Small Cap Value Report (Tue 8 October 2019) - BOWL, AIR, YOU, ARB

8th Oct '19 by Graham Neary

18 comments 6590 reads

Good morning! Let’s see what’s in Tuesday‘s RNS.

We have updates from:

Hollywood Bowl (LON:BOWL)
Air Partner (LON:AIR)
YouGov (LON:YOU)
Argo Blockchain (LON:ARB)

Hollywood Bowl (LON:BOWL)

Share price: 231.6p (+2%)
No. of shares: 150 million
Market cap: £347 million

Hollywood Bowl Group, ("Hollywood Bowl" or the "Group"), the UK's largest ten-pin bowling operator, is pleased to announce another strong performance for the year to 30 September 2019.

PBT is set to come in "slightly ahead of market expectations".

The prior forecast for PBT was £20.9 million.

Like-for-like revenue growth is 5.5% - not bad. It's easy to forget that like-for-like expenses tend to increase as well, perhaps by 3% or so. So the LfL revenue growth should be more than enough to offset that.

Checking the archives, I see that rival company Ten Entertainment (LON:TEG) reported LfL sales growth of 7.4% in H2. As a sector, bowling is clearly doing rather well this year!

Capital return

I wonder if management of BOWL read this report? Either way, they seem to agree with my view that the company is stable enough to carry a smaller equity cushion (e.g. see my remarks here and here and here).

The company's net debt at March 2019 was just £5.3 million, versus operating profit of £16.8 million in the previous six months. That debt figure was after payment of special dividends. So it was virtually debt-free, relative to profits.

Therefore, I can support this stance:

The Board remains committed to investing in the business while considering the appropriate use of surplus capital to enhance shareholder returns... Therefore, in line with the Group's capital allocation policy, the Board is considering returning additional capital to the Group's shareholders.

It's a cash-generative, successful business. So long as its sites remain well-invested, and there is no financial stress, I don't see why anything left over shouldn't be sent back to shareholders.

BOWL management have already demonstrated their shareholder focus by paying a couple of special dividends, but maybe they can push the boat out a little bit with their next move?

I suppose…

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MrContrarian

8th Oct '19

My morning smallcap tweet: RWA sprays the blame

Hollywood Bowl (LON:BOWL), £C21, Robert Walters (LON:RWA)

Hollywood Bowl (BOWL) guides FY pretax up over 10%, slightly ahead of market expectations. May return capital to the Group's shareholders.
21st Century Technology (C21) Edinburgh expected to award contract worth c.£2.9m over 5 years.
Robert Walters (RWA) Q3 net fee income up only 2%. Guides FY profit flat YoY. Blames Brexit, Hong Kong protests, US-China tariff war, gilets-jaunes, solar eclipses and cats-playing-pianos strike.

Mh101

Hi Graham,

If you have time to cover £AGFX trading update from yesterday / comments on the IPO that'd be much appreciated, given your sector knowledge!

Thanks

Brookeda

£BOWL are in my tuck away and forget category. They are being very astutely run by management and continue to both grow modestly and bring in great cash flow. The wild card for me is how their golf concept works and whether they are then able to grow a new income stream in that.

Snoo

I would like to request Air Partner (LON:AIR) (I have a long position).
Half year report out today. To me it seems like a miss off the last broker expectations and needs a strong H2.
Share price was up 7% yesterday on its new partnership to provide emergency services but has given it all back today.

shailenpatel

Air Partner (LON:AIR) half year results - seems ok, CEO talking about diversifying revenue streams and hires to strengthen team. Finally getting the 2018 monkey off its back?

The Phoenix

Hollywood Bowl (LON:BOWL) any chance of a ramble on Hollywood Bowl Graham seems to be holding up well given the high street carnage but have they reached maximum growth potential and maybe turning more into an income type stock moving forward.

coniston

Hi Graham,can you take a look at MOTR if time permits,buying back 10% of their equity,David Shelton took full advantage of last buyback to offload 8m shares.

jwebster

Air Partner (LON:AIR)

Bit difficult to read through the results. There is a lot of commentary from the CEO about investments and upskilling, i.e. higher costs.

Group Charter is the weak area with segment result down from 2,932k to 2,033k partially offset by Private Jets up from 1,384k to 1,724k. In Charter, customer revenues look lumpy and prone to micro shifts. The UK and Europe weak. The USA and their JetCard are the bright spots. There were high exceptions last period of 1,400k falling out this quarter, hence underlying has dropped.

At least net cash (ex JetCard) grew from 9,236k to 9,822k so the 6.3% dividend is covered for now.

Air is a Lord Lee holding. Suspect holding Air is a long-term affair, air travel should expand over time albeit at some point carbon tax could change the whole industry. Air’s long term price chart shows quite extreme oscillations, with a long-term floor around 50p a recent floor around 75p and reaching a high of 150p only last year.

For me, it’s a buy the deep dips and hold, if you can withstand earnings fluctuations.

Robert Walters (LON:RWA)

Trading statement, first table demonstrates the cyclicality of their earnings, with the UK -11% and the rest of world growing.

I think RWA is well run. The founder is the CEO and my own experience with RWA has been positive. In Asia, I’ve heard good things about their branches and they seem to be expanding successfully. Balance sheet is strong with net cash.

Recruitment is cyclical so RWA swoons in downturns and then recovers. So you must have a view as to where we are in the cycle.

TamzinPiworld

Air Partner (LON:AIR) here's a video interview with the CEO, talking through the results.

Main features: in line with expectations for the full year, and ahead of where they'd anticipated at the AGM. Investment hit PTP, but an exceptional lessens the drag. Previous investment in the US is bearing fruit in Private Jets, so hopefully the recent investment will pay hansomly too. Consultancy and Training looks positive, which helps diversify away from the lumpiness of Charter. The 2021 order book is looking very strong, so expect to achieve this year's forecasts, and a very good 2021.

Finncap (LON:FCAP) TU today, expect to report rev £14.2m PBT not less than £1.3m (period on period £9.1m £1.4m). Challenging mkt conditions, so resilient performance. Here's a recent investor presentation by CEO & CFO.

(Progressive Equity Research have a new Finncap (LON:FCAP) note out today.)

Graham Neary

re: Hollywood Bowl (LON:BOWL)

Hi - I agree, they need to probably increase the income payout now, since it looks to be mature and cash-generative. Just my view. Cheers. G

cmpeckham

Graham: "I expect that these metrics (ROC, ROE) will deteriorate for BOWL and for all other companies with substantial leases..."

Is that right? I understand how ROC will be impacted, but don't see why ROE should be.

I don't claim any expertise and am happy to be schooled on this, but as far as I understand it, although the details of the calculation will change, there is nothing to say that "R" will work out lower, or "E" will be higher. So why would ROE deteriorate?

abtan

Air Partner (LON:AIR)

I too found the results difficult to go through. A few thoughts to add to the comments above:

"Group Charter is the weak area with segment result down from 2,932k to 2,033k".
If you strip out Depreciation and Amortisation. the Group Charter results actually showed a Year-on-Year Increase from £3,119k to £5,002k. I'm not sure why this wasn't highlighted as I had to work it out for myself from the notes in today's accounts. If anyone can see what I'm missing your thoughts would be appreciated.

The decrease in Underlying Profit before tax from £4.2m to £3.0m is therefore (in my opinion) primarily coming from a £0.9m increase in central costs, which is being justified by new offices being opened. A good foundation for future growth perhaps?
In the small print there was a note about a £283k provision for possible unpaid French tax from prior years. This makes me question what other skeletons might be lurking in the closet and, if it wasn't for point 3. below, I would possibly even consider selling my current holding based on this.
Operating cash flow before working capital movements and after removing the +£2.8m operating cash flow gain for leasing liabilities (incidentally this is offset by -£2.7m under financing activities) was £4.0m. There is limited CAPEX expenditure each year, with the only major outgoing being dividend payments.

Air Partner (LON:AIR) has a current EV of around £44m so to be generating just under 10% of your EV in just the first 6 months of trading, with the expectation of a stronger H2, makes me view this as very undervalued and with a secure 7% dividend.

Cautious holder for now (I seem to be saying that a lot these days).

Cheers

Hi cmpeckham. Good observation. ROC takes the big hit, not ROE. But ROE also gets affected because in the early years, the interest + depreciation combo is bigger than the flat lease expense. This unwinds in later years.

xcity

'The decrease in Underlying Profit before tax from £4.2m to £3.0m is therefore (in my opinion) primarily coming from a £0.9m increase in central costs, which is being justified by new offices being opened. A good foundation for future growth perhaps?'

Or maybe it's the CEO's en suite putting green.

9th Oct '19

Air Partner (LON:AIR)

Yes, higher depreciation charge in H1’19. Looking at the two cost lines they load depreciation into, between half years:

Cost of sales from 8,448k to 5,073k and Admin from 5,467k to 5,154k. So the admin costs stayed flat and cost of sales reduced, but this makes sense as revenues reduced from 16,847k to 12,260k. While we don’t have the full detail to unpick it, I would go with the commentary that Group Charter segment is weak, with revenues down.

Refocusing on the cash flow.

The cash flow statement is mixed as it includes customer deposits for the JetCard. So looking at the movement on the non-JetCard cash balance between half-years, cash moved from 9,236k to 9,822k an increase of 586k. This was after paying the final 3.85p dividend of 2,011k. They are still to pay the interim dividend of say 1.75p which will cost around 900k.

So Air generate enough cash to pay the full 6.3% dividend which costs about 2.9m a year and leaves a surplus which should be north of 1m in a year. Also, they have net cash of 4.3m on the books.

So for now I own as a long term hold, as Air generates cash, holds net cash, pays a good dividend, has some prospects for growth albeit management need to be on their toes with the Charter weakness. Given their international revenue streams some protection from UK domestic travails as well.

Air Partner (LON:AIR)

Hi JWebster

Agreed that one can't split out depreciation between COS and Admin but there is certainly a big movement between the years, which makes it look like Group Charter, on an operating cash basis is doing much better this year. Any idea why?

Completely agree with you on the cash. Air Partner (LON:AIR) seems to make a lot of it! As for the Jetcard cash, I assumed this would be within working capital, so my comment above is looking at cash before working capital movements (the 6,862k figure below). Reducing this by £2.8m to account for the lease representations gives a true representation of c £4m from the first 6 months of trading.

Air Partner (LON:AIR)

The large increase in depreciation was this…

“The reclassification of lease payments from operating expenses to depreciation, interest and repayments of finance lease liabilities has resulted in an increase in cash generated from operating activities of GBP2.8 million. The increase is offset by a matching increase in net cash used in financing activities.”

For the cash position less JetCard I looked at this

Small Cap Value Report (Tue 8 October 2019) - BOWL, AIR, YOU, ARB

Hollywood Bowl (LON:BOWL)

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Graham Neary

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