Small Cap Value Report (Tue 5 Dec 2017) - VNET, FREE, CCT, FCRM, PCIP

Monday, Dec 04 2017 by

Good morning, it's Paul here!

Thank you for the reader requests. I'll be able to cover most of them. Please see the header above for the list of stocks whose results or trading updates that I will be reporting on today.

Vianet (LON:VNET)

Share price: 122.5p (down 9.9% today)
No. shares: 28.0m
Market cap: £34.3m

(at the time of writing, I hold a long position in this share)

Interim results

Vianet Group plc (AIM:VNET), the international provider of actionable data and business insight through devices connected to its Internet of Things platform ("IOT"), is pleased to announce its interim results for the six months ended 30 September 2017.

The core, cash generative business within Vianet is the Brulines business, which monitors & reports the flow of beer in tenanted pubs (to ensure the tenant doesn't cheat the system by selling cheaper beer, bought outside the brewery tie agreement). The second, up & coming division provides remote monitoring for vending machines. Its petrol station business has been disposed of.

Today's results look to have disappointed the market, with the share price down almost 10%. Although as with most small caps, there is little liquidity, hence it only takes a handful of small trades to move the price. So the initial price reaction is not necessarily anything to rely on.

Top marks to management for taking the time & trouble to produce a video & slides presentation for all investors, published this morning with the results. Why can't all companies do this? It levels the playing field, and gives retail investors similar additional information and understanding of the business that institutions & analysts get from meeting company management.

Talking of which, I'm meeting VNET management tomorrow, so if anyone has any specific questions, then by all means add a comment below, and I will endeavour to ask & report back. (please keep any questions brief, and to the point!)

Some key numbers for H1;

Revenues down 5.0% to £6.7m, although a very high proportion, 90% are recurring revenues - which are generally regarded as higher quality (as predictable & repeating) - hence deserving of a higher valuation of the shares.

Adjusted operating profit up 4% to £1.7m. It's always worth checking what items have been adjusted for, and in this case the adjustments…

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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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FreeAgent Holdings plc is a holding company. The Company is a provider of cloud-based software-as-a-service (SaaS) accounting software solutions and mobile applications designed specifically for the United Kingdom micro-businesses. It is engaged in the development and provision of the FreeAgent SaaS solution. With its software, its offering streamlines financial management, bringing together invoice and expense management to value-added tax (VAT) and payroll. It even enables users to automatically generate and submit their self-assessment tax return filings to Her Majesty's Revenue & Customs (HMRC). Its SaaS solution comprises various features, such as core invoice generation and bank reconciliation functions. Its SaaS solution is also integrated with other suppliers and an application programming interface and associated developer portal to enable third-party developers to exchange data between the Company and their own products. It offers its services through its product platform. more »

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The Character Group plc is a toy company. The Company is engaged in the design, development and international distribution of toys, games and gifts. Its geographical segments include other EU, UK and Far East. It designs and manufactures toys based on television, film and digital characters, and distributes these products in the United Kingdom and overseas. It also distributes finished products in the United Kingdom developed by overseas-based toy producers. Its diverse product range includes products for pre-school, boys, activity and girls. The Company's brands include Peppa Pig, Little Live Pets, Teletubbies, Minecraft, Scooby Doo, Mashems, Fireman Sam and Ben & Holly. Its customer list includes the United Kingdom toy retailers, the United Kingdom independent toy stores and a selection of overseas distributors. It operates approximately two distribution warehouses located near Oldham, Greater Manchester. It primarily distributes products sourced from overseas third parties. more »

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  Is Vianet fundamentally strong or weak? Find out More »

37 Comments on this Article show/hide all

jesseowens 5th Dec '17 18 of 37

Fulcrum Utility Services (LON:FCRM) please Paul

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Paul Scott 5th Dec '17 19 of 37


OK, I'll look at the following;
Vianet (LON:VNET) interim results
FreeAgent Holdings (LON:FREE) interim results
Character (LON:CCT) results
Fulcrum Utility Services (LON:FCRM) interim results
PCI- PAL (LON:PCIP) trading update

It will probably take me all afternoon to go through that lot, so probably not time for anything else. PCF (LON:PCF) is a bank, and I don't cover the financials sector. If it's quiet on Friday, you could always ask Graham to give it the once-over.

Regards, Paul.

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Aislabie 5th Dec '17 20 of 37

In reply to Carcosa, post #5

I am much in agreement with the view that PCF (LON:PCF) is doing OK and has a good chance of future growth. But I also understand why the market has taken a slice off ts value today.
It is down to the extraordinary care that smaller companies, (generally AIM, with a limited daily trading volume), must take with their public announcements, and that goes double in spades if they raise everyone's hopes with an "ahead of market expectations" announcement, as PCF did in September.
The outcome could be seen as in line with raised expectations showing a PBT of £5.0 million, but the undoubtedly one-off costs of £1.4 milliion were either forgotten by management, or were not being considered by management that is looking past them ,or were underestimated as late as September, or in fact the earnings were actually expected to came in at a net £6.4 million. It is these last two possibilities that make people nervous.
A clear statement in September might have avoided today's backward slide. They did actually state numbers, which is a good step but make really sure that they are right and undercommit. Good stuff will come through eventually.

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jonthetourist 5th Dec '17 21 of 37

The RNS from PCI- PAL (LON:PCIP) (hat tip to MrC) prompted me to do a bit of digging. I like SAAS companies as they can combine fast growth with decent defensive qualities, and I hadn't come across this one previously.

No investment advice is suggested.

Bull case: Tiny, fast-growing software co. with large addressable market. Not a flaky start-up. Self-funded. 100% client retention.
Bear case: Loss-making, jam tomorrow tiddler who have just flagged they can't cope with the growth they are getting.

Until recently, this was a small listed co. called IPPlus plc. That name appears to have been a pun on the combination of Internet Protocol and their postcode, being based in Ipswich. Last year they disposed of their out-sourced call centre operation, giving them a cash base to attack what they saw as their most promising market of secure payments. At the time the Chief Exec said "This marks the beginning of our next phase of growth and is a very exciting time for the business. The opportunities to grow our secure payments operations are without doubt considerable. We have an excellent team in place and cash resources to pursue our strategy."

After apx six months of the new setup the half year report included:
· Transaction volumes through PCI-PAL services have increased 58% compared to July-December 2015, reflecting buoyant client activity.
· Contracts signed with total initial value of £1.8m (2015: £0.5m), of which £0.4m recognised in the period (2015: £0.1m).
· PCI-PAL revenue increased by £414k to £975k (+74%) (2015: £561k).

The end-June 2017 final results showed sales climbing but still only half covering costs:

70% increase in revenue from continuing operations to £1,879,000 (2016: £1,103,000)
· Recurring revenues increased to £1.228m representing 65% of total turnover (2016: £0.790m, 72%)
· Continuing activities loss of £1,699,000 (2016: £859,000), reflecting scale-up investment in operating expenditure to grow the secure payment solutions business
· Closing cash and cash equivalents balance at 30 June 2017 of £1,958,000

In today's announcement the Chief Exec said:
"I am extremely pleased with how the current financial year has started. The level of global enquiries we are receiving more than vindicates our strategy of focusing entirely on our PCI compliant contact centre payment solutions. . . . The level of enquiries looks set to accelerate demand for our services faster than anticipated and the Company is evaluating the resourcing levels that may be required to take full advantage of the commercial opportunities in a nascent but fast-growing international market."

Directors have bought into the vision at prices not far short of today's 55p.

Interesting. It would be very good to hear from anyone who knows of this outfit professionally.


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coniston 5th Dec '17 22 of 37

Thank you Paul for comments on VNET.looks a solid business, my concern is there pts ratio of 2.67 is quite expensive on operating margins of 10%.

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FREng 5th Dec '17 23 of 37

TechMarketView is positive but warns that the SaaS model will delay the growth in profits and cash, as will the percentage taken by the sales partners.

I bought some today.

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Zipmanpeter 5th Dec '17 24 of 37

Re Paul's comment: "I wonder if the boffins at Stockopedia HQ could conjur up charts which include dividends, to give total shareholder return, and make them comparable with other companies?"

I'd like to re-echo support - this is absolutely in line with learnings on importance of divis in overall return.  Showing TSR (total shareholder return) over a period would be a fantastic addition to Stockopedia research possibilities.

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rhomboid1 5th Dec '17 25 of 37

In reply to Paul Scott, post #19

Hi Paul,
I watched the results presentation from Vianet (LON:VNET) and got a niggling doubt that it’s largely old ideas recycled with IoT tag lines, if they used phrases like ‘actionable data’ and ‘business insights’ less and instead gave clear examples of how their products deliver a compelling financial result for customers I’d be more inclined to invest! The lack of top line growth suggests customers are not forming an orderly queue either. Revenues have been c£14m for 3 yrs and margins are slim. The way they’ve tried to spice things up is by buying a vending machine business that has embraced the cloud which they now describe as key to achieving business breakthrough...I hope they do well but it’s not a compelling vision as laid out least not for me! So Q is can you talk through an actual new case study please

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Dan7710 5th Dec '17 26 of 37

In reply to rhomboid1, post #25

Spot on.

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ACounsell 5th Dec '17 27 of 37

In reply to Nothingventured, post #17

Fulcrum Utility Services (LON:FCRM) looks good to me too - surprised shares haven't gone up more given that they have pressed the Electric Vehicle infrastructure 'button' as follows (though could have done without holistic!):

'After successfully providing electricity connections for a number of Electric Vehicle (EV) charging projects, the Company is now expanding its service offering to provide an end-to-end EV charging infrastructure solution. This holistic service includes the supply and installation of EV charging stations in addition to designing, constructing and owning the electricity infrastructure required to power them. The Company sees this as an evolution of its existing electricity infrastructure provision in an exciting and growing market, which will be further bolstered by the 2017 budget announcement of a 400m fund for a national charging network and subsidies for vehicle purchases'

Have been looking for way into EV infrastructure 'space' so given that most of players either currently privately owned or part of large conglomerates (Siemens, ABB, etc). Could this be the start of a major growth opportunity?

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peterthegreat 5th Dec '17 28 of 37

In reply to Zipmanpeter, post #24

Yes I totally agree with Paul and Zipmanpeter that total shareholder return is the figure that really matters when comparing the histories of companies and its inclusion would make Stockopedia more useful.

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matylda 5th Dec '17 29 of 37

In reply to ACounsell, post #27

Fulcrum Utility Services (LON:FCRM) - Is this an indication of a decent "moat"...


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daveinthelakes 5th Dec '17 30 of 37

Paul, Re Character (LON:CCT)

Below is my post from 3rd November-

"I have been invested in Character (LON:CCT) for a couple of years, have confidence in the medium term and picked up more stock at 370p following the recent pullback.

We know the results to YE August, to be announced in the first week of December, will be excellent but I am concerned that the effect of the ToysRus administration in the States, although expected to be temporary, could be greater than we expect. UK toy sales appear to also be affected by the general weakness in consumption.

I also invest in the worlds largest quoted toy retailer Hasbro having recently bought back in following the shares pulling back from $116 in July to $90 due, in my view, to the overblown ToysRus concerns. Hasbro has been granted critical supplier status under the administration so essentially securing it's position. I doubt if Character (LON:CCT) has been granted such status.

Extracts form the Q3 Hasbro conference call-

"...the Toys "R" Us bankruptcy filing in the U.S and Canada negatively impacted our third quarter revenue and operating profit, including incremental bad debt expense associated with the bankruptcy.

"While the near-term impact of Toys "R" Us is disruptive, and we paused shipments for a short period as we gain clarity on the situation. We are working with them as we enter the holiday period. This doesn't impact our outlook for overall consumer takeaway, which has continued to be strong, but does introduce higher uncertainty as to the level of shipments to them in the fourth quarter."

"The challenges we saw emerging in the second quarter have continued in the U.K and Brazil, and we anticipate this will continue for the remainder of the year"

I fear that the outlook Character will announce for H1 could be even more dire than expected and have therefore sold around half my stock at 415p. I hope it is not as bad as I think it could be and expect to increase my holding again in the near future as I do see Character as a medium/long term position ."

The ToysRus Chapter 11 was around 11th September, after Character's YE and although in todays RNS they mention a sales drop of 5% in the USA they have not quantifed the post period loss caused by this bankruptcy. No doubt they were owed for goods supplied and quite possibly as a relatively minor supplier have been given no guarantee by the administrator and so may not be able to sell further product without insurance which even if available would be expensive. Without payment upfront I am not sure I would want to sell to the UK version of ToysRus bearing in mind their predicament and knowing what happens to struggling retailers post Christmas!

With surplus product and the move to online I think they may be somewhat dependent on their relationship with Amazon/Ebay and these platforms major retailers. Character retail from their own site but it is a bit basic frankly. They will need to improve their online offer pdq.

I sold my final tranche last week at 426p and will await the likely very poor interims next year when I expect a buying opportunity as I do like the company.


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Edward John Canham 5th Dec '17 31 of 37

In reply to matylda, post #29

Fulcrum Utility Services (LON:FCRM)

Think its a very good indication of a moat even though I hate the term.

Perversely its the operating margin of 17.2% that grabs my eye. Normal contracting tends to be 1-3% so if they can achieve this ......

If you read their accounts they have very large accrued income balances in creditors because their customers pay in advance of them doing the work.

They are then using the money generated to buy / retain ownership of the gas infrastructure they put in place and earn an on-going "royalty" from it for want of a better word. Plus recently they have been awarded a licence to do the same with electricity assets.

I'd say they're carving out quite a niche for themselves.


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daveinthelakes 5th Dec '17 32 of 37

Lighthouse (LON:LGT) have been mentioned by Graham recently and on tonight's BBC news regarding incorrect advice on pensions they were named in the second case referred to, admitting resposibility. This could be a one off of course.

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jonthetourist 5th Dec '17 33 of 37

Hi Paul

Well done for persevering today. As detailed above, I think PCI- PAL (LON:PCIP) look potentially very interesting. They have some more cash to come from their disposal, which reduces the danger of dilution. I just hope one or more of your readers knows something about their market place.


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bwakem 6th Dec '17 34 of 37

I see the Character (LON:CCT) toys-r-us situation as a minor set back. Just because a particular toy shop closes doesn't mean kids don't get toys for Christmas, they just get them from another shop. They may need to provide a few extra Peppa items etc to smaller shops which is probably slightly more expensive logistically, but I don't see a material issue here.

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peterthegreat 6th Dec '17 35 of 37

Re: Paul's comment on Fulcrum Utility Services
Hello Paul, I have held Fulcrum since October 2012 and topped up after the IC tip in August 2017 so I have seen plenty of ups and downs in the share price. Whilst the company's fortunes are improving as a result of improved trading, my impression is that good strategic moves into owning gas pipelines and expansion into electricity assets and services really explain why the company is doing so well. I initially invested because I thought the nature of technology development in the energy and transport sectors was going to require alot of new connections to be made. It has taken longer than I expected but there are signs that this is happening now. I also like to company's high ROCE, perhaps this is helped by the fact that it holds a large amount of customer's money in advance payments?

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LongValue 6th Dec '17 36 of 37

The market might be pricing the Vianet Group has a solely UK focused outfit. That's to say, its fortunes are linked to the UK pub industry – obviously facing headwinds. However, its iDraught offering is in now installed in over 240 sites in the US. Obviously just a toe in the water bearing in mind that it has installations in some 14,000 licensed premises in the UK. But nevertheless it has a US presence. And it's trying to develop it. In addition, its Smart Machine division has just won a three year contract to connect 7,000 vending machines across ten countries. With the number of machines increasing over the next two years. Basically, it has substantial export potential.

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jonthetourist 9th Dec '17 37 of 37

In reply to jonthetourist, post #21

PCI- PAL (LON:PCIP) aroused my interest enough to revisit it this weekend and delve through the RNS's to find out whether the directors seemed trustworthy. I am fairly allergic to companies chasing a big growth strategy but planning to capture most of the gain for themselves, while shareholders bear the risk.

Having found a grant of options in June this year to management representing 9% of the equity, my initial negative response was removed by the footnote that the CEO (a significant shareholder) had waived his rights. My take is the scheme looks like sensible golden handcuffs to keep the management team on board. 3 years continuous employment is a requirement for vesting, and there are different thresholds to be met in the share price. The options previously granted never passed the threshold for vesting and lapsed, so I can see merit in giving staff an incentive to stay on board for a more risky strategy. Board salaries don't look excessive.

My initial reading was that the leadership of this company had spotted a winner in their ranks and decided to sell off the rest of the business in order to fund ambitious expansion plans. Although loss-making, they still have £3million to come in over the next three years in stage payments from the sale of the call centre operation. So my further research has encouraged me to think this may be an interesting investment proposition.

They provide secure payment outsourcing to a range of clients. Many of the clients are anonymous, but one that Stocko readers may have come across is Serco and Boris bikes, aka Santander cycles. The biggest missing piece in my (and therefore to date, our, collective) knowledge is user feedback.

Any input would be very welcome. No investment advice is suggested or implied.


PS, The company describe themselves as:

PCI-PAL PLC is a market leader in securing payments, protecting customer data and reducing compliance costs.

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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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