Small Cap Value Report (11 Jun) - VNET, QPP, ECK, REDT, PRES

11th Jun '13 by Paul Scott

18 comments 18769 reads

Good morning! The big one for me today is results for the year ended 31 Mar 2013 from Vianet (LON:VNET) . Regulars will know that this is one of my largest personal holdings, mainly due to the strength of their recurring revenues (about 70% are on long-term contracts), and the strong dividends that this finances.

Vianet warned on profits in Feb 2013, but the results are not too bad, with pre-exceptional EPS dropping out at 9.8p, although that's flattered by a tax credit from utilisation of losses, and R&D.

The Chairman has proved good to his word, and has maintained the dividend, which will be 5.7p for the year. With the shares at 90p this gives an excellent dividend yield of 6.3%, which supports the investing case strongly. That seems to be well covered too, as dividends cost £1.5m to pay, but the business continued to generate around £3m in operating cashflow before changes in working capital.

The interminable contract delays from the small vending division have extended out even further, yet again, and I'm now taking the view that anything from this area will be a bonus, and is probably best ignored in valuation terms from now on.

There is a threat to the core beer monitoring business from the Government's proposed Statutory Code for Pub companies. Vianet say that they are challenging these proposals "as forcibly as necessary" to see them off. No doubt the pub cos are doing the same. It seems inconceivable to me that the Government would outlaw the use of beer monitoring equipment, as that lies at the heart of the landlord-tenant relationship in the British tied pub sector.

Expansion in the USA continues, and the fuel monitoring business has greatly reduced its losses. The outlook sounds reasonable, so overall at the current price I think Vianet looks good value, so I'm happy to hold for another year and collect in the big dividends.

Someone asked whether I had a chance to look at the Quindell Portfolio (LON:QPP) Annual Report over the weekend, and the answer is "no", I was too busy doing other things. Quindell is not a priority for me, as I don't like the company at all, have fully…

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fek47

11th Jun '13

Vianet (LON:VNET) results:

Revenue down 8.2%
Gross margin down 2%
Operating profit down 15.4%
PBT down 21.7%

and all this despite decreasing group administrative costs by £0.8m (ie. the profit figures would be even worse by -0.8m worse had they not achieved this reduction in overheads).

Unless there's something I'm missing these results are a complete disaster, no?

Beginner

Hi Paul
I bought into Red24 (LON:REDT) a few weeks back after watching for a while. It has shown consistent growth, and although they do have a limited client base at the moment, they are being very proactive in seeking to expand it both in the UK and outside. The dividend boost was very unexpected, but it is affordable. Overall it may well be worth a punt. (I worked under one of the directors a very long time ago (and so far beneath I was subterranean). If nothing else he is a pretty decent spud!)

Vianet (LON:VNET) seems to have taken a pasting this morning. Are you still happy to be holding? The dividend certainly makes this attractive, and I have used the fall today to top up. It is currently at 81.1. The inquiry into pubcos seems to be doing more damage here than it is to the pubcos!!!! Maybe Vianet (LON:VNET) should have read your last postings about SDL (LON:SDL) and chosen not to put too much in their reporting!!!!

Apologies. In above delete SDL (LON:SDL) and insert Silverdell (LON:SID).

Paul Scott

Hi Fek,

What you've missed is that poor figures were already expected. So it's all about what the actual numbers are against expectations, and these figures today were slightly ahead of expectations. Remember that they warned on profits in Feb 2013. Also, the valuation already takes into account poor performance, which is why the PER is low, and the dividend yield is now so high (it's now 7.1%, and that's well covered by core business earnings).

The shares initially opened slightly up, and I was expecting a move up to maybe 95p today on the back of figures which were slightly better than expected, and a pretty reassuring outlook.

However what has clearly spooked some investors is the comments on the regulatory situation. If you take the view that the Pubcos & Vianet will be able to lobby away the threat to the Tie, then it makes Vianet look cheap on the basis of recurring cashflows (especially when you strip it back to the core business, taking out the loss-making sundry operations in other sectors).

On the other hand, if you think the regulatory threat could be serious, then that calls into question the sustainability of earnings from the core business.

I've been reading the Govt consultation document this morning, and it doesn't actually attack the principle of the Brewery Tie, but it seeks to make the position of tenants equally fair based on whether the Pub is Tied or not.

Regards, Paul.

deucetoace

Hi Paul,
Do you have any views on Pressure Technologies (PRES) who reported interims today. Significant growth (albeit reading between the lines it might not continue at this level of growth in H2), net cash. I hold and they look good to me.
deucetoace

Hi Paul,

Thanks for your reply, and I appreciate that today's results are in line with the revised estimates following the February profit warning.

However the arguments in favour of holding on to Vianet (LON:VNET) seem to rest on its high dividend yield (which is even higher now due to the shares tanking another 10% today), but does a company whose revenues, margins and profits are all declining sound like a safe prospect regarding sustainability of dividends?

thanks, Francis

Hi Francis,

"does a company whose revenues, margins and profits are all declining sound like a safe prospect regarding sustainability of dividends?"

When you break down the various constituent parts of the business, the core business is still a cash cow, with long-term contracts providing recurring revenues. Remember that the losses from the fuel division, and the USA expansion are pulling back overall profitability. Vending sounds like it's going nowhere in the short term anyway.

So to my mind the crux of the situation is whether the position with the Brulines product can be defended against Government intervention. If it can, then the core business will keep chucking out juicy dividends for the foreseeable future. Buying today at 80p (which should be possible, as there has been heavy selling today) gives a dividend yield of 7.1%, which IS sustainable providing the regulatory situation can be managed.

Maintaining the dividend today was a strong message from the company. They said they would maintain it, and they have done.

I'm going to do more digging on the regulatory side of things, to try to assess the risk there.

Cheers, Paul.

bobdouglas

Looks a canny little British company - decent assets, rising dividends, profitable and doesn't look expensive with net assets of 16.5m against a market cap of 19.7m.

Hello again
The key potential proposal in the consultation document is:

'that flow monitoring equipment may not be used to determine whether a tenant is complying with purchasing obligations, or as evidence in enforcing such obligations'.

This appears several times. If this was given statutory force it would make the main Vianet (LON:VNET) product largely redundant. The claims the system is useful in quality monitoring would not make it financially viable in most pubs. I note the list of those being consulted DOES NOT include Vianet (LON:VNET). However the pubcos will argue very hard for the systems to be maintained. In a way this reminds me of the furore over tachographs, but here we have a 'spy-in-the-cellar' rather than one in the cab. The long-term future of Vianet (LON:VNET) may well devolve upon the Fuel Solutions and US activities.

Hi Beginner,

Fair points, but as Vianet make clear in their statement today, there has never been any evidence to suggest that Brulines equipment is inaccurate, and to date it has always stood up to legal scrutiny.
So it is curious that the Govt consultation paper appears to pre-judge against flow monitoring equipment.

Remember though that this is only a consultation paper, and that responses are being submitted by all interested parties, including Vianet.

Bear in mind too that the PubCos have huge political influence, hence the final outcome will probably be a watered-down version of the existing proposals. The consultation document specifically states that it is NOT attacking the principle of the Brewery Tie, which it accepts is a valid business model, but that it just wants to ensure that tenants are treated fairly.

Cheers, Paul.

Hi again Paul
Also, even if the orders are given statutory force, the pubcos could very probably continue using the system as it provides indicative purchasing and consumption figures. This is valuable commercial data. I have added again!!!!! Good luck to all, in and out!

http://www.sharesmagazine.co.uk/news/vianet-is-still-in-danger-territory#.UbcPdZ01iUl

"Anyone lured to the stock by its attractive dividend, currently yielding 7.1% based on today’s dividend announcement, needs to remember that it is pointless buying a stock for income if the share price keeps falling. That’s the market telling you the dividend is unsustainable because there’s a problem with earnings strength."

Unfortunately I'm inclined to agree with this assessment!

marben100

Hi Paul et al,

Results Presentation for Vianet (20 mins) now available here: http://mediazone.brighttalk.com/comm/h2glenfern/accdb5bc1a-36731-5595-42121

If you speak to management, please have a winge about the start time for their AGM: 9am in Stockton is not exactly shareholder friendly! Would have liked to attend that one but the start time makes it all but impossible.

Also confusing that the notice of results said that the results presentation would be available at 7am on their website: wasn't there earlier, when I looked. I now see that it was interactive - but no idea of how one would have found it and participated. No Q&A has been included in the recording.

Interesting thread on Brulines/iDraught, from the licencees perspective here: http://www.morningadvertiser.co.uk/Forums/News-Article-Comments/Licensee-loses-case-against-Enterprise-over-beer-flow-monitoring-equipment Hmmm... makes me somewhat cautious.

Cheers,

Mark

Mark Midmore

Just out of interest Paul, did you do any more 'digging' into Kentz. The fundamentals seem so solid and they keep releasing good news but the market is not listening! I'm happy to hold and buy more on any weakness. Have I missed something?

Last year at this time Kentz dropped quite sharply for no apparent reason. Just seems to be on a constant rollercoaster.

Mark,

No, I didn't do any more research on Kentz (LON:KENZ) as it seems to me the shares are just cheap because of market worries that profits might not be sustainable. Or that growth would be difficult from now on anyway.

There's nothing I can do about that, so I've just tucked away my Kentz shares into the long-term part of my portfolio! Am happy to hold - it looks a good company at a reasonable price.

Cheers, Paul.

snickers

This pub-tie review seems to have jumped out rather suddenly (begun in April) - and consultations already about to finish. Plenty of disgruntled comments about flow measurement, unsurprisingly, from pub lessees on bulletin boards, but without oversight the tie system is ripe for abuse. The issues are rather how accurate is the data, and whether the pubcos misuse it. I just read that 2008 govt paper criticising Brulines for inability to tell water from beer in the lines - they claimed they could do so by using density differences, & suggestions that this wasn't possible. Now (from idraught website) they use conductivity and temperature differences, so the system is improved. Unfair use of the data ought to impact the pubcos if reforms are made, not VNET, I'd have thought, especially since idraught is rolling out in the US for small chain bars & restaurants, open long hours with high staff turnover; that says it's useful for independents also. Unless you think spit and sawdust venues are the future.

Delpher

One of the major tenets of the proposed code is that flow meters should not be used for the purposes of determining whether a tenant is complying with a purchasing obligation leading to enforcement action. The root of this is twofold 1. the wide discrepancy between the cost of beers, wines and spirits bought under a purchasing obligation and the open market.and 2. the fact that a tied tenant unable to pay for supplies on demand is likely to seek them elsewhere and such a breach has been the easiest method of terminating the tenancy. There is no objection to flow meters per se so they could be an integral part of a new style of tenancy agreement based upon the basic principle that tied tenants should be no worse off than free of tie tenants.
The essence of all pubs is that there is a joint business arrangement between the landlord and the tenant to provide a profit for both using the landlord's premises, ideally in the style of a franchise. Unfortunately not all tenants are sufficiently skilled in business to make the best of the opportunity leading to the need for greater control by the landlord. i-Draught purports to monitor all aspect of the beer supply ensuring quality and providing the system can be relied upon will support both the tenant and landlord in establishing a true value of the business and its prospects so I see a beneficial outcome of the Consultation for Vianet provided that it can demonstrate added value under the proposed Code.

Small Cap Value Report (11 Jun) - VNET, QPP, ECK, REDT, PRES

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Paul Scott

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