Small Cap Value Report (19 Apr 2016) - VNET, TRI, UTW, CNCT, LRM

19th Apr '16 by Paul Scott

13 comments 15678 reads

Good morning!

Please note that Ed is doing a webinar this Thursday, at 12:30, to demonstrate the new international markets added to Stockopedia - with new regions added this week - Canada, Australasia, developed Asia, and India. More details are here. It's certainly exciting to see Stockopedia developing into a global site!

Europe and the USA are already available of course.

Vianet (LON:VNET)

Share price: 109p (up 2.3% today)
No. shares: 28.0m
Market cap: £30.5m

Trading update - for the year ended 31 Mar 2016. This has reassured the market, hence the shares being up just over 2% today.

Trading for the second half of the year has been as anticipated and, as a result, the Group's full year profits will be broadly in line with market expectations and ahead of last year's outturn of £3.18 million.

Broadly in line does of course actually mean slightly below.

The fuel business was sold a few months ago, so the group is now simplified, consisting of the core (but declining) brulines beer flow monitoring equipment, and a vending machines business.

Brulines has:

...strengthened its market position and maintained its contribution despite ongoing pub closures.

As regards vending, the company says:

Vending Telemetry is benefitting from the Group's increased investment in people and capability during the year which has resulted in good revenue growth during the second half, with the prospects for this business remaining excellent.

Outlook - it sounds as if the vending business is, at long last, making some progress:

James Dickson, Chairman, commented: "Against a backdrop of ongoing pub closures and increased investment, the Group has delivered year-on-year profit growth. Importantly, there has been solid overall progress across the core businesses and the sale of Fuel Solutions will allow full focus on our Leisure and Vending businesses where the medium to long term prospects are exciting, particularly for telemetry and payment solutions for the coffee vending market."

Dividend - a generous 4p final dividend is maintained.

My opinion - I became disillusioned with the limited growth prospects of this group some time ago. It's impressive that the big divis have been maintained - shareholders have received almost 23p in divis just in the last 4 years.

I feel that there is only limited scope for the share price to increase much from here. It's generally not a good idea to invest in companies where the core business is in structural decline.

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simoan

19th Apr '16

Hi Paul,

I've held Trifast (LON:TRI) for several years now. I agree it doesn't look especially cheap but it's one of those companies that rarely does. What the graphics don't show is the quality of the management. I realise for the size of the company they are very well paid but they have materially improved the company since the GFC with very good acquisitions and greatly improved operational efficiency to increase margins. Trifast is another really good example of the "buy and build" strategy you highlighted recently.

Of course, if you're a chartist then the share price is today at an all time high having cleared pretty strong resistance around 130p, so the share price is in clear blue sky. I'm happy to hold but looking to possibly offload some if it runs up much higher.

All the best, Si

hayashi22

I've been in Trifast for a while. Management succession was a concern but this has now been resolved and the new team are bedding in well. A nice mix of organic and acquisition led growth. They seem to have a decent moat too, and whilst the products might seem a bit boring they are not going out of fashion. The main risk is probably a recession hitting demand for industrial products -but that is true of many companies. A quality company.

pastybap

Re:UTW "What if the energy companies decide they don't want to keep giving away some of their profit margin to intermediaries such as Utilitywise? The business could be wiped out overnight. "

Having briefly worked as an accountant in a regulated energy company, I wouldn't say this is a particular worry i would have. The regulated side of the supplier is told what net margin it is allowed to make in a given year (1.5% in the company I worked for). Cost savings, and margin enhancement are therefore not a big concern. In fact the contrary. eg. it is better to make £150m profit on £10bn cost than £75m on £5bn cost. No wonder energy costs are persistently high!

The risk I see is a more commercially astute regulator, who will be more aggressive in forcing the utilities to reduce artificially inflated costs. On the flipside, many regulated untilities look for unregulated ancilliary services to enhance margins, and one day UTW may be of interest to them.

They still don't interest me as an investment though.

AnonymousUser39114

Hi

The UTW business model and the structure of their supplier and customer base seems to be similar to the Phones4u (now defunct) business model.

P4U had the major networks supplying them with phone contracts to sell onto their customers. One by one the networks pulled out and P4U was left with no business (admittedly P4U debt left by the VC's didn't help the situation!).

This scenario seems to also be a real risk for UTW, as Paul mentions.

kenobi

I agree with your comments on VNET, while they've done ok, especially if you factor in the divis, the future is uncertain, the fuel side has now been sold off so it only leaves vending machines and the declining main pub business. It could be that the vending machine business grows faster than the pub business declines, but if it doesn't the profits, divis and share price are going to fall. What visibility is there for future earnings on both sides ?
I sold out some time ago, as Paul says rarely a good idea to invest in businesses whose main products are declining.

K

Marcus Pugh

Any chance of giving a review on Gulf Marine Services (GMS)?

nseddon

Today's Times newspaper has an article in the business section on the reported GAAP vs non GAAP issue highlighted by Paul above
They are almost all at it
In my last job we were quoted in Canada and used adjusted ebitda! Made me chuckle and grind my teeth at the same time

stockandy

Hi Paul,
Thank you for your report on TRI.Perhaps the share price has further to go. Agree with what you say.And by the way thank you very much for writing these articles and I bought some BOO a few months ago
Kind regards
Stockandy

drvodkaquickstep

Nice to see a return to profit at Norcon Norcon (LON:NCON) where patient investors may well now start to get rewarded. An interesting micro-cap with a great balance sheet (lots of cash) but incorporated in IoM and overseas HQ which puts a lot of investors off. Interims later this year should give a flavour of the traction they are gaining outside of KSA. Meeting management in the next couple of weeks so happy to put questions to them. When will the dividend be reinstated is near the top of the list...

PJ0077

Great news regarding Stockopedia's huge increase in geographic coverage, Paul.

When will your South Korean Small Cap Value Report go live?

Beginner

Hi Dr V
Here is an obvious one for you, but something that crossed my mind: will growth come through acquisition or from organic growth, and will growth be sustainable given the lower headcount?

(I bought some Norcon (LON:NCON) a while back, having had dealings with the company in the 1980s. Was always a great set up!)

Thanks

Michael Billingham

Paul, good evening.

STM Those of us that support STM ( I have a holding) were pleased to see a 10% rise in the share price today. Two big trades around 10.30 this morning took the price up.

Velo

Well you've got me bang to rights there Paul - Yes I'm one of those investors who's sole reason I have Connect (LON:CNCT) in my income portfolio is for that luuverly jubberly divi.

I too have some concerns (which is why I traded it a bit in it's previous highs) and write-up's like yours make that little worry-bird on my shoulder chirp into my ear: Didn't I warn you about that?- Now everybody knows.

Something to consider over the concern you mentioned about the past-peak newspapers and mags side of the business -
They acquired a delivery parcel/freight company the other year (Tuffnells) and it's been exceeding all their expectations ever since.

It's grown revenue and profit very well indeed in this latest 6 month trading update and I can see it becoming more central and much more than a constituent part to their business mix.

In fact, wouldn't be at all surprised in future years to see the company metamorphose and become more focused on freight/parcel distribution only

Small Cap Value Report (19 Apr 2016) - VNET, TRI, UTW, CNCT, LRM

Vianet (LON:VNET)

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Paul Scott

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Small Cap Value Report (19 Apr 2016) - VNET, TRI, UTW, CNCT, LRM

Vianet (LON:VNET)

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Paul Scott

13 comments

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