Small Cap Value Report (Wed 15 Jan 2020) - RBG, QUIZ, MBH, RDT, INCE, TEG

15th Jan '20 by Paul Scott

80 comments 10357 reads

Good morning, it's Paul here.

Just to clarify, for any new subscribers who may not be aware, this is was a placeholder article, which is posted early every weekday, so that readers can add your comments from 7am on RNSs. Then I update the article section by section throughout the morning. Official finish time is 1pm, when the SCVR email goes out, by which time the bulk of the report is usually done. If I have spare time, I then add more sections on some days in the afternoons, which is bonus content that I'm doing in my own time.

Many thanks for the smashing positive feedback yesterday, I really appreciate it!

Today's report will focus initially on Revolution Bars (LON:RBG) because this is one of my big 4 personal holdings. Once I've got my head around that, then I'll look at other companies reporting on trading.

Estimated time of completion today is 2 pm

Update at 14:05 - today's report is now finished.

Revolution Bars (LON:RBG)

Share price: 88.8p (up c. 7% today, at 09:25)
No. shares: 50.0m
Market cap: £44.4m

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

Trading update

Revolution Bars Group plc ("the Group"), the leading operator of premium bars trading across the UK under the Revolution and Revolucion de Cuba brands, is today providing a trading update for the 26 weeks ended 28 December 2019 ("H1 FY20") and also for the important Christmas trading period through to and including New Year's Eve.

Background - this is a turnaround situation under new-ish (18 months), operationally focused management. The share price lost two thirds of its value, after the aborted 203p cash takeover bid from Stonegate, as investors clearly didn't believe the turnaround was likely to work.

What went wrong?

Old management too focused on expansion roll-out of new sites, took their eyes off the ball on existing sites
Brain drain of key site managers & area managers - led to demotivated staff, high staff turnover, and hence deteriorating performance
Distraction of protracted bid process from Stonegate at 203p per share, and interference from nightclubs operator Deltic
Older sites became tatty, as refurbishment cycle delayed
Competition intensified
Cost headwinds

Action taken

Expansion halted
Dividends stopped for the time being to focus on debt reduction
Numerous…

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simoan

15th Jan '20

Not necessarily, it could be that the sites are larger. 50% more revenue but the Hollywood Bowl (LON:BOWL) is about 4x the size of Ten Entertainment (LON:TEG)

As I said, I'm a simple soul. Let's just call a bowling alley a bowling alley. It could also be that Hollywood Bowl (LON:BOWL) is better at selecting sites i.e. where the locals have more disposable income and spend more on average per game. I don't know, all I know is Hollywood Bowl (LON:BOWL) was undervalued when I was collecting at 200p and now it's probably not. However, I don't see any good reason to switch into Ten Entertainment (LON:TEG) as it looks the poor relation of the two to me.

Simple simoan

shopping365

Another company with a different approach in this sector, which I must say I think is a complete punt at the moment, is £PHE. It has developed a system to convert old tyres and non-recyclable plastics into gases including hydrogen. You might like to read all about it here https://www.powerhouseenergy.n...

With a stock rank of 9 and a value rank of 0 it is certainly not one for the faint hearted, but maybe one for the watch list.

Gromley

That's a bit superficial isn't it Si? (Not always a bad thing)

I've not really looked into the comparison, but surely this may well just mean that Hollywood Bowl (LON:BOWL) has the bigger sites?

Their ROCE is approximately the same TEN : 20.5% BOWL : 20.7%

Although whether ROCE is a meaningful comparative I cannot say given that 'Capital' now includes the 'economic value of future committed rental payments'. So that measure may flap in the wind somewhat dependent on lease renewal or break clause dates; especially when we are talking about a relatively small number of sites in both cases.

You would perhaps expect the larger player to be more 'efficient.' That looks broadly true with Bowl winning on Operating margins, 21.9% vs 15.6% (both are good imho)

From just a superficial look I cannot really see which I would prefer, but I'm not sure how far they are really "competitors" or whether they just operate in the same field with non-overlapping monopolies(ish).

If I was specifically looking to invest in bowling, I could perhaps make a case to invest a little bit in each.

That too is very superficial and there may well be a case to consider one a much better prospect than the other, but nothing immediately comes to mind.

Thornabian

Really good piece on £RGB , the only worry I have is, how do they make money outside of Friday and Saturday night?

trident - re Revolution Bars (LON:RBG)

but my heart sank a bit on hearing a new commitment to a 25 year lease, but difficult to comment further without knowing the sites involved. Unfortunately, the saga around leases tends to show you that making long commitments to Landlords is generally not a good idea for most businesses in the current economic environment.

Yes my eyebrows shot up a little to read about them taking on new 25 year leases.

As you say though, it is site specific and whilst I don't know many of the Revolution Bars (LON:RBG) sites at all, the very few I do I would imagine to be relatively easily "passed on".

This, and particularly the last five words of the quote above "in the current economic environment", led me to muse on something.

Maybe, now is exactly the time to be locking in generous lease terms on retail property?

Pretty much everyone and his/her dog seems to be of the opinion that we are witnessing "the time when the internet murders the high street". In fact though, whilst I do not deny the permanent structural changes, I do think there is an element of economic cyclicity here that is perhaps being overlooked.

You probably have to consider here how much faith you have in the management (not my forte) and judge whether they are more likely to be acting stupid rather than smart.

Just as a somewhat related bit of personal experience I was recently vaguely looking at a lease offer on a Pub / Restaurant including accommodation and the rental deal looked to me extremely attractive just for the accommodation. It got snapped up fairly promptly, so I didn't get the chance to review with the tied supply agreements gave much scope to generate operating profits or whether it was a trap for the aspiring pub landlord. It certainly gave me pause for thought.

Back to Revolution Bars (LON:RBG) , when I read Pauls recent holdings review I winced a little as I felt he was still being too trusting (or perhaps even in denial). But perhaps his faith is in the course of being vindicated - although I have no position here, I genuinely hope so.

mojomogoz

Hello Trident

What's the connection Sosandar (LON:SOS) and UP Global Sourcing Holdings (LON:UPGS) ? Other than in the broad retail area?

Its a bit nerve jangly for sure but there seems some clues that UPGS should be performing okay - B&M European Value Retail SA (LON:BME) have expanded a decent bit through new stores (disappointed LFL), its been reported generally that homewares had a good Q4 / Christmas period (where UPGS focused) and the German consumer (their new growth market) had a robust time of it too. Higher £ will have helped costs a little too

Random13

This is probably a really good approach on these high risk results shares. All shares I have held like this tend to fall more on bad or even lukewarm results than they increase on good news. Good brave shout.

GavSmith01

This is my day job so I will try to explain a little about market microstructure in small caps - bear with me!

The RFQ (request-for-quote) system used predominantly in small/micro caps is designed to create liquidity without unduly impacting those compelled to provide it (i.e. the market makers). The orderbook (SETS) system used in the majority of large and mid cap names is structured differently, where instead participants place limit orders with prices and sizes they are willing to deal at, and when a match occurs (i.e. a buy limit order and sell limit order are at the same price), a trade takes place. Spanning the two, there are hybrid RFQ/orderbook stocks where market makers' quotes for NMS appear on the orderbook alongside regular limit orders.

The RFQ system is ideal for small names and I'll try to explain why. The point of having market makers obliged to quote is to provide liquidity where it may not be readily there, i.e. there is not a ready stream of simultaneous buyers and sellers, which is certainly the case in your typical small or micro cap. Remember the market makers (or in this case, more specifically the RSPs, or Retail Service Providers) are in competition with each other for your business, and the price you receive when you send an RFQ is from the best priced market maker in your size at that time. If you were to force market makers to publicly display their RFQ grid (i.e. all the prices/sizes they would be willing to deal at) as Paul suggests, this would make them less competitive, and perversely would actually reduce liquidity.

For example, as an RSP, imagine if as part of my normal course of market making, I'm long 100,000 shares in a stock which has NMS of 2,500 shares. So I'm long, and in size. In this case I want to get back flat, and so I would be a keener seller of stock, and in larger size, than I would be a buyer, where I may not want to price so aggressively. If I had to display my quotes publicly, what do you think would happen? The market (i.e. those watching the orderbook, be it other market makers, or hedge funds, or whoever) would see I was a seller in size and would sell ahead of me, driving the price down. Like showing your hand in poker, I'm at an immediate disadvantage. By showing my hand, my long position is now losing money, but I still have to get rid of it in order to balance my book and continue to make a market. So in order to prevent this from happening, I would take the only sensible option, which is to not quote my full size, instead dribbling out my position piecemeal. As a retail customer this would impact you, since if you were to want to buy say 50,000 shares, or 100,000 shares, you wouldn't be able to do so in one clip, and would have to therefore trade multiple times in much smaller size, and possibly at a wider spread. This is *exactly* how the SETS system works in big caps, but for small retail there it's not a problem as this piecemeal market is more than sufficient for the large majority of retail flow.

(In fact RFQ in very large size is indeed a thing, and is one of the avenues that institutions have to trade with investment banks who market make in significant size - in the tens of millions of £ - in your typical large cap name, with tiered pricing outside the usual bid-offer spread. One of the other alternatives is using an algorithm which splits your order up into time buckets and places small limit orders over the course of a time period to minimise your impact on the market and achieve a better overall execution price.)

As a retail investor, you can always ping the best-priced RSP to figure out what price they are willing to bid you for/offer you stock at in your size, so retail are not as a disadvantage. The bid/offer prices you see quoted on financial websites are the prices and sizes the market makers are obliged to quote in, and are ultimately there to give you an indicative range in which you will be able to trade. Asking for an RFQ to see if they are willing to improve on that is actually a good thing, tightens up spreads and provides significantly more liquidity to small cap investors where years ago there was none.

MichaelFBS

”Quoted share prices - the market is currently showing the prices of RBG shares as - Bid: 85.2p, Offer: 91.0p, an apparently wide spread. However, the published prices on small caps are not the real prices. The whole system is appalling actually, and something needs to be done about this.”

Thank you for this explanation (though I still dont quite understand it all!) and it demonstrates how much more I still have to learn

Also for your insights into £RGB even if it is not one for me.

That's a great contribution Gav, even though I knew some of it already to get a grounded view is really useful.

Even though I know that improved execution prices could be of great benefit, it is not something I have really focussed on - maybe I should.

With this in mind, can I pick up on :

As a retail investor, you can always ping the best-priced RSP to figure out what price they are willing to bid you for/offer you stock at in your size, so retail are not as a disadvantage.

Are you able to provide an "idiots guide" as how how one might go about this? (eg 1 find the best priced RSP & 2 "Ping" them".)

That might be a really basic question, but as I've not really focussed on execution costs not to me. (As they used to say on 'millionaire' - "It's only obvious if you know it")

Hi Gromley,

Thanks for your nice comment. Short of asking your broker, it's really just a case of requesting electronic quotes in different sizes, and seeing what comes back (and don't click the "execute" button when you're given the 15 second timer!) Price level changes will almost always be at round levels. So if you want to trade 50,000 shares, I would try 10,000 first and see what price you get back. Then try 50,000 and see if it's any worse. If the price is higher, try 25,000, and depending on what quote you get back, you may wish to try 20,000, or 30,000 or maybe 32,500 (often price levels change at increments of 2,500). You ideally want to get as much as you can at the price level before moving up to the next price band. If you find the price steadily increasing as you increase your size, it's most likely because there is a limit order on the book (which may even be on NEX, not on LSE) which the RSP will be leaning on, knowing they can cover the balance. Bear in mind that trading a small amount at a lower price, hoping to come back for a second bite at the same price, doesn't always work, as the RSP will have the chance to adjust their pricing between your quotes such that the second time you go back, the quote may be higher, and you may well have been best off doing your full size at the slightly higher price the first time round!

Bear in mind that if you are being offered a large amount of stock without the quoted price being higher than it was for a small amount of stock, this is a sign that the RSP offering this best price is already long of stock which they are looking to get rid of. If they get any longer (i.e. someone else sells to them) then they are likely to reduce their price next to see if they can entice anyone to take their shares off them (i.e. their quote goes down, which will most likely affect the best bid-offer). Basically, if you are being offered a significantly larger amount of stock than is normally available, the next price move is probably downwards. Conversely, if they are only offering a small amount of stock (and you may see the market tighten up such that occasionally you may only be able to get a few thousand shares available electronically), the RSP will be short and if someone buys further, they will raise their price to entice sellers, which will allow them to square off their position.

When trading small caps in size, typically you may find you can only really buy significant amounts on down days, and sell on up days, because the RSPs will typically be long of stock on down days which they are able to readily sell to you, and vice versa on up days. The other point people should take note of is to leverage results days and trading statements, as there will be liquidity around then anyway and the market maker will be doing a lot of two-way business, meaning they will probably offer larger amounts of stock for both buyers and sellers, and possibly with a tighter spread. So if you want to buy more, or sell on a profit warning, do so quickly while the liquidity is there!

Rusty2

My broker is showing currently showing 87.4/90.8, the spread tend to be wider in thinner trading such as early morning before 9am, some traders don’t trade at this time. I suspect those quoted prices were early in The day. Some shares have very wide spreads but other similar size companies have narrower spreads not sure why, is it to do with liquidity?

Also the size of the trade can affect the price, I see trades of 1 share are often outside the spread quoted, not sure why anyone does 1 shares deals. Large orders also can go through at odd prices. This is why Stockopedia prices which are the last trade are a poor way to show share prices in my opinion.

bryans1311

May I echo Gromley’s thanks for these comments Gav. Really useful to know. Even though I’ve been investing for many years, I’m a bit wet behind the ears when it comes to the technical aspects of trades execution.

iwright7

16th Jan '20

I was reflecting on the significance of Ten Entertainment (LON:TEG) announcement that it now has 70% of its estate using the more cost effective Pins and Strings. Not understanding what Pins and Strings technology is, I Googled a manufacturer of such equipment who claim it is simpler/cheaper and gives the customers reasons to play more games and to return . Does seem like a "Game Changer" which is and will both reduce cost and boost sales.

Pins and Strings

Easier for Your Customers - Because they have a better experience in your center and are more likely to return.
CenterPunch deck lighting illuminates the pins, enabling dazzling light shows that will excite and engage your bowlers.
Quietest Operation - Your customers don’t hear the machines running, making for a more pleasant environment in your center.
Keeps Customers Informed - If a problem occurs during play, customers are updated on the scoring monitor and notified when it’s okay to bowl again making for a better experience.
Reliability - Your customers are not kept waiting for the pinspotter to set pins or for their balls to be returned.

https://www.bowltech.eu/en-en/products/pinspotters

Trident

The only connection other than a very broad retail background is that they both don't seem to have issued trading statements at a similar time to the prior year announcement.

For UP Global Sourcing Holdings (LON:UPGS) last years announcement was pretty positive, and there is some general wariness the background to retail sales has perhaps dented upsides.

All speculation at this stage of course!

Yes, superficial by necessity as until yesterday I was not familiar with £TEN - in fact when I see reference to it I always get confused with that basket case Ten Lifestyle (LON:TENG) ! I didn't wake up one day and decide I needed to own shares in a ten pin bowler operator like Hollywood Bowl (LON:BOWL) (it's just a good profitable company with sound management that is throwing off cash) so I have never compared the two companies before. I was only responding to the initial request for comments from Phil to make the point that £TEN didn't seem that much cheaper to me. Personally, I find comparing P/E's based on adjusted EPS to be a pretty blunt instrument for comparing two companies and prefer EV/EBITDA.

You are correct that ROCE is similar and growing for both companies - this is good! However, this misses the point I was trying to make with reference to revenue per site. How efficiently management use the company's assets is better illustrated by ROA which has been 20-40% higher for Hollywood Bowl (LON:BOWL) in the past few years.

Anyway, I'm sure everyone is well and truly bored with this by now. I'm certainly not trying to say that Teg Group Ord (LON:TEG) would make a bad investment!

All the best, Si

jules2k6

Thank you Gav for sharing you professional insight into quotes and pricing.

Thanks for the clarification re UP Global Sourcing Holdings (LON:UPGS) angst.

Last year was billed as unscheduled update given such good trading conditions expectations needed to be raised. Both that year and prior year 2nd week of Feb was time of 'official' update. The 2018 one was bad of course. Not many to go on....I note that mgt have been keen trumpet positive in the RNS which I'm generally wary of...that said my guess is okay trading and I think since warning after IPO the approach has been to guide low-ish and match to outperform. We'll find out in few weeks

17th Jan '20

An additional Ten Entertainment (LON:TEG) efficiency snippet from the Telegraph Questor today....

....As an example of its efficiency drive it has developed a proprietary lane booking system that helps maximise lane utilisation and minimise waiting at peak times, and has recently introduced “iServe”, which allows customers to order food and drink to be delivered directly to their lane.

Seems Ten's innovation continues and is another "Game changer" - I hold. Ian

Paul Scott

18th Jan '20

Hi Gav,

Very interesting, thanks.

Just one small point. I'm not suggesting that market makers should be forced to disclose publicly their positions. I was just suggesting that the RSP prices (not necessarily the size) are publicly quoted, rather than us having to waste time to call a broker or put in a dummy trade to ascertain what the real prices are. This would improve liquidity, because people would be more inclined to deal, if they could see that the real spread, which is often much tighter than the published prices on financial websites.

As an aside, I spent an afternoon at Winterfloods, years ago, and it was fascinating to see the teams of market makers at work. One guy was absolutely manic, I could almost see steam coming off his keyboard, he was doing trades & moving prices of about a dozen fairly liquid small caps, simultaneously, plus chatting to me at the same time! Market makers are basically just traders. There's nothing mysterious about it. And as you say, they're competing against each other (and us!)

Best wishes, Paul.

Small Cap Value Report (Wed 15 Jan 2020) - RBG, QUIZ, MBH, RDT, INCE, TEG

Revolution Bars (LON:RBG)

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