Small Cap Value Report (Tue 26 Mar 2024) - RBG, CHRT, JNEO, 888, ASC, GOOD, LUCE, BAG

Good morning, it’s Paul amp; Graham here as usual!

Revolution Bars (LON:RBG)

Ominous news from Sky last night. Its says this struggling chain of bars amp; pubs is talking to investors about an emergency fundraise, wants to close a quarter of its sites (maybe a CVA or pre-pack administration I wonder?), and has also put itself up for sale. Clearly that doesn’t bode well for existing equity.

RBG has itself just issued a statement confirming the speculation, which says -

Revolution Bars Group PLC notes recent press speculation. Following a period of external challenges which have impacted the Company’s business and trading performance, the Board is actively exploring all the strategic options available to it to improve the future prospects of the Group. These include a restructuring plan for certain parts of the Group, a sale of all or part of the Group and any other avenue to maximise returns for stakeholders. The Company also confirms it is currently engaged with key shareholders and other investors including Luke Johnson in respect of a fundraising. 

The Company continues to trade in line with management’s expectations.  

The Company is not in talks with, nor in receipt of an approach from, any potential offeror relating to an acquisition of the issued and to be issued share capital of the Company.

We’ve been flagging RBG shares here as high risk for a while, eg

26/7/2023 – AMBER – In line trading for FY 6/2023. Special situation, only for risk-takers.

18/10/2023 – AMBER/RED – Flagged “material uncertainty” going concern statement, high risk.

5/1/2024 – AMBER/RED – High risk special situation.

I previously liked RBG as a value/turnaround situation, but as the facts have deteriorated, we changed our minds here and became more negative. Many bars groups are struggling because younger people are spending less on alcohol (a higher percentage are teetotal than previous generations), plus the experiential leisure groups like XP Factory (LON:XPF) are taking away some market share. 

The latest incarnation of the former Luminar/Deltic nightclubs business,now called Rekom, went bust yet again in early 2024. Plus of course the labour-intensity means living wage increases are hurting disproportionately, not to mention soaring energy costs, on top of the pandemic chaos. No wonder many bars are struggling, there are just far too many, and the industry needs a permanent cull of the excessive number of struggling hospitality sites, to leave more business for those that remain.

I’m worried existing equity at RBG may have little to no value, and the same could well be the case at Nightcap (LON:NGHT) .

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Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to review trading updates amp; results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it’s anybody’s guess what direction market sentiment will take amp; nobody can predict the future with certainty. We are analysing the company fundamentals, not trying to predict market sentiment.

We stick to companies that have issued news on the day, with market caps (usually) between £10m and £1bn. We usually avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed – please be civil, rational, and include the company name/ticker, otherwise people won’t necessarily know what company you are referring to.

What does our colour-coding mean? Will it guarantee instant, easy riches? Sadly not! Share prices move up or down for many reasons, and can often detach from the company fundamentals. So we’re not making any predictions about what share prices will do.

Green (thumbs up) – means in our opinion, a company is well-financed (so low risk of dilution/insolvency), is trading well, and has a reasonably good outlook, with the shares reasonably priced. OR it’s such deep value that we see a good chance of a turnaround, and think that the share price might have overshot on the downside.

Amber – means we don’t have a strong view either way, and can see some positives, and some negatives. Often companies like this are good, but expensive.

Red (thumbs down) – means we see significant, or serious problems, so anyone looking at the share needs to be aware of the high risk. Sometimes risky shares can produce high returns, if they survive/recover. So again, we’re not saying the share price will necessarily under-perform, we’re just flagging the high risk.

Links:

Paul amp; Graham’s 2024 share ideas - live price-tracking spreadsheet (2 separate tabs at bottom),

Frozen SCVR summary spreadsheet for calendar 2023.

New SCVR summary spreadsheet from July 2023 onwards.

Paul’s podcasts (weekly summary of SCVRs amp; macro views) – or search on any podcast provider for “Paul Scott small caps” – eg Apple, Spotify.

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Ludicrously busy today, so please don’t expect us to cover all of these! We’ll home in on the most significant, and the ones subscribers are looking at most (as shown on the home page most viewed widget) -

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Summaries of main sections

Cohort (LON:CHRT) – 594p (pre market) £247m – Contract Win – Paul – GREEN

Good news with another decent-sized long-term contract win, to protect Royal Navy ships, presumably from drones and the like. Forecasts are raised c.10%, with potentially more upside. I was already positive on CHRT, increasingly so after today’s good news. It has good visibility from an order book now over £0.5bn, has a strong balance sheet, and shares look reasonably priced. So I remain bullish. (I have a de minimis personal position personally).

Journeo (LON:JNEO) – 284p (pre-market) £47m – Final Results – Paul – GREEN

Very strong 2023 results, fuelled mainly from acquisitions which bizarrely seem to have cost nothing (in cash terms). Confident (in line) outlook for 2024. Overall, this looks very good, so I’ll stick with GREEN.

888 Holdings (LON:888)  - up 1% to 84.8p (£380m) – FY2023 Results – Graham holds 888 – AMBER/RED

These results aren’t pretty but aren’t completely awful either, allowing stale bulls like myself to dream of success. The new management team wants to change the name to “evoke plc” and they claim that they can get the leverage multiple below 3.5x by the end of 2026.

ASOS (LON:ASC) - up 10% to 380p (£454m) – H1 Trading Update – Paul – AMBER/RED

A typical update from Asos, which tries to sound positive, but with little substance to it. Guidance unchanged, which is for continuing losses before tax remember (but they only talk about EBITDA). I remain highly sceptical about the company fundamentals, including a £500m 2026 bond that it might struggle to refinance, but anything could happen as it might have strategic value to an acquirer (Frasers (LON:FRAS) now controls 27%).

Good Energy (LON:GOOD) - down 20% to 270p (£49m) - FY 12/2023 Results (unaudited) – Paul – AMBER

A quick review of these complicated accounts convinces me that there are too many moving parts, and hence way too much guesswork involved in trying to ascertain what the future might hold for this energy supplier. Other parts of the business are not financially significant. Balance sheet is pretty good, but not as strong as I previously thought. So it’s not for me, as nobody knows what normalised profits (if any) these smaller energy suppliers will make once everything gets back to normal.

Luceco (LON:LUCE) - up 11% to 134p (£216m) – Final Results [slightly ahead] - Paul – GREEN

Superbly clear presentation of good results (slightly ahead exps). Reassuring outlook. Sound balance sheet. I remain positive on this share – it’s a good business, owner-managed, at a reasonable valuation. Cyclical recovery upside, and you’re only being asked to pay about 12x earnings in a fairly tough earnings environment, which could end up looking a bargain in a future economic recovery.

A G Barr (LON:BAG) – up 7% to 548p (£614m) – Final Results – Graham – GREEN

This old soft drinks maker announces good results for 2023/2024, as expected. A confident outlook statement should, I think, give investors some confidence that the margin rebuild plan can succeed. Bolt-on acquisitions are performing well and BAG remains cash-rich.

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Paul’s Section: Cohort (LON:CHRT)

594p (pre market) £247m – Contract Win – Paul – GREEN

Cohort, the Independent Technology Group…

CHRT is a collection of six largely autonomous defence-related businesses.

We’ve commented favourably on it before, including most recently a GREEN view of its last interim results, published on 13/12/2023.

Today’s news is a particularly large “at least £135m” contract with the Royal Navy for “electronic warfare countermeasures”, including a “trainable decoy launcher system”.

Work on this contract “will commence immediately”, expected to be for 10+ years, with options to extend.

This is the best bit –

Together with other recent order wins, the contract is expected to materially enhance the Group’s earnings.

Also potential for export orders -

“It represents a real vote of confidence in Ancilia, a fully UK designed and built solution, for which we see encouraging export prospects.  

“Over the life of the project, we estimate it will sustain employment for 150 skilled and professional people in North Devon, and export success could see this increase further still.”

Have brokers raised forecasts today? -

The only note I can find is from commissioned researchers Equity Development. It flags that the already large order book is now over £0.5bn.

EPS forecast for FY 4/2025 is raised by 10% to 40.3p

Last year actual adj EPS was 36.4p, and a similar figure of 36.2p is forecast for FY 4/2024.

At 594p per share I make that 16.4x 4/2024 forecast, and 14.7x 4/2025. Note there’s also further upside for future years, as the full contract kicks in.

Paul’s opinion – I already liked CHRT shares, offering good visibility from a large order book, strong balance sheet, and reasonable valuation. Today’s news enhances that, and I imagine we might see shares continue rising.

Hence I’m happy to stick at GREEN.

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Journeo (LON:JNEO)

 284p (pre-market) £47m – Final Results – Paul – GREEN

£1.1m Orders – a separate RNS for a £1.1m contract win seems a bit over-the-top, given that it’s not particularly material to the £48m forecast revenues for FY 12/2024 –

Journeo plc (AIM: JNEO), a leading provider of information systems and technical services to transport operators and local authorities is pleased to announce that, further to its announcement on 11 March, it has received additional purchase orders totalling £1.1m to supply and install important safety systems on Arriva buses within the Transport for London (TfL) fleet.

The product sounds very interesting though – cameras to replace mirrors, to enhance safety. Great idea, and let’s hope these are installed on all the HGVs on the road, so we don’t get any more tragedies involving left-turning vehicles crushing cyclists that the drivers can’t see.

So I’d be interested in hearing more about this product.

This is for 150 buses, suggesting it’s a useful £7.3k per bus. I imagine there could be plenty more contracts available with other bus operators too?

No change to forecasts from this deal though -

The revenues are included in management’s expectations of performance for the current financial year and add to the Company’s strong order book, providing further future revenue visibility.

Final Results for the year ended 31 December 2023.

Journeo plc (AIM: JNEO), the information systems and transport technical services group, is pleased to announce its final results for the year ended 31 December 2023.

Figures look wonderful – helped by what seem to have been inspired acquisitions (Infotec amp; MultiQ) -

Revenue up 118% to £46.1m (20% organic)

Adj PBT up 325% to £4.0m

Statutory PBT reassuringly close behind at £3.7m

Adj EPS is up 92% to 19.8p (PER of 14.3x last night’s closing share price of 284p)

I like the mention of growing recurring revenues, and this -

The increasing barriers to entry into our sector are helping us to establish defendable market positions.

Seeking out further acquisitions “in adjacent markets” – good, as the track record on acquisitions so far appears terrific, so I’m happy to hear companies that are good at acquisitions doing more of them, providing they stick to a financially disciplined approach and do their due diligence carefully.

Outlook and the commentary generally, sound confident – eg

We entered 2024 with a strong order book, a growing sales opportunity pipeline, and reduced reliance on third-party technology. This gives us the confidence that we will continue to deliver on market expectations.

Broker update – thanks go to Cavendish for an update note. It says 2023 results are in line with recently upgraded forecasts.

FY 12/2024 forecast is for only modest growth, a 10% uplift in adj PBT to £4.4m, and adj EPS of 22.1p, so hopefully there’s upside on those forecasts, which I think would be needed to propel the shares sustainably higher.

Balance sheet - my usual quick checks here show NTAV of £6.0m – adequate, but not strong. There’s not much in fixed assets though, so it doesn’t need a huge NTAV. Receivables seem high at £12.2m, which is worth querying if you speak to management or go on a webinar. Note that the £8.1m cash pile has come from customers paying up-front, with deferred revenue of £5.8m (current liabilities) and £2.8m (non-current). So another key question for management is the expected movement in these creditor figures – if they are likely to permanently renew, then the cash balance should remain high. If they are expected to unwind, then the cash balance would correspondingly fall. That’s a key question, as it would determine how much cash is available for acquisitions.

Overall I only have those queries, other than that the balance sheet looks OK.

Cashflow statement - negligible free cash generation, with the increased cash coming from the cash within acquisitions – this looks a very odd situation, where the acquired companies seem to have been paid for using their own cash piles! I’ve been looking for the cash outflow to make the two acquisitions, but it’s the other way around – there’s a net £3.0m inflow from acquisitions! So these two companies that have helped transform group performance seem to have been acquired for nothing! How on earth was that possible?! Is there a catch, why did the vendors agree to such a deal?! As it turns out, the £7.1m cash raised from fresh equity wasn’t needed. That’s what the cashflow statement is telling me anyway.

If management can pull off more deals like this, then shareholders will be celebrating some more.

Going concern statement is clean, with no issues there.

Major customers – note 3 points out that the 2 largest customers accounted for 17% and 11% of group revenues, so there is risk from big client concentration, and lumpiness of orders, something to bear in mind. There could be occasional lean year in future, which you get sometimes from lumpy order type companies. For that reason I wouldn’t be chasing the share price too high, although that doesn’t seem to be an immediate worry judging from the upbeat remarks about orders.

Paul’s opinion – yes I think this looks very good, I can see why many readers are positive on JNEO. We were late to the party here at the SCVR, my last two comments (both in Feb 2024) were green. I’m happy with the numbers today, so will stick with GREEN. People tell me there are lots of opportunities in public transport, with public funds going into improvements. JNEO management seem particularly good at acquisitions, so if they can pull off more blockbuster deals, the excitement could continue.

Shares have had a great run, so it looks as if a bit of profit-taking might be going on today.

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ASOS (LON:ASC)

Up 10% to 380p (£454m) – H1 Trading Update – Paul – AMBER/RED

Struggling online fashion retailer. Mike Ashley’s Frasers (LON:FRAS) now controls 27.1% (at 20/3/2024).

The market likes today’s update for H1 of FY 8/2024.

Big fall in revenues, down 18%, but strategy is now trying to make a profit, rather than gangbuster sales growth in the past.

“Ahead on plan” to reduce inventories to c.£600m by year-end. Was £1,078m 8/2022, then £768m at 8/2023. As sales are down 18% in H1 8/2024, then inventories should naturally reduce 18% to £630m, so its £600m target is not demanding.

Free cash outflow of £(20)m in H1, but it says this is dramatically better than prior year, and H1 typically sees large seasonal outflows. Hmmm, I’m not convinced.

“Robust cash balance” of more than £330m, which is actually down from £353m at the start of H1. It also conveniently forgets to mention the £673m of gross interest-bearing debt at the start of H1 (including £464m convertible bond, and £185m term loan).

Outlook -

Full-year guidance is unchanged, including: 5-15% sales decline, positive adjusted EBITDA, inventory back to pre-COVID levels, and positive cash generation, reducing net debt.

Bear in mind the large depreciation changes on its expensive warehouses, and capitalised IT costs, so positive EBITDA could easily still be a hefty PBT loss.

Paul’s opinion – unchanged – it’s a lousy business that never generated any free cashflow, with modest operating cashflow completely consumed by capex (building more warehouses, and capitalising a load of internal IT costs). Therefore I don’t see how the 2026 convertible loan could be refinanced. Its 0.8% pa coupon is pie-in-the-sky now, so even if it can be refinanced, the interest cost would be multiples of existing costs.

Why is Mike Ashley hoovering up shares then? Who knows, his strategy is perplexing. It might involve trying to bully suppliers and bond holders into discounts, but that failed to work at Matches.com according to recent press reports.

Hence I see little to no value in Asos shares as a standalone company, but it could possibly have significant strategic value to an acquirer maybe?

There’s nothing in today’s update to make me want to buy the shares, I think it’s heavily PR-d and quite misleading in parts (especially only mentioning gross cash, and ignoring the substantial net debt). The published accounts from Asos always strike me as a lot worse than the positive noises made from cherry-picked positives in its trading updates.

Meanwhile the Chinese continue to exploit the loophole allowing them to sell direct to consumers, putting further pressure on Asos’s margins.

Why get involved in this share, other than as a punt on somebody bidding for it, for strategic value? Our colour-coding system is based on the fundamentals, not takeover speculation, so I have to stick with AMBER/RED, and that’s probably being generous.

Over the last 20 years we’ve seen almost the full life cycle of online fashion – astonishing really -

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Good Energy (LON:GOOD)

 Down 20% to 270p (£49m) - FY 12/2023 Results (unaudited) – Paul – AMBER

A sharp 20% drop in share price today, although that’s only giving up a recent price spike, so the market perception hasn’t actually changed much over the last 6 weeks or so.

I reviewed GOOD here on 12/2/2024 and it’s coming back to me now, re-reading my notes. Its main business (the only profitable part) is electricity supply, where it had a stunningly profitable H1, but was forecast and has given back most of those bonanza H1 profits in H2 losses.

I concluded that the other parts of the business were too small to focus any time on. Overall, I concluded the shares are impossible to value, due to the wild gyrations in profitability. Although I leaned positively due to balance sheet strength, concluding amber/green in Feb 2024 at 254p per share. It’s slightly higher now, even after today’s sharp fall.

Some numbers for FY 12/2023 -

Revenues £255m (up 2.4%)

PBT £5.7m (up on underlying £1.4m in 2022) – only a small profit margin of just over 2%.

EPS seems to have fallen, but it’s presented badly in the RNS, due to a one-off profit in 2022. Canaccord presents the numbers better in its update note today (very helpful, thank you). It has adj EPS going up 12% to 17.1p, but hindered by a much larger tax charge in 2023.

These figures are very difficult to make sense of, with a very low overall margin, loss-making bits within the group, differing tax rates year to year, gyrating H1 vs H2 profits/losses, it’s almost incomprehensible actually, in terms of figuring out any trends, or what the future performance is likely to be.

Outlook –

The Board has confidence in Good Energy’s strategic direction and future prospects. In the short term, trading has commenced in line with management’s expectations. Further ahead, as a trusted brand with an array of high quality services under one roof, Good Energy is well positioned as a premium specialist in the rapidly growing microgeneration market. We have a proven track record of delivering on our strategy and we look forward to creating further value in 2024 and beyond.

Balance sheet - NAV is £42.0m, slightly up on £39.0m a year earlier.

Taking off the £5.7m intangible assets, NTAV is £36.3m. This includes £10.6m valuation an investment in associate (ZapMap, I think), so be prudent I would write off this figure too, getting to my adjusted NTAV of £25.7m, which is not as good as I expected.

Note there is a “corporate bond” of 5.0m, mostly not repayable in 2024 (see note 5 in the RNS).

Cash generation is very strong, but note that half came from favourable working capital movements (receivables growing £22.3m vs payables growing less at £11.2m)

Paul’s opinion – this business seems like a black box to me – ie I have no way of ascertaining what level of profit it is likely to make (if any) in future. I feel that about the whole sector of energy supply. Figures being reported now are hugely affected by the energy crisis, and it’s anybody’s guess where profits are likely to settle down.

Therefore I remain of the view that it’s just not an area I want to get involved in.

The balance sheet isn’t as strong as I’d imagined, it’s still decent though, but overall I’m going to shift down from amber/green last time to AMBER now. There’s far too much guesswork in trying to form a view on how companies in this sector might perform longer term, as it relies on so many factors outside their control. They only have to screw up their hedging arrangements in some unforeseen way, for potentially major problems to surface. Also the accounting in very complicated – problems in that area caused Yu (LON:YU.) shares to collapse in 2018 for example.

It’s not for me, I want simpler things to invest in. AMBER.

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Luceco (LON:LUCE)

Up 11% to 134p (£216m) – Final Results – Paul – GREEN

Luceco plc, the supplier of wiring accessories, EV chargers, LED lighting, and portable power products, today announces its audited results for the year ended 31 December 2023 (“2023″ or “the year”).

Company’s headlines –

Profitability at the upper end of expectations despite challenging markets. 

Continued growth and strong cash generation.

I covered its FY 12/2023 trading update on 30/1/2024, concluding favourably and increasing from amber/green to GREEN. Based on: slight beat after a good Q4, Good cashflow reduced net debt a lot, reasonable valuation (138p at the time), and possible upside from operational gearing in an economic recovery.

This is one of the best presentations of key results information below that I’ve ever seen – comprehensive rather than cherry-picky – please would other companies use this as a template! –

We can quickly calculate that the PER is reasonable at 12.1x

Net debt is fine at 0.6x EBITDA, with a nice 23% reduction in the amount.

Dividend yield is 3.6%, and it’s well covered by earnings at 2.3x

Adjustments are much smaller than last year, which is good.

Operating margin is quite good, and has improved.

Outlook – is similarly well-presented, and reassuring -

Balance sheet - is strong, with £93.8m NAV, and £53.7m NTAV.

Working capital is healthy, at a current ratio of 2.0x (anything over about 1.3x is good)

Long-term gross debt of £22.3m is fine, and down usefully from £28.4m LY.

Inventories have usefully reduced, as the company promised they would.

Overall, I have no concerns at all here.

Cashflow statement - looks a very healthy business, that can easily fund reasonable divis, debt reduction, bolt on acquisitions, all without breaking into a sweat!

Paul’s opinion - this is a very simple share to research, with the numbers being really straightforward and no funnies anywhere in there.

I continue to like this share, it looks a decent quality business, reasonably priced. I could see shareholders doing well on this, in the next economic cycle. Worth considering as something to tuck away and forget for a while, I imagine.

It’s owner-managed by John Hornby. I’d like to get him on for a podcast actually, so if any LUCE advisers are reading this, please do reach out.

Overall then it’s another GREEN from me.

Long-term, the chart is not so great, and includes a bonkers pandemic boom amp; bust -

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Graham’s Section: 888 Holdings (LON:888)

Share price: 84.8p (+1%)

Market cap: £380m

(Graham has a long position in 888.)

888 (LSE: 888), one of the world’s leading betting and gaming companies with internationally renowned brands including William Hill, 888 and Mr Green, today announces its audited financial results for the year ended 31 December 2023…

This is a highly leveraged gambling company.

When I first invested in it, it had a wonderful balance sheet. But it used that balance sheet strength to buy William Hill (in mid-2022). My error was in failing to sell out despite the extraordinary financial risk the company had taken on.

I’ve now accepted that it will either be a zero or a multi-bagger from the current level, depending on whether or not it solves the debt problem:

Today’s full-year results for 2023 are as follows:

• Revenue down 8% to £1.7 billion (pro-forma or like-for-like basis, taking away the timing effect of mid-year acquisitions and disposals).

• Pro forma adjusted EBITDA down 1% to £308m.

• Adjusted net income £48m (last year: £64m).

• Actual net loss £56m (last year: loss of £121m).

I think there are a few sources of hope in these numbers. For example, “Adjusted EBITDA” might not be worth much when you’re trying to value a secure, profitable company, but where it has a real value is in assessing the ability of a company to survive a high debt load in the short-term. Which is pretty much the main question hanging over 888.

888’s adjusted EBITDA of £308m (down only 1% like-for-like) seems quite good to me, given the 8% fall in like-for-like revenues.

Again taking a rose-tinted view, the company was still loss-making in 2023 but it’s a much smaller loss than 2022.

Net debt fell slightly to £1.7 billion, with the help of some favourable exchange rate movements.

Net debt to EBITDA was stable at 5.6x, but this is a level that is not sustainable in the long run and needs to be reduced.

“Value Creation Plan”

Lots of parts to this plan, here are some of the big ones:

• New CEO (since Oct 2023), and 7 out of 10 positions in the executive team are new appointments.

• New group operating model, includes £30m of additional annual cost savings.

• Geographies will be split up into “Core” markets (UK, Italy, Spain and Denmark) where 888 is a market leader, and “Optimise” markets, where 888 is not trying to be a market leader but does want to optimise the return on its investments. As previously announced, 888 could leave the US market.

• New name: Evoke plc (if shareholders approve).

New targets: 5-9% revenue growth p.a., adjusted EBITDA margin to increase 100 basis points p.a., and most importantly leverage to get below 3.5.x by the end of 2026.

Outlook

• Q1 revenue £420-430m

• Positive outlook for full-year revenue “consistent with medium-term targets”

• Unchanged adj. EBITDA guidance for 2024: approximately £340m.

Graham’s view

These results aren’t pretty, and even my rose-tinted glasses can’t avoid that.

There are £49m of “integration and transformation costs” which have been treated as exceptional. Can we trust that this number will be going to zero very soon? I’m not sure.

The CFO’s summarised cash flow statement seems like critical information to me. The key elements of this are as follows.

• Cash generated from operations before working capital: £233m (up from £140m)

• Negative working capital movements £82m (last year: negative £170m)

• Summing these together, net cash generated from operating activities was £151m (last year: negative £30m).

The company could really use a year when working capital movements were flat or were even positive for once.

Unfortunately, for the last two years, these working capital movements have been relentlessly negative. Receivables have increased, customer deposits have fallen, and the company has reduced outstanding payables. All of which serves to suck cash out of the company.

Moving on further down the CFO’s cash flow statement, we have a few very important items:

• Capex is a negative cash flow of £68m this year, £77m last year.

• Net interest paid £138m this year, £76m last year.

Net interest paid doesn’t tell the whole story, as the interest that was actually charged on the company’s borrowings over the year was £176m (there is often a mismatch between the time interest is charged and interest is paid).

Between capex and the interest bill, it seems that the company is facing regular outflows of about £250m. This depends on interest rates, as most of the debt is at floating rates. The first maturity will be in 2026 (£350m coming due).

I still think it’s possible that this company will pull through. Indeed, if £50m of “integration and transformation costs” can disappear soon, if £30m of additional cost savings are found, if interest rates don’t rise further (or fall), and if we can start to see like-for-like revenue growth, then I would expect this stock to be a multibagger. But that is a lot of “ifs”!

It does have the potential to generate serious amounts of cash, I think, but the last two years have been chaotic. Between the William Hill acquisition, the old management team getting evicted, enormous cost savings being sought, and the impact of new gambling legislation, the company has seen tremendous turmoil.

Investors in the 2028 bond haven’t started to dump it yet.

I’m going to remain AMBER/RED on this one. It might turn out to be worthless, or it might be worth a lot. As it’s only a very small fraction of my personal portfolio, I haven’t felt obliged to sell out of it yet. Someone without my rose-tinted glasses might view it simply as RED.

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A G Barr (LON:BAG)

Share price: 548p (+7%)

Market cap: £614m

A.G. BARR, the branded multi-beverage business with a portfolio of market-leading UK brands, including IRN-BRU, Rubicon, FUNKIN and Boost, today announces its results for the year ended 28 January 2024.

This has been on my best ideas list for two years running, so I’m psychologically invested in the outcome here!

We covered the company’s ahead of expectations trading update in January.

Now we get confirmation of a good year for the company:

The numbers above are slightly misleading as they do include an acquisition.

On a like-for-like basis, revenues were up 8%.

The growth in net cash is especially pleasing as the company is paying dividends and also bought the Rio drinks brand for £12m during the year. The company acknowledges that it could borrow if it wished, but “in the near term, we value the financial flexibility that a positive cash position provides”.

Outlook is good:

Having seen continued positive brand momentum in the early weeks of the new financial year, we remain confident in our strategy and the continued delivery of revenue and profit growth in the year ahead.

Profit margins

I’ve been banking on this company rebuilding its profit margins; the Chair says: “margin rebuild plan well underway” – good!

You may be wondering how this can be true, given that BAG’s adjusted operating margin (in the table above) actually fell during the year. The reasons for this are to do with acquisitions. In the company’s words:

At 12.3%, adjusted operating margin* was 130 basis points below the prior period (2022/23 : 13.6%). This was an improvement upon our expectations from earlier in the year and largely a consequence of the successful acceleration of Boost and Rio production in-sourcing. This provides further confidence that our margin rebuild programme will deliver as planned over the next two years.

So the company is more than happy with the profit margin result for 2023/24, while still aiming for a significant improvement over the next few years. Refreshed production facilities at Cumbernauld should have a big part to play in this.

I should also mention that BAG shareholders were provided with plenty of warning that the Boost acquisition would reduce margins, so the result for 2023/2024 doesn’t come as a surprise. Reduced margins in the short-term are a small price to pay for acquisitions that should provide attractive long-term contributions to total group profitability!

Industry comments: the UK soft drinks market contracted in volume terms by 2.9%, while increasing in value by 8.3%. Hopefully this year will be better, but these numbers tell a story of a consumer who is hurting. BAG reports both volume and value market share gains during the period.

Interest income enjoyed an uplift to £1.4m (previous year: £0.5m) as rates increased.

CEO transition: the outgoing CEO will be available until the end of July to help Euan Sutherland take over smoothly.

Adjusting items: I should mention that these are beautifully clean accounts. The only adjustment is a £0.8m credit relating to an earn-out payment that will not have to be paid. This £0.8m credit is deducted from the PBT figure, so that adjusted PBT is lower than actual PBT! I don’t get to say that very often.

Graham’s view

I remain positive on this one. It’s not cheap in terms of the earnings multiple but we are talking about a company with an excellent, very consistent track record of profitability, a strong net cash position, well-known consumer brands, and good prospects to rebuild its margins.

The macro environment might remain challenging, as consumers might continue to feel the pinch, but that will impact most companies, and I think BAG has proven itself better able to handle adversity than most.

At the moment, my main concern is the new CEO. But as I’ve just said, I reckon that BAG has greater resilience than most companies and that would include the likes of the Co-operative Group, Saga and Superdry.

Stockopedia

Source: https://www.stockopedia.com/content/small-cap-value-report-tue-26-mar-2024-rbg-chrt-jneo-888-asc-good-luce-bag-993173/