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

Good morning, Paul here!

Apologies for yesterday's report being late - it's now finished, and covers results from;

A fairly detailed look at Luceco (LON:LUCE) and its latest profit warning. Is it a buying opportunity, or should we follow the excellent conclusion of Stockopedia's brilliant 2016 profit warning analysis, by selling first and asking questions later?

Q3 results from Begbies Traynor (LON:BEG) - (I am long)

LoopUp (LON:LOOP) results

Headlam (LON:HEAD) results.

Anyway, to get you started today, here is the link to yesterday's report.

I'm having insomnia issues at the moment, so got up in the middle of the night to write it. Not ideal, but there we go.

Also, please could readers kindly try to avoid having spats in the comments section? It's rather tiresome when that happens! Many thanks. Although I must admit that one (now former) reader flouncing off yesterday (I couldn't work out why), with his parting shot being to tell us that 99% of us are clueless, which gave me the best laugh of the day!

---

Revolution Bars (LON:RBG)

Share price: 148p
No. shares: 50.0m
Market cap: £74.0m

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

Brief comment

I've been wading through the reader comments for yesterday, and quite a few people want me to comment on recent results from Revolution Bars. I was quite pleased that Graham was working that day, as people already know that I'm bullish on the company, so thought it would be interesting to get Graham's take - which I can probably summarise as being lukewarm, at best!

I'm sure you've already worked out that Stockopedia gives Graham & I complete freedom to write what we believe to be true, at that moment in time, on all companies. We don't confer, or go soft on stocks that the other (or anyone else for that matter) happens to own. In any case, I welcome bearish views on stocks that I hold, as it makes me think more, and question whether I'm right or wrong.

There isn't time at the moment to write anything detailed on RBG, but to give you my current thinking, here's a copy of something I just posted in the comments to yesterday's article, which you might otherwise have missed;

• The accounting issues are pretty irrelevant I think - indeed the onerous lease provision will actually boost future reported profits, so could be seen as positive.
• Roll-out of new branches going well (exceeding initial targets)
• Almost debt-free
• Current trading of -2% LFLs is a bit disappointing
• Food - good to see new CEO & COO being focused (by the Chairman) on improving their food offering. This is key, and a big opportunity in my view. They already have big footfall, but if they could fill the bars with diners during the day, then a lot of upside - high margin sales, with little to no additional fixed costs
• This share is woefully misunderstood by the stock market - we can buy now at under 150p, when a cash bidder was turned away at 203p quite recently. So the valuation clearly doesn't make sense.

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

Obviously, as always, that's just my personal opinion (on a stock which I hold a big long position) - which is sometimes right, and sometimes wrong!

---

Restaurant (LON:RTN)

Share price: 255p (up 7.2% today)
No. shares: 201.1m
Market cap: £512.8m

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

Final results

Here are few bullet points, which I posted as a comment below, in reply to a reader. It seems worth copying here, for people who don't read the comments. Not a small cap, but it's in a sector I take a particular interest in, and has interesting read-across for a sector that is really struggling at the moment, due to over-capacity & cost pressures.

For me, this one is glass half empty, but I can see that if people believe the turnaround strategy will work, then they might see it as glass half full. I would consider buying back here, if the company can start reporting positive LFL sales again, but doubt that is likely to happen any time soon. Time will tell.

My impression is that the figures are not as bad as they could be, but the narrative seems to have been heavily PR'd to create a positive impression, when actually profits are falling, and likely to continue falling.

2017 results;

• LFL sales down 3.0%
• Adjusted profit before tax down from £77.1m in 2016, to £56.7m in 2017
• Dividend held at 17.4p, but that not's well covered any more, by adjusted EPS of 22.3p

Current trading - "broadly in line", so slightly below in reality.

Outlook - this is cleverly worded to sound positive, but actually seems negative to me. "Significant price investments" means cutting prices & discounting. So that's bad for profitability, if volumes don't increase faster than prices have fallen. The way I read this, it's a profits warning for H1, with hopes that H2 will be better;

The trading performance of the business in the first half of 2018 will reflect the significant price investments made in the middle of last year.  We expect to benefit from our strategic initiatives gaining further traction as the year progresses.

On the positive side;

• Strong balance sheet, although working capital looks odd, with very large trade & other payables
• Little net debt
• Great cash generation - so if it got into difficulties, it could cut capex to the bone, and ride out a recession, unlike many weaker competitors.
• Management is implementing a turnaround plan, which should help (e.g. closing poorly performing sites, cutting costs)

It's difficult to exaggerate just how bad things are in the casual dining sector, due to big over-capacity & well publicised ongoing cost pressures. So this is probably a sector to avoid altogether, in my view.

I see no reason to close my (small) short position on RTN, based on today's results.

---

Bioquell (LON:BQE)

Share price: 322.5p (unchanged today, at market close)
No. shares: 22.47m
Market cap: £72.5m

Final results

Bioquell PLC (LSE symbol:BQE), the specialist provider of biodecontamination systems and services to the international Life Sciences, Pharmaceutical and Healthcare markets, today announces its preliminary results for the year ending 31st December 2017.

This is not the usual type of stock that I cover. However, it's profitable, and I've written about it before, so no harm in having a quick gander at today's results.

Its defence business is so small, that it's hardly worth looking at. The core business is in the biodecontamination sector.

These figures look good;

• Revenue up 10% to £29.2m, up 6% at constant currency
• Decent gross margin - up from 48% in 2016, to 52% in 2017
• EBITDA up 29% to £5.3m
• Note that the company only capitalised £132k of development spend in 2017. So the gap between EBITDA and operating profit seems to be due to amortisation of historic development spend - i.e. the business is nicely cash generative now.
• Pre-exceptional operating profit up 81% to £2.9m
• Cash-rich, with £14.6m cash on the balance sheet, with no interest-bearing debt.
• Balance sheet overall is very strong indeed, so the group clearly has scope for either special divis/buybacks, or acquisition(s)
• Last year there was a major share buyback, of £41.4m, shown on the cashflow statement

Current trading - looks fine;

The business has started 2018 in line with expectations and the board remains confident in delivering further growth in revenue and profits.

My opinion - I've only had a very quick look, but like what I see.

What's interesting is that, whilst the PER looks high, the price to free cashflow is a lot more attractive.

Also take into account that net cash is 20% of the market cap - and this is genuine cash, it's not smoke & mirrors, in my view.

I don't have time to dig any deeper at the moment, but this one certainly looks worthy of deeper research. Note that Christopher Mills is involved, who has an excellent track record of sniffing our overlooked and undervalued companies. The trouble is, he sometimes grabs the upside for himself with a lowball takeover bid - that happened at Essenden for example, where I was forced out of a nice position at a low premium.

Bioquell has a strong StockRank of 87, which confirms that this one might be worth doing some more work on. Nice chart too;

---

I'll leave it there for today.

See you in the morning.

Best wishes, Paul.