7:59 cut – VNET

Vianet (VNET) – Trading Update

Vianet say that their first 4 months of trading “has been as anticipated with the Group being on course to meet market expectations.”. They also say that they have signed 3 new long term contracts bringing in £10m of revenue over the next 3 to 5 years.

As this works out at around £2.5m / year versus FY2019 revenue of £15.7m, this is material. It is perhaps surprising that this doesn’t put them ahead of 2020’s forecast revenue given that 8 months remain of this period. One possibility is that these new contracts were previously built into forecasts (which would have been imprudent). Another is that declines in the traditional beer metering business are expected to accelerate (which would have perhaps been worthy of comment).

I think there is a good chance the explanation is in fact that implementation will not be immediate and there will be a ramp-up period. In this scenario FY 2021 estimates look likely to be raised.

On 26th June they issued an AGM update saying “trading in the first two months being slightly ahead of the Board’s expectations”. The share price quickly rose, as did broker revenue forecasts, but broker consensus EPS forecasts fell, driven by Cenkos. This is likely to be on product mix / margin concerns. Today’s announcement describes the contract wins as being from their “Smart Machines” division, which were described in June’s statement as “higher value”. Therefore I am hopeful for EPS upgrades (perhaps from FY2021) to flow from today’s statement in due course.

One issue to highlight is that expansion has in the past consumed working capital due to their annuity model. The company carries a small amount of debt, but I do not believe this is a cause for concern. [Edit: Also, their “transformational” coffee contract is taking a long time to convert into actual orders. While no revenue from this contract is included in forecasts and therefore this could be seen as a potential (very significant) upside, it should also result in some scepticism concerning the speed of rollout for today’s new contracts]

The shares have fallen back recently, trade on a forward PE of 12.6, with conservative forecasts, a very high proportion of recurring revenue and good quality metrics such as operating margins. After having reduced around 145p I will be looking to add this morning.

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