Ouch. Investors inRevolution Bars Group (LSE: RBG) suffered a 35% fall in the value of their shares on Friday, withthepriceplunging as low as 126.5p after a surprise profit warning.
Revolution waslooking like a classic growth story since flotation in March 2015, trading on a modestvaluation 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. Thedividend looked set for a progressive few years too, and though yielding only around 2%, thats decentfor a company at this stage in its development.
Then on Friday, the company warnedthat no growth is likely this year after all, and thatEBITDA (pre-opening costs)is nowexpected 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 riseingeneral 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 wasnt enough, two bars in those hotbeds of revelry, Blackpool and Cardiff, were closed for two weeks for refurbishment.
Same old story
Whats happened here is something that Im always banging on about, and Ive seen it many times in my years of watching growth shares. An attractive candidatedoes 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 normalcircumstances and the forecast dividend would be very well covered too. Its often events like this that have me seeing a rare buying opportunity for an otherwisemissed growth boat, sowhy am I feeling a bit twitchy in this case?
For one thing, those extra cost drivers of living wage and minimum wage, well, they didnt suddenly come out of the blue, andIm a little disappointed that the company had apparently notnoticed these well-publicised sector cost headwinds until so late its year ends 30 June.
Revolution also assuresus that the barswhose 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 dont like companies painting their hopes with a gloss of certainty like that.
What I take from the statements about maturity and about next years contributions is:These bars have so far not yet done as wellas wed hoped, but were optimistic about next years profitability and we surely cant assumeany more than that at this stage.
Chief executiveMark McQuater speaks ofthe businesss capability to deliver high returns on invested capital, but I cant help wonderingif buying now might be throwing money into a pit. Id definitely wait and see.
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