VTG - Vita Group Ltd

[Lizard]

Another one from the recovery stock review that I didn't get around to writing up back in March...

If low Price/Sales were the sole marker of a "recovery stock", then VTG would be near top of the list. With a market cap of $35m and FY2011 revenue of $387m, this stock comes in at a P/S of just 0.09.

Vita Group listed in 2005 as "Fone Zone" (FZN), issuing 66.2m shares at $1 in a 50% equity sell down that valued the business at $132m. The original business had been formed in 1995 by David McMahon and Maxine Horne - a couple who remain in control of the business as both shareholders and managers.

Fone Zone was/is a chain of phone retailers with a link to Telstra. More history in an early thread below:
http://www.sharetrader.co.nz/showthread.php?5422

They have since added Next Byte, which retails Apple product and the Fone Zone stores are gradually converting over to a Telstra-branded offering. This makes their revenue heavily dependent on both Apple and Telstra - which will ring warning bells to anyone who has previously invested in any companies that attempted symbiosis with a more powerful player. They have several smaller, but associated offerings - Sprout accessories and iConcierge servicing/training.

The original company was well groomed for listing by Private Equity company, Investec who sold down to 10% on listing and the remainder just after first result. As is typical with groomed floats these days, the company exceeded the first forecast, allowed Investec to exit at a premium (high of around $1.30) and then began the series of profit downgrades due to margin squeeze, causing the price to halve.

The Next Byte acquisition the following year drove revenue higher, but with only a small improvement to bottom line NPAT in 2008. With the collapse of sales during the Global Financial Crisis, the associated acquisition debt turned into a noose, as the covenants were breached and the share price plunged to lows of around 7cps.

A change in business model negotiated with Telstra provided a cashflow boost as trailing commissions changed to up-front commissions, enabling additional commission to be generated over the 2010 and 2011 years and allowing debt to be repaid. This means that, superficially, the 2012 results will appear lower than the 2011 year and the first half provided NPAT of only $0.9m. However the company has stuck with forecasts of EBITDA of $15-$18m for the full year, which should result in NPAT of $4-$6m for FY2012. While this will likely be lower than the $6.8m recorded last year, it should well exceed prior year once the abnormal commissions in 2011 are accounted for.

On this basis, forward P/E should be around 5.8-8.8 at current price of 25cps. They are likely to pay between another 1-2cps in final dividend. Should the forecast be achieved and continued into 2013, then NPAT of $10m for 2013 would be on the cards, making a market cap of $35m simply too cheap to ignore.

While the history of VTG and the margin struggles of other tech distributors in recent years should make for caution, it appears that the founders may have learned to moderate their forecasting and to keep the market fairly updated with forecasts. They have also been buyers of shares, spending a joint $480k on market in March, while another director spent $19k. Perpetual has recently been selling down their holding, but with the arrival of Pie Funds on the register yesterday, it is possible that the overhang has cleared.

For myself, I have had both very good and very bad trades on all three of the tech distributors I have invested in (RNS:NZ, AMO:AX, CLT:AX), which means this is probably not one to hold too long. However, as a punt on achieving the next result and then a good first half in 2013, there are some signs the odds are in place and VTG is just too cheap to miss.

[Snow Leopard]

Hi Liz

Wonderful that you keep bringing your researches and thoughts to the Share Trader community.

Even with my Fundamental Hat on I have certain rules that I never ever break unless I really want to.

One is buying into shares trading below 50c and another is with regard to trading volume (VTG would appear to have to many days when there is no trades to pass).

Can you get out of this out a reasonable price if it turns turtle?

best wishes
Paper Tiger

[percy]

Lizard.
What is the point/points of difference between VTG and CLT.?

[Lizard]

Even with my Fundamental Hat on I have certain rules that I never ever break unless I really want to.

One is buying into shares trading below 50c and another is with regard to trading volume (VTG would appear to have to many days when there is no trades to pass).

Hey, well if it was liquid and trading above 50cps, it probably wouldn't need me to cover it as the paid analysts would be...

As always, a gamble with the illiquid ones - free float is not the worst I've seen with 73% held by top twenty. There seems to be enough liquidity that it has some chance of building from here.

PS: I'd never remember stuff if I didn't post it where I can find it again - my reasons aren't really that admirable

[Lizard]

I am hoping that the difference between VTG and CLT will be a retail presence. CLT was always very much a distributor. Maybe the comparison with RNS:NZ would be better now they've also added the retail and training. I haven't actually followed CLT for a few years - hard to piece together the announcements, but looks like a wind-down, as they seem to have exited the majority of revenue since I followed last.

RNS:NZ are even cheaper on a Price/Sales basis, although probably explained by debt levels - maybe I should be writing them up as a recovery stock, though they might need a name change before sentiment could go their way again!

[percy]

I am hoping that the difference between VTG and CLT will be a retail presence. CLT was always very much a distributor. Maybe the comparison with RNS:NZ would be better now they've also added the retail and training. I haven't actually followed CLT for a few years - hard to piece together the announcements, but looks like a wind-down, as they seem to have exited the majority of revenue since I followed last.

RNS:NZ are even cheaper on a Price/Sales basis, although probably explained by debt levels - maybe I should be writing them up as a recovery stock, though they might need a name change before sentiment could go their way again!

Thanks Lizard.
RNS.Do you think they should try Triumph Industries again.?

[Lizard]

Thanks Lizard.
RNS.Do you think they should try Triumph Industries again.?

Perhaps not in your lifetime.... I guess after "Triumph" and then "Renaissance", the next name might be "Revolution"?

[macduffy]

Perhaps not in your lifetime.... I guess after "Triumph" and then "Renaissance", the next name might be "Revolution"?

Getting off the track here but "Lazarus Industries" has a nice ring to it.

[Lizard]

Been slow to move since I started the thread at 25cps in May, but finally getting a bit of a move on and looking at clearing out 30cps today.

[stoploss]

Piefunds recently put these back in the portfolio,he has had a very good run of late. New Iphone release later in the year should help these as well....