Vianet Share Discussion Threads

[jeffian] 25/2/2013 09:50

Paul,

"the group has changed considerably in the last few years. They made a series of acquisitions, and have used the cashflow from the core Brulines business to finance initially loss-making activities such as the fuel monitoring & vending operations."

I remain a shareholder but, like others, have reservations following the profit warning. The point about the acquisitions is that they were borne of necessity rather than conviction. The core Brulines business can only go so far in the UK and is under threat here from legislative changes, so they needed to find new long-term profit centres before profits stagnate and fall back (as, indeed, the recent TS is indicating). Yes, the US has the potential to drive Brulines forward but it is early days yet and remains to be seen whether the initial trialling will turn into widespread adoption, but the jury's still out on the new businesses. Fuel Solutions has yet to establish stable profitability and Vending, which has exciting possibilities, has not achieved much yet. So, yes, they have a window of opportunity to convert from the largely static Brulines business into something else that grows, but it's not entirely clear when or if that will be achieved and they don't have for ever to find out. I'll give them the benefit of the doubt for now, but we need to see real progress this year and delivery of some of that 'potential'.

[paulypilot] 25/2/2013 08:10

Hi Liarspoker,

I'm not sure that is a logical way of looking at VNET, since the group has changed considerably in the last few years. They made a series of acquisitions, and have used the cashflow from the core Brulines business to finance initially loss-making activities such as the fuel monitoring & vending operations.

However, if you model the figures with them moving into profit (which will obviously happen at some point, otherwise they would just be shut down!) then the earnings picture becomes much more interesting.

So VNET is really a core, highly profitable business, with several smaller, loss-making, developing businesses attached. See it in its constituent parts, and look to what happens when growth emerges, and it all looks a lot more exciting.

Management just have to deliver on the growth, which so far they have not managed to do.

Brulines made a £5.5m operating profit (before group central costs) last year, for example, whilst fuel monitoring lost £1m, and vending lost £0.2m. The USA will also lose about £0.5m this year, and hence the full results are going to be depressed by these factors.

There are new contract wins in fuel starting in Mar & Apr 2013, so that could well eradicate losses & move it into profit for 2013/14. Same with vending, once they close their big contract that has been delayed, that should deliver a much better performance in 2013/14 as well.

You have to look forwards at how the results should improve, not look backwards, to get a handle on how these shares are probably at an attractive entry point right now.
However, it all depends on management actually delivering. I think they have over-promised and under-delivered so far, and will say so in my update note being issued later today by Equity Active, the company I helped recently set up to shake up smaller caps research & Investor Relations. We're independent, so we can say the things that other people are thinking but dare not publish!

Regards, Paul.

[liarspoker] 24/2/2013 22:43

I'm not so sure that this is a bargain even after the share price fall.

5 year average PBT = £3.64, which gives a PBT multiple of 7.4X 5 year average PBT, but OP before adjustments will come in at no less than £3.2m suggesting a much lower PBT.

Ok, so contracts are due to come in next year so let's say they do £4m PBT which would give a broad EPS of 12p giving a multiple of 8.16. The 5 year average P/E is 10 so the 2014 multiple is not much of a discount to the longer term average.

Given the increases in costs over the last few years ( increasing revenue, falling PTP ) this company is around fair value as I see it especially since there are no assets to fall back on.

If VNET manages to do 13.5p eps on a multiple of 11 then the company is starting to look cheap imo.

[masurenguy] 24/2/2013 14:14

You make some excellent points Paul and I concur with your view. I have retained my holding here although it's slightly under water at the moment. My only reservation relates to management credibility and the final results will be the first test to see whether they comply with the recent update or whether there is more bad news still to be revealed.

[hastings] 24/2/2013 13:27

Appreciate your thoughts and comments Paul.

[hastings] 24/2/2013 12:45

Hi Paul,
I don't hold here,but was tempted! some very good thoughts and in depth analysis of the co and prospects well put. In relation to the divi, I wonder what pre-tax figure Cenkos now has pencilled in,for both this year and next year in relation to the level of cover. I take on board, what you say in relation to the core business generating consistent profits in order to maintain the yield, but equally would a drop in in the full pre-tax alter the picture somewhat.

[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.