Small Cap Value Report (Tue 6 Jun 2017) - RBG, COMP, JOUL

Tuesday, Jun 06 2017 by

Good morning, it's Paul here!

Thanks to Graham for another very interesting report yesterday.

Hospitality & Retail sectors

I'm getting increasingly nervous about these sectors, mainly due to cost pressures. Until recently, I had assumed that companies would be able to mitigate cost pressures (e.g. by making efficiency savings, putting up prices, trimming staff rotas, etc). However, I'm starting to think that view might be wrong.

The shock profit warning from Revolution Bars (LON:RBG) (in which I hold a long position) a couple of weeks ago came completely out of the blue. To my knowledge, nobody had predicted that costs would spiral out of control. Some people were bearish on the stock, but for other reasons. Although, with hindsight the departure of 2 CFOs in rapid succession might have been a clue - I must be more sceptical about this in future, and ignore management reassurances. Apparently some other senior finance staff also left at the same time, to join a competitor. So it seems that financial controls slipped. I remain of the view that this should be fixable. Most importantly LFL sales are fine, and margins strong - that's what really matters.

So overall, I think RBG is probably (we can never be certain) now good value at 123p per share. However, that's a huge drop from the level of around 220p where it was just weeks ago - about a 45% drop. Clearly that focuses the mind, and I don't want to be exposed to any other similar situations.

For that reason, I've ditched most of my shares in other hospitality, or retail shares. In the case of Patisserie Holdings (LON:CAKE) I've had a couple of disappointing store visits, and feel the valuation is probably now high enough. It's managed to mitigate cost increases so far, but will that continue? Customer service standards slip if staffing is reduced. The figures look great for this company, but can it maintain such a high operating profit margin? I'm not sure it should try to - because if the operating margin is too high, then customers might become disillusioned with the poor value for money, and decline to visit in future.

I still hold some Fulham Shore (LON:FUL) - but in reduced size. I am…

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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 »

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Patisserie Holdings PLC is a United Kingdom-based cafe and casual dining company. The Company offers cakes, pastries, snacks, meals, and hot and cold drinks across the United Kingdom. The Company's segments include Druckers, Flour Power and Philpotts. It offers products, such as coffee, dairy, fruit, packaging, cocoa and wheat items. It offers cakes in various categories, including celebration cakes, gluten free cakes and wedding cakes. The Company operates under various brands, including Druckers-Vienna Patisserie, Philpotts and Flour Power City Bakery. The Company offers a range of cakes, such as Gluten Free Flapjack, Gluten Free Chocolate Chip Muffin, Cortina, Chocolate Box, Carrot Cake, Cheesecake, Blackforest, Exotic Fruit Tart, Pecan Tart, Citron Tart, Choc Mousse, Mixed Berry Mousse, Raspberry Tart, Madame Valerie Slice, Mille-Feuille, Gluten Free Chocolate Brownie and Gluten Free Marble Cake. more »

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The Fulham Shore PLC is engaged in the management and operation of The Real Greek, Franco Manca and Bukowski restaurants in the United Kingdom. The Real Greek food centre serves dishes of Greece and the Eastern Mediterranean. Franco Manca serves Neapolitan sourdough pizza, which is baked in a wood burning brick oven. Bukowski is a London-based, charcoal-grill restaurant and bar, serving breakfasts, burgers and grills. The Company operates 45 restaurants, comprising 32 Franco Manca, 12 The Real Greek, and one Bukowski Grill franchise in Soho. The Company’s subsidiaries include Kefi Limited, FM6 Limited and Souvlaki & Bar Limited. more »

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  Is LON:RBG fundamentally strong or weak? Find out More »

40 Comments on this Article show/hide all

aflash 6th Jun '17 22 of 40

In reply to post #191649

Good post. Gd results. I hold. Looking to buy more at support point: 50p

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JohnEustace 6th Jun '17 23 of 40

I remember Next (LON:NXT) issued a study on the living wage last year and identified that the main impact on their business would result from increases to maintain differentials.
Two points from that for me.
1. It reinforces that Next have high quality management.
2. They did the work and issued the findings for everyone else to learn from, so management teams that didn't take notice don't get to make any excuses in my opinion.

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fanmail 6th Jun '17 24 of 40

In reply to post #191684

Agreed. I used to go into Philpotts almost everyday when it was owned and managed by Phil Brown. Wouldn't go near it now.

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drvodkaquickstep 6th Jun '17 25 of 40

Investors may be interested in FY results from WYG (LON:WYG) this morning.

Of particular interest is the change in management with Douglas McCormick (ex. WS Atkins (LON:ATK) and £CSG) coming in as CEO to replace Paul Hamer. I was never happy with the old management who I perceived as greedy and it kept me away. Douglas did a sterling job at Sweett Group navigating them through extreme dire straits due to the SFO investigation etc and creating value by means of a significant 42p cash offer from Currie and Brown.

WHI Ireland have a 140p price target as of today (current SP circa 104p) and house broker N+1 Singer note the discount to peer group implying a circa 200p valuation.

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INVESTOR53 6th Jun '17 26 of 40

In reply to post #191604

Except for staff trying to live on the inadequate wages paid at the moment.

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Paul Scott 6th Jun '17 27 of 40

In reply to post #191589


Thanks. Brain storm! I've corrected the date now.

Regards, Paul.

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AnonymousUser252054 6th Jun '17 28 of 40

Patisserie Holdings (LON:CAKE) down 7.93% today. I'd guess at least half of that is due to Paul's analysis,  £10m+ off the market cap from one paragraph.  That's power.

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laurie 6th Jun '17 28 of 40

In reply to post #191669

Re: Brighton Pier (LON:PIER)
Brighton Pier (LON:PIER) is uninvestible for me because Luke Johnson is involved. He is part of the group that made a low offer for Interquest (LON:ITQ) which Paul discusses here- . If a management team controls a significant number of shares, they can force a takeover at a ridiculous price. An investor needs to know that management is trustworthy; Luke Johnson has proved that he is not. He also owns significant amounts of Brighton Pier (LON:PIER) and Arden Partners (LON:ARDN).
For purposes of future avoidance, here is the list of directors of Chisbridge, which is attempting to force the offer for Interquest (LON:ITQ).
Board of Directors:
G P Ashworth
C E Eldridge
D C Bygrave
L Johnson

And Oxford Metrics (LON:OMG) –Management issue themselves options in great quantities.

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Rob McBride 6th Jun '17 29 of 40

In reply to post #191649

Perhaps it's just me, but I wish people would stop making these "special/personal request" posts. Especially if you're just going to blindly copy sentences from the RNS and not provide any commentary of your own on the company. Perhaps consider writing your own assessment on the companies of interest and then others will respond and provide input.

In my opinion, we get top quality analysis 5 days a week from Paul and Graham and we should be happy with whatever they wish to comment on for a particular day.

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Howard Marx 6th Jun '17 30 of 40

In reply to post #191789

Agreed Rob.

The box at the bottom asks me "Howard Marx, what's your view on this article?"

It doesn't ask me what my query or question is.

After all this is a discussion thread, not a question/answer session. Yet in the past 12 months has often become akin to a GP's surgery!

Times move on..

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smatthews1 6th Jun '17 31 of 40

In reply to post #191789

Completely agree Rob, not only that, but the market is built upon difference of opinions, so share your thoughts and let them be known, as there are some very insightful analysis from readers on here.

There is no greater reward than following your own analysis rather than following others.

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rhomboid1 7th Jun '17 32 of 40

I took the view it was better to accompany a request for comment with at least some of the highlights from the RNS to try & indicate why I thought it might be worth reporting on. I'd hoped if Paul or Graham commented that would spark a debate that I would as ever contribute to. My view is clear when I declared my ownership of both.

Sorry if that upset you but sometimes it's difficult to work out what works best for the majority

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fredericktug 7th Jun '17 33 of 40

In reply to post #191774

Good Morning Laurie,

Thank you very much for replying to my post and sharing this information. I can very well see that the situation at Interquest is highly questionable and that it rightly puts the investment community off both the people involved and also rightly cross contaminates into their other interests. In much the same way there can be a premium attached to star management, there should be a discount (and bad small) following management and directors who have treated shareholders badly. Proper due dilligence like this is often lacking in the City!

I managed to catch Pier at around 50p and then sold in the high 90's (don't you wish you sunk all your savings into the ones that double!) and am not invested now but still following progress, which appears very good. I think there will be more acquisitions made there and I like the general direction of travel. I admit this now give me serious concerns that I (and others) could invest capital, be waiting patiently and then find ourselves )perhaps after years) rewarded with a low-ball offer from impatient and opportunistic management. Not on.

I have actually had some dealings with the man himself. He was tough and uncompromising but I respected him. It was a small (by his standards) potential transaction that was not to be at that time, mainly becaise the target company ended up pre-packing. A few years later I then asked him for assistance in a legal action I became involved in (which I won, and also won the appeal!) - his response to this was to offer to assist my opponent/defendant! Nice!

Again, many thanks for sharing this information and noted. Who was that broker that famously titled it's research note (I think it was on Mirror Group) - "Can't Recommend A Purchase"!


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ambrosia 7th Jun '17 34 of 40

In reply to post #191704

the main impact on their business would result from increases to maintain differentials.

i have no idea what hat means

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unwise2 7th Jun '17 35 of 40

To everyone on this thread that has posted they have bought more RBG because its cheap I would suggest you consider what Jim Cramer once said:

"One of the worst trades I ever made was Bethlehem Steel trading at 2x earnings. I said "How low can it go?" It went to zero."

Go to the performance section of this site and see how well QM, VM and just Momentum have performed in the last few years.

RBG's momentum rank is now 2.

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Trident 7th Jun '17 36 of 40

On the subject of Luke Johnson. I read his Sunday Times article last weekend. It was an assertion that a diversified portfolio was not the way to go, as he preferred to believe that running winners in a more limited selection of investments was the better opportunity to make money. He seemed to argue that some analysis showed that holding Bonds or similar, was just as effective as a diversified portfolio strategy (didn't state timescales or otherwise justify this).

I think Paul is possibly in a similar camp of thinking for his own portfolio. Although perhaps Ed Croft wouldn't agree based on his analysis/overview.

Of course there are many different investment strategies out there.

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FREng 7th Jun '17 37 of 40

In reply to post #191689

The share Fulcrum Utility Services (LON:FCRM) options for directors (6 million new shares issued today at nil cost) make me wonder who they are running the company for, themselves or the ordinary shareholders.

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laurie 7th Jun '17 38 of 40

In reply to post #191829

Luke Johnson also owns significant amounts of Elegant Hotels (LON:EHG). I wonder if damage to his reputation was considered when he became involved with the Interquest (LON:ITQ) takeover?

One of the independent directors of Interquest (LON:ITQ) is organizing the shareholder revolt against management. Read about it here: There is currently 20.1 % known support for the 'no, thank you' vote.

disclosure- Interquest (LON:ITQ) I hold a small amount, bought at an average price negligibly but annoyingly above the offer price.

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fredericktug 7th Jun '17 39 of 40

In reply to post #191979

I'm in Elegant Hotels and showing a nice gain but I admit the Interquest behaviour is a significant negative, it effectively makes me want to take a profit and reduce.

PIER is getting cheaper and in my view compelling, but it is also tarnished - I may invest but not in volume - a risk has been added.

Thanks again for illuminating everyone!


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rick 7th Jun '17 40 of 40

In reply to post #191789

Graham quite regularly asks for requests in the small cap arena that might be of interest to readers. And both Paul and Graham can cover or ignore these requests as time and relevance permit. Lots of eyes are better than few, and as most posters here don't seem to abuse this, I myself welcome postings on interesting RNS developments.

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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 on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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