Ouch. Investors in Revolution Bars Group (LSE: RBG) suffered a 35% fall in the value of their shares on Friday, with the price plunging as low as 126.5p after a surprise profit warning.
Revolution was looking like a classic growth story since flotation in March 2015, trading on a modest valuation with a forward P/E of around 13. Earnings per share in 2016 climbed by 14%, and we had forecasts of 7% and 16% growth for this year and next respectively. The dividend looked set for a progressive few years too, and though yielding only around 2%, that’s decent for a company at this stage in its development.
No growth
Then on Friday, the company warned that no growth is likely this year after all, and that EBITDA (pre-opening costs) is now “expected to be broadly at the same level as last year.“
The cause, it seems, is twofold. Firstly, the living wage, increases in minimum wage, the apprenticeship levy, and the rise in general business rates have all been blamed for costs that are now going to be more than anticipated.
On top of that, the bars opened during the past 12 months are apparently “taking longer to mature to full profitability than originally anticipated“, though apparently raking in an average turnover of £43,000 per week. And if that wasn’t enough, two bars in those hotbeds of revelry, Blackpool and Cardiff, were closed for two weeks for refurbishment.
Same old story
What’s happened here is something that I’m always banging on about, and I’ve seen it many times in my years of watching growth shares. An attractive candidate does well as long as the news flow is always at least as good as expected — and Revolution shares had been appreciating nicely since last summer. But when something downbeat comes along, wham, a price collapse.
If we assume EPS for 2017 will now be flat, the fallen share price would suggest a forward P/E of under nine, which would look like a screaming bargain for a growth share in normal circumstances — and the forecast dividend would be very well covered too. It’s often events like this that have me seeing a rare buying opportunity for an otherwise missed growth boat, so why am I feeling a bit twitchy in this case?
For one thing, those extra cost drivers of living wage and minimum wage, well, they didn’t suddenly come out of the blue, and I’m a little disappointed that the company had apparently not noticed these “well-publicised sector cost headwinds” until so late — its year ends 30 June.
Optimism overdone?
Revolution also assures us that the bars whose maturity is a little late in coming “will make a full profit contribution in our next financial year.” Now, that would normally be good news, but I don’t like companies painting their hopes with a gloss of certainty like that.
What I take from the statements about maturity and about next year’s contributions is: These bars have so far not yet done as well as we’d hoped, but we’re optimistic about next year’s profitability — and we surely can’t assume any more than that at this stage.
Chief executive Mark McQuater speaks of “the business’s capability to deliver high returns on invested capital“, but I can’t help wondering if buying now might be throwing money into a pit. I’d definitely wait and see.
