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

4th Dec '17 by Paul Scott

42 comments 19504 reads

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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FREng

5th Dec '17

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.

Zipmanpeter

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.

rhomboid1

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 today..at least not for me! So Q is can you talk through an actual new case study please

Dan7710

Spot on.

ACounsell

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?

peterthegreat

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.

matylda

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

daveinthelakes

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.

Dave

Edward John Canham

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.

Phil

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.

jonthetourist

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.

Jon

bwakem

6th Dec '17

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.

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?

LongValue

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.

9th Dec '17

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.

Jon

PS, The company describe themselves as:

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

22nd Apr '18

Jon,

I see PCI- PAL (LON:PCIP) are the first company presenting at Mello. I think the placing at the end of January and the new business wins make the company even more interesting albeit the share price has halved in the last three months.

They are investing all the cash quickly and one major concern I have is the prospect of another heavily discounted placing down the line. I normally avoid companies that leave PI's out, sorry if you were caught out in this regard but do you have any further thoughts as I am tempted by the growth prospects. Have they ever given any indication as to when positve cash flow will be attained?

Thanks, Dave

Hi Dave

Nice to have a discussion on these guys! Yes, it's looking very binary now. We can get in at well under the placing price, but where is the news of contract wins? They need to be accelerating their customer acquisition dramatically to move to breakeven. If they can then everything looks rosy.

I wrote to the FD about their cashflow projections recently. He was cagey, but pointed out that the institutions who bought in at the placing had needed convincing that the company could survive even if things didn't go to plan.

My current feeling is that the presentation at Mello will either have me loading up with more, or desperately trying to unload.

See you there?

Jon

PS At 3pm Livingbridge have a presentation on Finding Unrecognised Growth in Micro Caps. They have 5% of PCI- PAL (LON:PCIP), so I shall probably be there too.

Jon.

Yes I will be at the presentation. See you there.

Not surprised the FD would be cagey about cash flow projections as it could be construed as inside info ?

I see they signed 8 new contracts post YE by the results announcement (about 11 weeks)

Dave

Yes cagey may be unkind. He is of course constrained.

One of my questions may be what is the financial threshold for a contract win to prompt an RNS announcement.

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

Vianet (LON:VNET)

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Paul Scott

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