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Hi Everyone a few points to make
Depreciation is not a tax deductable expense it is deducted from the operating profit but added back on the cashflow it is just paper accounting to show you the theoretical cost of owning a asset as it depreciates over its theoretical life ,when their tax liability is calculated by HMRC this would be added back in so they would have a tax liability after finance costs of 4.130 million
2 They didnt need to put cash aside to pay tax they already stated they have 6.1million to set against tax liabilities
The fuss has been over the depreciation being spread over a longer period improving the PBT on the accounts but it is irrelevant really ,it never made sense to spread these costs over short period.
3 they spent 6.9 mill on plant and machinery[growing the business]
4 spreading asset depreciation means they dont think they will need to spend as much on renews/maintenance which is good for us
You have to understand they are investing most of their generated cash into the business its not going into our pockets anytime soon only to grow the business, some have said they might need additional funds to grow the business quicker, the jury is out on that one
Yeah totally a paper accounting thing.
Pippi - at last we are in agreement about something
I'm an accountant myself - we do all our business cases, forecasts, budgets and post investment reviews on EBITDA and cashflows as that is what is actually happening.
As you say the rest is just a paper thing that dictates when and where things get accounted for. It's not massaging the numbers - its following the very clear rules that get checked by the auditors each year. Failure to follow the rules is a serious issue. It's not about makin numbers better.
Equally on cashflow - every business should be doing their best to improve cashflow. Getting your money in quicker and taking the allowable time to pay your bills is good business sense.
XP appear very good at managing cash - they have only a small trade debtor balance and their trade creditors seems consistent - growing as their business grows (more venues > more customers > more alcohol, more food, more energy to pay for so the amount owing at any given time will grow broadly in line with COS.
Yes but operating profit has barely increased despite the making £2.3M adjustment & despite x2 on revenue —— so why not?
Don’t get blinded by EBITDA —- they are using accounting rules to paint that rosey as possible —— where did £28.7M of gross profit go?
£16.1m site level operating costs
£5.4M of D&A; which could have been £2.3M higher
£8.5M central costs
£2M financing costs
Poof!! There goes profit!!
Don’t expect a rerate or shareholder return !
So essentially they can only afford to sticky plaster repair the escape rooms and boom sites… and still not turn a profit.
That gets them some cash & a bit of year end hokey pokey with the cash flow gets it higher —- but some fine margins here
one of the things i’m most excited about is the double digit lfl growth in both escape hunt (the more mature business) at 17% and boom at 29%. and considering a lot of these sites hadn’t fully opened yet or been open long it would’ve taken a while to gain traction. so i think that’s very impressive. i think you can also add the fact richard is always looking at the data and looking at how they can optimise sites. like i said before he’s mentioned adding a ****tail bar at the o2 venue to increase drink spend before concerts or adding an extra escape room at sites where there’s more capacity. i think they’ll continue to achieve more double digit growth and this will be turbo charged if/when the market recovers.
Pippy back to deramping again - SIGH
They are not doing anything to blind anyone.
They shows the EBITDA at site level which is super helpful - it helps me model out the growth The central Opex is clearly segregated as this wll not grow in line with revenue - with sensible cost managemnet it should decrease as a % of revenue and we'll see EBITDA margin improves as the number of venues grow.
We've all already agreed that depreciation and amortisation is a paper exercise - this compnay has already invested £50m to put into place it's current infrastructure
They dont have £2m Financing costs - they have minimal debt and only paid £200k interest in 2023. You are muddling up their lease costs .
As I have said in many posts already....
XP has a network of 80 venues; this is fully paid for. We know from the lastest RNS that:
1. XP are continuing to see L4L growth of their current estate (Escape Hunt - 17% in 2023, 11% YTD in 2024 and (Boom Battle Bar - 19%, 9% YTD in 2024)
2. The change in depreciation shows that they believe the life of the games is longer than previoulsy thought
3. These 80 venues require only a modest amount of annual maintence CAPEX
4. These 80 venues represent a paid for Asset that delivers a miniumum +£10m Cash per annum and +£10m EBITDA
5. Bigger CAPEX undertakings (Full Refit of existing Venue or New Venues) to be funded organically through the +£10m cashh flow it generates + combined with a small amount of 'low cost' vendor financing when opening new venues
Sorry if that’s frustrating you!
But I’m not minded to put more investment here on the back of growth alone and selectively choosing metrics ( they can push the book entries around to land EBITDA where they want it)
Let me flip the question —- what’s your forecast for profit for the next few years bottom line
They have gone from a 4.9 million operating loss, year end 22 to a 6.1million taxable profit, depreciation added back in ,before capital allowances end 23
you will see its the fair value adustments relating to share based contingent consideration of 6.2 million that muddied the waters year end 22
So what do you make it going forward?
Some interesting discussions over the last few days.
For me i'm somewhere in the middle - disappointed that overall PBT is a small loss but encouraged by revenue and EBITDA growth, EBITDA margins increasing and a healthy cash generated from operations figure.
Whilst EBITDA can be 'fudged' a bit it is still a useful, and dare i say it the main, indicator for a growing company where they are reinvesting all income so the PBT figure will always be low.
To say EBITDA is not important is also disingenuous. Many companies sell all or part of the business based on this, often between 7 to 10 times EBITDA. Two companies i own did this recently, Croma and EAAS.
Eaas is a good example. A growing company (rev increased from £22m to £33m 2022 to 2023) but due to cashflow issues and therefore high funding PBT is only c£1m. Total value of business was low at c£20m, yet they recently sold part of their business for £29m based on an EBITDA multiplier.
I suspect if either Escape or Boom was approached both would command more than the current SP so the growth is adding value.
Cash generation is key for me - in the results just published cash generated was c£9m, of which c£6m was used to invest in the business (new sites and buying franchises etc) and c£2m on finances (paying for leases etc). Therefore, bottom line cash increased by c£1m.
To say where has the gross profit gone maybe compare this to revolution bar group, RBG. It had revenues of over £150m and made gross profits of £117m, however, failed to make an overall profit. Both companies have a similar business model, however, compared to RBG i'd say XPF are doing quite well
Below link is the investor meet presentation
Had a listen & doesn’t sound too bad.
They talk about cash generation & how they benefit from rent free period for higher cash flow … so as sites mature and the big chunk of new sites go beyond this point then this will mean less impressive cash generation all-be-it still positive…. But they talked about taking on debt to fund faster expansion as an option.
You missed an important point about haveing "negative working capital"
Most customer pay upfront, they carry very little stock (2-3 days of drink)
Yet they may most of their bills in arrears (cleaning)
So as the grow - the negative working capital will increase in line and generate additioanl cash