Restaurant Group Rights Issue and Brexit Gloom

Restaurant Group (RTN) have announced the terms of the rights issue that is required to even part finance their proposed acquisition of Wagamama. I made some somewhat negative comments on that deal in a previous blog post and the general media comment has likewise been negative.

The rights issue is to raise £315 million at a price per share of 108.5p which is a discount of 57% discount to the last trading day price. Net debt will also increase substantially and the current dividend will be very much reduced. The high dividend yield was one of the reasons investors might have bought the shares in the last year so they will be very disappointed.

Investors Champion suggested that investors might have been “stitched up” and that buying anything from private equity owners is a recipe for a poor outcome. All I know is that I am very wary about buying rights issues that are at a steep discount since I got suckered into buying shares in RBS back in 2008. It usually means that advisors have told the company that there is little appetite for the issue because it is perceived as risky, and hence nobody is going to take up the rights offer, or underwrite it, without a very big incentive.

The share price has been falling further today after the announcement and is down over 5% at the time of writing.

Brexit Gloom

The pound has been falling and so has my portfolio today despite the fact that a lower pound will help many of the companies I hold – but when markets are falling there is nowhere to hide. Apparently this is over concerns that Mrs May won’t be able to either agree a deal with the EU; or even if agreed, won’t be able to get it through her cabinet or Parliament. Cannon to the right of her, cannon to the left of her, cannon behind her, volley’s and thunder’d, stormed at with shot and shell … but still she pushed forward with the Chequers deal into the valley of death (to paraphrase Alfred Tennyson).

Personally I thought the Chequers proposal was a good basis for a deal with the EU but the Irish border issue is a likely deal breaker. Time for a rethink perhaps? But I don’t mean another referendum as I don’t believe the general public have any enthusiasm for another lengthy political campaign and there is little time for one.

The Financial Times (FT) had the usual negative Brexit stories today which is getting very tiresome. I would cancel my subscription if it was not for the occasional useful article they publish. With news short over the weekend I think the editor might be instructing his staff to produce articles to fill the space on Monday focused on Brexit. This time it was how Brexit is weakening productivity growth, Ramsgate being on standby for a crisis at Dover, immigration curbs that worry meat processors and an editorial focused on the “serious” Jo Johnson. Apparently meat processors employ more than 60% of staff who come from the EU. I am not scared.

Will we run out of fried chicken or beef-burgers? Probably not because as the article points out some of the tasks can be automated. They clearly have not been to date because cheap foreign labour makes it uneconomic. My conclusion is that Brexit will improve productivity enormously to the benefit of the economy and help those low-paid workers whose wages have been depressed by immigration.

But there was one interesting article in the FT today. That was about the popularity of “proxy resignation services” in Japan. These are organisations that will take on the task of telling your boss you have quit if you are too embarrassed to do so. Fed up with your company, your work or the bullying boss. Just call “Exit” to give your notice on the required date and they handle it from then on. No need to even face your colleagues or be accused of being a quitter.

This is simply the reverse of the amusing George Clooney film “Up in the Air” where he ran an outplacement service for companies, i.e. took on the task of firing people in a way that avoided difficult conversations.

There should be a market for such services in the UK, but perhaps it should be extended to helping you dump your girlfriends or wives? So much better than having emotional confrontations. So there’s an idea to pursue for some entrepreneurial web developer. Even Mrs May’s cabinet might find such a service useful in the next few weeks.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Bad News from Crawshaw and ULS, Ideagen AGM, Victoria Doubts and Other News

The real bad news today is that butchers Crawshaw (CRAW) is going into administration, “in order to protect both shareholders and creditors”. They hope the business will be sold as a going concern but it is unusual for shareholders to end up with anything in such circumstances. The shares have been suspended and the last share price was 2p. It actually achieved a share price of 3425p at its peak in 2005. Revenue have been rising of late but losses have been also.

I never invested in the company although I do recall seeing a presentation by the company when it was the hottest stock in the market but I considered it to be a business operating in a market with no barriers to entry and likely to suffer from competition once the supermarkets had woken up to what it was doing. That’s apart from the difficulties all high street retailers have been facing of late. Well that’s one disaster I avoided at least.

Another AIM stock I do hold is ULS Technology (ULS) who operate a conveyance service platform. A trading statement this morning for the first half year said the revenue is expected to be up 3% and underlying profit up 5%, despite a fall of 4% in the number of housing transactions across the UK market. But the sting in the tail was the mention of a slowdown in mortgage approvals which “may well be short lived but is likely to have some impact on the Group’s second half results”. The share price promptly dropped 20% this morning. It’s that kind of market at present – any negative comments promptly cause investors to dump the shares in a thin market.

One piece of good news for the housing market which I failed to mention in my comments on the budget was that the “Help to Buy” scheme is not being curtailed as some expected, but is extended for at least another two years to 2023.

Yesterday I attended the Annual General Meeting of Ideagen (IDEA), another company I hold. It was unexciting with only 4 ordinary shareholders in attendance so I won’t cover it in detail. But boring is certainly good these days.

It was the first AGM chaired by David Hornsby who is now Executive Chairman. One pertinent question from a shareholder was “what keeps the CEO awake at night?”. It transpired that the pound/dollar exchange rate was one of them simply because a lot of their revenue is in dollars (their US market seems to be a high growth area also). I suggested they might want a “hard Brexit” when the pound would collapse and improve their profits greatly. But the board somewhat ducked that issue. Note that this business is moving to a SAAS revenue model from up-front licence fees which may reduce organic growth slightly but increase revenue visibility. The point to bear in mind here is that even on a hard Brexit it is unlikely that trade tariffs would impact software income because there are no “goods” exported on a SAAS model.

Another question asked was about financing new acquisitions which the company does regularly. These are generally purchased for cash, and share placings are done to raise the funds required. Debt target revenue is only one times EBITDA so debt tends to be avoided.

It is worth comparing that with Victoria (VCP) a manufacturer of floor coverings who issued a trading statement on the 29th October which did not impress me or anyone else it seems. Paul Scott did a devasting critique on Stockopedia of the announcement. In summary he questioned the mention of a new debt being raised, although it was said that this would be used to repay existing debt, when there were few other details given. He also questioned the reference to reduction in margins to maintain revenue growth. The share price promptly headed south.

The company issued another RNS this morning in response to the negative speculation to reassure investors about the banking relationships, covenants and credit rating.

I have held a few shares in Victoria since the board bust-up a few years back and attended their last AGM in September when I wrote a report on it here: https://roliscon.blog/2018/09/11/brexit-abcam-victoria-and-the-beaufort-case/ . The share price was already falling due to shorters activities and my report mentioned the high level of debt. The companies target for debt was stated to be “no more than 2.5 to 3 times” at the AGM which is clearly very different to Ideagen’s!

I did have confidence in Geoff Wilding, Executive Chairman, to sort out the original mess in Victoria but the excessive use of debt and a very opaque announcement on the 29th has caused a lot of folks to lose confidence in the company and his leadership. Let us hope he gets through these difficulties. But in the current state of the stock market, the concerns raised are good enough to spook investors. It’s yet another previously high-flying company that has fallen back to earth.

One more company in which I have a miniscule number of shares is Restaurant Group (RTN) which I bought back in 2016 as a value/recovery play. That was a mistake as it’s really gone nowhere since with continuing declines in like-for-like sales. At least I never bought many. Yesterday the company announced the acquisition of the Wagamama restaurant chain, to be financed by a rights issue. The market reacted negatively and the share price fell.

I did sample some of the restaurants in the RTN portfolio but I don’t recall eating in Wagamama’s so it’s difficult to comment on the wisdom of this move. All “casual dining” chains are having difficulties of late as the market changes, although Wagamama is suggested to have more growth potential. The dividend will be rebased and more debt taken on though. With those reservations, the price does not look excessive. However, while they are still trying to get the original business back to strength does it really make much sense to make an acquisition of another chain operating in the same market? Will it not stretch management further? I will await more details but I suspect I may not take up the rights in this case.

One other item of news that slipped through in the budget announcements was the fact that in future Index-linked Saving Certificates from NS&I will be indexed by Consumer Price Index (CPI) rather than the Retail Price Index (RPI). This is likely to reduce the interest paid on them. But it will only affect certificates that come up for renewal as no new issues have been made of late. These certificates are becoming less and less attractive now that deposit interest rates are rising so investors in them should be careful when renewing to consider whether they are still a good buy. I suspect the Chancellor is relying too much on folks inertia.

At least even with the bad news, my portfolio is up significantly today. Is the market about to bounce back? I think it depends on consistent price rises in the USA before the UK market picks up, or a good Brexit deal being announced.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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