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Small Cap Value Report (Tue 28 Feb 2017 – Part 1) – RBG, BOO,

Tuesday, February 28, 2017 7:46
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Good morning!

Brand new Stockopedia charts

The technical guys at Stockopedia HQ have been busy working on completely new charting software, for a long time now. Well, today is launch day! I had a preview last night, and it’s a massive improvement on the existing charts on this site.

Ed is doing the launch in a webinar at 1pm today. The webinar sign up link is here. There are already a large number of people signed up, so there’s clearly lots of interest in the new charts.

Whatever you think of charting, it does measure investor sentiment. So combining some analysis of the chart, with strong fundamental analysis, makes a lot of sense to me. I’ve certainly been more willing to run my winners, and tolerate more stretched valuations (in certain circumstances) recently, after reading the excellent Mark Minervini book on super-performance stocks – don’t be put off by the spivvy-sounding title to the book, as it’s an excellent read, highly recommended. He relies on some simple charting techniques to time his buy amp; sell points.

There are a lot of interesting trading updates amp; results out today in our small caps universe. Therefore both Graham amp; I will be writing reports today. I know it’s a pain when we deliver 2 separate reports, but the logistics of it currently necessitate that, otherwise chaos will ensue if we try to merge lots of sections into one report.

Graham’s report is taking shape here.

This is our plan of action today:

I intend reporting on

Revolution Bars (LON:RBG) – in line interim results amp; outlook

Boohoo.Com (LON:BOO) – due to popular demand, I’m continuing to report on this, even though it’s now a mid-cap. Yet another positive trading update, and completion of Nasty Gal acquisition.

Graham intends reporting on;

Waterman (LON:WTM) – interim results

Redde (LON:REDD) – interim results

Avanti Communications (LON:AVN) – interim results

Swallowfield (LON:SWL) – interim results

Then, if there’s time, we’ll try to more briefly mention:

Johnson Service (LON:JSG) – interim results

Avingtrans (LON:AVG) – interim results + acquisition

Elegant Hotels (LON:EHG) – reassuring AGM trading update

These last 3 might have to wait until I get home this evening though (am currently visiting family, and travelling back home this afternoon).

Revolution Bars (LON:RBG)

Share price: 197p (down 1.75% today)
No. shares: 50m
Market cap: £98.5m

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

Interim results – for the 6 months ended 31 Dec 2016.

Both FinnCap and Numis have confirmed this morning that these half year results are in line with expectations. Both have also today increased their full year profit forecasts by 2-3% for both the current year (ending 30 Jun 2017), and the following year. This is mainly due to one extra new site being added – the IPO plan was to open 5 new sites per year, but that is now 6 new sites.

FinnCap also cites a solid H1 performance, and softer prior year comparatives which are now feeding through for H2. I’ve looked at both brokers’ forecasts, and they look sensible amp; achievable. E.g. Numis only assumes 1.5% LFL sales growth for this year, which I hope to see beaten.

Therefore, in my view we should be able to rely on broker forecasts in this case (they always need to be checked). The risk of a significant disappointment here looks fairly low. Although you can never rule out the chance of a profit warning, with any company, because life is inherently unpredictable, especially with smaller caps.

Key points;

Revenues up 12.7% to £66.7m – driven mainly by new site openings, but also a respectable +2.0% LFL sales performance in H1.

Grown from 62 to 66 sites in H1. 2 more new sites planned for H2.

Importantly, all 4 new sites are trading in line with plan – this is very important for a roll-out, as it demonstrates that the expansion process is being well planned amp; managed.

Adjusted EBITDA (a proxy for cashflow) is up 13.6% to £9.2m

Adjusted EPS is up 7.1% to 9.1p

Are adjustments reasonable? I think so, yes. The only adjustment made is for non-recurring opening costs – i.e. running costs incurred on new sites, prior to them first opening the doors to trade. That is a legitimate thing to adjust out, to arrive at underlying profitability.

Seasonality – H1 (Jul-Dec incl.) is stronger than H2, as it includes summer amp; Xmas. Last year the split was £5.0m H1, £4.3m H2, at adjusted operating profit level.

Adjusted profit before tax up 10% to £5.5m (One broker had £5.6m planned, so a whisker below).

Net debt – was nil at 31 Dec 2016. Although the company used half of its £10m revolving credit facility in the period, since 4 new site openings were bunched together (new sites cost c.£1m in capex each).

Outlook – cost headwinds are mentioned (same as everyone else in the sector), but they sound confident;

The strong first half performance reflects determined execution of our operating model. Whilst certain cost headwinds are expected in the second half, the strong first half performance, together with on-going mitigating activities mean the group is meeting expectations.

Current trading – looks solid, a whisker down on the H1 level of LFL, but it’s close enough not to matter in my view;

Recent trading over January and February has been positive.  Like-for-like sales for the eight weeks to 25 February rose by 1.7%.

This, taken together with improved Adjusted PBT and the impact of new sites, gives us the platform to be confident about our prospects for the future

Dividends – despite self-financing all the costs of its own roll-out, RBG still manages to pay shareholders respectable amp; growing divis, from cashflow too. This really emphasises what a superbly cash generative business this is.

The interim divi has been increased by 10% to 1.65p. The final divi is forecast to be larger, so we should get about 5.4p in total divis for the year – a yield of just over 2.7%. Whilst not high enough to justify me putting out the bunting, it’s still much better than the return on cash in the bank. Also, I reckon that divi payments could double or more over the next 5 years.

The beauty of a decent roll-out is that the profits go up each year, and hence the divis also rise. Then when the roll-out is complete, divis can be drastically increased, as you then part-own a big cash cow, which can divert its cashflow from funding new stores, to paying bigger divis.

Therefore, I see this share as a very attractive future dividend payer, and not a bad payer in the shorter term either. The balance sheet strength, with nil net debt, means that the divis should be pretty safe too, even in a bad year.

I’d much rather buy a stock like this, with sustainable amp; growing divis, than a high yielding but precarious dividend payer (like e.g. McColl’s Retail (LON:MCLS) yesterday, or disasters like Fairpoint (LON:FRP) or Entu (UK) (LON:ENTU) – both of which I got caught out on – beguiled by a high, but as it turned out, unsustainable divi yield).

With yields, I concentrate more on companies which have a high, growing, and sustainable capacity to pay dividends, rather than what they happen to be paying out currently.

Valuation – we now can have more confidence in the broker forecasts, with solid H1 numbers in the bag, and decent current trading too. So one broker is saying 17.0p adj. EPS for this year (ending 6/2017), and 19.4p for next year.

As it’s a June year end, I think we should be valuing the share on next year’s earnings, and in my view the forecasts are a tad soft, so personally I’m using 20p adj. EPS as my valuation benchmark.

Therefore at just under 200p, this share is on a forward PER of about 10.

To my mind, that’s quite obviously an incorrect (far too low) valuation. That’s why this stock is an out-sized position for me, being my 2nd largest holding in both my real, and fantasy portfolio. Where I find a clear valuation anomaly, I load up in it. Obviously, as always, that’s just my personal view, you may agree or disagree with it as you wish.

A self-funding roll-out should be rated at 15-30 times forecast earnings.

I’ve read that some investors feel RBG should be rolling out more aggressively – 5 or 6 sites per annum is not very ambitious, given that it has a proven format, which typically generates over 300k cashflow per new site, for an investment of about £1m – the ROCE on new sites is superb, at c.38%. That makes rolling out the format a complete no-brainer, with such attractive ROCE being achieved.

More cautious investors might prefer the more moderate rate of expansion. It means the company is less likely to make mistakes, in my view. Plus, the roll out can always be accelerated in the future. It depends on your timescales. I’m seeing this as a 5-year, or more, type of investment.

My opinion – I’m not impartial on this share at all, I think it’s a terrific bargain – unless of course there’s something that other people know, which I’ve missed?

Overall though, it seems to me this was floated with institutions, yet little to no effort has been made to cultivate a private investor shareholder base. Therefore, the share price has been depressed by several institutions drip-feeding stock into the market (you can see that from reading the “holding in company” RNSs), with insufficient buying demand from private investors.

So I think this indigestion of stock could well be one of the reasons as to why this stock appears to be so cheap. That’s fine with me – it’s an opportunity for the patient, the way I see it.

Overall then, this is my summary opinion;

  • Interim results today are fine, and in line with expectations.
  • The full year outlook is fine.
  • The share looks dirt cheap to me, on a fwd PER of about 10, for no apparent reason.
  • Broker profit forecasts raised today by 2-3% for this, and next year.
  • Good, and growing dividend yield.
  • Very strong balance sheet, with nil net debt. No pension fund issues.
  • Roll out of new sites is progressing to plan – so continued growth in profit is likely.
  • Great ROCE on new sites, of 38%, which is the key measure of any roll-out. This one is working, so the stock should be on a much higher PER.
  • Concerns over the recent departure of FD now look groundless.

I’ve no idea why the share price has fallen a little this morning. It’s a particularly illiquid share for a £100m mkt cap stock. People buy amp; sell for all sorts of reasons. When the fundamentals are this strong, I don’t take much notice of market price fluctuations – they’re often illogical in smaller caps, because there isn’t the liquidity to allow big sellers to exit when they want to.

Boohoo.Com (LON:BOO)

Share price: 151.1p (up 3.0% today)
No. shares: 1,123.3m
Market cap: £1,697.3m

(at the time of writing, I hold a small, indirect position in this share via a share club)

Nasty Gal acquisition – this has completed, and will give BOO an additional avenue to expand in the USA;

Following the announcement on 9 February 2017, plc (“the Group”), the leading online fashion retailer, today announces that it has completed the acquisition of certain intellectual property assets and customer databases from retailer Nasty Gal Inc. (“Nasty Gal”) for US$20 million.

The transaction will be financed through a combination of the Group’s existing cash resources and a new bank debt facility of £12 million. The Group will consolidate Nasty Gal from 1 March 2017.

Some people have expressed concern about why a new bank facility is being mentioned. I say, who cares? It doesn’t matter at all to me.

Trading update – they’ve done it again! Beating expectations again; plc (“the boohoo Group” or “the Group”), the leading online fashion retailer, has delivered a strong trading performance since the Group’s trading update on 10 January 2017.

The Board now expects boohoo Group revenue growth for the twelve months to 28 February 2017 (“FY 17″) to be around 50%, ahead of the previously guided range of 46% to 48%.

The Group continues to benefit from improved operating leverage in the business and now expects to deliver an adjusted EBITDA margin at the top end of the previously guided range of 11% to 12%.

This guidance relates to and, which has been consolidated from 3 January 2017.

Note the particularly strong margins which BooHoo generates, despite being so aggressive on selling prices.

My opinion – fantastic performance continues, with BooHoo repeatedly demonstrating in the last 2 years why it justifies a high valuation.

Obviously there’s no scope for any mis-steps at this kind of rating, but so far, so good.

I remember saying a while ago that BOO was, in my opinion, actually a better business than Asos – with more growth potential, and generating much higher margins. Long term, it’s not fanciful to imagine that BOO might even overtake Asos in market cap terms, if its international expansion goes well.



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