This is a company that I mostly sold out of in late 2019 when the P/E hit 20x. During 2020 I sold the remainder when it was clear that both their pub and vending machine businesses would be severely hit by the covid response for a year or more. Today’s results (and annual report) are worse than I could have imagined at that time (specifically, revenue is 25% worse than I then forecast) yet I see the share price is higher.
The first two lines of their financial “highlights” tell the story straight away:
If recurring revenues were 92% of the whole last year, then the most revenue can normally fall is 8%, plus the effect of attrition. Worse still, despite a 48% fall in revenues, the proportion of recurring has actually fallen – the supposedly recurring revenues have apparently fallen more than the supposedly non-recurring ones. But this wasn’t a normal year and the loss of revenue was mainly due to a relaxation of contracts precisely to avoid attrition, as well as bad debts.
The divisional performance section should make this clear, but they’ve made a right hash-up of the tables, for example:
Traditionally the Smart Zones business provided a service to breweries to check that their tenants paying subsidised rent were keeping to their agreements to buy beer from them at a premium (“tied pubs”). In recent years the business has been slowly shifting to providing sales analytics for a range of hospitality customers in the UK and US.
Getting back to the recurring revenues theme, they have identified a likely net reduction of 662 sites in the UK which is actually better than in FY2020, and represents around 6%. However, the company has been “proactively providing short term pricing support to customers to mitigate the impact of national and regional lockdowns in the hospitality sector”.
Financial performance has therefore been appalling, though thankfully not as bad as the drop of 189% in turnover given in their comparison table. I have corrected the percentages and years below:
Total connected devices and iDraught penetration should give a guide to normalised revenue, with a higher cost per device for the latter.
My opinion is that fewer pubs have closed this year because of uncertainty leading to a freeze in decision making. As with Revolution Bars, there is no reason to believe that long-term trends away from licenced alcohol sales have suddenly stopped or will do so. Indeed, many of their customers continue lose money despite government support and remain short of capital despite raising money from shareholders.
Sadly, I expect a jump in pub closures after full reopening followed by a reassertion of long-term trends.
This is the “exciting” part of the business:
The Smart Machines division consists of telemetry insights and monitoring, and contactless payment predominantly in the unattended vending retail and coffee sector, as well as ERP and mobile connectivity services.
Unattended vending machines might have been expected to do well during covid, remaining open and taking a greater share of retail spend. Unfortunately many of them are in workplaces and other locations that were closed or suffered significantly lower footfall, although they highlight essential workers as significant customers.
Again, here is the YoY comparison table with the percentages corrected:
In the medium term this business should grow, supported by trends away from cash and increasing labour costs. They claim market share of 50% and penetration of 8% which should put them in a strong position.
As they highlight, and in contrast with Smart Zones, the coronavirus pandemic is likely to support prospects for this division in the medium term. Unfortunately, in the short term it has served to obscure underlying trends.
The company has had borrowings since I began looking at it. High development costs (capitalisation is ahead of amortisation) and a shift towards annuity-based vending machine sales consume significant amounts of cash. Nonetheless, in FY 2020 it was cash generative, albeit with assistance from beneficial working capital movements.
In FY 2021 Covid losses had a significant impact on their finances and they obtained a CBIL loan of £3.5m in the period. Additionally they have an overdraft facility and an acquisition loan. Based on disclosures in the annual report I estimate the details to be as follows:
The American SBA loan refers to the US job retention scheme and has been forgiven, leaving £1.3m to repay this year.
There was second consecutive year of beneficial working capital movements in FY 2021, but of course it is easy to reduce receivables when you have unilaterally stopped charging customers, and I do not believe this can continue. A reversal of this year’s beneficial movement would be a minimal prudent assumption following a return to normality.
Using the same operating cashflow as FY 2020, this gives a potential FY 2022 cashflow statement that looks like this:
With gross cash of £1.9m and an undrawn overdraft facility of £1.5m this seems manageable and that is reflected in the going concern statement. However I cannot see how they have enough cash to get through FY 2023 without severely impacting growth by reducing investment or stretching working capital, and even then they would be dependent on the overdraft facility being renewed.
Although not immediately required, future demand for shares cannot be guaranteed and a fundraise of £3m-£6m now seems prudent. The precise amount would primarily depend on growth rates they expect from their annuity model and the levels of investment they think will be required to stay ahead of the competition.
This is an “avoid” for me until they come up with proposals to repair their balance sheet. However it is an interesting company operating at high gross margins in potentially fast-growing markets and so post-fundraise I think it would be well worth putting in the effort of making a detailed DCF model.
We will be discussing Vianet in Small Caps Live from 11am on Wednesday 16th June.