Small Cap Value Report (14 Jun) - TRCS, ESR, VNET

14th Jun '13 by Paul Scott

17 comments 17369 reads

Good morning! Just a couple of bits of admin;

1) In case you haven't already seen it, Stockopedia have created a special landing page for my reports, here. So if you wish to, you can bookmark this page to get straight to my most recent reports & search the archive by company ticker.

2) Stockopedia have also set up an automatic, free 11 a.m. weekday email service, which sends you an excerpt and a link to that day's report from me. So why not add your email to the list to ensure you never miss a report?

3) I love reader comments, especially where they point out something I may have missed (inevitable occasionally, at the speed I have to report on things) or got wrong. So even if you don't want to take out a paid subscription (although obviously that really helps, and is worth every penny), then do please register for free (link is tucked underneath the paid subs on the sign up page) & add your comments to the comments after my articles.

Right, let's get into today's news releases. Looks pretty quiet again. A lot of us follow Tracsis (LON:TRCS) the innovative scheduling software and niche hardware company for the rail sector. The CEO made a very positive impact at an Equity Development investor forum event earlier this year (their next one is on 26 June incidentally).

Tracsis issues an up-beat sounding trading update today. Turnover is forecast to be in excess of £10m, and underlying profits are in line with previous market expectations. I cannot readily find any broker forecasts for Tracsis, so if anyone has this info, it would be helpful to add in the comments section. So I cannot really comment further on the Tracsis valuation, other than to say that with a history of repeated out-perform trading statements, an in line one may slightly disappoint shareholders? Although the £6m cash balance, and the nuggets of positive prospects in today's statement might be enough to keep the £40m market cap up there?

I really like this company, but am not convinced that profits are sustainable at this level (just under 10p EPS last year) because a lot of the profit is reliant on lumpy hardware sales for e.g. monitoring the conditions of points & overhead power wires…

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Yantomawr

14th Jun '13

Good Morning Paul,

In addition to having your daily report “published” by Stockopedia, I understand that you are also to appear on the next Stockopedia webinar on the 26th June.

I appreciate the time, effort and expertise/experience that you put into your daily reports and updates and look forward to the webinar.

In view of your relationship with Stockopedia (which seems to be closer than any of the other 50 or so “Guru's” that are screened) – has any thought been given to Stockopedia offering a “Paul Scott Small Cap Guru Screen”?

Regards, Yantomawr

bicboy100

Paul,
I agree that there do not appear to be any broker forecasts for Tracis, so have no idea what in line profit expectations are. However the statement says OVER 10m revenue. So I'd take that to mean 10.5m as a minimum all things being equal. Looking at last years figures that gives about a 20% increase in revenue, which typically feeds through to a greater eps and profits increase. That may not necessarily be the case this year given that have had to pay for an aquisition. However adding only a 20% eps increase takes the shares to around 11.8p. So a PER of around 14 give or take a little.

I accept its not particularly cheap but given the aquisition is likely to make a stronger contribution this year and the rail francising block has now been cleared, I can see these having a good couple of years fom here.

I'll continue to hold and watch closely.

Thanks for the blog its interesting reading and I'll try to comment more often now I have signed up.

Cheers Lee

thekingsgambit

Hi Paul,

I have updated my NFSC thread with my take on the Tracsis RNS, which may be of interest :-
http://boards.fool.co.uk/trading-statement-out--12830235.aspx

All the best

Stuart

Paul,
The Ensor property is on the books for £542,000, which they envisage making a profit on. So depends what they get for it as to whether its material. One would hope with palnning permission they could add at least £250,000 to this, which is 10% of current profit, so nice to have in the back pocket in the event of market fallbacks etc.

I think at the current price 55p they are still relatively cheap. PER of 10 with a decent divi thrown in. They should do well once the economy picks up. They also state that there is much more to do with turning around the aquisition so that should provide some growth while we are waiting.

I'd be adding on weakness at these prices if I wasn't already fully invested.

mathewawood

Paul,
I came to the same conclusion. Regulation banning flow equipment <5% IMO and a possible flip side that Pub cos might decide that the I-Draught product is superior at monitoring ("Intelligent flow meters are installed on every line under the bar counter. The meters can distinguish whether the fluid passing through the meter is beer, water, or line cleaning fluid. Therefore the volumes that are displayed on the web site for comparison against the till are beer only, with volumes identified as water or line cleaning fluid removed. between" from Vianet website) then the older allegedly discredited Brulines flow equipment (www.publications.parliament.uk/pa/cm200809/cmselect/cmberr/26/26i.pdf Page 36) and hence get them switched over pronto. Interesting to see Cenkos seem to be confident on the future and have kept the EPS for 2014 and 2015 at 14p and 14.9p. IMO at 77p this stock has moved from a GARP to a GASP! (Growth At Sensational Price).

Paul Scott

Hi Yantomawr,

Yes, I will be doing the next Webinar with Ed on 26 June. It's the first time I've ever done anything like that, so hopefully it won't be a total car crash! I'm just going to run through how I use the StockReport to very quickly assess whether a company is worthy of further research - I reckon it takes me less than a minute to do that using the StockReports, which is why they are so useful. For me the screening facilities are the icing on the cake, it's the StockReports here which are so immensely useful to me in stock picking.

Thanks for your kind remarks by the way. I don't think my methods of stock picking can really be distilled into a screen, as I don't rely on any particular set of numbers. It's more an overall assessment of the figures, and comparing that with the market cap. Also I flex things depending on the type of market we are in.

Also, I make lots of mistakes, and am constantly learning (I don't think investors really ever stop learning) so am not sure that I'd want to set myself up as a "guru", and indeed I have many friends who are far better investors than I am! So it's more a case that I come up with SOME good ideas, and they are here for readers to select ideas for further research of your own.

Cheers, Paul.

marben100

Thanks for that reference, Mathew.

I note para 98 of the report you reference (which is emboldened in the Parliamentary paper):

It is entirely legitimate for a company to seek to ensure that the other party to a contract respects its terms. However, we believe that where a measurement device is used to police this, it should be properly calibrated, and subject to external verification. If necessary, the Weights and Measures Act 1985 should be amended to ensure this. Furthermore, given the impossibility of distinguishing between beer dispensed and sold, beer run off and disposed of preparatory to serving, and water used to clean the lines, we believe pubcos should not be allowed to rely on data from Brulines equipment to enforce claims against lessees accused of buying outside the tie.

The solution of having Vianet equipment independently verifed/audited for accuracy sounds like a sensible one to me. Ought to satisfy all parties, as long as Vianet can demonstrate that its equipment is accurate and reliable!

Cheers,

Mark

Beginner

15th Jun '13

Hello Mark and Matthew
I think you have an oudated document re the consultation on the brewery tie. Try this one:

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/193711/13-718-pub-companies-and-tenants-consultation.pdf

It is worth taking note of changes in phrasing and priorities from the 2009 report. I read the shifts positively for Vianet (LON:VNET). I am hanging on anyway!!!!

Good luck all.
B

Thanks for that, Beginner,

I see that one provision in the proposed regulation says:

Information obtained from flow monitoring equipment may not be used for the purpose of determining whether a Tenant is complying with purchasing obligations, nor may it be used or considered as evidence when taking enforcement action on purchasing obligations.

I'm still holding too, but this is a bit concerning.

PhilHofGrowYourDough

I was in at £1.02 & again £1 but sold out completely for ~15% loss at 88p in April.
I dont like the momentum on the stock and I think there are better quality growth companies out there.

Good luck to all holders.
Cheers
Phil

16th Jun '13

Hello Mark
Yes, that is concerning, but don't forget it is only a proposal in a consultation paper. Also the phrase specifies that flow monitors should not be available 'when taking enforcement action'. They could still be used for stock control and inventory purposes. They are also being pushed by Vianet (LON:VNET) as useful in maintaining beer quality. See here:

http://www.cask-marque.co.uk/blog-news-info/blog/entry/25th-assessors-meeting-marston-s-visitor-centre-burton-on-trent

I doubt the real utility of the i-Draught system in this, but it is another aspect of the firm. Overall I think the balance of probability is that there will be either little interference, or a declaration that such monitoring systems are in fact used for the purpose of trade, and will therefore come under Weights and Measures, and require external monitoring by local government (as you suggest). I did as much research on this company as possible before I bought in, reading up on the story rather than the figures. As a result I like the company much more than I like what the company does!! Having said that, I am really surprised at both the content of some government paperwork, and the very adverse reactions of the markets.

The overall outcome for us, I think, is that the company will have become a VERY long-term hold while the uncertainties are sorted out. Hopefully US expansion and the growth in Fuel Solutions and telemetery will make the wait profitable. I have averaged down below a pound, but am loath to sell up because of the losses I will make. Hopefully the coming dividend will also get the car through the MOT!!!! Good luck one and all, and let's hope we can make Phil slightly regret his decision to bale.
B

Hi Beginner,

I'm trying to become emotionally uninvolved with my selections and so I'm avoiding the sentiment of loathing taking a loss. Rather I'm attempting to take the view that a sale (even if it's a loss) frees up some cash for other opportunities. Also by using this psychology I dont get tied into a long term hold of a loss making stock because my ego wont let me take a loss.

Finally whether the stock dives, soars or gets stuck for years, I will have made the right decision for me. At present I think there are some good medium term opportunities out there, I dont want to be in long term holds unless they are delivering.

Each to their own and best of luck.

Cheers

Phil

You are wise Phil. Good luck.
B
(but don't forget, if Vianet (LON:VNET) can keep up the dividend, now at nearly 10% , and make the recovery, that would be delivering!!)

If!

:-)

Hi Beginner,

I had read the current 2013 report and it was the bit on page 27 5.19 that concerned me “the accuracy
of data from flow monitoring equipment and the analysis of that data are highly
contentious issues.” So what I tried to do was delve deeper and find why it was "highly contentious".

I found the answer on my above post reference from the 2009 report. It basically went into detail about a PubCo rep making the huge cock-up and saying to the commitee that the brulines system measures the density of the liquid passing through. Hence it can tell the difference between cleaning water and beer. Which was subsequently discovered to be a complete lie.

Thats why I think its so important for Vianet to prove that the new and improved I-Draught solves this problem and for the PubCos to get it fitted asap.

17th Jun '13

You are dead on Mathew, but there have been court cases since those comments, and though it was not the main point of contention, the courts generally found that the Vianet (LON:VNET) systems were trustworthy in each case. Here is an example:

http://www.morningadvertiser.co.uk/Forums/News-Article-Comments/Licensee-loses-case-against-Enterprise-over-beer-flow-monitoring-equipment/(offset)/10

And as you say the i-Draught system should solve all these issues. I think a recovery from here is possible, and I am hoping for one. All things crossed!
B

18th Jun '13

Thanks Beginner. I think we work well together! Lets just hope our analysis pans out.

Yes Vianet has got great recovery potential. Its forward P/E is 5.24 and with the div now at nearly 8%. Its a no brainer.

We dodge this govt regulatory bullet and the broker EPS 2014 Fc of 14.0p (Interesting that they kept it the same after the 11th June Finals) comes in then its a 130+p share I'd say. Big pay off for a small risk.

Fingers crossed here too!

Small Cap Value Report (14 Jun) - TRCS, ESR, VNET

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Paul Scott

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