Investors may have breathed a sigh of relief that Vianet (VNET:AIM) hasn't cut its dividend following February's profit warning, yet there remain significant risks hanging over the group. Its core pubs monitoring business faces the threat of UK government intervention and there's no guarantee that a large delayed contract in its vending arm will actually go ahead. The market is clearly worried, sending the shares down 9.6% to 80.5p.


VNET - Comparison Line Chart (Rebased to first)


Vianet specialises in monitoring consumption of beer in pubs, petrol in forecourts and food/drink products through vending machines. Its profit warning four months ago was a result of contract delays in many parts of the business, investment to crack the US drinks market and weaker-than-hoped demand from the UK leisure industry.


Today's results marginally beat the revised earnings guidance with £1.8 million pre-tax profit (2012: £2.3 million) and a 5.7p per share dividend (2012: 5.67p). The opportunities in the US are starting to take off yet there's two risks that jump out of the results and are likely to weigh down on the share price until there's clarity on the matters.


Firstly, UK government proposals for a new code serving the pubs industry are negative for Vianet. A consultation document published on 22 April includes restrictions for using beer flow monitoring systems. Vianet says it implies that companies cannot use beer monitoring data as evidence to show landlords may have infringed the terms of their pub tie, namely the agreement between a pub to buy at least some of its beer from a particular brewery.


Vianet admits it is a real threat but reckons the probability of the proposals becoming law are 'very low'. Nonetheless, it says the proposals, if approved, would have a 'material impact' on its business. The consultation ends on 14 June.


Secondly, there's growing uncertainties over whether Vianet's 'significant' new vending contract, previously expected to sweeten this year's numbers, will actually materalise.


Chief executive officer (CEO) Stewart Darling wouldn't reveal the identity of the client but says a change in ownership has pushed back the start date. He says the client is a mainland European business recently demerged from a US owner and then taken over by a third party. This activity has disrupted the work schedule. 'It will be game changing for our vending arm,' says Darling. He says the client expects to reconvene in September or October to review the deal, however the CEO warns there is no certainty as to whether it will be the same senior management team who were originally involved in the contract award.


Against these negative issues, the US opportunities look interesting. Vianet reckons it can break even once it has between 700 and 800 operational sites. It says that could be possible with a single customer, given the scale of some of the potential players. The following information from today's results presentation to analysts and institutional investors illustrates this point.


vianet US


Yet the question investors need to ask is whether the US opportunities, together with UK developments including a focus on the coffee market for vending, will offset any setback with the UK pubs market. Anyone lured to the stock by its attractive dividend, currently yielding 7.1% based on today's dividend announcement, needs to remember that it is pointless buying a stock for income if the share price keeps falling. That's the market telling you the dividend is unsustainable because there's a problem with earnings strength.

Issue Date: 11 Jun 2013