Vianet-zero?

Vianet cropped up in todays SCVR as a result of a contract win RNS-reach announcement - I posted this overlong and waffly-ing response to Paul Scott's question

I cannot see why anyone would buy this share, when there are so many other, better companies out there? It's not even cheap.'

So the discussion seems to have moved onwards from danger of capital raise to what's the opportunity? Is there even an opportunity?

and am crossposting it here so that it adds to the VNET thread.

I topped up just before Xmas when the price fell to below 80p - and now have more than enough shares - with the rise to around 100p it's suddenly one of my largest holdings. So I'll be holding from here to see where it takes us!

Vianet (LON:VNET) (I hold)

Mcap £28m, EV £30.5m Revenue £8.4m

Now this is getting more interesting.

'Overall, VNET is an OK business - the Brulines business is mature/ in structural decline, but a cash cow. The vending operations seem very small, and despite positive newsflow over the years, haven't really moved the dial much.'

Thank you Paul - that's a fair summary of the past.

As you say, the company has some form on this - false dawns and slow starts over the years. Now the pandemic on top of that. Which doesn't mean that it won't come good in the end - but it certainly makes us more sceptical.

Is it a fair prediction of the future?

Well that all depends. It's certainly not without execution risk, but I think there is clear evidence that this is not the same company it was a decade ago - and similarly the prospects have changed.

'I cannot see why anyone would buy this share, when there are so many other, better companies out there? It's not even cheap.'

Well you did ask - so here goes. And it's ok I won't take that personally :-)

That's because I see it as a turnaround with growth prospects rather than the value share it used to be. At least that's the way that I look at it - and these are shares I like to find - having had some success with the likes Haynes, Eleco and similar. Both near 10 baggers for me, being apparently moribund businesses whilst transforming themselves into software and service companies. But they are not easy to find in the UK market and almost always come with some form of history and risk - otherwise they would not be overlooked?

So what's changed under the covers for Vianet? This is the opportunity and the bit I always struggle with expressing. So apologies if this is overlong and waffly-ing.

The business has always been about the data. It still is but the old telemetry box (which monitored beer flow or counted mars bars) is now an internet hub capable of connecting one machine or many machines in a zone with virtually limitless sensors and actuators as well as software - and the icing on the cake - contactless payment services ( they bought the payment services company over a decade ago - but its only just coming into its own).

But Vianet don't make the hub anymore - they've outsourced it. They've spent the last few years building a cloud based real time data analytics and management platform sold on a Software as a Service basis. Which has the effect of depressing revenues whilst annual recurring revenue grows. This has particularly been the case in the smart machines (currently mainly vending) division where the change from capital box sales has masked the growth in annual recurring revenue. The revenue is still about the same - though its hard to tell with the pandemic effects - but where it used to be 80% capital sales and 20% recurring - now its 80% recurring and 20% capital sales. At the same time old sites and machines (offices for example) have been shaken out by the lockdowns – and replaced by new smart-machine connections. A far better base to move forwards from?

Talking of depressing revenues - there is also the pandemic to consider.

I've also been of the popular view that the old beer monitoring is a business in gently decline. Indeed I've been pleasantly surprised by how resilient its been as pubs shut. Largely that's because the old brulines equipment has been 'upgraded' to the smart-zone system with data analytics and reconciliation to the epos system available to the customer via the cloud platform in real-time across their whole estate. Contactless payment and vending connections being options in the zone. It turns out - that with lockdowns and rolling restrictions - the old stable business of bar sales has changed abruptly. Sales are much more volatile than they used to be and real-time data is much more valuable. As a result of the pandemic - smart zones could well be a growth division. But not in wet-led pubs that were the core of brulines. The future is more like the 300 site AMC theatre installation they have in the US?

In the smart machines division - the opportunity for real-time data analytics and management has been transformed even more and also more quickly by the pandemic. Vending services are now referred to as 'unattended retailing' and have the advantage of being much more resilient in the face of a lockdown as well as removing the cost of labour. Though I have to say I am not at all a convert to the idea of doing my shopping from a machine - let alone drinking in a pub with no annoying bar staff! But I can see the opportunities?

Even more ironic - is that Vianet sold their forecourt fuel flow monitoring division for a good profit a few years ago and reinvested the proceeds into the development of their software service. Now it appears that the future of fuel flow will be transformed over the next decade or two - and its all unattended retailing - with flow monitoring of energy and contactless payment - already in trials for Vianet's new platform. But that's classic Vianet jam tomorrow?

Back to the present. I agree that this mornings release is just newsflow. Though the number of connections is something we can hang a figure on - the last AR clarified the revenue per connection for the smart machines division at something just over £100 annually if I remember correctly. Which would put the annual recurring revenue from the 3000 initial connections at around £300k plus the installation/connection costs for the box. Virtually zero reveue in this year to end of March.

All that does is confirm that - on its own - its not signficant. Though if more of the estate of 10,000 machines comes on board then it starts to look better.

But I don't think that’s the point of this rns. The division has a sales target of 50,000 connections over the 2 year period ending in march2023 - though personally I'd give them a little longer to achieve this -which helps to put this contract into some context? And based upon the same £100 per connection would be an annual recurring revenue increase of £5m.

Anyway this has turned out to be a lot longer - and more descriptive note than I'd prefer.

I fully appreciate that this opportunity will not be too many investors taste. Not yet anyway – indeed I’ve been counting on it. I’d much prefer that the shareprice reflects actual progress – rather than become another overhyped tech transition.

Hopefully I've given a flavour of the reasons why I see this as a company in transition from a moribund beerflow and marsbar vending machine outfit to a cloud data analytics and management plaform making realtime data available to customers based upon hospitality venues and vending in the present but with a much wider range of applications in the future.

FWIW the eps this year (to end of March) will likely be just above zero - say between 0.3 and 0.5p - but that does reflect an H1 with partial lockdown and many restrictions. The pile of goodwill and intangible assets hides the underlying profitability. I forecast 6p. 11p and then 19p eps for the years end march23 - end march25. But that's my glass-half-full view. I’ll need to revisit those figures when I get to see the H2 underlying earnings - and there are a lot more customers for them to win before these figures become a reality - though the technology is now in place and today's win helps to show that they are actually on the runway .

Cheers

Mark

Vianet (LON:VNET) H1 Trading update this morning.

Waffly as usual with few figures but we get

    6.3m Revenue up 55%

    Smart Zones now effectively fully back to normal trading

    Smart Machines added 12.9% connections during H1

Subject to their being no further restrictions on hospitality and no restriction in the supply of semi-conductors they expect to reinstate a dividend for the full year.

What can I divine from the tea leaves?

Smart machines seems to be selling new connections at the rate I'd expected - maybe just a tad better. Looks like smart zones took  a little longer to open up than my original esimates - and looking back I overlooked the extent of restrictions still in place in during Q1  - so my optimism needed tempering a little.

I am now forecasting 1.1p eps for H1 based upon the 6.3m revenue and 5.1p for the Full year.

It seems a positive update - with sales in smart machines on track - and for the future this should become the engine of growth whilst smart zones now trading normally through h2 continues to impress as the cash cow.

The unattended retail, contactless payment and data analytics markets look set to grow strongly coming out of the pandemic and with labour shortages so I like the market and the business. I've been adding to my holding since the shares dipped below 100p and may continue to add if they remain below 100p after this update,

cheers

Mark

Vianet (LON:VNET) AGM update this morning.

Nice waffly update with no figures. So I feel justified in waffling with no figures. But ooops - my forecast for H1 is 2p eps. And 5.8p for the FY. Couldn't resist some figures.

On the basis of this update that's looking conservative, but without more information I can't justify upping it yet - but risk is now firmly to the upside in my view. Why?

the Group's performance in the first three months of the financial year has been very encouraging, with profits higher than anticipated with both divisions expected to return to more normal trading during H2 2022.

Which is great but we don't know managements anticipations and there are no broker forecasts to help.

Our Smart Zones division is recovering in line with the UK pub market with almost 90% of pubs having re-opened by the end of June with a corresponding return to full billing

That is ahead of my H1 estimate. I estimated 94% of connections still in the network and 85% average return to full billing in H1.

The re-opening of pubs has resulted in increased demand for our draught beer market and retail data insight services as the industry seeks to understand its new 'normal' trading in the post restriction era.

My assumption that lost connections are not replaced with new sales looks to have been too cautious, with a potential silver lining from lockdowns, in that management companies need data analytics to improve trading insight - Smart Zones continues to impress. I had seen it as the cashcow in gradual decline but the addition of data analytics, contactless payment and unattended retail may just be a winner in the new normal for pubs and bars?

Meanwhilst over in Smart Machines....

we are benefitting from a material increase in the use of contactless payments and demand for remote connection to unattended retail assets, which has resulted in new contracts

I had assumed 10% growth in revenue and recovering margin based upon new connection numbers similar to H2 and below those targeted by management with the new sales team over the next 2 years. I had not assumed that ARR per connection would continue rising - conservative I know - so that looks as if my figures are too low as well.

For the moment I am happy to keep my figures where they are - whether H1 turns out to be 2p or 2.5p eps is not going to make the difference, but whether growth in connections is 10% or 20% will make a big difference in the longterm as will increased revenue per connection.

.....data capture from remote assets and contactless payment is generating significant interest, with field trials underway in the fuel forecourt and franchise kitchen sectors in the UK and internationally

The fuel forecourt business looks intriguing, particularly with the switch towards EV charging, more of a car-park with charging connections, contactless payment, 24 hour unattended retailing and a dark kitchen? I had to look up franchise kitchen sector - and that didn't help much, as all I got was outfits selling new or kitchen makeovers. But more than likely it's referring to franchise operations for chains rolling out and particularly dark kitchens. Again, unattended retailing and contactless payment and quite possibly resource management (from smart zones) as well? If any of this pays off then scalability should be good here, as it all uses the same cloud software, data and contactless payment units?

I find that quite encouraging? I also think there is scope for unattended retailing in 24hour pharmacies and other essential retail businesses. All I need them to do now is engineer in Zytronic (LON:ZYT) contactless multi-touch screens and I get to kill two birds?

My view? You'll have guessed its positive. I like unattended retailing and contactless payment as a future sector. This appears to be moving as I had hoped. Lockdowns are likely giving Vianet a tailwind with higher growth, based upon continued development, more sales resource and growing demand for contactless payment services, remote data analytics and unattended retailing. Based upon Vianet's history of slower than planned rollout and sales growth - the market is understandably sceptical and likely underestimates the growth rate coming out of lockdown. But then again I could easily be wrong and the market right!

My current forecast is for zero revenue growth in Smart Zones over the next 2+ years and 15% annual revenue growth in Smart Machines delivering

14p eps in the year to march 24,

260p shareprice.

- that is starting to look conservative with more risk on the upside as downside risk is receding?

cheers ( I'm still drinking the Kool-aid from the vending machine)

Mark

Vianet (LON:VNET) Again!

For me this has always been about whether Vianet will get through the pandemic in the right shape to finally create some growth. Well we made it this far. So perhaps we can agree that Vianet is worth a tad more than zero? But how much more?

Finally got around to updating my numbers following the FY21 results earlier this week. Here are some extracts from my notes.

Vianet FY21 Results to end of March 2021

Revenue     8.369m (16.262m).

Loss              -1.955m (2.431m)

eps               -6.75p (8.47p)

but the loss is flattered by a tax credit of 867k, largely related to the R&D spend 2.312m (1.947m)

Loss before Tax -2.772m (2.516m)

Underlying loss -0.687m (4.030m)

which they calculate by adding back the (R&D) amortisation, exceptional items (restructuring and covid costs) and share based payments.

Debt 4.56m (1.334m)

Cash 1.894m(0.381m)

The debt comes from a CBiL loan of 3.5m. Which has funded the R&D - and to be fair the company did say that they would use it to fund the R&D.

Operating cashflow 1.052 (4.216m)

which looks as if it comes primarily from reductions in working capital of 1.2m during H1.

Under the circumstances, with pubs and bars shut for a large part of the year together with office locations (for vending machine) the -0.687m underlying loss and 1.052m operating cashflow have kept the lid on the debt and left them with 1.894m in cash (there was a note in the trading update that a futher 0.45m payment was received post balance sheet year end) and an unused overdraft facility of 1.5m.

Not that I am advocating they burn all this cash - but just to note that the need for a capital raise appears to have lessened somewhat? No doubt opinions will vary on this, but with the covid regulations easing from 12th April and 85% of their smart zone sites now open - it seems that will be generating cash now rather than burning it?

Where do we go from here?

That rather depends upon your view of the company prospects. Some, like myself, discovered Vianet as a cash generative value share paying a chunky dividend and with promises of future growth. Until the pandemic the magic cash machine, in the form of the beer-monitoring division now renamed smart zones, fairly much continued to provide just enough cash to support the chunky dividend and pay for the colossal R&D to provide the growth that never quite happened. But the chunky dividend helped the wait, though leaving the company with rather less cash on the balance sheet than would have been helpful in hindsight.

Probably should have paid a little less dividend or spent a lot less on R&D but that's history. Looking forward - are we going back to chunky dividends and low growth with a worse balance sheet, or is the promised growth now going to emerge phoenix like from the fires of the pandemic as the company speak would have us believe?

Here are my forecasts for FY22 and FY23

FY 22

Revenue 14.6m

Pbt 1.67m*

eps 5.7p

(* I've assumed zero tax based upon available reliefs and credits)

FY23

Revenue 17.9m

Pbt 3.36m

Profit 3.19m*

eps 11p

(* tax rate of 5% assumed based upon tax reliefs and credits - quite possibly an underestimate)

So it looks as if I have drunk the company koolaid? And long heralded growth is about to arrive?

Well, I've just presented my numbers. I've based this on the pre-pandemic FY20 and have reduced my forecast for FY22 eps - based upon the FY21 H2 starting point and the current slowdown in relaxation of covid restrictions. The FY22 forecast results in both revenue and profits below pre-pandemic levels (even accounting for the contingency release boosting profits in FY20) but that gives a good starting point for continued growth in FY23. The numbers can't lie. But they can be and most likely are wrong.

There are some useful pointers in the report that I've used to calibrate my spreadsheet. The figure of 94% smart zone sites still on contract, and 85% reopened as of April 12 - gives a steer on the revenue for smart zone revenue in FY22. For FY23 I've assumed that smart zone revenue only just gets back to pre-pandemic levels. But that operating margin achieves pre-pandemic levels thanks to the continued upgrade of sites. So there is some upside here if they sell more sites, but also downside if we go back into lockdown. You can't have that both ways - so I've modelled it on the basis of covid easing roughly as planned, maybe a little later and with no growth in smart zone sites.

So that means any growth has to come from Smart Machines? And to be fair this is pretty much what the company has been saying for the last couple of year. I've assumed that revenue growth in smart machines is around 10% in FY22 and that revenues and margins recover to pretty much the same as pre-pandemic - but that is increasing through FY22 and results in 15% increase in revenue and slightly rising margins in FY23.

To provide some support for this growth assumption, buried in the report are some useful figures for Smart Machine connections. During the year they added around 5,000 new contactless (payment) connections (vending machines) though because of the pandemic causing some reductions the overall level of connections remained constant at 38,000. Each connection generated £100 in revenue annually - up from £64 - which I think shows the positive impact of the covid restrictions on unattended retail, where those site remained in operation. Although operating profit per connection fell at the same time, largely due to the covid related costs and support. As well as an increase in the sales team. The enlarged sales team has a target for an additional 50,000 connections over FY22 and FY23 - which increases the number of connections being served by 230%. Significantly increasing revenue and profit in the smart machines division.

As it happens the forecasts I've used for revenue and profit from the smart machines division are low than would be achieved if the sales team hit these targets. To put them in the annual report - I am supposing that they must think them achievable? Which means that there is some upside of around £1m in revenue and £300k over my assumed figures if they hit these targets. And more if they go beyond.

My conclusion

Having had some successes with small companies overhauling their businesses and transitioning to digital - Haynes, Science Systems, Eleco and the like I've been looking for more under the radar digital transitioners. With a long term executive chairman, James Dickson, holding 20% and buying more at 90p during the pandemic, I think Vianet ticks those boxes. I think that my eps forecasts of 5.7p FY22 and 11p FY23 are achievable. My assumptions for FY22 are pessimistic but possibly not pessimistic enough - because of the uncertainty of relaxations, and that Vianet has some history here with things taking a bit longer.

There is upside beyond this if either the smart zones or smart machines division sell more connections. It's taken some years and burnt through a lot of R&D funding but under the covers the company has changed a lot. With over 90% of its revenues recurring (assuming covid restrictions easing) and most of that via its cloud based data-analytics and contactless payment software-as-a-service solution for which it appears the development has been completed and the product rolled out with good timing for opening up from the pandemic.

There are a lot of areas of the economy where an effect of the pandemic has been to force an increase in the pace of change - primarily through digitisation. Contactless payment being a prime example. The revenue figures from contactless payment smart machine connections seem to bear this out. In addition I think the growth of unattended retailing has only just started. The concept has a lot of potential, not least in busy transport hubs where personal contact is likely to be less desired in future as well as the applications of refuelling (EV's?) and contract kitchens - trials for which are mentioned in the recent report.

The smart zones division has held up better than might have been expected pre-pandemic. New installations use a common platform with the smart machines installations. With a change under way from simple beer-monitoring in a pub to installations where a hub connects multiple devices providing data analytics for flow-monitoring, linkage to tills, contactless payment, resource management and unattended retailing - probably more suited to bars and city centre venues than a traditional boozer. The US installation of around 300 sites, primarily in AMC theatres is an interesting example? On this basis - with the pandemic forcing the pace of change - there may also be a basis for future growth within the smart zone division? Which is not in my current assumptions

There is execution risk. They have developed the product but despite the signs it may not sell as well as I've assumed. Or margins may not be achieved. It doesn't help that the company has taken so long to reach this point and quite understandably views will differ on whether they will now succeed!

I have to admit I am not that certain of my own figures yet. The H1 results will do a lot to show how far adrift I am, and I think the short term risk is probably to the downside despite my pessimistic assumptions, but by H2 I think that reverses and the risk moves to the upside. It might pay to wait the H1 results and see? But then again..........

Accordingly I've nibbled a few more at around 94p and VNET is now my 9th largest holding with about 4% of my portfolio. I'll add more if the price weakens significantly.

If you've read this far - my commisserations and apologies for taking up your time with my waffle,  

cheers

Mark

"Reviewing this has helped me to understand the market growth opportunity, recently expressed as 'unattended retail segment' , and to realise that you are buying into the vision of the long-term chairman and 20% shareholder who has recently spend considerable cash buying more shares. As it turns into a SaaS operation the ability to increase growth without increasing costs also rises - if it works gross margin and operating margin will rise considerably pushing up profits ahead of sales?" 

I don't think much has changed from Mark's above summary in December.

Main thing of note for me was the clarity over executive leadership, in case it was ever in doubt: 

"As announced on 8 December 2020, Stewart Darling stepped down as CEO and left the Group at the end of March 2021. Having held the role of CEO prior to Stewart, it was a simple transition for me to assume an Executive role again and presented an opportunity to make changes to the operational structure of the Group, and it is pleasing that the management team is now cohesive and fully engaged. The Board will keep the operational and Board structure under regular review but, at the current time, no immediate changes are anticipated."
 

I'm happy to maintain what for me is a meaningful position (8% of portfolio) but am not minded to add more until there is more clarity on whether they can capitalise on the long touted growth opportunity. Would be surprised and disappointed to see them do a placing.

Thanks

Doop

Copy of what I've just posted on the SCVR - as a placeholder. I intend to revisit my forecasts and will post my updated figures here once I have a few hours to do the spreadsheet work.

Vianet (LON:VNET)

Thank you Mojo - that is the link I was looking for.

As you rightly say the results - 0.7m operating loss and 1.1m operating cashflow are as foretold in the April trading update so no surprise.

The results do give more detail on revenue and profit in the two divisions which is useful - I need a few hours to try to work that into a forecast if I can.

The price fall this morning looks like an exit by those looking for a quick profit?

My sense is that a return to pre-covid profits will be a stretch for this year FY22, due to the speed (or lack of it) of opening up - but FY23 should see a return to growth - primarily from the unattended retail (vending) division. I've seen nothing in the results to change that view and my existing forecasts are for 6.9p eps this (FY22) year and 10.4p eps in FY23

Accordingly I've added a few this morning at 96p, possibly unwise in advance of revisiting my numbers, we'll see.

cheers

Mark

In December's 2020/21 interims Vianet (LON:VNET) said recurring revenues for the prior half year were £6.9m (82% of £8.41m).

Quite a bit of that £6.9m doesn't seem to have 'recurred' as hoped, judging by the total revenue figure of £4.07m reported for the current half year!

I appreciate vnet has endured a tough trading environment but I can't see what is to be gained by trying to talk up the situation and hoping no one will notice.

At the moment - it looks like the market agrees with you. The likelihood of tier4 extending and a tier5 being introduced has to play on minds - with the perception that a fund raise is more likely.  Though with a vaccine rollout the end game has not slipped. yet?

cheers

Mark

Mojo - me again! Sorry.

Been looking at the cashflow when I can find a minute. 

Yes,  I was way off and took their presentation fairly much at face value - reality looks much worse and  you make very valid points:

cash loss for half year is really £2.55m

A couple more observations on Vianet (LON:VNET)

I am always on the lookout for legacy companies transforming into new markets particularly into software. I've had good fortune with companies like Haynes and Science Systems most recently and am currently looking at D4t4 Solutions (LON:D4T4) and Eleco (LON:ELCO) is one of my larger investments.

A takeover can be an exit for long term builders of such companies once the growth starts to come clear.  Even committed visionaries like Mr Dickson.

Thanks Mojo for your response.

Your post was valuable as it will prompt me to look deeper into a holding that I have ignored for a while, in particular on point 1) where I think you make some really valid observations.

2) My perception is that it has always, really, been "his company". I have no greater insight than the publicly available information, but the CEO departure seems an amicable one, with continued involvement. No surprise to see Chairman step into role and wouldn't be surprised to see him continue in it. What I like about his involvement is the material shareholding, combined with sensible salary, and continued purchasing for amounts which are material in relation to his salary. I'd be surprised if there was a fundraising to dilute his interest which he has spent 10 years and over £1m increasing from 13.7% to 17.4% via 32 separate purchases averaging £30k a pop.

3) I do agree, and will do more work on this. To my simple mind, the dividend tap needs to be fully turned off until the business is in a position to resume payments out of free cash-flow, bolstering the balance sheet in the meantime.

4) Will have a look at RM. The trouble with TNI is that it needs to be really truly very cheap to compensate for the call on cashflow required by the pension obligations. I see those obligations in perpetuity at a low discount rate, whereas I'm not sure the cash in-flows to the business can be seen as such.

OK, I'll bite. Have often read your posts over on SCVR where you hold credibility with me on account of being chastised by the Boohoo-obsessed fan-boy herd. I am invested here for the following reasons:

1) QUALITATIVE: Decent quality revenue (high % recurring)...decent margins supported by R&D...entrenched position in an unfashionable "declining market" which may be more enduring than assumed (I do like this theme and have enjoyed success there before with TNI/Reach and now SNWS)...interesting growth in the Smart Machines segment with a large addressable market.

2) MANAGEMENT: It has a long-term motivated executive Chairman who has consistently purchased stock in meaningful amounts. Should be interests aligned with s/holders.

3) UNDERSTANDABLE FINANCES: I do agree these are less robust than may initially appear, however the accounts aren't a difficult read, despite the emphasis on adjusted figures. A prudent course of action to my mind would necessitate eliminating the dividend for 2 years to pay down debt.

4) VALUE: I just think the valuation isn't particularly demanding at or around these levels. It affords no real credibility for a return to historic levels of profitability, let alone for a profitable expansion of the Smart Machines business as was being witnessed prior to Covid. Has the long term value of this business really halved in terms of the opportunities ahead of it over the next 10 years?

On top of which I do love it wherever I see deferred revenue - what a lovely business model if you can grow sales, whilst being paid up-front. On top of which I do love the fact that no-one likes it - it is unfashionable, based in North East, largely uncovered by analysts.

This isn't a large holding - approx. 5% - but I don't see any reason to jettison it based on recent results and would respectfully suggest that there are better short options elsewhere (TUE/AstonMartin?)

All the best

Doop