Small Cap Value Report (9 Oct) - VNET, THT, ZYT, QPP, OPTS, ACM

Wednesday, Oct 09 2013 by

Good morning! Vianet (LON:VNET) has issued a trading update this morning, and it will be interesting to see how the market reacts to this. Technically, it's a mild profit warning, since they indicate that pre-exceptional operating profit will be c.£3m, about 10% down on last year, for the current year ending 31 Mar 2014. However, in the circumstances, with a major threat to their core business from the Government's proposed Statutory Code, that's actually not a bad result in my opinion. We already knew this was likely to be a poor year, with all the extra costs associated with defending the company against this legal threat, and disruption from management time being diverted from the business, plus the inevitable standstill on making new sales of the beer flow monitoring equipment until this issue was resolved. So anyone expecting a good year this year just hadn't done their research!

Pub closures has meant that the installed base has fallen to 17,000 Pubs, where it was expected to stay at 17,500, so that's disappointing, if not altogether unsurprising in the circumstances. The group's other divisions have improved, with the vending division now profitable, the USA making "positive progress", and fuel division is now close to breakeven.

The bit I like best is that the recurring revenues are emphasised (mostly on five year contracts), which has allowed continued strong cashflow, and the interim & final dividends are being maintained, which is excellent news. That means the 7.6% dividend yield is safe, for the time being. Now all they need is for the regulatory threat to fall away, as it's very likely to in due course, and in my view we'll be heading back to a quid a share, and maybe more once some decent vending contracts come through.

I am expecting the shares to open down modestly today, and if they continue dropping, I will be using that as a buying opportunity. The valuation here is pretty attractive if you think, as I do, that the regulatory threat is not likely to have any teeth. Anyway, let's see what happens!





There's a solid trading statement from Thorntons (LON:THT) this morning, for their Q1, being the 14 weeks to 5 Oct 2013. I'm not quite sure why they measure a quarter as…

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Vianet Group plc is a provider of real time monitoring systems, data management services, and actionable insights for the leisure and vending sectors. The Company's segments include Leisure Services, which includes design, product development, sale and rental of fluid monitoring equipment, data management and related services; Vending, which includes design product development, sale and rental of machine monitoring equipment, data management and related services; Technology, which includes the provision of data management and technology related services, and Fuel Solutions, which includes wet stock analysis and related services. Its Leisure division consists of the core beer monitoring business (including the United States), and gaming machine monitoring. Its subsidiaries include Brulines Trustee Company Limited, Vianet Americas Inc and Vianet Limited. more »

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Zytronic plc is involved in developing and manufacturing of touch sensor products. The Company is also engaged in the development and manufacture of customized optical filters. Its geographical segments include Americas (excluding USA), USA, EMEA (excluding UK and Hungary), Hungary, UK, APAC (excluding South Korea) and South Korea. Its products incorporate an embedded array of metallic micro-sensing electrodes. Its technologies include projected capacitive technology (PCT) and multi-touch mutual projected capacitive technology (MPCT). PCT touch sensors can be constructed from one, two or three layers of laminated, toughened glass. Its sensing products offer touchscreen solution for applications, such as leisure, digital signage, retail, surfaces, banking and industrial applications. Its touch sensors are used in video jukeboxes and slot machines. The PCT touch sensors are used in a range of workplace applications, from medical diagnostic equipment to oil field machinery controls. more »

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21 Comments on this Article show/hide all

Paul Scott 9th Oct '13 2 of 21

In reply to post #77959

Hi Martin,

The broker forecast for Vianet (LON:VNET) this year was complete nonsense, so I've always disregarded it.

Given the disruption to the business this year, people should have been expecting pretty dreadful figures from them, so to come in 10% below last year isn't bad, in my opinion.

It was blindingly obvious that the regulatory threat would put a hold on any new contracts, and probably delay renewals too. So I would be amazed if anyone was expecting profit growth this year - if they were, they just hadn't done their research properly!

Cheers, Paul.

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shanklin100 9th Oct '13 3 of 21

Hi Paul

But VNET do have an obligation to state if they consider broker expectations to be unrealistic?

Cheeers, Martin

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johnrosier 9th Oct '13 4 of 21

Morning Paul, I understand what you say about the balance sheet at Thorntons but I think overall you may be being a little harsh. Management seem to be following a sensible strategy which is yielding results in operational terms. As it reduces its reliance on stores (and gets out of the incumbent leases) cash flow should improve.
You are probably right to say they had a lucky escape but they do now seem to be on the front foot.
I wish one of my other retail holdings, French Connection (LON:FCCN), which admittedly has a much, much better balance sheet, would show some sales and profits growth!

PS well done on the half marathon - will go to the site and donate now.

Website: JohnsInvestmentChronicle
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Paul Scott 9th Oct '13 5 of 21

In reply to post #77961


"But VNET do have an obligation to state if they consider broker expectations to be unrealistic?" 

True, which is what they have done today.
But really it's down to us as investors to consider whether broker forecasts are sensible (which in this case it obviously wasn't), not take them as gospel.

I cannot understand why anyone would have imagined that they would see profits rise, in a year where selling their core product has been brought to a virtual standstill by a regulatory threat from the Govt? But judging by today's 12% drop in share price, it appears that's exactly what some people have done! Still, it's only 34k shares traded so far, so all pretty irrelevant really. Just makes the divi yield even juicier for anyone buying at these levels, especially as we have bang up-to-date confirmation that it's going to be maintained, due to strong recurring cashflows.

This seems to me a situation where one has to completely ignore negative market sentiment, and keep focussed on the figures & the likely reaction when the regulatory threat goes away. Remember that the regulatory threat only mentioned beer flow monitoring equipment as an aside, it's not in any way a core issue.

Cheers, Paul.

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Paul Scott 9th Oct '13 6 of 21

In reply to post #77965

Hi John,

Re. Thorntons (LON:THT)

"Management seem to be following a sensible strategy which is yielding results in operational terms. As it reduces its reliance on stores (and gets out of the incumbent leases) cash flow should improve."

That's true. Maybe the figures would stack up better once you strip out the remaining loss-making stores, but I don't have those numbers?

I agree that their strategy is good, and is working. The only thing I am challenging is that the valuation is too high, once you factor in the net debt & the pension deficit. To my mind, a sensible price for THT shares, in their current position, would be about 50p per share, so I think the shares are significantly overvalued at 91p. That's the only reason I'm bearish on them, not that I dislike the company, but that I dislike the share price!

Cheers, Paul.

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Gostevie 9th Oct '13 7 of 21

Morning Paul,

I'm tempted to get back into Vianet (LON:VNET) for the reasons you outline but it's another one where I am put off by the bid/offer spread - 64p - 68p at the time of typing, or around 6%. Ouch!


PS See you at Mello Central this evening if you are going.

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shanklin100 9th Oct '13 8 of 21

Hi Paul

So with NXR we should largely ignore the pension deficit but with THT it should be fundamental to valuing the company?

Cheers, Martin

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bsharman 9th Oct '13 9 of 21

Regarding VNET, when is the final Statutory Code decision likely?

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Paul Scott 9th Oct '13 10 of 21

In reply to post #77969

Hi Martin,

"So with NXR we should largely ignore the pension deficit but with THT it should be fundamental to valuing the company?"

I'm more worried about the Bank debt at Thorntons (LON:THT) than their pension deficit.

However, on the subject of pension deficits, you do have to look at each one individually, and assess its significance. In the case of Norcros (LON:NXR), their fund is very big, but only has a deficit which is small (something like 5-10%) of the total fund. Therefore one would expect that to melt away as interest rates normalise.
Also, the annual overpayments required to be paid by NXR are only about 10% of their EBITDA, which strikes me as modest, and so I just tend to regard its pension deficit as justifying a discount of say 1-2 points on their PER. So I'm not ignoring it.

As regards Thorntons, I can't remember the details on their pension deficit, but as I say, I'm more concerned about the excessive bank debt at Thorntons, which has to be taken into account in the valuation, you can't just ignore bank debt. It also greatly increases the risk. What would happen if the bank suddenly get a missive from regional office, telling them to drastically reduce their exposure to Thorntons? You would have an emergency Rights Issue/Placing at a big discount. I'm not saying that is going to happen, or even likely, but it's a risk. This is why I avoid highly geared companies. Everything might be fine now, but what happens if some big external shock occurs, e.g. the Euro blowing up, then all of a sudden Banks want to call in loans again & you're back on the critical list.

Cheers, Paul.

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Asagi 9th Oct '13 11 of 21

In reply to post #77968

Hi Gostevie, why not try and place a trade in Vianet and see what price you get quoted? Advertised LSE spread now 68p - 70p.

Asagi (no position)

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Paul Scott 9th Oct '13 12 of 21

In reply to post #77968

Morning Steve,

Yes indeed, I shall be at Mello Central tonight, depleting their supplies of wine, so see you there!

You know the answer to wide bid/offer spreads - a proper telephone broker! They are more expensive, but a good strategy is to have a cheap online broking account to use for trades where the spread is narrow, then also have a secondary account with a telephone broker to use on small caps when the spread is very wide and/or where you need to get some size.

It's not worth using a telephone broker unless your trades are £5k+ in my opinion, as the minimum commission (typically £50) then outweighs the benefit of tighter spreads. But on £10k+ deals in small caps, a telephone broker is essential in my view.

Cheers, Paul.

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Gostevie 9th Oct '13 13 of 21

Thanks Paul. Helpful advice as always. I'll ask you to recommend such a broker this evening. As you deplete the supplies of white, I shall be depleting the supplies of red.

Positive RNS from Newriver Retail (LON:NRR) this morning although not much market reaction.


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deucetoace 9th Oct '13 14 of 21

In reply to post #77967

THT at 50p would be on a prospective PE of 6 whilst growing EPS this year at about 30%. I accept the debt levels are not what you would want but that price is unrealistically low. I think you might usefully compare someone like Lindt where you will see THT are on a lower PE, presumably allowing for the debt levels. At the current price I think THT is cheap. It is only the debt levels that are stopping me adding more.

VNET otoh has massively over promised for years and years (I recently happened on a broker tip for them from 2008 (I really must get rid of all this paper) - they were trialling in the US then, the price was much higher etc.....). On top of that it has acquired regulatory issues. I wouldn't touch it.

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kenobi 9th Oct '13 15 of 21

In reply to post #77974

Does seem encouraging, is it me, or is it a little odd that they would rns the rates paid by individual retailers ?? Seems to me that would be competition sensitive and you wouldn't want other retailers to know what you are charging your current tenant ?

All seems positive to me, I'm sure Paul knows much more about this,

cheers K

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Paul Scott 9th Oct '13 16 of 21

In reply to post #77978

Hi Kenobi,

I was coming on to Newriver Retail (LON:NRR) later!

"is it a little odd that they would rns the rates paid by individual retailers ?"

As far as I can recall from my days as a retailing FD, rents were publicly published by a body like the Valuation Office, or some other property body, as they are needed for rental evidence purposes when challenging rateable values for Business Rates, and when negotiating rent reviews every 5-years.

I remember my old CEO hitting the roof when he heard that a competitor had taken on a new lease across the road at a much higher rent, as that would impact on our forthcoming rent review, by establishing local current rental evidence!

Cheers, Paul.

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Nopunting 9th Oct '13 17 of 21

Paul - your comments on VNET are spot on. The yield will be highly supportive; there will be clarity in the next couple of months re the Government review and they are still making profits this year with the upside from a) US b) vending and c) breakeven at Fuel to help them. Debt is low at less than 1 x PBT. Yield is 7.5% and PE on the revised forecasts is around 7 x.

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rmillaree 9th Oct '13 18 of 21

Ref pensions deficits - had a quick look at Norcross and Thorntons

Thorntons made £3.7 mill post tax profit last year and the pension deficit appears to be £25 mill range with obligations of £90 mill.
If this is the case then this firms puts Thorntons in the basket case sitaution when it comes to investing unless there is some certainty that there another out (NTAV?) or increase in profits on the way (can they ditch shops and make more money if they do wholesale?). It will take well over 5 years entire profits at this rate to clear the deficit.

Norcross - their deficit is £30 mill but post tax profits are much higher at 9.1 mill - their scheme liabilities though are £420 mill.

Hmmm - i would be much more comfortable with Norcross on the basis than an extra £3 mill to them per year still leaves £6 mill profit - compared to Thorntons who be left with £0.7 mill.
Unfortunately the size of the scheme liabilities for Norcross is £420 mill ins much higher than Thorntons - so if pension deficits increase again this seems a much more risky than the chocolateers. I have no idea though if a LFL deficit comparison should ever be done with regard to pensions so it may be larger is necessarily worse if it has more conservative assumptions or more knowns than unknowns.

On these numbers neither is really company i would want to invest in at present with the figures as shown per the last accounts.

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deucetoace 9th Oct '13 19 of 21

In reply to post #77984

Re pension deficits the main issue at present is the artifically low interest rates. Once they move to a realistic rate the deficits will reduce significantly. I am taking little notice of them at present. Bank debt is of course a different issue.

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cig 9th Oct '13 20 of 21

In reply to post #77968

It's always worth checking what price quote you get even with discount brokers, the RSP spread is often significantly smaller (half?) that of the LSE spread. Once I even was offered to buy at the LSE bid(!), all for the regular bargain basement commission and executed online.

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cig 9th Oct '13 21 of 21

In reply to post #77986

If you believe interest rates will move in a major way, why invest in stocks at all? The market is not pricing major interest rate moves any time soon, so if you're really convinced the market is wrong here, you can make easy millions with interest rate or bond derivatives.

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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