7:59 cut – RBG

Revolution Bars – FY Results

Background

It has been a long time since Revolution Bars moved from a newly listed growing company to a recovery story.

I had the good fortune to buy near the 2017 lows after a profits warning and to sell out near the highs after a recommended cash takeover offer from Stonegate. I then followed them as the takeover offer was rejected by shareholders and the true magnitude of management distraction and loss of key personnel over the offer period became apparent, all the while against a mediocre consumer backdrop and questionable customer proposition.

Recently I formed the view that today’s results might mark the point at which the recovery should start bearing fruit. This, combined with good results and takeover activity from elsewhere in the industry led me to buy back in last month.

[Note: The above section was edited post-7:59 to add more background detail]

Today I am quite likely to sell if disappointed, to add if impressed but the share price does not react, or (in the ideal case) to sell out for a significant quick profit if I think the share price gets ahead of itself.

FY 2019 Results

The first claim in today’s results is that the business has now stabilised, but is that backed up with the figures?

Well, they did hit the revenue forecasts, but it is harder to tell on the profits side as I only have consensus forecasts and these seem to be on a different basis.

Like-for-like sales not only fell 3.5% over the period, but continued falling in Q4.

On the operating cash flow side, things look stronger, with positive operating cash flows of £8m once depreciation and one-off impairments are excluded. In addition to that there is another large increase in payables which surely cannot be repeated for a third year and may not be sustainable at current levels. Current assets are £19m vs current liabilities of £26m, which looks uncomfortable.

Loans are now at £17.5m vs adjusted EBITDA at £11.1m, a ratio of 1.6x, a sharp deterioration on loans of £15.5m vs adjusted EBITDA of £15.0m last year. This debt figure excludes a significant “rent free creditor”, potentially stretched payables and (of course) lease provisions.

Falling like-for-likes right into the latest quarter suggests either a failing business offering or a backlog of maintenance and capex (or both). [edit: If the latter, this once again emphasises the risks in valuing a pub company on a cashflow or EBITDA basis – a continued high level of expenditure is required to keep this kind of business stable]

As expected, after blaming the weather and the football in the first half, they blame political uncertainty over Brexit for a poor second half. Now, in the name of research I went to one of their bars on a Friday night and I can assure you that nobody was talking about or worrying about Brexit. If people were really focused on Brexit when going out for the night then the one bar 48% of them would avoid is Wetherspoons. Which reported excellent LFLs once again. With employment at all-time highs I am confident in discounting this excuse as delusional nonsense.

Post year-end

Clearly there are no signs of recovery in this period, so what about the months since 29th June 2020?

They report “like-for-like** sales and ahead of the market tracker for high street bars in two of the last three months”. This gives consider scope for interpretation, however they later confirm that “In the first thirteen weeks of this financial year like-for-like** sales increased by 0.7%”. My caveat would be that since we are now into a new period, some of these bars will be on comparables from when the bar was only open for a few months, potentially before they trade had fully ramped up.

They now talk about one more year of consolidation before restarting growth in 2021.

Conclusion

Arguably the company has now moved from a recovery to a survival story. I see a significant risk of this company hitting covenants on its loan facilities. There may be a turnaround, but it looks like I bought in too early. There is a chance of a bounce on the open due to news on positive LFLs, but if so I will be selling on balance sheet concerns.

[Edit: I no longer hold shares in RBG. Despite turning a quick profit this was not really of the magnitude that made the risk and time worthwhile.]

One thought on “7:59 cut – RBG

  1. Presumably “brexit” as a reason simply means that they believe the overall market to have been soft and they are rationalising it as Brexit related. They are in effect saying that poor performance is not the fault of the management because they think every pub was impacted (whilst providing no evidence for this to be in fact true). Market share data would be a more persuasive argument.

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