Vianet Share Discussion Threads

[bonio10000] 24/2/2013 12:43

Always interesting to read how people read into results want they want to read.

That applies to both bulls and bears.

[paulypilot] 24/2/2013 12:35

Hi CR,

The intangibles point is a good one. The company seems to combine amortisation of goodwill with amortisation of internal development spend, which is a bit misleading, as one is non-cash, and the other (larger) item IS cash costs. So from now on I think I'll be considering EPS after deducting the amortisation of intangibles, which gives a lower EPS figure.

I queried tax with the company, and they said that following a reorganisation of their activities, acquired tax losses are being utilised which should result in nil tax this year & next year, and possibly further. So the tax paid in cashflow is probably relating to prior years. Cenkos used nil tax in their most recent notes.

Personally I accept the exceptionals, as they did make multiple acquisitions a couple of years ago, so that figures. But it does seem to be every year. Would be good to get a final write-off and clear statement that that's it on reorganisation - I might put that in my note actually.

You're right that there are probably faster gains to be made elsewhere, but I want to be in this share when the RNS does come out saying the big contract for vending has been signed. That could be any time. Remember they trialled it successfully with Coca-Cola and VISA at the London Olympics, can't get much better than that for a reference site. There is some technical issue with a third party which is causing an unavoidable delay apparently.

If there wasn't a divi here, then I wouldn't be interested. But I feel income is more important than ever, and have positioned my portfolio mainly in high yielding shares with good growth prospects too, with a 2-year view. Also I bought most of my VNET shares at around 102p when the New Solera overhang was being cleared, so with a divi already in the bank, am around breakeven - not bad considering there has been a profits warning. People had plenty of time to buy in at that price, as the shares were anchored at that price for about 6 months. I've also bought more at 117p, so a bit underwater on those, but not concerned about that.

It's just a nice fairly low risk, each way bet. Even if the growth areas don't take off, the core business with its long term contracts, should still be worth the current share price (if not more), and keep throwing off 6% divis.

Cheers, Paul.

[deanowls1] 24/2/2013 12:13

I jumped in for a few more on Friday to top up as I see this as a growth share overtime. Interestingly (for me somewhat) I was reading through one of the vending companies last week after a profit warning and they had closed a distribution centre and committed new routes for the salesmen, wouldn't it be much more easier to have a report into them on a daily basis giving them the stock availability, cash in machine, any defects so they can be where they need to? Big opportunity. Paul is the 2000 bars in the us a roll out now as opposed to trialling for a chain of 2000?

[cockneyrebel] 24/2/2013 12:12

Fair enough. You might be right but I'm not sure how many private investors will buy it ahead of the results.

After the operating profit line last year they had intangible amortisation of £702k, share based payments of £57k and net finance costs of £57k and £489K exceptionals. They mention 'exceptionals' in the trading update again in the trading update. I'd have found it a bit more helpful if they had given an approx pre-tax profit.

Are they definitely zero tax this year? They were at the interims but year end last year they had income tax of £274k. Also I couldn't see why the cashflow statement said they had paid £853k 'income tax paid' might refer to the prior years tax perhaps. Did they not have past losses to use up then too?

I think basically you're prepared to sit it out here and hold or you decide there's just as fast gains to be made elsewhere. Fall on Friday was on a lot greater volume than the rise at the start of the year.

I might revisit but I want to hear more from the co first - although 10-25k was being traded on Friday that might not always be the case with mm's only obliged to deal in 1k imo.

Hope it comes good for you anyway.

CR

[paulypilot] 24/2/2013 11:43

Hi CR,

I disagree about the detail - this trading update actually gives chapter & verse on each division. There's almost too much detail in it! And they give a precise estimate for this year's out-turn, of £3.2m. I've tabulated all the detail & put it in perspective of each division's turnover & profit, and the picture becomes much clearer then. I will include this table in my new Equity Active note being issued tomorrow, I'll put up a link to it here, or it will be emailed to everyone on the Equity Active email list - there's a link here on our website - EquityActive.co.uk

It's a mistake to try to view VNET as a single business, it is actually 4 distinct things, each of which is performing differently. The crux is that the core business (Brulines) which generated £5.5m profit in 2011/12 is fine, and just churns out profits & pays the dividends, plus generating enough cashflow to fund the growth in the other areas (e.g. fuel monitoring lost £1m last year, and the USA expansion is happening faster now, hence will initially be at a loss too).

The problem is that the growth areas are all taking longer to happen than previously indicated, so I can understand shareholders getting restive over that. I think growth potential & timescales need to be moderated somewhat.

They did lots of acquisitions in rapid succession, so there have been a lot of exceptionals with re-organising, although I had hoped that was coming to an end, but looks like there will be some more.

However, the crux for me is that the core business (80% recurring revenues, on long term contracts remember) is worth the current mkt cap (or more) just on its own. So the growth areas are in for free, and should come good at some point. Today's disappointment is next year's soft comparatives, and when they do announce the signing of the big vending contract, everyone will get excited again. There have been some technical reasons for the delay, but mgt say nothing has changed fundamentally, and it will happen.

They have arguably over-promised in the past, and need to moderate the language of exciting growth, to ensure that reality matches expectations.

However, for me the original investing case is intact - i.e. VNET shares are a great each-way bet. You get a 6% divi yield from secure, recurring cashflows, and mgt are emphatic the divi is safe (and it should be since cashflows from Brulines cover it more than 3 times!). Then when the growth does kick in, which it will do gradually, then the shares will re-rate.

As we saw on Friday, there is strong support for the shares from income seekers below a quid, so risk/reward looks great to me. Downside maybe 10p, and that can just be ridden out anyway. Sit back and collect a terrific, secure dividend yield. Then upside of maybe 50-100% on the share price as growth comes through over the next say 2 years.

Mgt are really excited about USA expansion, saying that customers in the USA are far more receptive to the advantages to be had from iDraught, whereas it's a harder sell in the UK leisure sector outside of Tenanted pubs. The demise of a competitor in the USA created a "one off opportunity" to jump in with a key US distributor, which is why they have accelerated roll-out plans in the USA.

This was actually flagged in the Dec 2012 Interims if you check back, but I think they missed an opportunity to moderate market expectations for the current year, and it was odd that Cenkos upgraded expectations after arguably there were some warning signals with the Interims.

However, once the USA roll-out is going well, nobody will care that there were £400k more up-front costs than originally planned. It's more important to build the business, than to worry about whether one year's profits will be shy of expectations. But there again I've always taken a long-term view of this share, which I think will be usefully higher in 2 years' time, plus throwing off almost 6% divis whilst we wait.

As regards liquidity, it is indeed strange that the MMs are only up in 1k shares, although personally I've never had any trouble dealing the shares in blocks of 10-25k shares. There has been good daily volume in the last few months.

Regards, Paul.

[cockneyrebel] 23/2/2013 10:37

I think the whole problem with profit warnings like this is that there's never enough detail PP.

You have to wait for the results for many of the details to be revealed and some of the questions answered.

The 700k miss in operating profit comes in H2. To make that up they need to have a H1 in the coming year that is flat with H1 last year and improve H2 next year by £700k just to get next years earnings on a par with this years expectations prior to the warning. If H1 for the coming year turns out weaker than H1 this year then you have a struggle on your hands.

"Against that background, the Group believes that operating profit before exceptional items and amortisation for the full year will be not less than GBP3.2 million as compared to GBP3.9 million for 2012". You cannot quantify 'exceptional items' imo. The problem with these sort of things is there's often a temptation for co's to squeeze in a few more exceptionals that aren't that exceptional, to keep the miss looking as minimal as they can imo.

The second issue is it's AIM with mm's dealing in 1k. If you do commit a serious amount here you are effectively locked in in situations like this or take a big hit on the price when buyers are thin on the ground. Really, if you are committing serious amounts in an illiquid share that take you well over the mm size you want to be very confident imo. I just can't be confident until I see more detail.

The potential gain has to outweigh the risk by some way for me and I'm not sure that's the case here after the warning imo.

I'm sure there are plenty that might view it differently tho and are comfortable with the risk/reward potential still.

All just my opinion, will wait to see what they say at the results.

CR

[paulypilot] 22/2/2013 17:19

Hi chaps,

Personally I prefer it if all costs are expensed through the P&L, but it is a perfectly acceptable alternative accounting treatment to capitalise some development costs as intangibles. I forget the detailed rules, but you have to prove certain tests to the auditors to be allowed to do it.

This is open to interpretation, but my personal view is that it's not a problem if the amounts are relatively small. But it becomes a problem if it massively distorts profits & hence the valuation of the company.

I don't like Globo (GBO) for example, because they use very aggressive accounting treatment of this & it hugely inflated EBITDA, which funnily enough is the figure they always quote when trying to ramp up their share price.

Last time I looked at VNET, the amount they capitalised wasn't that different to the amortisation charge, and it wasn't a sufficiently large figure to concern me, but others may want to take a more conservative approach & expense all development costs, it's up to you.

As oregano mentioned, it might also be linked to R&D tax credits, I don't know?

People tend to get ultra-cautious after a profits warning, and start taking an extremely pessimistic view of everything, whereas personally I don't see that a lot has changed here. Just some contract delays, and a decision to roll out in the USA faster than originally planned.

Regards, Paul.

[oregano] 22/2/2013 17:03

this is perhaps the most civilised BB out there. it is nice to see.

Capitalised software costs in the immediated term take costs out of the p&l (although they return in the medium term through amortisation).

However they will be included in the capex line which is only £0.5m, and as the cash flow here is healthy, i would not consider it a problem.

There are often tax breaks associated with r&d developemnt, so if you can get them then capitalising development costs is sensible.

[dangreen86] 22/2/2013 16:56

Paul do you see any issue with capitalizing software costs? I don't, but other investors have mentioned this as a red flag.

[paulypilot] 22/2/2013 16:30

Hi,

I posted this on TMF and thought it would be useful here too.
I've collated the points in the RNS today into positives & negatives, by division, and it's actually quite mixed. Today however people are only seeing the negatives.

If you work through the RNS, it's actually got positives & negatives for each section, and is not all bad news at all (although people are only seeing the bad news today). Consider the +ves and -ves below, collated by me from the RNS;


Core beer monitoring
- delays in iDraught installations
- bottom end pub disposals
- less favourable rates of renewals
+ many pub cos conducting extensive evaluations of iDraught (higher margin)
+ no further erosion in installed base (18,000 pubs) expected.

Vending telemetry
- Significant order delayed
+ Significant order expected in 2013/14

Fuel monitoring
- H2 loss-making due to poor trading in Dec/Jan
- Delays to significant contracts
+ Reduced cost base & new business gains
+ Significant new contracts commencing in Mar & Apr
+ Expect strong start to 2013/14

iDraught USA
- £0.4m loss for 2012/13, vs small profit planned, due to up-front costs from enlarged market opportunity.
+ Exciting opportunity to extend beyond Colorado
+ Full launch began in Feb 2013, into 10 States.

Overall
- Economic environment remains difficult
+ Confidence in longer-term growth


They made a policy decision to invest more in the up-front roll-out costs of the USA, because a "one off opportunity" came up to partner with an American company to do a faster roll-out. That, and unavoidable contract delays, are the main reasons behind today's warning. Once those contract wins are announced though, people will quickly forget today's warning.

Regards, Paul.

[sir leonardo] 22/2/2013 15:57

WELL WELL WELL!!!!!!!!!!!

IF YOU PUT TEN OF US IN A ROOM !!!!!!FFS LAST MAN CLOSE DE DOOR BEHIND THEM!!!!

MANAGEMENT ARE NOT TO BE TRUSTED THIS IS GOING DOWN!!!!!!!!

FAULT LINES WILL LEAD TO CRACKS WILL LEAD TO QUAKES!!!FFS GET OUT

[woodcutter] 22/2/2013 15:54

well having sold out this morning due to the uncertainty i think it's no longer a case of whether the financials work or not, we are beyond that now imv. It's a question of credability and whether the management can be trusted. Paul has spoken with them and has his view as do many of us who have not had that opportunity.

But it is my experience that management are only ever going to tell you the good news and polish over the bad news. I have had my fingers burned in the past on misleading management conversations and i make a point now to try and be dispassionate and just go by the wording of the rns/news service and the numbers, i don't ever get close to the bod on any of my investments.

If you put 10 of us in a room and asked us to interpret this latest TS you'd most likely get 10 very different opinions so as i said it's a question of trust and credability.

If you believe long term that they can be trusted then your still in, if you have lost faith then your out. Either way the financials will ultimately define which decisions was right.

Me i'm out, their past record is too patchy to keep the faith.

Woody

[adam] 22/2/2013 15:38

....."Apologies, as I misunderstood that earlier"

don't apologise. your misunderstanding is the result of the carefully chosen wording.

[cockneyrebel] 22/2/2013 15:24

The divi is safe for this year PP but idf there isn't a fwd looking improvement by the results then I think investors will woder whether the divi is safe going fwd imo.

You either have faith and believe in these as you do to your credit or you play safe with a wait and see. Might be a great buy if all goes well or might be a cow if you're holding when they do hint at reducing the divi if they do - that's the prob with high divi's imo. Looks well covered at the moment but depends on the fwd performace and cash pisition in the year ahead.

Tough call, I prefer easier calls really.

Perhaps I'm totally wrong.

CR

[dangreen86] 22/2/2013 15:18

What is the issue with capitalizing software costs? Under IFRS costs incurred to develop software for sale to others are expensed as incurred until the products technological feasibility has been established, clearly VNET feel this threshold has been passed, as do the auditors. Also if a firm develops software for its own internal use these are also capitalized.

[this_is_me] 22/2/2013 15:16

Seriously overvalued.

[shanklin] 22/2/2013 15:06

Paul

No need for you to apologise.

That sentence in the RNS is IMHO completely disingenuous.

Cheers, Martin

P.S. Feel pretty fortunate to have had no position this morning having sold on the 8th and 11th February more through luck than judgement, having read that they are capitalising software development costs.

[paulypilot] 22/2/2013 14:58

Just spoken to the company, and they've firmly reiterated that the dividend is safe, as indicated in the RNS this morning. The USA expansion sounds exciting too, and they're confident that the other delayed contracts will come through, but there are technical issues causing a delay, so it's slipped from one year into the next.

At this valuation I think it's fine. We get a near-6% divi, twice covered, whilst we wait for the growth to come through. Mgt are putting a lot of time & effort into the USA, as they a market which has proved receptive to their product & they have a deal with a national partner.

To clarify, the 2,000 figure is indeed the potential market for the clients they are already either rolling out with, or doing pilots with. So it's an aspiration, not a currently installed base. Apologies, as I misunderstood that earlier.

Regards, Paul.

[pj 1] 22/2/2013 14:54

paulypilot 22 Feb'13 - 14:42 - 233 of 233

Would be really interested in any points from your planned discussions with them today. I do hold but sat on the fence presently.

Pub business is now very low margin on Liquid sales, so surely and cost savings from idraught is a must med/ long term?

Maybe the lower end market calibre of Tenant/ Lease holder who are bailing out fail to see the benefits

Cheers

PJ

[paulypilot] 22/2/2013 14:42

Hi jamieline,

A week later, pah! That would be luxury!! It was two days after my note that the pr warn came out!!! Talk about Sod's Law. But there we go.

There's a lot of info in the trading update today, so I've put it into a table, which I'll include in my update note on VNET to be issued on Monday. But it basically splits it into two columns, positive & negative, and 5 rows, for the 4 divisions, and overall.

It's actually fairly balanced, i.e. each item has a positive & a negative. It all boils down to essentially delays in new contracts, and cost over-runs with a more ambitious expansion in the USA.

For the core business they say that no further erosion of the installed base (currently 18,000) is expected, and those are on long-term contracts, so it looks pretty solid to me.

Vending is under-performing purely because of a delayed "significant order".

Fuel has also had 2 significant delayed orders, but they confirmed these are starting in Mar & Apr, so a "strong start to 2013/14" is expected.

Finally, iDraught USA is extending beyond Colorado into 10 states, so there are additional start-up costs associated with that.


So when you work through the statement dispassionately, and weigh it all up, the negatives are nearly all just delays, which are temporary factors.

I think the market certainly over-reacted first thing (probably due to Spread Bet positions being automatically dumped by computers on stop losses), and that the shares are probably still good value.

The 5.7p full year dividend costs £1.6m in cash terms to pay. But that is twice covered by the reduced operating profits of £3.2m they are expecting for 2012/13. Bear in mind they are running on a nil tax charge due to b/fwd tax losses, then profits after tax will only differ from this marginally, due to interest cost (which will be very small, as they are paying ultra-low interest rates on their borrowings).

So there is clearly not any threat to the dividend, in my opinion.

This allows people to lock into an almost 6% dividend at the current price of just under a quid, twice covered from cashflow. And the growth is in for free.

I appreciate that it's always a case of jam tomorrow with this company, but I really feel people are massively over-reacting with some of the comments here.
But each to their own, everyone has different perspectives.

Regards, Paul.

[jamielein] 22/2/2013 13:48

Paul, I do really feel for you - your first note in your new company being VNET, and a profits warning a week later. It couldn't really be worse timing could it?

I'm still holding, but decided not to buy more as I was 50-50 whether to sell this morning. That was more due to where I thought the share would go short-term, rather than long-term prospects. I couldn't get over 100p for them, so I decided to hold.

There's no reason to believe the company isn't going to do well in the future. Obviously I'd have to reassess if there's any more disappointing news, but at the current price after the recent news, I think they're fair value.

If I didn't hold here, I probably wouldn't be buying yet. I'd wait for positive news.

[paulypilot] 22/2/2013 13:34

mechanical trader,

I'm not making excuses. You describe yourself as a trader, so perhaps you have a different outlook to me? I look at the business fundamentals, and invest with typically a 1-2 year horizon, sometimes longer.

It is normal for their to be bumps in the road with small caps, that's the way business is, in real life. Can you explain what you think is so terrible with VNET's profits warning today?

If you read it carefully, they are simply saying that there have been some contract delays, and that the USA expansion has incurred some extra costs. I fail to see why either of those are a disaster? Profits falling from £3.9m to £3.2m is disappointing, but when it's for specific reasons as they have explained, then I accept that.

The share price should go down about 15%, and it has.

From my perspective though, there is nothing in the announcement which worries me about the outlook - quite the opposite actually, in that they are upbeat about the future. Although it could be argued that they always sound upbeat, and always deliver delays, etc. Which is a valid point. They need to think more about under-promising & over-delivering.

However, the fact remains that their core business is cash generative, on recurring long term contracts, so the divi should be safe, and locks in a near 6% yield buying at today's price. That is clearly attractive to income-seeking investors, with the icing on the cake being the growth.

It's not a time to think emotionally, profits warnings should just be a trigger to calmly reassess what has actually changed, and if the answer is "not much", as in this case, then potentially a sharp fall can be a buying opp, as it was when I topped up at 87.8p and 90p earlier this morning. That locked in a 6.5% yield, not something I'm making any excuses for!

Regards, Paul.

[cisk] 22/2/2013 12:30

Paul,

Reading between the lines could it be that the cash cow is less stable that originally thought?

'anticipated iDraughtTM installation programmes and reduced contribution from traditional beer monitoring solutions as a result of bottom end pub disposals and the uncertainty that accompanies the disposal process. In addition, there have been less favourable rates at contract renewal as a result of customers transferring some non-core support services back in-house'.

If it's as you say that the existing base remains stable (and would only grow by replacing with iDraught) then all well and good. If though the installed base is dropping (which it looks like what is happening), costs are increasing on expansion (which of course is required in order to grow) then they are being squeezed every which way. After all, all you ever hear is about pubs closing each day, not opening up.

If the contactless vending machine product were such a success last summer then customers would surely be falling over themselves to introduce such a product? Clearly the technology must be ready so what is the break on the uptake? Maybe the economics aren't there in terms of the cost versus the savings it generates.

For Fuel Solutions, my understanding (which could of course be wrong) is that once the product is in, it's installed so revenue flows. So how would poor trading impact this? Did petrol forecourts really sell that much less in those two months?

Finally the statement (which I understand you will discuss with them) 'Following several months of set-up activity, the full USA launch commenced in February with initial installations across ten states with several national USA retail chains, controlling over 2,000 bars' is very misleading and really the management should know better and have stated something less ambiguous.

So I think that they do have opportunities but their cash cow is galloping out of the field faster possibly than we thought. And the management should have flagged cost overruns earlier to the market - as a previous poster suggested, this could have easily be turned into a much more of a positive which could have even caused a rise in the share price.

I believe you have met the management before - would be interested on your views on them and their experience / professionalism, in regards to handling these types of matters.

Regards
Cisk

[mechanical trader] 22/2/2013 12:26

For gods sake Paul stop making excuses.