Real Good Food Share Discussion Threads

[cockneyrebel] 04/3/2013 20:19

I'd say take a look at MUBL (MBL Group) 140661.

A distribution co like RGD in many ways, pinched by supplier and customer and squeezed in the middle.

Everyone there didn't want to hear what I said when they were nearly £2, or when they fell to 150p, or 100p, or 50p, or 25p.....

I've done this for a living for 13 years now. That doesn't mean I don't get things wrong but I definitely have learned a lot in that time. One thing I've learned is don't bother talking to directors. Only call the co if you need a specific piece of data, if they tell you anything else take it with a pinch of salt imo. They are either lying to you or they are telling you stuff they should be telling everyone when they chat about the general stuff you reckon PT has told you imo.

Another thing I've learned in that time is that when people post negative things on a thread it isn't always because they are short, it can be that some actually want the novice investors not to get caught out. I've told you a number of times I'm not short RGD and never have been. There's a lot been suckered in here. I was lucky in that when I go heavy in a stock I do a lot of digging and I found out about PT. I sold out and told everyone here my reason. In the past year I've seen bullish posters talking this co up, meetings to see the directors, big sizzle sessions but none of those poster have been around since the last statement. No news on another meeting, none of their thoughts etc. All very keen to talk about the co 6 months ago tho.

Caveat Emptor imo.

C|R

[140661] 04/3/2013 18:51

I am copying an excellent summary prepared by BrianGease which is based on a careful analysis of the business. I recommend people read this well thought through analysis. I have added some points to support/supplement BrianG's comments.

"I tend to think of RGD a bit like a restructured company starting afresh in 2009, as it emerged from the financial crisis and approached the end of the reduced 'reference price' phase of the EU sugar regime reform. Key points to add are Turnover up 25% to March 2012 and a further 20% increase forecast to March 2013. EPS gone from 1.3p in Dec 2009 to 5.1p to Dec 2011 and an expected 6.5-7p for year ending March 2013. Again very impressive growth.

Although it's currently on what appears to be a 'value' forward earnings multiple of 5.9x (assuming 6.8p for the current year), it's probably better considered as a 'growth' company.

Earnings figures since 2009: (note that I'm ignoring the Jan-Mar 2012 period)
2009 2010 2011 2013 2014
1.8p 2.6p 6.5p 6.8p* 7.8p* (* = my more conservative numbers)Based on my conversation with PT I am working on an EPS figure closer to 8.5p to March 2014.


You say: "EPS is pretty meaningless unless it converts into cashflow"

Well, I think that's an important check in two situations:
1. Over the long term.
2. Where the difference is being funnelled into poor quality intangibles, or dubious receivables/inventory in an underhand manner.

With this company, I believe (2) just doesn't apply, so I'll only consider (1).

As a growth story, I'm quite happy for the company to invest heavily in its own business, where that investment makes economic sense. Obviously that's quite normal; and as a shareholder I rely on management to allocate capital judiciously. Some companies issue significant new equity in order to fund their growth. RGD is fiscally more solid than most high growth companies, so banks are willing to lend against various assets, which means reasonably priced debt can be used to fund growth. As a shareholder I certainly prefer prudent debt-funded growth over what would be substantial dilution. Of course if you're taking a DCF approach to company valuation, deferring cashflow and taking on debt will have a negative effect in its own right, but I believe the benefit of the investments will substantially outweigh the costs. I concede that there's a strong element of belief here, and trust in management's ability to deliver.

Given some of what you said in your earlier post, I suspect your counter may be - "yes, but that's a never ending process, because of the capital intensive nature of the business".

I think there are two elements here:

Firstly, will they continue to plough profits into investing for growth? My feeling is that the current surge will continue for about two years, then the push for capex led growth will slow considerably. I don't consider earnings that are being invested in capital required for growth to be of any lesser quality than free cashflow, other than the risk those investments don't deliver the expected returns.

Secondly, is there any other significant drag effect that will hold CFPS below EPS?
You say: "This is a capital intensive business. The replacement cost of the factories and other assets will be significantly higher than their historic cost, meaning Capex per share is always going to dwarf the depreciation per share just for the business to stand still."

That seems a good point in principle, but I'm not so sure it's significant in practice. You're basically saying that normal asset depreciation doesn't allow for inflation, so replacement cost will be higher than cumulative depreciation. That's obviously a general point that will affect all businesses that have capital expenditure to depreciate - so capital intensive businesses will be affected to a greater extent. Looking at the past few years since the disposal of the fish business:

Year Revenue B,P,P&E Additions Depreciation
2008: £218.6m £13.1m £1.41m £1.72m
2009: £215.6m £15.2m £0.71m £1.89m
2010: £200.1m £15.6m £2.16m £1.78m
2012: £249.0m* £17.0m £3.12m £1.73m (revenue for 12m to Dec 2011)
[B,P,P&E = Buildings, Property, Plant & Equipment]

It's clear that investment in plant and equipment has ramped up sharply since 2010, and I seem to recall it's going to be over £3m again in the current year.

Revenue tends to be a bit of a lagging indicator of new spend, but I think it will soon more fully reflect the new investments.

My belief is that technological advances in food production and distribution equipment mean that equivalent performance can be often be bought for no more than the historic cost. Obviously there will be a significant variation across the range of assets, but I think the vast majority of the difference between the depreciation cost and additions relates to increased capability. I think revenue growth will support that view.

On that basis, I expect capital expenditure not to be a long term drag that causes variation between EPS and CFPS.


Your point about it being on a racy 15x multipe of historic earnings, while probably true, doesn't reflect growth potential. The current historic multiple is actually 5,5x. This is probably a case where you either believe there's a valid turnaround growth story, or you don't. I think the current broker estimates are too ambitious, and put too much pressure on staff to deliver, and risk investor disappointment (with the effect that has on sentiment). But, even with reduced targets, it seems to me an attractive investment as under-performing assets start to perform correctly, revenues rise, and margins correct.

The only 'leakage' between declared profits and the balance sheet, is the amount consumed by actuarial revaluations of the DB pension scheme. This isn't huge when compared with the size of the company, and there are currently negotiations underway to investigate if any beneficiaries of the scheme wish to look at other pension alternatives. We can also hope that the liabilities don't keep heading in the way they have over the last few year, but I wouldn't bank on it!


On the question of working capital; it won't recover until they they moderate their investment programme. Cash generated by the business, along with increased debt are funding increased working capital requirements as well as supporting capex plans. I'm happy with this. Obviously the company's in the situation it is. There's nothing we can do to go back and alter profitability prior to 2009. You can either consider that historic performance is a good indication of the future performance of the group, or like me, think it of as a new company since 2009.


When you say:
"If the execution of the growth plans falter or fail - the debt is going to bring this down as CR has repeatedly pointed out." Net debt is around the same as it was 3 years ago but the business is substantially larger and the interest cover significantly improved. debt is not a problem for RGD although we would all like to see it fall which will happen over the next 2-3 years.

You're right that this is a possibility, but I think you need to try understand the business and the people to assess this risk. I believe the company are demonstrating their operational capability, at the same time as their IR ineptitude. That would seem to create an investment opportunity, but I'm more than aware not many share that view..."

CR, what would you say the share price should be if RGD announce that for the year to March 2013, EPS will be no less than 6.7p, net debt is below last years level, all businesses are now trading profitably for the year and 20% growth forecasting in EPS for 2014? Then give me an example of a company trading on the parameters you apply to RGD in arriving at your valuation. Do this and I might then take you seriously. As always GLAH.

[cockneyrebel] 04/3/2013 17:50

The chart is on a big support level here too - a close below 35p and the next support is 23p

CR

[cockneyrebel] 04/3/2013 17:46

It had to be done Typo :-)

CR

[bigbigdave] 04/3/2013 17:40

Looks like I shorted them in the stockchallenge a month too early :o(

[typo56] 04/3/2013 12:25

Wow, you don't often short anything in the Stock Challenge. Last thing you shorted was CPR April last year. Needless to say it was your best pick. You really need to get a grip of this bull nonesense and do more shorting.

[cockneyrebel] 04/3/2013 10:27

Exactly - if the co has all this to tell you why not tell all shareholders?

A director on a one to one will tell you what you want to hear, not what you need to know.

Put these in my March Stockchallenge as a short today.

CR

[shanklin] 04/3/2013 10:22

140661, The question you need to ask yourself is why none of this information is ever put in an RNS. All IMHO DYOR etc.

[140661] 03/3/2013 18:09

CR, I simply reported what my conclusions were from my meeting with PT. I was very encouraged and thought others might find his comments helpful. GLAH

[cockneyrebel] 03/3/2013 10:52

140661 - this is a distribution co in the main. They have no control over their costs and they have no price leverage over retailers as they are't a brand name that can command a premium. They have debt that exceeds the market cap by 30% or so.

They have poor operating cashflow. They have a CEO with a chequered history at best.

Go and have a look at API recently - they pout themselves up for sale and look like they can't get a buyer even on a PE of around 6 and asset/debt/performance wise they are a far better co than RGD. RGD isn't even worth a PE of 5.5 imo, they'd never sell out on that rating imo.

We'll see what they say this month but my bet is you're still frustratedly trying to talk these up from an even lower share price in a month's time imo.

CR

[140661] 03/3/2013 10:39

CR, I believe RGD will report growth in most headline numbers of 20%. I would expect to see EPS of not less than 6.5p, lower debt, all businesses being profitable over the course of the year and the expectation of similar growth next year. You can keep knocking RGD but this company is producing above average growth and has made tremendous progress under PT's stewardship. The business is not immune to the overall state of he economy and this year's figures will be below the original expectations but 20% growth is a very solid performance. Lets not forget with the shares trading at 37.25p, they trade on 5.5x, so a massive discount to the market. Although he has no intention of breaking up the business it would be interesting to work out the break up value which I suspect would be a 3-4 times multiple of the current market cap. Value will come out for those with a bit of patience. GLAH

[cockneyrebel] 03/3/2013 10:04

149661:

"1. this years figures to March 13 will show a very healthy improvement on last year (circa 20% growth)."

That will be a miss for the eps then by some way?

What is 'this year's figures'? Sales? Op Profit? Gross Profit? Earnings?

CR

[fugwit] 03/3/2013 09:44

Interesting read Shanklin, just as well rgd focus on refined imports and not cane.

[140661] 02/3/2013 19:23

fugwit, agreed it is late but it takes time to get independent coverage as a small company. It is coming in the next quarter and will hopefully be the prelude to more institutional interest.

Typo56 I understand your frustration but you wont need to wait much longer for clarification. The fact they obtained a 5 year facility for a larger amount ,6 months early is a good start but I believe the rate is also improved, not long to wait.

[typo56] 02/3/2013 18:03

Why do they need to wait to the release of the annual accounts to inform shareholders about the detail of the PNC renewal? Why couldn't they have disclosed more about the 'excellent deal' back in December?

[fugwit] 02/3/2013 15:00

Many thanks for the feedback 1440661, it is appreciated.

My only comment would be that PT was supposedly 'taking' steps to develop broker coverage last November when I discussed it with him, at the time we were imminently expecting a new analyst note, a quarter later I am still waiting...unless I missed it of course. Otherwise as ever time and results will out. Ta again.

[alter ego] 02/3/2013 10:38

thanks for taking the time to post that 140661

[140661] 02/3/2013 09:50

I had a good meeting with PT yesterday and have come away very pleased with the progress they are making. As always PT was very careful not to disclose any information not in the public domain so the conclusions I have reached our mine not the company's.

First, he confirmed that trading in the sector remained tough. RGD's customers are suffering and that is pushed down to suppliers such as RGD so its a difficult environment. They do not have any sight of this changing in the short term so are assuming these conditions will prevail for the foreseeable future.

Second, the relationship with Omnicane continues to develop and he was happy to see them buy more shares. PT was out in Mauritius recently and sees this relationship becoming increasingly valuable over the next few years.

The management teams across all businesses are now complete and he believes all divisions have the management teams capable of taking them forward.

We discussed the level of debt and the concerns raised by many commentators on this thread that debt was out of control etc. PT reiterated that they were very comfortable with the debt position. The recent renewal of the debt facility had been very competitive with other major lenders aggressively bidding but they had stayed with PNC as they had offered an excellent deal and their were much lower transaction costs. He said that the accounts would show what a good deal they achieved. On the overall level of debt he claims debt is coming down.

I mentioned my frustration at the share price and the poor wording in the recent update. He accepts that the last statement could have been more informative and will try to ensure more clarity is given in future. On share price he agrees the shares are under valued and is planning on taking steps over the next few months to increase broker coverage and to hopefully attract some institutional interest.

My assessment is as follows:

1. this years figures to March 13 will show a very healthy improvement on last year (circa 20% growth).
2. net debt will be lower than March 2012 and significantly lower than Sept 2012.
3. all 5 businesses will be profitable over the course of the year.
4. next year will show more of the same, 20-25% growth.

PT is entirely focussed on making RGD a great success. He has now built the business and we are about to start an exciting journey which should culminate in the shares being gradually rerated over the next 12 months. GLAH

[spaceparallax] 26/2/2013 17:19

Good to see the share price putting up a fight.

[spaceparallax] 15/2/2013 10:18

Sadly we do appear to have drifted through our late 30s support. We could do with some positive news to help avoid the decline towards the low 30s

[briangeeee] 14/2/2013 21:35

I'd make more use of stock screens if I knew what I was doing, but I don't! Strong ROE/ROTA, etc, is great, but I want a company that will end up in that situation, not necessarily start in it - hence my problem. It's something I need to work on.

I'm not too familiar with the specific characteristics of Buffet's cigar butt failures, but I'd only put a sugar and derived products business in that category if Mr Cameron et al have their interfering way with sugar and salt, etc. If that's the case, then Coca Cola might also find itself heading in that direction!

I haven't had a look at AAZ yet, but if you reach a positive conclusion, I'm all ears....

The difficulty with assessing RGD as an organic turn-around opportunity is that it all comes down to belief in management's ability. Overly bullish forecasts via presentations and the company broker, no tracking of current or previous management targets, no available detail on planing for growth and upside, all means poor management credibility and a low rating. No amount of inspection of their financial history is going to help with that.

It's easily fixed over time by moderating broker forecasts, meeting or exceeding targets, and demonstrating sound financial control and planning. I believe or hope they take advantage of the current opportunity to improve IR, alongside the hopefully strengthening results over the next couple of years.

[140661] 13/2/2013 07:06

BrianG, thank you for your very detailed and informed analysis. You have summarised the position very well IN MY OPINION and we now wait to see who is right. GLAH

[briangeeee] 13/2/2013 00:47

For reference, this is a useful explanation of the basics of the current sugar regime, which is in force until 2015 and possibly longer.