Small Cap Value Report (Wed 7 Mar 2018) - RBG, RTN, BQE

I am very confident this is likely to be a big win, but no idea when - patience needed.

Hi Paul,

Re: Revolution Bars (LON:RBG) I assume you noticed the after hours RNS yesterday:

https://www.investegate.co.uk/...

Another shrewd investor (Keith Ashworth-Lord) has taken the holding up to 10% in his Buffettology Fund. The only collective vehicles I hold are Fundsmith but if I had to choose another it would definitely be this fund.

All the best, Si

Si
You’ll be relieved/not interested to note that none of your red thumbs came from me as an iPad running a Safari browser doesn’t allow me so to do..and if it did I wouldn’t done so as I find your views interesting & thought provoking.

I for one would be delighted if you continued to post but obviously that’s only a decision for you.

PS I still dislike Revolution Bars (LON:RBG) and like Paul & appreciate his views both here and on Twitter..Can’t do a smiley but would put one here if I could

Well done, Si, you're going out in style.

A defeated gladiator condemned to death by the crowd.

Come on Si lighten up, there is no requirement to be a latter day Captain Oates!

Red or blue thumbs do not win an argument or even represent a majority view and who said the majority are always right? You have opinions as do others, don't take it personally, this is not that kind of discussion board.

Thanks for your concern. 

When I first joined Stockopedia it was a much more tolerant place to contribute with like-minded investors. You hardly ever saw a post with red thumbs. It was like a village pub with a good community spirit. Nowadays, it's more like a Revolution at 1am on a Sunday morning, inhabited by too many ne'er do wells  and "you lookin' at me" types with no bouncers on the doors. Not my kind of place at all. Anyway, this is my last word on the matter, and also my last ever post on Stockopedia.

All the best, Si

Paul, thank you for your helpful analyses, which do much to make Stockopedia a valuable resource.

I have a normal policy of not investing in retail businesses, including retail eateries, because of their fickle and over-extended customers. I have therefore passed over the comments on Revolution Bars etc to look at Bioquell (LON:BQE), which at first glance is attractive to me because its customers in the life science and health sectors give the business defensive qualities.

The company has intellectual property (a quick search revealed 3 granted US patents), and the IP may - or may not - give rise to a real defensive moat. It would be nice to see operating margin rising to validate the defensive moat hypothesis.

In 2014/15, the company sold a significant part of its then business for £33.6 million, and the 2016 annual report says: "Strategic review concluded; management restructured and focus on further development and improvement of bio-decontamination business". The increase in revenue from 2016 to 2017 suggests that the strategy has been successful but, because of the change of business focus, historic trends are not available to be analysed.

Paul says that net cash is 20% of market cap, presumably leading to a cash-adjusted share price of 266.4p and a cash-adjusted trailing PE ratio of 27. (Is that a meaningful calculation to undertake?). Even at this price, the PE ratio is too high for me, especially as the absence of a long comparable track record makes future performance particularly speculative.

One for the watch list.

I don't see how any of the Revolution Bars (LON:RBG) comments can be construed as a comment on Paul's position. He's more than capable of analysing the exceptionals and his comment on the onerous leases was simply that it was all to the good because it would make future profits look better.

I do have a problem with some current accounting standards and some companies use of them because they make it very hard for novice, naive or time-poor investors to really get a grip on what is going on. And in the cases mentioned also seem to make it difficult for the companies' accountants to work out the figures correctly.

I note Paul's slightly adverse comment about Christopher Mills: whilst I hesitate to disagree, I have been an admirer of Christopher Mills for some years and have followed him in to Bioquell (LON:BQE) as well as into North Atlantic Smaller Companies Inv Trust (LON:NAS) MJ Gleeson (LON:GLE) and EKF Diagnostics Holdings (LON:EKF)
These have all been rewarding experiences: at least 100% up on all 4 of the above mentioned (and 350% up on MJ Gleeson (LON:GLE) ). I still hold all of these (although I have a rule to top-slice when a share has doubled).
I would therefore suggest that having Mills on the Board is rather a positive, not a negative.
Best regards to all,
Richard

I am, sort of, with Phil on the Revolution Bars (LON:RBG) issues. The 'sort of' is because I think it is virtually impossible, even going through all the notes to the accounts in detail, to know exactly what was going on. And clearly the company don't either as they chose to restate the accounts for 2015 and 2016 for misapplication of accounting standards (Restaurant (LON:RTN) had to do likewise in their results yesterday, but to a much lesser extent). I go into more depth since it seems to be an active discussion, and quote from the accounts; please ignore if it is too abstruse for you. It is for me which is why I wouldn't hold Revolution Bars (LON:RBG).

Also require estimation and judgement

And quite a few other expenditures are exceptional, even if they occur regularly and aren't treated as exceptional by other companies

And onerous leases are very sensitive to assumptions about budgeted cash flow and about the risk free discount rate

A consequence of this is that it becomes very hard to work out the profit/loss on current trading, the extent of investment in new business, capitalisation of anticipated losses and changes in assumptions not directly related to their own business activity.

It's no wonder that everyone concentrates on cash flow.

Thanks Damian,

Very interesting article. A lot of the issues have been discussed here one way or another. However, one I picked up on, and hadn't previously noticed was this:

This is important as the financial performance targets for 2018 management bonuses are based on adjusted EBITDA and adjusted profit before tax according to the latest annual report:

“For the 52 weeks ending 30 June 2018,the financial targets will be measured based on adjusted EBITDA and adjusted profit before tax (“PBT”).”

I think it’s right for investors in any company to ask whether it is reasonable that over £3m of cash spent on fees and payoffs should be excluded from the calculation of their bonuses?

And

By creating a provision, Revolution Bars is expensing its remaining rent obligations on some bars upfront in full and treating the cost as an exceptional one which many analysts and investors are encouraged to ignore.

The future benefits to profits will not be classified as exceptional and will no doubt count towards management bonus targets

Peter

If you're invested in Revolution Bars (LON:RBG) then this is a "must read" article about how they've massaged profits: https://philoakley.sharescope.co.uk/index.php/2018/03/07/can-you-trust-a-companys-profits/

For the record, I apologise for the use of a rude word yesterday. While I think it was a wholly accurate summary of the departed poster, based on content and style of the post, it was inappropriate in the context of this forum.

I was somewhat unhappy at the time because, having reiterated Paul's request for a bit of background on why people want particular shares covered, we had two posts in quick succession just giving Epics, then the "who do you think you are?" message. Instead of getting wound up by it, I should just have laughed at the statement "99% of the people are not or do not hold financial qualifications. "

Won't happen again.

Jon

I think I've made this point about RBG before. It is no easy task to improve the food offering. I expect that the vast majority of the products they offer are ready to reheat foods from the likes of Brake Bros. The only way of dramatically improving this offer is by having chef's capable of preparing and cooking from fresh which neither the culture or equipment is likely to support and would require an increase in menu prices.
This also means increasing the kitchen labour overhead when with all the casual dining chains discounting like crazy there is very little room to manouvre on prices. The other point is that these premises are built to be late night bars first and foremost and being able to convert them to premises which also appeal for all day dining is a very difficult trick to pull off. Weatherspoons do it but only by dint of going for the cheap and cheerful which does not suit the RBG brand.
I would not be expecting any dramatic improvements in margin to come from increased food sales. The money is made from the premium booze.

At the time of the Stonegate bid last year, it was rumoured that they were interested in Revolution Bars (LON:RBG) at an EV/EBITDA of about 5 as this was significantly lower than their internal ration of 9.

Just prior to the bid the Revolution Bars (LON:RBG) ratio at the then price of 125p was 4.5. At the offer price of 203p the ratio was around 7.5 but the expectation was that through stripping out some of the c.£3.6m of Head Office costs and getting procurement synergies this would be reduced to the target ratio of 5.

If Stonegate were to work on a similar premium of 62% this would imply an EV of around £125m requiring an EBITDA after stripping out HO costs and including procurement synergies of £23m to £25m. To get to a projected EBITDA for FY18 of £23m you need to regard all the exceptional costs as exceptional. But assuming this is the case, I would say that the EV/EBITDA ratio still looks favourable for Stonegate.

I have no position but can see why Stonegate could still be interested at a similar premium to their previous approach implying a price closer to the 240p that would likely need to offer to holders to secure acceptance.

The question is whether they feel that both the market and £RBG's prospects have worsened since July 2017. In that case they might want an even greater safety margin than a difference of 4 between their internal EV/EBITDA ratio and the projected ratio of Revolution Bars (LON:RBG) after stripping out costs.

I think that RBG is too good a fit and the commercial justification in a difficult market is too compelling for Stonegate not to have another go at some point. But I think they will conclude that they have plenty of time to see how things pan out.

Exactly zoolook (as regards VLE).

The main subsidiary, Impetus, made £1.83m core PBT in H2 alone (before intra-group interest and charges) with a full 6 month contribution from the large new contract announced in spring 2017.

So Impetus looks as if it can make say a core £4m PBT this year, even without any contribution from the new "opportunities" quoted in today's statement. Call that £3.2m PAT, or £2.7m for VLE's 83%. Then give this a not too demanding multiple of say 13, and that covers the entire current VLE £35.77m m/cap.

Then add on £18.4m of cash - which represents 502p per share - plus £2.3m of freehold property - 62p per share - plus the value of Shire Foods as a nicely profitable business producing £0.83m core PBT, plus something for Sira Defence, and draw your own conclusions as to the potential upside.

Some my recall Paul drawing attention to an extraordinary video interview of Clem Chambers, CEO and founder of Online Blockchain (LON:OBC), a couple of months back. Well, Mr Chambers is offering free pizza to anyone going along to Firezza Pizza in Dean Street W1D 3RY on Wednesday next week to hear his “insights into the blockchain/crypto world”. Someone might be interested to go along and report back. Here’s the link
https://www.eventbrite.co.uk/e...
The SP of On-Line PLC (renamed Online Blockchain in December) shot up in 2½ months from 14p to peak at 152p on 09 January . With extraordinary timing, Mr Chambers raised £1m the next day, but alas, the SP has since steadily dwindled and last night closed 50% off at 72p. Hence, I suppose, an offer of free pizza.

In response to andrea341

Re Volvere the NAV doesnt reflect the value of their subsidiaries (They are not an investment company). If you look at the performance of the subsidiaries and attribute a sensible value (as opposed to an accounting book value) and add that to their cash pile then the sum of parts is well in excess of the market cap.

Re Revolution Bars (LON:RBG) - leaving aside for the moment whether there is a bid premium in the price and concluding that we can't rely on the P&L, the question arises as to whether this is a self-funding roll-out based on the cashflow statement.

At first glance, it would appear that it is as £6.6m of capex is covered by £7.1m of cashflow from operating activities. However, within that £7.1m are two favourable working capital movements. Debtor days have been squeezed from 19.7 days at the end of H1 2017 to 18.0 days at the end of H1 2018. Creditor days have remained constant at around 58 days. The question is whether these ratios are likely to continue to show improvement in future. I would suggest that neither debtor nor creditor days can be sweated much harder. If you add back in the £5.5m of provisions you get to an adjusted operating cashflow of £4.7m - some £2m short of capex. This does, of course, include the £2.2m of cash sent to money heaven in respect of professional fees. So, if you believe that this was all related to M&A activity, then the capex was funded by operating cashflow excluding working capital movements.

Turning back to the issue of whether the price includes a bid premium, I would say that it probably does to the extent that the instis who bought in at 200p and higher (e.g. BoA) remain as holders. Clearly, if they decided to move on or if Deltic sell the 1.5m of shares that they can ill-afford to continue to hold, the share price would take a knock.

I think this is finely balanced for the moment. Would the instis accept a renewed bid from Stonegate at 225p? I suspect they might be happy to a second time round as they appear to be the only credible bidder. I would think that management would certainly recommend it having previously been happy to sell at 203p.

The trouble is that this has, I think, become a riskier hold. In the absence of a renewed bid it has become harder to value as we don't know if the onerous lease provision is kitchen-sinking or whether it will actually be required. Other liabilities (mainly provisions for onerous leases) now comprise 28% of the net assets excluding liabilities.

If I was Stonegate I would wait to see if the price dribbles down to 125p as they appear to have a clear field and trading and market conditions don't seem likely to push the price higher at the moment. As you say, the factor that could improve trading is developing their food offering but, as many competitors are proving, this is not an easy win.

All of the above assumes rational behaviour on the part of the players and, of course, there may be other factors to consider at Stonegate such as the ease of purchasing growth versus generating it organically. Despite their parting shot that they take a disciplined approach I agree with you that they will be back at some point.

Let's hope that if another bid does appear Revolution Bars (LON:RBG) chooses some cheaper professional advisers.

I'm also very keen on comments on Microgen (LON:MCGN) please - I am a happy holder, and think they are good value considering the growth being made.

As per my comments on Matylda's "I read the market oh boy" page today, I just don't get the staggering valuation of Volvere (LON:VLE) at all, in particular the ridiculous NAV 52% premium and also what I see as a higher risk tiny collection of holdings (of which only one is looking good at present) compared to Draper Esprit (LON:GROW) which is on a relatively more moderate premium of 37% and, IMHO, has a much more promising collection of investments, including some big names.

Finally, I can't imagine you'll please comment on Lookers (LON:LOOK) ... but you have commented quite a bit on the car dealers sector quite a bit in the recent past; overall, these results look better than some in the sector, such as Cambria Automobiles (LON:CAMB) which doesn't look promising.

Looks like the markets as a whole are on the brink of another fall in light of Mr Tweet's latest fiasco... good grief.

A second request please for Microgen (LON:MCGN) . Shauney2 has summarised the results above. Comparing to the Stock Report this looks like a significant beat vs. market expectations.

Water Intelligence (LON:WATR) announced this morning that it is raising £4.2m (18% of its market cap) through a placing/subscription at 195p, representing a 4% discount to yesterday's closing price.

The funds will be used for the following purposes.
- Acquisition of its Louisville, Kentucky franchisee. This is said to be immediately earnings enhancing.
- To provide firepower for three further acquisitions of franchisees.
- To fund development of new products, particularly to support its insurance channel and through its partnership with Flo Technologies.
- To provide working capital to support the rapid growth being achieved throughout the business.

Corporate acquisition of franchisees has been a major driver of growth in this business over recent years, and I view this as a very positive development.

Ref RBG and accounting issues.

I couldn't disagree more that the accounting issues are irrelevant, accounting tends to be about the culture within an organisation and that of RBG was rotten. Hopefully that is in the past but the fact that the adjustments will flatter the future results means we have to wait and see if that Rotten egg is fixed. It should be hard to present simple clean accounts that don't mislead - lets be honest RBG have been misleading by the bucketful. This is a p/e based business investing wise to me and the profits compared to turnover are so small that its easy to hide the true state of play if one has the will.

This may work out in favour of the nimble in that if the culture is no longer rotten and or future trading is ok and many have walked away for good reason due to the fact that they don't trust the presented figures then there may be a temporary depression in price and this may be a buying opportunity. This scenario does appear to be playing out - i was tempted to buy back in at 150 before the most recent results having luckily cashed in near the top but i am happy to wait and see at present.

With regard to the fact they are debt free would one agree that there are significant liabilities on the balance sheet that are potentially an issue if cashflow is tight. There is 31 mill owed out excluding other liabilities over 12 months and they have only 13 mill of receivables/cash. This should be no biggie if they churn out future profits at expected levels but its by far from a rock solid balance sheet - i guess thats the risk with RBG compared to a similar company that may own some decent freehold and have a proper decent NTAV that supports say 50% of the shareprice when buying.

WANdisco (LON:WAND)
Any thoughts on the preliminary results and new partnership agreement from WANdisco (LON:WAND) :
* revenue growth - 73%
* "Adjusted EBITDA3 loss $0.6 million (2016: $7.5 million loss)" - does this mean anything?
* "The loss after tax for the year increased to $13.5 million (2016: $9.3 million), mostly as a result of two non-cash items: an exceptional finance loss of $4.0 million and an increased share-based payment charge which was partially offset by the significant reduction in EBITDA loss for the year. The exceptional finance loss arose from the retranslation of intercompany balances at 31 December 2017, reflecting the appreciation of Sterling against the US dollar."
* the currency translation loss sounds okay to me - not an ongoing cost
* the share based payments don't look so rosy. "WANdisco plc operates share option plans for qualifying employees of the Group. Options in the plans are settled in equity in the Company and are normally subject to a vesting schedule but not conditional on any performance criteria being achieved". So more than £2m is paid out to directors and employees in share based payments with no performance criteria and while the company is still loss making. I guess this would make sense if salaries were low.
Any thoughts Paul?

Not a request for a comment, but simply noting that the Restaurant (LON:RTN) statement today shows massively improved reporting over the previous management. Their troubles had been extensively discussed in these columns.

Paul Microgen (LON:MCGN) please. Their Aptitude Software division looks to be doing particularly well. Not much price movement this morning, but they are expensive and on a 52 Week High, so am hoping for some latent PEAD. Ian

Good morning Paul

Another request for Volvere (LON:VLE) please.

On another board, someone posted this analysis a while ago. Since then, there has been the £3.4m share-buyback.

"1. Shire: My profit assumption for H2 is that it will match last year's H2 of £1.02m. We are now past the anniversary of sterling devaluation, so the negative impact on margins has worked through. The re-pricings they have progressively done through H1, and also the fact that sterling in H2 may actually be better than H2 last year, may make the out-turn better. A full year out-turn PBT of £0.78m, I apply a lowly rating of 5* Post Tax Earnings to derive a value of £3.1m.

2. Impetus: I am hoping for at least £3.7m PBT as already explained. I would value this much more highly, and think a market average P/E of 14 times is prudent given the growth and contractual backing for the earnings. Value £41.4m.

3. Perhaps harshly I give no value to Sira.

4. £2.6m of NTAV given that it is mostly freehold property.

That gives a Gross Value of £47.2m, from which I deduct 20% for Minorities and a further 10% for Bruvva's Bonus for the increase in value created....so net net £31.2m. I would expect year end cash to be at least £22.5m, so my total SOTP valuation of the business is £56.6m (£13.89 a share)."

It would be good to get your view on their RNS and the above

cheers,

Francis

Be very interesting for Paul's thoughts on volvere Volvere (LON:VLE), given Graham's bullishness on the stock. My largest shareholding by a mile

Good morning Paul
Welcome back. Not sleeping is really tough. I hope you find a good solution soon.
I would be interested in your thoughts (and Graham's - if I remember rightly this is one of his favourite holdings) on Volvere (LON:VLE) . The results look good (already quoted above) and they are well ahead of market expectations on revenue but:
* all the profit increase comes from the automotive consulting business. The other businesses are struggling
* the trading update says "Whilst the decline in new car sales in the UK has affected the scale of some manufacturers programmes, there remain many opportunities for Impetus in what is a very large sector". So definitely a note of caution there (cautious optimism?) for this year

Disclosure - I hold

Microgen (LON:MCGN) )

Preliminary Results. Revenue up 46% to £62.6m 37% excluding the benefit of recent acquisitions. Adjusted Operating Profit up 43% to £13.6m. Adjusted EPS up 39% to 17.1p. Total Dividend 6.25p an increase of 25%. Cash £19.1m.
PER 27 maybe rich but good revenue visibility with strong recurring revenue which should be enhanced by the need for a new accounting standard for insurers IFRS to be implemented by 2021

Distil (LON:DIS) put out an RNS late yesterday (6th). They issued shares to cover their bill to their broker for the last year. I’ve not come across that before. Is it usual? Is this a good sign or a bad sign? Stocko says they are unlikely to go bankrupt so why did they not just pay out the money, does this indicate the broker has super confidence in them?
Share price has been drifting down since autumn of last year (Stockopedia has them as a falling star) and they put out a lackluster update in January but have up ticked quite a bit in the last week.
I have a small holding left after cashing in on gains last August.

ST Ives (LON:SIV): disposal of the marketing print business looks like it has boosted this share. Up 8% today.

Bioquell (LON:BQE) Please Paul, thought they would have made more ground on those results.

My morning smallcap tweet:

Water Intelligence (LON:WATR), Tyman (LON:TYMN), NATURE (LON:NGR), Mysquare (LON:MYSQ), Volvere (LON:VLE), Palace Capital (LON:PCA), WANdisco (LON:WAND), Mirada (LON:MIRA)

Water Intelligence (WATR) placing at 195 (4% discount) for the acquisition of the Louisville, Kentucky franchise and working cap.
Tyman (TYMN) placing by bookbuild to fund the acquisition of Ashland Hardware.
Nature Group (NGR) in advanced discussions with a preferred bidder having reached agreement on indicative terms and pricing on firesale of O&G division to cut debt. Its lender will wait to end of April 2018.
MySQUAR Limited (MYSQ) The Bell of Doom rings as MYSQ turns to death spiral finance of £2.1m ostensibly to fund a potential acquisition or investment into a company that is developing mobile payment services. If it's for an acquisition why do theyneed the cash now?
Volvere (VLE) FY trading. Rev & preax up substatially due to Impetus Automotive. Shire Foods profit down - "we are investing in Shire so that we have the capability to grow. We expect revenues to increase in 2018 and with that, profitability, although this will depend on our ability to contain the effects of higher raw material and labour costs." NAV 656p (end H1 623p). I hold.
Palace Capital (PCA) increased interest rate hedges to 70% of drawn debt. Will inc av cost of debt from 2.9% to 3.4%.
Wandisco (WAND) Fusion will be sold as a standard component on Alibaba Cloud. WANdisco's first OEM agreement in China significantly expanding addressable market.
Mirada (MIRA) takes a secured one-year loan facility from a shareholder for up to £3m at 15%. FIFTEEN PERCENT! "The Directors are confident that as a result of its pipeline of potential new customer contracts and the expected revenues from its recently won contracts now being implemented, the Company's cashflow position will improve and it will be able to satisfy all debts as they fall due."

Trading update for Volvere (LON:VLE) a turnaround specialist today :-

The Group expects to report record revenue of approximately £43.2 million (2016: £33.0 million) and profit before tax of £3.22 million (2016: £1.94 million).

The Group expects to report increased year-end consolidated net assets per share (excluding non-controlling interests) of approximately £6.56 (31 December 2016: £6.17) and Group net assets of approximately £26.0 million (31 December 2016: £26.6 million). Of the Group net assets, cash including marketable securities represented approximately £18.4 million (31 December 2016: £20.1 million), of which marketable securities represented £6.3 million (31 December 2016: £nil million). The level of cash including marketable securities is particularly pleasing given that the Group repurchased £3.46 million of its own shares in the year.

Full year end results on 25th May

Lloyd

Morning Paul, glad to have you back with us. Good luck sorting your sleep hygiene issues out, I used to have insomnia myself and it's so disruptive.

I'm sure we'd love to hear your thoughts on tariffs, Trump, Cohn etc, but I'm also requesting WANdisco this morning, which you briefly held: delivers revenue growth of 73%. up 45% year-on-year to $22.5 million (2016: $15.5 million) Cash overheads contained at $24.5 million (2016: $23.4 million). Still lossmaking: Adjusted EBITDA3 loss $0.6 million (2016: $7.5 million) but probably not for long, as...

No numbers for the deal but there probably doesn't need to be: WANdisco (LON:WAND) - LAUNCHES OEM SALES PARTNERSHIP WITH ALIBABA CLOUD -WANdisco Fusion to be embedded as a standard component in selected Alibaba Cloud solutions, first OEM agreement in China significantly expanding addressable market.

For the uninitiated, Wandisco is a currently-unique solution that enables instantaneous uploading to the cloud through some tech jiggery-pokery.

I hold, but not enough evidently!

Results out for building components supplier Tyman (LON:TYMN) this morning together with an announcement of quite a big acquisition in the US and associated placement of 10% of their shares via an accelerated book build with institutions (presumably leaked as the shares fell 4% yesterday!)

https://www.investegate.co.uk/tyman-plc/rns/final-results/201803070700079091G/

https://www.investegate.co.uk/tyman-plc--tymn-/rns/acquisition-of-ashland-hardware/201803070701019094G/

Decent enough results. Possible concern they’re buying at the top of the market cycle and expanding into the competitive US market further stretching the balance sheet.

Also an update from Volvere (LON:VLE) , one of Graham’s holdings.  Record revenues and profitability reported (though not sure what market expectations were).

https://www.investegate.co.uk/volvere-plc--vle-/rns/trading-update-and-notice-of-final-results/201803070700069074G/

Gus.