the Govt was supposedly mooting - i.e. to provide Govt subsidies towards rents, in return for landlords taking a haircut.

How much competition left when trading resumes? There could be a big bounce, if Revs ends up hoovering up market share, but this is clearly dependent on being allowed to re-open, and not being (nightmare scenario) at the centre of another covid outbreak.

People want to party. Look at Bou'mth beach at the weekend! (smell of urine reported - not me this time!)

Overall I think this share remains high risk, but nowhere near as high risk as it was last week.

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Scs (LON:SCS)

Share price: 146p (up 14% today, at 11:17)
No. shares: 38.0m
Market cap: £55.5m

Re-opening & Liquidity Update

... focused on becoming Britain's best value sofa and carpet retailer.

It's already opened 80 of its stores (on 23 May). I hadn't realised that this was possible prior to 1 June, but it seems to be.

19 sites in Wales & Scotland remain closed.

ScS's website says it has 100 stores nationwide, so looks as if it's reopened all of the ones it can, in England. That's quite interesting, as it goes against my assumption that retailers might only open the most profitable stores first. Might have to re-think that idea.

Nothing is said about how the initial days trading has been (they will have this data instantly, through the EPoS system), so I assume it probably wasn't any good. If it had been encouraging, then today's RNS would have said so. That said, it's far too early to draw any conclusions.

Cash position - very robust, so there are no solvency issues, or risk of dilution;

ScS has been building a strong balance sheet. As previously announced, the Group drew down £12m from its revolving credit facility (RCF) on 17 March 2020. Including the £12m RCF, as at 25 May 2020, the Group held £48.3m in cash.

Net cash is therefore £36.3m. This has mostly been customer deposits in the past, and probably still is.

Guidance/outlook - too early to provide clarity, it says. Not good enough, is my reply! Other companies are giving various scenarios to guide investors, including the key assumptions. ScS could do that too, but has chosen to keep investors in the dark.

My opinion - this is a decent company, with a strong balance sheet. It therefore has no solvency risk, in my view.

Being stuck at home for long periods could, I imagine, trigger a boom in desire & need to renew sofas. Therefore, I think this could be an interesting share to buy now, providing we're prepared to ride a potentially volatile share price. If it drifts back down again, after today's 13% rise, then I might be tempted to pick up a few, possibly.

The downside risk is that fear of unemployment could cause consumers to draw in their horns, and defer purchases of furniture. It's difficult to know either way.

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Foxtons (LON:FOXT)

Share price: 43.3p (up 3% today, at 12:45)
No. shares: 330.1m
Market cap: £142.9m

(I'm long at the time of writing)

Covid-19 Update

I reported on the recent refinancing done by this London/S.East estate agent, here on 17 April 2020. I concluded that it now looks well-financed, and bought some shares myself, as a potential recovery share.

Today's update tells us that branches are re-opening this week, with all expected to be open by 1 June. Furloughed employees are being brought back on a gradual basis. Brought in social distancing measures, and extra cleaning, which all sounds sensible. Soicially distanced, hygienic viewings of properties will resume.

Trading during lockdown - I'm not surprised that sales commissions are down heavily, but wonder why lettings income are down 40%? I thought this was more recurring revenue, but perhaps not. A fall of 40% suggests that a lot of the lettings income comes from new lettings. I probably should have researched this more thoroughly before buying the shares!

The business has continued to support customers online and over the telephone since the lockdown period began. Commissions earned in the eight weeks between Monday 23 March 2020 and Friday 15 May were down 44% on the prior year. Lettings commissions have proven to be more resilient than sales commissions, down 40% and 61%, respectively. Mortgage broking revenues were down 2%.

In any case, this should represent the low point, now that branches are re-opening.

Net cash at end April was £37.1m, ignoring lease liabilities of course. This looks very healthy to me.

Outlook - significant uncertainty, but pleased with resilience so far.

My opinion - I think this is a good recovery share, now it has refinanced. There could be a lot of churn in London properties, with many people perhaps deciding that they can work from home, hence moving further out.

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I'm out of time today. See you tomorrow.

Please bear in mind that I cannot cover everything, hence tend to focus on a few companies that interest me. Sorry if that means things you like are overlooked.

People who say I only write about companies that I own personally, are very obviously wrong. Most days, I don't hold any of the shares written about.

Best wishes, Paul.