Small Cap Value Report (19 Nov 2014) - VNET, AVON, OPTS, AGA, MYX, BLUR

19th Nov '14 by Paul Scott

12 comments 16066 reads

Good morning! Today's report is going to have to be a bit briefer than usual, as the first version has just disappeared due to a computer malfunction, and I have to go out for a lunch meeting shortly. So will rattle through as best I can.

Pubcos

There was big news last night, when a rebellion of some MPs saw an amendment passed, against the wishes of the Govt, to allow tied pubs to buy drinks on the open market. This has put a massive spanner in the works for pubcos such as Punch Taverns (LON:PUB), Enterprise Inns (LON:ETI), and others. Will the takeover of Spirit Pub (LON:SPRT) still go ahead I wonder?

If this measure is not reversed, then it could kill off the tied pub, and would be disastrous for pubcos profits. So this sector could still be a good area to think about putting on some short positions perhaps?

Vianet (LON:VNET) shares have also dropped in sympathy, as their main profit earner is the beer flow monitoring equipment used by pubcos to monitor that only expensive beer bought from them is being served, and not cheaper beer from the open market.

Avon Rubber (LON:AVON)

Results for the year ended 30 Sep 2014 are out today, and look good on a brief skim.

Company results seem to be getting more & more complicated, with companies seemingly inventing their own definition of profit to give the most flattering result possible. Check out this complicated table;

Broker forecast seems to be 40.3p, so using the 43.7p adjusted EPS figure above, the company seems to have beaten expectations.

The company has also moved into a net cash position, of £2.9m, which is good.

There is a pension deficit, but the overpayments are less than 10% of profit, hence it's not material in my view.

Outlook sounds positive;

Our strategy has significantly improved the shape of the Group, reduced the risk profile and improved margins. This is providing continued growth and the outlook for the future remains positive.

Dividends - at under a 1% yield, the divis are very small, and over 7 times covered, which strikes me as being unnecessarily cautious. Shareholders should be reminding management who owns…

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janebolacha

19th Nov '14

PUB and ETI are still loaded down with private equity debt so this vote may well precipitate the restructurings needed to get these two companies on to a sound long-term footing. The vote is perhaps a reaction to companies like these having pushed the "tied house" model just too far, particularly as regards the prices of drinks supplied to the tied pubs. It's a reaction to the greed of the pubcos and the private equity companies.

Gostevie

Must be honest and say that Vianet (LON:VNET) has been something of a serial disappointment for me. Each time I buy some it seems that within a few weeks or so something is announced that knocks the price.

I do like the company, it pays a good yield and is on a P/E of about 6, so it's cheap in that respect, but I'm starting to think it's probably cheap for a reason. Perhaps it is just accident prone.

Or perhaps I am just a bit crap at timing my purchases (more likely).

Oh well, will hold for the time being ahead of the interims in a couple of weeks.

Steve

dsmorgan

Paul, do you still follow Dialight? Do you have a recommendation on it at the moment?

kenobi

to be fair to vianet, it seems to me that a fair proportion of it's problems are caused by external issues, such as this. This is a very tricky situation, I can understand the backlash against stories of brewerys overcharging, pubs closing and landlords being unable to make a profit.
However, how would this work ? presumably the idea is they would be allowed to buy in cheap beer and then that would force the breweries to lower prices of their beers ? surely they will just make up the difference by putting up rents ? Perhaps that's a better way overall anyway ?

Its pretty tough if your main business is selling systems to monitor beer sales, you've just had the market stalled for 12 months while the government investigated whether to ban your main product, having got past that, now mp's pass another measure that would effectively make your systems pointless. Goodness me the companies or shareholders must have done bad things in a past life !

Like you I'm just wondering if perhaps this product which only exists for the breweries to monitor tenants, has any future at all one way or the other.

K

woodcutter

Paul when you have time, if possible, would you mind explaining the OPTS finance lease receivables and how they are accounted for in the P&L, Balance sheet and cashflow statement.

I've considered investing a few times but haven't due to a lack of knowledge of how the leasing system financials operate. It doesn't look very cash generative.

thanks

Woody

Cleeve

On vnet i really cant see that this issue is their fault, they are anyway using their technology on petrol and vending machines and am not sure that the pub trade was reslly doing what they wanted it to do, but of course it may affect cashflow and profits in the near term, but on a longer term view I always got the impression that they wanted not to rely on pubs so much so maybe this will just accelerate that process. Have to say its a bizarre decision as many pubs have entered into long term leases and are probably now in the dark stuff although it should have little effect on pubcos like marstons whose share price has held up well. Clearly rents will now rise dramatically and there will be an option for the likes of green king to make big gains in revenue, could bring beer prices down, but to be fair to the pubcos there should be a long notice period, i am not a great fan of goverments getting involved with business but no doubt those that paid the best lobbyists won the day. As for vnet it may be an opportunity to buy lots more just need to get a handle on what this could do to their biz plan and the potential affect on dividends.

zoolook

With Vianet the investment case seems to me whether the core traditional UK business buys time to allow them to successfully diversify. No position

jdclare

Paul
Your views on Dialight and Carclo would be appreciated. Meanwhile thanks for your column

intuitive6191

With Vianet the investment case seems to me whether the core traditional UK business buys time to allow them to successfully diversify

Agreed - but not much chance if the management plods along at its current pedestrian pace.

WarrantStar

Paul,
Thank you for your above report on Avon Rubber (LON:AVON). I just had a good look at the new company report, and the Stockreport too, and concluded that they are likely to keep growing. I concluded they are doing well, and have the following economic moats in place:
Expertise. Brands. Intellectual property. Military approval processes.

I also note that they are not associated with Avon Tyres.
I just bought some Avon shares.
Thanks,
Paul.

shipoffrogs

Woodcutter

I looked at OPTS a couple of years ago, and back then it was transitioning from selling the machines outright to leasing them. I can remember spending considerable time trying to understand whether the reported lease income was something that I could rely on and understand.
I gave up and decided why bother risking the disconnect between cash flow and profits.
If you're saying that it now doesn't look very cash generative then that's probably all the knowledge you need to apply here.
If it's too complex - you don't have to understand it, you can just walk away.

ship that's fine but i'm interested in the knowledge, yes it's complicated but that shouldn't deter us as investors from trying to understand the numbers imv. So i gladly accept someone with an accounting background explaining the principles of OPTS lease revenue etc.

Small Cap Value Report (19 Nov 2014) - VNET, AVON, OPTS, AGA, MYX, BLUR

Pubcos

Avon Rubber (LON:AVON)

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Paul Scott

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