VTL - Vital Telecommunications (formerly Team Talk)

[Hawkeye]

Looks interesting up again today...

Do you think someone is going to make a takeover attempt again?

[BIRMANBOY]

Well if you trust underlying market forces...stating the obvious...been in a tight 70 to 80 cents range last 9 months or so and suddenly over the last 2 weeks there is an upsurge in buying and volume. So yes something is going on..as investors of course we will be the last ones to find out LOL. My bet is that there is going to be some sort of announcement of improvement in performance and or reinstatement of dividends. Either or would be fine. This is an unloved stock so for there to be some resurgence of interest has to be something of substance rather than a few punters with some spare cash.

[Hawkeye]

Well if you trust underlying market forces...stating the obvious...been in a tight 70 to 80 cents range last 9 months or so and suddenly over the last 2 weeks there is an upsurge in buying and volume. So yes something is going on..as investors of course we will be the last ones to find out LOL. My bet is that there is going to be some sort of announcement of improvement in performance and or reinstatement of dividends. Either or would be fine. This is an unloved stock so for there to be some resurgence of interest has to be something of substance rather than a few punters with some spare cash.

Thanks for your comments captain personality. I have a few of these shares so naturally I would have an interest in the price and thought someone dropped the ball with a price sensitive press release or something. I have NTL they are famous for not telling investors anything.

[BIRMANBOY]

My comments were of a general nature and not directed to you personally. (otherwise I would have added your quote in). But yes I do have a charming personality..thank you:cool: Hopefully your shares will be a good investment for you. Anyone owning these is either inherently a masochist or a new born optimist but regardless of the cut of your cloth..its always nice to come out ahead.

Thanks for your comments captain personality. I have a few of these shares so naturally I would have an interest in the price and thought someone dropped the ball with a price sensitive press release or something. I have NTL they are famous for not telling investors anything.

[Hawkeye]

I like to think i'm an optimist... but then again I also have PEB so maybe i'm could be mistaken for the former...

[tim23]

A bit firmer last week expecting dividend this year that should help be good to get rid of remainder of Farmside too.

[winner69]

Dont people talk about Teamtalk any more

This sounds pretty good

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/TTK/314587/274937.pdf

[percy]

Dont people talk about Teamtalk any more

This sounds pretty good

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/TTK/314587/274937.pdf
Surprised they are still in business.

[tim23]

Anyone share my optimistism about return to paying dividends with next profit announcement?
Disc - hold

[waikare]

Anyone share my optimistism about return to paying dividends with next profit announcement?
Disc - hold

Hi Tim23, below is taken from their 2018 Interim Report released 20/3/18, I guess it now becomes a waiting game.

OUTLOOK AND GUIDANCE We are pleased to say that our results demonstrate consistent improvement and that we are on track to meet our guidance. We are excited about moving into the next phase of our fiveyear plan as we reinvest into our infrastructure which is critical in producing better results for our shareholders. The aim of the company once these capital programmes are completed is to move to a dividend policy of paying around 50 – 70% of net profit after tax.
The company is on track for a resumption of dividends along with reinstatement of the dividend reinvestment option at the end of financial year 2018.

[BIRMANBOY]

Yes indeed ...might be time to add a few more before the upswing takes place....Whats that you say ....can you hear the chugging sound in the distance??? That's the sound of the man working on the pump... gang ee ang oooh ee oo...that's the sound of the man working on the pump..ooh aaah oooh aaahhh . In answer to your question..yes you're right I have no shame LOL
Hi Tim23, below is taken from their 2018 Interim Report released 20/3/18, I guess it now becomes a waiting game.

OUTLOOK AND GUIDANCE We are pleased to say that our results demonstrate consistent improvement and that we are on track to meet our guidance. We are excited about moving into the next phase of our fiveyear plan as we reinvest into our infrastructure which is critical in producing better results for our shareholders. The aim of the company once these capital programmes are completed is to move to a dividend policy of paying around 50 – 70% of net profit after tax.
The company is on track for a resumption of dividends along with reinstatement of the dividend reinvestment option at the end of financial year 2018.

[tim23]

Best volume for a few weeks and interesting closing spread...

[tim23]

Strong volume again today, looked at chart on ANZ securities, last 3 volume spikes have seen price hike, maybe another coming in anticipation of good result and dividend resumption. Holding at this stage.

[Lola]

dont people talk about teamtalk any more

this sounds pretty good

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/ttk/314587/274937.pdf

they are now!!!

[tim23]

they are now!!!
Last year update 10.8.18 result 24th so same pattern this year may see update this week?

[silverblizzard888]

Likely results this week, last two announcements we're 23rd and 24th august, no announcements of material change, so we can assuming they will be meeting guidance. Guidance was between $4.1 - $5.6 million after tax profit.

Expect payment of dividends, I'm expecting they will continue where they left off and pay 4 cents. Within their affordability.

[tim23]

Likely results this week, last two announcements we're 23rd and 24th august, no announcements of material change, so we can assuming they will be meeting guidance. Guidance was between $4.1 - $5.6 million after tax profit.

Expect payment of dividends, I'm expecting they will continue where they left off and pay 4 cents. Within their affordability.
Result is out Thursday confirmed in email I sent to CEO, Jason Bull - prompt response too.

[silverblizzard888]

Profit was inline with guidance, good to see debt reduced, though they broke their promise about resuming dividend this financial year, however its not a bad thing at least they have their priorities right and have not tired to pay it because they said they would and the focus towards the sustainability of the company is always positive.

[tim23]

Profit was inline with guidance, good to see debt reduced, though they broke their promise about resuming dividend this financial year, however its not a bad thing at least they have their priorities right and have not tired to pay it because they said they would and the focus towards the sustainability of the company is always positive.
I was disappointed at no dividend but concur - PE is about 6 making them look rather cheap.

[waikare]

TeamTalk moves to raise $8.7 m of capital to fund investments for growth.

TeamTalk Limited (NZX: TTK), the publicly listed telecommunications services provider, today announced it will be raising approximately $8.7 million of new capital to assist in funding the rollout of a new digital radio network, transformation of its Wellington fibre optic network and the acceleration of new products and services.

The capital will be raised by way of a $2 million placement to selected institutions and other eligible investors at $0.75 per share (Placement) and a fully underwritten pro rata 1 for 3 renounceable rights offer at $0.65 per share.

[winner69]

Headline says new capital for growth

Looks more like cash needed to stay in the game ...but growth sounds better ....and more seductive

[blackcap]

Headline says new capital for growth

Looks more like cash needed to stay in the game ...but growth sounds better ....and more seductive

I need to dig into their books a bit. Because they made about $4m (or 15cps) profit last year and have just affirmed that they are looking for a similar amount in FY19. So whats up with that.

[winner69]

I need to dig into their books a bit. Because they made about $4m (or 15cps) profit last year and have just affirmed that they are looking for a similar amount in FY19. So whats up with that.

I usually associate ‘growth’ in terms of what extra one can grow over and above organic growth.

The new money is to roll out a nationwide digital radio network and significantly improve its Wellington CBD fibre network.

To me that’s spending on infrastructure to stay in the game ....without that spend well what would be they have in 2020.

Maybe there is some real growth elements in their strategy so i’ll forgive for saying growth.

But touting growth seems to be at odds of going to shareholders for cash and then saying they’ll give some back by way of dividend ...instead of funding growth out of earnings

Never mind

But last page of the press says TTK is @ SCREAMING BUY on the stated multiples

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/TTK/325624/288985.pdf

[blackcap]

I usually associate ‘growth’ in terms of what extra one can grow over and above organic growth.

The new money is to roll out a nationwide digital radio network and significantly improve its Wellington CBD fibre network.

To me that’s spending on infrastructure to stay in the game ....without that spend well what would be they have in 2020.

Maybe there is some real growth elements in their strategy so i’ll forgive for saying growth.

But touting growth seems to be at odds of going to shareholders for cash and then saying they’ll give some back by way of dividend ...instead of funding growth out of earnings

Never mind

But last page of the press says TTK is @ SCREAMING BUY on the stated multiples

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/TTK/325624/288985.pdf

Exactly right winner what you say about what kind of spending. I was hinting towards capitalising infrastructure expenditure. If its done just to stay in the game you can be "profitable" by accounting metrics but have no cash for poor shareholders and ultimately go under. I will be asking some questions at the AGM. Even my paltry 1,000 shares gives me the right to ask questions.

[winner69]

Exactly right winner what you say about what kind of spending. I was hinting towards capitalising infrastructure expenditure. If its done just to stay in the game you can be "profitable" by accounting metrics but have no cash for poor shareholders and ultimately go under. I will be asking some questions at the AGM. Even my paltry 1,000 shares gives me the right to ask questions.

Unless that radio network gets heaps of new customers hard to see any step change in revenues

Hope F19 revenue growth more than F18

[blackcap]

I see a whole bunch of directors and execs bought shares recently.... 6 of them to be precise.

https://www.nzx.com/announcements/325936

Gotta be a good signal if any.

[waikare]

The share offer one can either pay by direct debit or cheque, the last time I used direct debit via. Linkmarketservices for Gentrack I was debited a $5.00.


Has any body used this direct debit system for payment for their TTK share offer, and were you charged a fee?

[Joshuatree]

81% take-up @ 65c. Forsyth barr underwriting the leftovers , 1 .9 mill shares. Supposed to start trading again today. 4200 through @ 72 c
OFFER: TTK: TeamTalk Limited - Completion of Rights Offer (https://online.asb.co.nz/ost/CA86ED6A3FF356EAB260C6BC72B20695/companyannouncements/showannouncement/nzx/ttk?issuercode=ttk&number=327236&ispdf=false)

[tim23]

A bit of price firming this week, result must be due tomorrow or Friday, return to dividends?

[winner69]

A bit of price firming this week, result must be due tomorrow or Friday, return to dividends?

Jeez ....Teamtalk still exists

Good luck tim

[tim23]

Jeez ....Teamtalk still exists

Good luck tim
Thanks - I keep the faith!

[couta1]

Jeez ....Teamtalk still exists

Good luck tim Another Dog stock, about as bad as SLI in its fall from grace.

[percy]

Another Dog stock, about as bad as SLI in its fall from grace.

And to think I thought they are starting to look very interesting.?

[blackcap]

A bit of price firming this week, result must be due tomorrow or Friday, return to dividends?

Be a bit weird to return a dividend after a capital raising a few months back for mine. But they may, who knows.

I purchased a small amount of these about a year ago at 77 odd cents and took part in the 1 for 3 capital raise. Half year is just out and I am very happy with what I read there. If they can get close to their $4.4m profit that would mean 2 consecutive years of 11CPS earnings on a stock that is priced at 80 cents. Dividend being paid at FY, at 50% of earnings would imply about a 5.5 cent dividend. Is it sustainable. Jury is out but the new team strike me as focused and there have been plenty of insider buys of the stock too.
Looking to add to my holding but think there is a bit of time available before it heads over $1.

[winner69]

Seems all honky dory at Teamtalk. Roger is happy ...that’s the main thing

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/TTK/330884/295356.pdf


Think that means 5 cents divie on cards later this year

[tim23]

Better response than I expected - quite good volume for this stock too post result.

[DarkHorse]

I've recently started looking into this company. With underperforming leaders and division gone, and two apparently solid divisions left + competent new leaders, they look interesting indeed. They cite international research suggesting modest tailwinds in the radio sector, which they dominate in NZ. Citylink revenues and ebitda have been steady and gradually increasing for several years. However I don't have a good grasp of the sector and whether they have a sustainable competitive advantage. Any insights anybody? Thanks! DH

[tim23]

Best volume in a while today and highest close all year I think - better things coming hopefully...

[Anna Naum]

Another Dog stock, about as bad as SLI in its fall from grace.

Recent high today. Nice

[winner69]

OMG ...going to be VITAL

We wanted a name that was: Simple, Strong and Heroic

Love the heroic bit

https://www.nzx.com/announcements/333800

[pg0220]

OMG ...going to be VITAL

We wanted a name that was: Simple, Strong and Heroic

Love the heroic bit

https://www.nzx.com/announcements/333800
But rebranding costs coming out of potential future divie?

[waikare]

Team Talk will become Vital (VTL) on the 1st July

[BIRMANBOY]

Well, every dog will have its day...and this day has been a long time coming but credit due for dedication and hard work and also recognition of the importance of a dividend for shareholders. 3 cents plus imputation credits announced and very welcome it is. Hate to see non productive capital not pulling its weight but great to see my stubborn nature not to sell at a loss finally being somewhat justified. Lets hope this brings some life back into the shares.

[BIRMANBOY]

Well a nice dividend payment into the bank a/c today. Vital has arisen and is looking less like a "night of the living dead" and more like a functioning business. Long may they prosper. :t_up:

[emveha]

EBITDA forecast 8.7 to 11M$, not bad if they can achieve that!

[tim23]

I see Salt filed a notice of holding 5% recently...

[winner69]

See they still hanging in there ...now VTL

Anybody still interested

[Lola]

See they still hanging in there ...now VTL

Anybody still interested

Certainly am. Nice little earner. Bit like RAK...they need someone like Peter Beck who knows a bit about delivering rockets . Both could do with one each.

[tim23]

Result due Tuesday

[Southern Lad]

Result due Tuesday

While company is forecasting a reasonable level of EBITDA, the I, D an A are high meaning that there is not of Net Profit forecast for FY20. While they may have operating cashflow, they continue to plough significant amounts back into the network as they implement their nationwide digital radio network and also underground and modernise their fibre network in Wellington following the removal of the trolly bus above ground infrastructure.

The adoption of IFRS 16 will significantly increase EBITDA but not Net Profit.

Before going all out on VTL I would like to see some signs of bringing these projects to a successful conclusion and getting a clearer view on future profitability and true surplus cash flow levels.

In the half year to December 2019, VTL had operating cash flows of $3.9m but spent a net $4.0m on investing in new property, plant and equipment. Not a lot of surplus cash to pay a dividend from. Second half will no doubt have some COVID-19 impacts.

[winner69]

Seems pretty good result

And a divie

Could be a big mover today

Glad I brought this up when I did

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/VTL/358553/329102.pdf

[blackcap]

Seems pretty good result

And a divie

Could be a big mover today

Glad I brought this up when I did

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/VTL/358553/329102.pdf

Hey winner, I just tried to contact Jason Bull but he is busy. How do you reconcile the really good operating cash flow, yet the NTA declines from 69 to 59 cents?

[winner69]

Hey winner, I just tried to contact Jason Bull but he is busy. How do you reconcile the really good operating cash flow, yet the NTA declines from 69 to 59 cents?

Probably somethingto do with those leases and this IFRS16 thingie

Let us know if Jason clarifies

[blackcap]

Probably somethingto do with those leases and this IFRS16 thingie

Let us know if Jason clarifies

I will, I emailed him as he was busy on the phone. I think it has to do with the current portion of the Lease Liability which is about $5m which makes about sense. The IFRS16 thing does complicate matters. I really like the operating CF though. I hope the "investments in Assets" are real assets and not just maintenance expenses.

Seems I was wrong. The fall in NTA has to do with the Weighted Average number of share difference between FY20 and FY19 due to the capital raise.

[Southern Lad]

Share price has firmed a bit over the last week, with 173,000 shares traded today at 80. Still a couple of weeks until the ex divi date (1 October) for the 2.5 cps fully imputed dividend.

Presumably share price being pushed higher by yield chasers along with the potential for higher dividend payments in coming years out of increased cashflow once the capex spend falls away and opex savings are realised. I note that with $4.5m of existing imputation credits at June 2020 (equivalent to over 10 cps in imputation credits alone) that future dividends are likely to continue to be fully imputed.

[financewiz]

Share price has firmed a bit over the last week, with 173,000 shares traded today at 80. Still a couple of weeks until the ex divi date (1 October) for the 2.5 cps fully imputed dividend.

Presumably share price being pushed higher by yield chasers along with the potential for higher dividend payments in coming years out of increased cashflow once the capex spend falls away and opex savings are realised. I note that with $4.5m of existing imputation credits at June 2020 (equivalent to over 10 cps in imputation credits alone) that future dividends are likely to continue to be fully imputed.

Great to see the share price finally back over 80. This feels undervalued and the environment should be conducive to disaster recovery solutions (remember when we went into lockdown back in March the mobile phone network crashed). Would be good to receive more regular updates from the Company...

[tim23]

Great to see the share price finally back over 80. This feels undervalued and the environment should be conducive to disaster recovery solutions (remember when we went into lockdown back in March the mobile phone network crashed). Would be good to receive more regular updates from the Company...

Good call - thats always been their way very low key few updates to market - PGG, HGL are same as was MVN - a bit annoying as a holder which I am.

[Lola]

Good call - thats always been their way very low key few updates to market - PGG, HGL are same as was MVN - a bit annoying as a holder which I am.

Agree..one gets the feeling they don't really give a hoot about shareholders. Pathetic div. What about some future plans and strategy to achieve them? Upcoming AGM will present the Board and the CEO with an opportunity to share these (if any) with shareholders, but wont hold my breath. Vital? ...yeah right. Seems just a cozy little existence for this team.

[tim23]

Agree..one gets the feeling they don't really give a hoot about shareholders. Pathetic div. What about some future plans and strategy to achieve them? Upcoming AGM will present the Board and the CEO with an opportunity to share these (if any) with shareholders, but wont hold my breath. Vital? ...yeah right. Seems just a cozy little existence for this team.

And annoyingly their result date is never on the NZX website, I email CFO Jason Bull to get the date and back in the day the announcement was always late afternoon!

[financewiz]

Good call - thats always been their way very low key few updates to market - PGG, HGL are same as was MVN - a bit annoying as a holder which I am.

Great reading the Annual Report which was released yesterday on the NZX website. Highlights were the $29m in orders for the 2020 financial year - 200% up on the 2019 year. Also, great to see a customer from the Vital Cloud network came only 2 weeks after launch! The pic showing the vans & some of the team looked great as well. Expecting the share price to start to reflect the last couple of years of hard work in the coming weeks.

[Southern Lad]

Lack of profit guidance in AGM presentation material today suggests there may be some short term pain.

Is anyone who attended the AGM (in person or virtually) able to give an insight into the mood of the directors/any interesting shareholder questions?

[financewiz]

Great reading the Annual Report which was released yesterday on the NZX website. Highlights were the $29m in orders for the 2020 financial year - 200% up on the 2019 year. Also, great to see a customer from the Vital Cloud network came only 2 weeks after launch! The pic showing the vans & some of the team looked great as well. Expecting the share price to start to reflect the last couple of years of hard work in the coming weeks.

Any thoughts on the half year results. IMHO the increase in orders does not seem to be translating into improved financial results.
It would also be good to have had more visibility into how the cloud network was performing...

[Southern Lad]

Trade today of 777,229 shares (approx 1.88%) at 80 cents per share. Given the Vocus takeover by Macquarie Infrastructure and Real Assets and Aware Super, do we have money chasing the remaining fibre infrastructure in independent ownership?

Strikes me that a demerger of VTL into separate Fibre and Radio entities would increase the combined valuation from the present combined number. Is an industry player prepared to takeover VTL to get access to the Fibre assets?

If director’s view that the capital spend to renew existing assets is nearing an end is accurate, VTL is going to substantially increase free cash flow.

[waikare]

Up 2 cents to $0.79 today on very low volumes, only 741 shares in 4 trade lots...……..

[tim23]

Trade today of 777,229 shares (approx 1.88%) at 80 cents per share. Given the Vocus takeover by Macquarie Infrastructure and Real Assets and Aware Super, do we have money chasing the remaining fibre infrastructure in independent ownership?

Strikes me that a demerger of VTL into separate Fibre and Radio entities would increase the combined valuation from the present combined number. Is an industry player prepared to takeover VTL to get access to the Fibre assets?

If director’s view that the capital spend to renew existing assets is nearing an end is accurate, VTL is going to substantially increase free cash flow.

Interesting theory - I'm patiently holding still.

[financewiz]

Interesting theory - I'm patiently holding still.

Or seems to be. I bought back in when I saw that large share action a couple of days ago. From what I can seem most of the 800k share volume was an off market trade at $0.80. Regardless of that I think Vital is a secure play with limited downside risk and a cashflow that should improve as the capital spend winds down. I definately think its a takeover target at this price...

[tim23]

Or seems to be. I bought back in when I saw that large share action a couple of days ago. From what I can seem most of the 800k share volume was an off market trade at $0.80. Regardless of that I think Vital is a secure play with limited downside risk and a cashflow that should improve as the capital spend winds down. I definately think its a takeover target at this price...

Yes its held up pretty well given the recent 10% decline in the NZX

[nztx]

what happens when the hot air evaporates out of the balloon ? ;)

where's our good friend - Ogg, when a good takeover or takeout is needed ? ;)

[Lola]

Or seems to be. I bought back in when I saw that large share action a couple of days ago. From what I can seem most of the 800k share volume was an off market trade at $0.80. Regardless of that I think Vital is a secure play with limited downside risk and a cashflow that should improve as the capital spend winds down. I definately think its a takeover target at this price...

Interesting D and O disclosure today.

[Southern Lad]

Really positive to see Andrew Miller shell out $639,200 to purchase 800,000 shares for an average of 79.9 cents per share. The other 166,666 shares look like it is a transfer from Andrew's personal name to a Trust. Market has responded accordingly by pushing the last traded price to 82 cents this afternoon.

[BIRMANBOY]

Yes the other thought that came to mind was ...if we weren't paying him so much there may be room to increase the dividend.... Another unfortunate example of excessive salary for sub-optimal performance.
Really positive to see Andrew Miller shell out $639,200 to purchase 800,000 shares for an average of 79.9 cents per share. The other 166,666 shares look like it is a transfer from Andrew's personal name to a Trust. Market has responded accordingly by pushing the last traded price to 82 cents this afternoon.

[tim23]

Anyone noticed the little creeping share price appreciation?

[winner69]

Anyone noticed the little creeping share price appreciation?

Share price might get to $1 one day ……soon?

[waikare]

Perhaps someone with the right skills could change the Thread name to it's new name "Vital"

[Lola]

Anyone noticed the little creeping share price appreciation?

Sure have. Nice timing by the CEO when he bought that line a few weeks ago.

[Snoopy]

The adoption of IFRS 16 will significantly increase EBITDA but not Net Profit.


I wonder if anyone got to the bottom of the implementation of IFRS16 on leases on the Vital result from 2020? The answer to this question is not trivial as it affects the adjusted Net Profit after Tax by between 60% and 109%.

From AR2020 p4

"As with our interim results earlier this year, IFRS 16 which although non-cash impacting does impact our results. Our Net Profit after Tax at $0.734m takes into account the IFRS16 impact to Net Profit after Tax of ($0.44m)."

However, this is the only time the figure $0.44m appears in the annual report. So where did it come from?

From AR2020 p17
"For judgements relating to NZ IFRS 16 refer to the Changes in Significant Accounting Policies (Note 3a), and the disclosure notes in relation to Leases (Note 21)."

Note 3 talks about changes to the balance sheet. But in note 21 there appears the following table:


]$
2020


2020 Leases Under IFRS16]$


Interest on Lease Liabilities$1.412m


Expense Related to Short Term/Low Value Leases$0.219m


Depreciation of Right-to-use Asset$5.619m]$


2019 Leases Under NZ IAS 17


Lease Expense$6.136m



Now what I think this table is saying is that under IFRS16, the total lease expenses are:

$1.412m+$0.219m+$5.619m= $7.250m

WHEREAS under NZ IAS 17, the lease expenses would have been $6.136m.

This means upon adopting the IFRS16 standard, lease expenses have increased by: $7.250m - $6.136m = $1.114m
As a result NPAT would reduce by 0.72x$1,114m = $0.802m.

That is rather more than the $0.44m reduction suggested on AR2020 p4. So I remain confused :-(

SNOOPY

[Snoopy]

I wonder if anyone got to the bottom of the implementation of IFRS16 on leases on the Vital result from 2020? The answer to this question is not trivial as it affects the adjusted Net Profit after Tax by between 60% and 109%.

From AR2020 p4

"As with our interim results earlier this year, IFRS 16 which although non-cash impacting does impact our results. Our Net Profit after Tax at $0.734m takes into account the IFRS16 impact to Net Profit after Tax of ($0.44m)."

However, this is the only time the figure $0.44m appears in the annual report. So where did it come from?

From AR2020 p17
"For judgements relating to NZ IFRS 16 refer to the Changes in Significant Accounting Policies (Note 3a), and the disclosure notes in relation to Leases (Note 21)."

Note 3 talks about changes to the balance sheet. But in note 21 there appears the following table:


]$
2020


2020 Leases Under IFRS16]$


Interest on Lease Liabilities$1.412m


Expense Related to Short Term/Low Value Leases$0.219m


Depreciation of Right-to-use Asset$5.619m]$


2019 Leases Under NZ IAS 17


Lease Expense$6.136m



Now what I think this table is saying is that under IFRS16, the total lease expenses are:

$1.412m+$0.219m+$5.619m= $7.250m

WHEREAS under NZ IAS 17, the lease expenses would have been $6.136m.

This means upon adopting the IFRS16 standard, lease expenses have increased by: $7.250m - $6.136m = $1.114m
As a result NPAT would reduce by 0.72x$1,114m = $0.802m.

That is rather more than the $0.44m reduction suggested on AR2020 p4. So I remain confused :-(



I am one step closer to solving this. I decided to re-look at the AR2020, to see if there were any clues that I had missed. Sure enough there was.

"The Group has elected not to recognise a right-of-use asset and corresponding lease liability for short-term leases with terms of 12 months or less and leases of low value assets. Lease payments on these assets are expensed to profit and loss as incurred."

That means no 'right of use asset' has been created for short term leases and leases of low value. IOW the accounting treatment of these assets is just the same as before. So I need to remove any lease expenses as they relate to short term leases and leases of low value from my calculations.


]$
2020


2020 Leases Under IFRS16]$


Interest on Lease Liabilities$1.412m


Depreciation of Right-to-use Asset$5.619m]$


2019 Leases Under NZ IAS 17


Lease Expense$6.136m



Now what I think this table is saying is that under IFRS16, the total lease associated expenses are:

$1.412m+$5.619m= $7.022m

WHEREAS under NZ IAS 17, the lease expenses would have been $6.136m.

This means upon adopting the IFRS16 standard, lease expenses have increased by: $7.022m - $6.136m = $0.886m
As a result NPAT would reduce by 0.72x$0.886m = $0.638m.

That is still more than the $0.44m NPAT reduction suggested on AR2020 p4. So I remain confused :-(

SNOOPY

[Snoopy]

'Vital', as this company was rebranded in 2019, is a small niche overlooked share (you can tell that because since the company name changed from Teamtalk a couple of years ago, no-one has bothered to update the thread title). This indicates to me it might be 'worth a snoop'. So let me introduce them to you as a provider of infrastructure and communication services.

Vital has two divisions:

1/ 'Wired Networks' that principally consists of two wholesale fibre communication networks, one around the CBD in Wellington (acquired) and the other around the CBD in Auckland (built in house). Originally branded as 'Citylink', the Wellington network in particular, 32km of the 250km total, has been extensively rebuilt in the last few years. The 'old overhead cables' - that piggy backed on the now retired trolley bus line network - have migrated underground. They now goes through the old Powerco subterranean gas ducting. Of course the electronics on the end of the fibre have concurrently been updated to produce a more flexible product package range that tops out for maximum speed at 10Gbps (slightly higher than the maximum 8Gbps offered by top line Chorus hyperfibre). 'Citylink' serves business (including Dimension Data and Datacom) and the telecommunications industry (including Spark, Vodaphone and 2 degrees). Vital have a TAAS (Telecommunications as a service) contract with the Department of Internal Affairs to deliver telecommunications services for all government agencies. Further, 'Citylink' are contracted to operate Wellington's free Wi Fi service throughout the CBD. They also offer cloud based data storage capability to customers in Wellington and Auckland, and provide peering exchanges for ISPs to share data.

The original 'Citylink' Network was sold by the Wellington City Council in 1999 to investment firm 'Active Equities'. It was subsequently acquired by Teamtalk (as Vital was named then) in 2006.

2/ 'Wireless Networks' is New Zealand's only nationwide wholesale radio network for voice and data traffic, and it operates in the microwave spectrum. This division operates three networks, (1) 'ActionNet' the legacy network that is in the process of being replaced by a (2) new digital radio network equivalent (engineered by Tait Electronics of Christchurch). Customers may be found in the Civil Defence, Emergency Services, Health, Utilities, Public Transport Education and Logistics and Freight sectors. 'Wellington Electricity' and "Auckland Airport' are two of the more high profile customers. There is a dedicated network for emergency services too, with a new contract just signed for St Johns. In 2016, Vital launched (3) 'RT max' as an affordable entry level digital radio service based on Motorola's 'Linked Capacity Plus' technology.

A significant capital raise of $8.2m was made in FY2019 to go towards funding these upgrades, and a new computerised management system to support them. The current company policy (AR2019 p2) is to pay out 50-70% of NPAT as dividends to ensure enough cash is retained to keep investing in the networks.

For those students of history, there was a third division 'Farmside' that concentrated on selling satellite and fixed wireless internet in rural areas. However this division was sold to Vodaphone in two tranches of 1/ 70% on 1st June 2017, and 2/ 30% on 31st May 2018.

Conclusion: As (1) the only nationwide wholesale provider of a digital radio service and as (2) one of the top three in the fibre Wellington market (with Vodaphone and Chorus) and Auckland (with Vector and Chorus) , Vital PASSes this first test.

SNOOPY

[Snoopy]

eps = Normalised Profit / No. Shares on Issue at End of Financial Year

FY2016: 0.72( $4.569m + $0.229m ) / 28.369m shares = 12.2cps
FY2017: ($4.144m - 0.72($0.457m) ) / 28.369m shares = 13.5cps
FY2018: ($4.512m - 0.72($0.195m) ) / 28.369m shares = 15.3cps
FY2019: ($4.054m + 0.72($0.205m) ) / 41.381m shares = 10.2cps
FY2020: ($0.734m + $0.44m +0.72($0.211) ) / 41.381m shares = 3.2cps

Notes

1/ FY2016, FY2017 and FY2018 results have had operating returns from the now sold 'Farmside' division removed. Any profits from the sale of this division have also not been included in these earnings figures.
2/ In every year I have adjusted for the 'after tax effect' of any gain or loss in the fair value of derivatives (found in the 'Finance and Expense' note in each respective annual report).
3/ In FY2020 I have added back the claimed 'after tax effect' of the adoption of adoption of IFRS 16 on the treatment of leases. Reading p4 of AR2020, the contempt with which IFRS 16 is held is remarkable. The Chairman in effect says it is a non-cash adjustment that should be ignored!
4/ For years FY2016 and FY2017 I have changed the tax rate to the standard corporate rate of 28%. This removes the effect of previous years tax losses skewing the operational results for the current year.

Conclusion: Things were going well until the 'set back' of FY2019, which was 'Covid compounded' by the deferring of customer upgrades in FY2020. FAIL test!

SNOOPY

[Snoopy]

Return on Equity = Normalised Profit / End of Year Shareholder Funds

FY2016: $3.455m / $20.209m = 17.1%
FY2017: $3.815m / $25.327m = 15.1%
FY2018: $4.372m / $29.766m = 14.7%
FY2019: $4.202m / $42.095m = 10.0%
FY2020: $1.326m / $41.740m = 3.2%

Conclusion: You could say within rounding errors that things were OK until the 'setback' of FY2019. This was then compounded by an even bigger setback in FY2020. FAIL test!

SNOOPY

[Snoopy]

Net Profit margin = Normalised Profit / Normalised Revenue

FY2016: $3.455m / $32.923m = 10.5%
FY2017: $3.815m / $34.766m = 11.0%
FY2018: $4.372m / $34.225m = 12.8%
FY2019: $4.202m / $34.771m = 12.1%
FY2020: $1.326m / $32.868m = 4.0%

Conclusion: Good profitability gains between FY2016 and FY2018 which proves it can be done. PASS test!

SNOOPY

[flyinglizard]

very interesting chart, feed me at $0.77 -$0.75 if you do not want the share

[Snoopy]

Very interesting chart, feed me at $0.77 -$0.75 if you do not want the share


I for one won't be feeding you any shares Flyinglizard, because I don't hold any. The Buffett style interrogation of the financials has thrown up a couple of unwelcome trends. But like all published information, it is historical. I think anyone investing from here will be looking for a recovery. Indeed that is what the Grant Samuel valuation report said back in 2017 when Spark made their takeover offer at 80c, and the Samualoid came back with a much higher valuation (refer to page 27 of the 'Independent Advisors Report' dated 23rd March 2017). Using a perspective from the last balance date, I have adjusted this valuation for:

1/ The sale of 'Farmside' AND
2/ There now being 41.381m shares on issue AND
3/ Current Net Term Debt being $1.8m - $14m AND
4/ A Capital Investment adjustment of $7.809m

to be between



Vital Valuation Summary (Adjusted GS)



Low
High


Enterprise Value - Teamtalk Mobile radio
$30.8mtiday
$38.5m


Enterprise Value - Citylink
$44.6m
$52.7m

tiday
Equity Proportion of Corporate Costs
($5.7m)
($5.7m)


Combined Enterprise Value
$69.7m
$85.5mtiday


Net Debt for Valuation Purposes
($12.1m)
($12.1m)


Capital Expenditure Adjustmenttiday
($7.8m)
($7.8m)


Equity Value
$49.8m
$65.6m


No. Shares on Issue
41.4m
41.4mtiday


Takeover Share Price
$1.20
$1.58


Expected Trading Range (x0.75)
$0.90
$1.19



The above also assumes that Vital will be able to execute their business plan successfully.

Grant Samuel in 2017 was looking at a CAGR (Compounding Annual Growth Rate) for revenue of 3.4% for Citylink and 4.6% for Radio up until FY2022. The actual revenue growth rate so far is as follows.





FY2017 RevenueFY2020 Revenue (Actual)FY2020 Revenue (GS Forecast)


Citylink Revenue
$14.599m$13.678m$16.139m


Teamtalk Radio
$20.167m$21.771m$23.080m



Notes

1/ For annual growth rates, see GS Report p29 (Mobile Radio Growth, CAGR 4.6%) and GS Report p30 (Citylink Growth, CAGR 3.4%)

Comparing 'actual' to 'forecast' revenues, there is quite a lot of catching up to do. So it looks like that expected trading range of the share price that falls out of the GS modelling is a little high. So that could explain why the share price for VTL closed at 80c today. Maybe Mr Market isn't so stupid after all?

SNOOPY

[Snoopy]

If director’s view that the capital spend to renew existing assets is nearing an end is accurate, VTL is going to substantially increase free cash flow.


A claim from the Chairman and Chief Executive (AR2020 p4) is that of the $9m of capex spent over FY2020, around 80% of that is for new infrastructure (0.8 x$9 + or - $0.5m = $6.8m to $7.6m). This correlates well with the 'Assets under Construction' figure declared in the 'Property Plant & Equipment' note (AR2020 page 25 of $7.578m). So I think I can use this 'Assets Under Construction' figure over the years to get a pretty good idea of how much the 'transformation' of 'Vital', FROM 'analogue radio system' and 'overhead fibre' TO 'digital radio system' and 'underground fibre' has cost.



FY2016FY2017FY2018FY2019FY2020
FY2021fΣ(FY2017 to FY2021)Average



Assets Under Construction$5.267m$3.589m$5.110m$8.856m$7.578m
$3.750m$28.883m


Sustaining Capex$0.527m$1.955m$0.436m$0.598m$1.461m
$3.750m
$1.640m


Total Capex$5.794m$5.544m$5.546m$9.454m
$9.039m
$7.500m
$37.083m



Note

1/ I have not added the figure for FY2016 to the total. I believe the FY2016 'Assets Under Construction' relate principally to the construction of the 'RT Max' entry level radio network. As such, it does not represent part of the 'big two' ('undergrounding CityLink' and 'National Tier 3 Digital Radio') system upgrades. The undergrounding of Citylink had definitely not started in FY2016. Furthermore there was little investment in the now legacy 'ActionNet' two way radio arm, because it was not clear what technology would replace it. By elimination, the main infrastructure spend over FY2016 must have been on 'RT Max'.
2/ Capex for FY2021 is an estimate (refer AR2020 p4). The expectation is that after FY2021, the major transforming system upgrades will be finished.

Outside of the 'once in a system generation' upgrades, Capex normally relates to individual customer contracts. As such, it is normally recovered from those customers over the length of each supply contract. Such Capex is also 'lumpy', dependent on when new contracts are signed. Why does this matter? Because if the cashflow from any such 'initial investment' will not match the cashflow from the customer that is paying for it, then this means that once the hardware is in place cashflow should be greater than profits. And that offers the potential for paying out 'more than your earnings' as dividends on a sustainable basis. This is the basis for rival wholesale broadband provider Chorus indicating they will look to be paying dividends out of cashflow rather than profits. Nevertheless the publicly stated dividend policy at 'Vital' is to pay out no more that 50-70% of NPAT as dividends (AR2019 p2).

SNOOPY

[Snoopy]

Net Profit margin = Normalised Profit / Normalised Revenue

FY2016: $3.455m / $32.923m = 10.5%
FY2017: $3.815m / $34.766m = 11.0%
FY2018: $4.372m / $34.225m = 12.8%
FY2019: $4.202m / $34.771m = 12.1%
FY2020: $1.326m / $32.868m = 4.0%



HYR2021, a 25th February announcement, contains the following quote in the interim report covering letter.

-------------------

Outlook

Vital provides full year guidance for FY21 that Net Profit after Tax will be broadly in line to FY20.

-------------------

This statement is in the context of the previous year incorporating the initial Covid-19 lock down and the immediate business uncertainty that followed to 30th June 2020. That being the case, it is disappointing that there will be no improvement in NPAT this FY2021 year. The new St John Ambulance contract announced at EOFY2020 should have flowed into the HY2021 result. Revenue was up to $17.85m for the half year, which combined with 2HY2020 revenue of $15.978m, gives a half year annualised revenue of $33.828m (+3% on FY2020). Not disastrous, but still below FY2019, FY2018 and FY2017, despite all the new technology being deployed.

On the hunt for clues, I happened to notice that testing for impairment modelling of goodwill has changed (AR2020 p27). Both the discount rate of future earnings of 9.69% ‐ 9.84% (c.f. 2019: 7.37% ‐ 7.71%) and terminal growth rate 1.0% (c.f. 2019: 0.0%) has gone up. However the overall goodwill on the books for both the wired and wireless networks has not changed. This would suggest to me that Vital needed the sales growth into the future to increase above past expectations, in order justify the same amount of goodwill on the books. If this is not happening, we could be looking for a goodwill write-down once the FY2021 accounts are done and dusted. I wonder if the announcement on 15th June 2021 that the Head of Sales and Marketing is to leave, with no indication of what 'the next phase of his career' might be (contrary to the announcement of the Chief Technology Officer leaving in March) is tied in to this sobering profit outlook picture?

Back to the half year profit announcement letter:

"Vital is also on track to achieve the savings target we set ourselves back in 2019, and to date we have identified $1.8m of the $2.0m annualised target. Approximately $1.1m is expected to be fully realised in FY22 financial year with the remaining identified savings to be realised in FY23."

Now let's say the new Head of Sales and Marketing is able to boost profits by half the modelled discount rate (4.85% - 4.92%) -say 4.89%- in each of FY2022 and FY2023. That would see underlying profits go up from $1.326m (FY2021 estimate unchanged from FY2020) to $1.391m (for FY2022) and $1.459m (for FY2023). On top of this, we can add the after tax benefits of the identified cost savings of 0.72 x $1.1m = $0.792m (for FY2022) and 0.72 x $2m = $1.44m (for FY2023). Putting all that together, my underlying profit forecasts for the future are (assuming 41.740m shares are on issue):

FY2022: $1.391m+$0.792m = $2.183m or 5.2cps
FY2023: $1.459m+$1.440m = $2.899m or 6.9cps

'Vital' trades at 79c on the market today. If my earnings predictions are accurate, then this trading price represents a PER 15.2 on FY2022 earnings and 11.4 on FY2023 earnings.

SNOOPY

[flyinglizard]

just wait for late Aug announcement. They have completed three years network upgrading, so the future earning should go up again.

[Snoopy]

just wait for late Aug announcement. They have completed three years network upgrading, so the future earning should go up again.


I do hope so flyinglizard. But I can't get out of my head what Chairman Roger Sowry said on p2 of AR2016, before the 'big capital spend up', funded by a cash issue to shareholders I might add, happened:

"Trading conditions continue to be tight, and as forecast, margins are under pressure as customers continually pursue more services at a lower cost. Unfortunately not all of our cost inputs necessarily follow the same path so we are constantly having to review the way we do things, as we continually strive to do as much as we can with our shareholders’ money."

We are told that revenue for HY2021 was $17.85m, a good half year, yet profit for FY2021 is forecast to be very close to profit for FY2020? I wonder if the real stakeholder 'winners' at Vital, are in fact the customers?

SNOOPY

[Snoopy]

They have completed three years network upgrading, so the future earning should go up again.


To garner the likelihood of flyinglizards prediction coming to pass, it might be useful to take all the reinvestment out of the equation and just look at the operating cashflows.



FY2016FY2017FY2018FY2019FY2020


Operating Free Cashflow$8.241m$7.121m$7.680m$7.102m$13.698m



After a declining trend that bump in Operating Free Cashflow over FY2020 looks promising. So let's have a look at the Cashflow Statements for the last two years to try and see what happened.



FY2020FY2019


Cash flows from Operating Activities


Cash provided from:
and would

Receipts from Customers$37.197m$35.865m


Net GST Receipts$0.212m$0.087m


{A}$37.409m$35.952m


Cash applied to:


Payments to Suppliers$11.061m$15.968m


Wages & Salaries$9.840m$9.659m


Interest Expense net of Realised FX Gain/Loss$1.652m$1.133m
and would

Income Tax Paid$1.158m$2.090m


{B}$23.711m$28.850m


Net Cashflows from Operating Activities {A}-{B}$13.698m$7.102m



To figure out what has happened we need to step back and think about how this company operates. A new bespoke job will typically involve a large payment up front for hardware, software and installation. This money, plus a profit margin, is recovered by Vital gradually over some years.

From p2 of AR2020 we learn
"Overall, we did see an impact to revenue, and we are experiencing a delay in forecasted orders, with some projects being postponed out to future years."

The key line in the above cashflow statement is the 'Payments to Suppliers' line. My contention then, is that, during the Covid-19 lock down, and in the months of doubt that followed, the cashflow was saved by not installing new customer equipment for the equivalent of several months. The ceasing of this work had a big effect on 'cash out'. But capital previously spent meant that the existing capital installations(*) were cash cows that kept churning out revenue. Thus capital spending (*) at suppliers stopped, but revenue kept coming. This is my explanation for the dramatic positive change in cashflow at the operational level over FY2020!


---------------------
(*) The 'capital installations' and 'capital spending' I am referring to here is what I call 'micro capital spending' on equipment dedicated to one customer that would be recovered from that customer as part of the operational business model. I am not talking about the generally larger spending on networks that service many customers with an indeterminate payback date that I would be class as 'Investment cashflow'.
---------------------

If I am correct in reading this situation, then once the FY2021 results are released, the operational cashflow will drop back by at least $5m, confirming we are not in a bold new era of generating large excesses of operational cash.

SNOOPY

[flyinglizard]

The get a likelihood of this prediction it might be useful to take all the reinvestment out of the equation and just look at the operating cashflows




FY2016
FY2017
FY2018
FY2019
FY2020


Operating Free Cashflow
$8.241m
$7.121m
$7.680m
$7.102m
$13.698m



After a declining trend that bump in cashflow over FY2020 looks promising. So let's have a look at the Cashflow Statement for the last two years to try and see what happened.




FY2020
FY2019


Cash flows from Operating Activities


Cash provided from:


Receipts from Customers
$37.197m
$35.865m


Net GST Receipts
$0.212m
$0.087m


{A}
$37.409m
$35.952m


Cash applied to:


Payments to Suppliers
$11.061m
$15.968m


Wages & Salaries
$9.840m
$9.659m


Interest Expense net of Realised FX Gain/Loss
$1.652m
$1.133m


Income Tax Paid
$1.158m
$2.090m


{B}
$23.711m
$28.850m


Net Cashflows from Operating Activities {A}-{B}
$13.698m
$7.102m





operating cash flow good! Time to test the market. I better place my testing orders around $0.65-$0.74.

[Snoopy]

Operating cash flow good! Time to test the market. I better place my testing orders around $0.65-$0.74.


I took a few bites to get my post right. I came to the same conclusion as you flyinglizard before I thought about it a little more. The last bit of my post 838 got written after you had replied to it. Read the whole post (now completed) and see if you still think the operating cashflow is good.

SNOOPY

[Snoopy]

'Vital', as this company was rebranded in 2019, is a small niche overlooked share (you can tell that because since the company name changed from Teamtalk a couple of years ago, no-one has bothered to update the thread title).


Thanks for updating the thread title Vince (or was it Sauce)?

SNOOPY

[flyinglizard]

Thanks for updating the thread title Vince (or was it Sauce)?

SNOOPY


http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/VTL/368147/341118.pdf

F21 half year report. Clarified everything.

Vital remains confident that its plan is on track to achieve increased profitability in the nextfinancial year. This year the company will complete its major capital investments and haslaunched its new products to address both the decline in its old fibre services as well asachieving growth. The new wholesale fibre products launched in November have been wellreceived by our partners and we expect to see our churn stabilise and to start to recaptureour market share over the next 6 to 9 months.

Orders for the period were $8.576m, a 48% increase compared to $5.779m for the sameperiod last year. As communicated at the AGM in October, growth in orders is the clear signthat we are on track and these are the first indicators of increased profitability.Operating costs have increased, fundamentally driven by costs associated with investmentinto internal and customer funded Vital network assets.Vital is also on track to achieve the savings target we set ourselves back in 2019, and todate we have identified $1.8m of the $2.0m annualised target. Approximately $1.1m isexpected to be fully realised in FY22 financial year with the remaining identified savings tobe realised in FY23.Net debt of $14.456m is up from $12.142m at 30 June 2020 as forecast.

[flyinglizard]

I noticed that the half year report released on 25/02/2021. The company announced partner with VENTIA and Logic Wireless later on, which is in line with the half year updated business news.

[Snoopy]

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/VTL/368147/341118.pdf

F21 half year report. Clarified everything.


Look, I am not saying you are wrong flyinglizard. It may yet with hindsight be the perfect time to invest in VTL now. Everything may run out according to management's plan, although I do note they haven't put any hard numbers on their growth vision. The hard numbers they have put out, I have incorporated into my profit projection post 835. Read the half year update and my post 835, in tandem, and you will find nothing in one that contradicts the other. What I am saying is that management do not have a great record 'executing the plan' in previous years. So I think it pays to question some of the stuff they say and not get too caught up in 'managment hype'.



Vital remains confident that its plan is on track to achieve increased profitability in the next financial year. This year the company will complete its major capital investments and has launched its new products to address both the decline in its old fibre services as well as achieving growth. The new wholesale fibre products launched in November have been well received by our partners and we expect to see our churn stabilise and to start to recapture our market share over the next 6 to 9 months.


The above paragraph demonstrates intent but not success. If you look at the HY2021 Cashflow Statement that accompanies the management comments, you will see that revenue is down to $16.529m from $17.356m in the pcp, a fall of 5%. They may be 'starting to recapture market share'. But the plain truth is, they are still noticeably behind where they were.



Orders for the period were $8.576m, a 48% increase compared to $5.779m for the same period last year. As communicated at the AGM in October, growth in orders is the clear sign that we are on track and these are the first indicators of increased profitability. Operating costs have increased, fundamentally driven by costs associated with investment into internal and customer funded Vital network assets.


It is encouraging that new orders are rolling in, but how do those compare with the legacy system orders that are rolling out? And how do the new orders stack up against increasing operating costs? In case you hadn't noticed profitability for the half is down on the pcp from $0.522m to $0.506m, a fall of 3%.



Vital is also on track to achieve the savings target we set ourselves back in 2019, and to date we have identified $1.8m of the $2.0m annualised target. Approximately $1.1m is expected to be fully realised in FY22 financial year with the remaining identified savings to be realised in FY23.


All of the above information I have put into my forecast earnings post 835.



Net debt of $14.456m is up from $12.142m at 30 June 2020 as forecast.


Dare I wheel out the Minimum Debt Repayment Time statistic here? If profit matches last year, as forecast, I calculate an MDRT of:

$14.456m / $1.326m = 10.9 years

A value over 10 indicates a very heavily indebted company. That is not necessarily a problem in a network company with stable cashflows. But it does mean there is little room for 'executional error'. Be careful.

SNOOPY

discl: do not hold VTL

P.S. I think it is good that VTL are partnering with 'Ventia' and 'Logic Wireless'. But exactly how those arrangements translate to bottom line profits remains to be seen.

[Snoopy]

For those looking for a high yielding stock with a bit of growth, TTK looks not too bad.

They've just posted a 25% increase in NPAT and said "over the next three years we expect to grow EBITDA by $0.5 million to $1 million pa, to continue to reduce our overall debt, and as a minimum to maintain our current dividend policy".

PE = $2.16 / ($4.8m NPAT / 23.0m shares) = 10.4x
EV/EBITDA = (23.0m shares x $2.16 + $18.1m net debt) / $12.5m EBITDA = 5.4x
Gross dividend yield = 20c / 216 / 72% = 12.9%

They're cum a 10c dividend payable in a months time. Not sure if there's anything in the 5m cross at $2.00 today?


Ten years on, let's repeat this little exercise done by Catalyst. I have taken the earnings figures from the FY2020 report (which makes the numbers nine years on).

PE = $0.80 / (($0.734+$0.44)m NPAT / 41.381m shares) = 28.2x
EV/EBITDA = (41.381m shares x $0.80 + ($14.0m -$1.858m) net debt) / ($3.515m + ($10.637m-$5.619m) ) EBITDA = 5.3x
Gross dividend yield = (2.5c / 80c) / 72% = 4.3%

Not much to cheer here in nine years of 'progress', although I do note the EV/EBITDA ratio is more or less the same.

SNOOPY

[Snoopy]

Year
Dividends as DeclaredGross DividendsGross Dividend Total


FY20170c +0c 0c + 0c0c


FY20180c +0c 0c + 0c0c


FY20190c + 0c 0c + 0c0c


FY20203.5c + 0c 4.86c + 0c4.86c


FY20212.5c + 0c 3.47c + 0c3.47c


Total8.33c



Averaged over 5 years, the dividend works out at 8.33c/5 = 1.67c (gross dividend) per year.

I have considered a capitalised dividend rate of 5% as appropriate for Chorus. However, taking account of VTL being a much smaller beast with a concentrated two area geographical market for broadband, I feel a 6% capitalised dividend rate is more appropriate here. This assumption, combined with the five year average of earnings gives a 'fair value' for VTL shares as:

1.67c / 0.06 = 28cps

SNOOPY

[Snoopy]

I have been thinking about the Buffett test results for a few days, so this summary makes some sense of how the Vital business is operating. Vital have been operating in a couple of market niches where they have done well (a national coverage two way radio market in which they are the sole player, and fast internet in downtown Wellington and Auckland), and which show the potential for good profit margins. Vital have sold a third business arm (Farmside) that did not have such a positive outlook. They have spent significant capital upgrading their National Two Way Radio Service to digital, and have relocated (Wellington) and electronically upgraded (Wellington and Auckland) their two central city broadband fibre loops. BUT.....

Where is the revenue growth as a result of all this new investment (I use Chorus in the table below for comparative purposes)?



HY2020HY2021Increment (Decrement)


Chorus Fibre Revenue$187m$228m+21.9%


Vital Fibre Revenue$6.425m$5.896m(8.2%)


Vital Wireless Revenue$10.467m$11.955m+14.2%



OK at least Wireless revenues are growing. But Wireless are loss making at the EBIT level and the loss increased to ($0.883)m from ($0.804)m over the pcp. We also know the 'Head of Sales and Marketing', Phil Henderson left the company on 16th June 2021. Earnings per share sank over the initial Covid-19 year, which was not a surprise. Return on Equity slumped in sympathy. But in fact 'eps' was in decline a year before that. What perhaps is a surprise is that there is no 'eps' recovery expected from that Covid-19 low this year. With such a poor sales period, thoughts inevitably turn to the overall robustness of the company in such tough trading times. I have explored this on the 'Fibre Broadband' thread.

'Interest Cover' ( EBIT/I = 3.51 ) and overall ability to repay debt ( 'Net Debt'/EBITDA = 2.17 ), compare favourably with my comparative set of broadband network operators. That means I don't see any short term questions about the viability of Vital, even with its current depressed levels of profitability. However, in the recent past, Vital has shown that they will not hesitate to cut dividends if that capital can be put to better use reinvesting back into the company. This explains the rather low 'Capitalised Dividend Valuation' of 28cps (my post 846) that I have made of Vital. This 28cps value is historical. A dividend declared when the annual result is announced will bump this figure up, albeit to nowhere near where VTL has been trading of late - near 80c.

It has been said on this forum before that board appointments made of former politicians have in the past seen such appointments 'out of their depth'. I don't think you could say that about Chairman Roger Sowry though, who made this very prescient remark showing very good understanding of the business in AR2016. The comment IMO is still very apt today.

"Trading conditions continue to be tight, and as forecast, margins are under pressure as customers continually pursue more services at a lower cost. Unfortunately not all of our cost inputs necessarily follow the same path so we are constantly having to review the way we do things, as we continually strive to do as much as we can with our shareholders’ money."

In summary Vital looks to be on a well thought out business track. But customers want more and more for less and less and Vital can't rearrange that equation to give a decent profit outlook for shareholders. Buffett would not be investing (I guess you knew that before starting to read this post). And I would want to see a much more favorable progression along the business plan path, or alternatively a share price closer to 50c, before I would consider investing in VTL myself. That sounds like my cue to exit from this thread.

SNOOPY

discl: do not hold and do not plan to

[nztx]

so Snoops - before you exit - is there a factor of possible future takeover target in the SP ?

Has Teamtalk (the old name) not been subject of circling sharks in the past ?

What possible takeover values would assets such as the Wellington Loop etc likely have
to larger operators ? ;)

We know that bits of the VTL/TT Operations have been hocked off to other operators in the past too ..

[Snoopy]

so Snoops - before you exit - is there a factor of possible future takeover target in the SP ?


See my post 833. That suggests a takeover offer in a share price range of $1.20 to $1.58 would have a good chance of success. We are well short of that price range with market trades of late. So I don't see any sign of an 'on the horizon' takeover influencing the share price right now. Remember though, if you factor in a takeover into any of your company analyses, then almost every share looks cheap.



Has Teamtalk (the old name) not been subject of circling sharks in the past ?


Yes Spark had a go in 2017, chasing the Wellington and Auckland loops. They were pretty scathing about the Vital 'Teamtalk at the time' management and the independent valuation they commissioned too.

“This report asks shareholders to have enormous faith that the TeamTalk Board, many of whom are the same team which has led TeamTalk into what Grant Samuel refers to as the “ill-fated” acquisition of Farmside, and more recent “disarray”, will deliver the huge improvement relied on in the valuation.”



We know that bits of the VTL/TT Operations have been hocked off to other operators in the past too.


Yes that was the "ill fated" Farmside acquisition referred to above that has since been sold to Vodaphone. What remains though I would describe as 'core businesses' for Vital. Being a small cap already, I would not see Vital remaining a listed entity if it were split in half.

SNOOPY

[Snoopy]

What possible takeover values would assets such as the Wellington Loop etc likely have to larger operators ? ;)


I have to admit I am not sure of the rules regarding network ownership and going after retail customer are at this level. According to p13 of the 'Teamtalk bid rebuttal report'.

"TeamTalk believes that Spark's threat to build its own fibre network in Wellington and Auckland is not credible in the near term. As noted above, building fibre broadband networks in the CBD areas of large cites is highly challenging, costly and comes with significant risk. Further, civil works in these areas would require Council consents, which may only be provided with conditions attached such as the requirement to work outside of business hours or put in place traffic management plans. Indeed, Spark itself has spoken to the significant challenge when its representatives recently stated that: “The TeamTalk acquisition is preferable to alternative strategies to build new networks in Auckland and Wellington”. "

I thought 'Citylink' was a wholesale network? So I don't really understand why Spark as a retail company wanted to own it. I would have thought Spark could have bought access to the 'Citylink' network at any time. And if they weren't happy with the price, then Spark could use an alternative via Chorus. I was also surprised that Spark, being a retail company, would be allowed to own a wholesale network, 'Citylink', at all. I am fairly sure that if this situation was playing out in Australia then Spark would not be allowed by law to own 'Citylink', because it would be picking the most profitable diamond out of a network of roughcuts, thus disadvantaging the profitability of the wider wholesale network that remained.

Nevertheless, there were no noises from the Commerce Commission at the time of the Spark offer. So it would seem logical that Vodaphone or 2 degrees, or dare I say it, Chorus would all be possible 'big player suitors' that could be interested in taking over 'Vital' outright.

SNOOPY

[financewiz]

I agree with your analysis Snoopy, I really want Vital to prosper I love their new branding but I'm not seeing enough traction and also concerned by their Sales Manager leaving rather abruptly - doesn't bode well for their next earnings release.

[waikare]

Taken from their News Release..........

27 August 2021

VITAL Increase Profit: Declares dividend of 2.0 cents
VITAL Limited (NZX: VTL), the publicly listed telecommunications services provider today
announced its annual result for the financial year ended 30 June 2021.
• Profit after tax of $0.841m, an increase of 14.5% compared to $0.734m June 2020.
• Revenue $35.24m, an increase of 5.6% compared to $33.36m June 2020.

[nztx]

All the increases seem fine but VTL's Div Payouts in past 3 years (paid once a year in Oct) show the reverse:

2019 3.0 cps
2020 2.5 cps
2021 2.0 cps

(all fully imputed)

[Snoopy]

All the increases seem fine but VTL's Div Payouts in past 3 years (paid once a year in Oct) show the reverse:

2019 3.0 cps
2020 2.5 cps
2021 2.0 cps

(all fully imputed)

Well I have some good news. As a result of the declared dividend, that will be paid in FY2022, the 'capitalised dividend valuation' of this company has increased (was 28cps)!



Year
Dividends as DeclaredGross DividendsGross Dividend Total


FY20180c +0c 0c + 0c0c


FY20190c + 0c 0c + 0c0c


FY20203.5c + 0c 4.86c + 0c4.86c


FY20212.5c + 0c 3.47c + 0c3.47c


FY20222.0c +0c 2.78c + 0c2.78c


Total11.11c



Averaged over 5 years, the dividend works out at 11.11c/5 = 2.22c (gross dividend) per year.

I have considered a capitalised dividend rate of 5% as appropriate for Chorus. However, taking account of VTL being a much smaller beast with a concentrated two area geographical market for broadband, I feel a 6% capitalised dividend rate is more appropriate here. This assumption, combined with the five year average of earnings gives a 'fair value' for VTL shares as:

2.22c / 0.06 = 37cps :t_up:

SNOOPY

[nztx]

Well I have some good news. As a result of the declared dividend, that will be paid in FY2022, the 'capitalised dividend valuation' of this company has increased (was 28cps)!



Year
Dividends as DeclaredGross DividendsGross Dividend Total


FY20180c +0c 0c + 0c0c


FY20190c + 0c 0c + 0c0c


FY20203.5c + 0c 4.86c + 0c4.86c


FY20212.5c + 0c 3.47c + 0c3.47c


FY20122.0c +0c 2.78c + 0c2.78c


Total11.11c



Averaged over 5 years, the dividend works out at 11.11c/5 = 2.22c (gross dividend) per year.

I have considered a capitalised dividend rate of 5% as appropriate for Chorus. However, taking account of VTL being a much smaller beast with a concentrated two area geographical market for broadband, I feel a 6% capitalised dividend rate is more appropriate here. This assumption, combined with the five year average of earnings gives a 'fair value' for VTL shares as:

2.22c / 0.06 = 37cps

SNOOPY


probably looks a bit better grossed up for notional coy tax

I tend to look at net dividends landing in the hand as a yardstick when comparing apples with apples :)

Bean Counters are conservative like that :)

[Southern Lad]

Taken from their News Release..........

27 August 2021

VITAL Increase Profit: Declares dividend of 2.0 cents
VITAL Limited (NZX: VTL), the publicly listed telecommunications services provider today
announced its annual result for the financial year ended 30 June 2021.
• Profit after tax of $0.841m, an increase of 14.5% compared to $0.734m June 2020.
• Revenue $35.24m, an increase of 5.6% compared to $33.36m June 2020.

Friday’s announcement was far more down beat than what we seen in the past. In addition to mentioning the COVID headwinds in terms of customers, shipping delays and skilled worker shortage, we had no mention of the $2 million of annual cost savings that were expected now that the massive capital expenditure project is complete. At the half year announcement back in February, VTL were advising that $1.8m of the $2.0m target had been identified and that $1.2m was expected to be fully realised in FY22. Have VTL recoiled from these savings, or is it a case of these savings now been consumed by the other headwinds?

Presumably depreciation and amortisation expense will increase once the new network is fully switched on, although I note that D&A expense for FY21 is $13.466m compared with $10.637m in FY20 so maybe that increase is already largely reflected. The FY21 increase is all in the wireless network segment.

The immediate challenge is the the Public Safety Network RFP. A lot of management focus is going into attempting to secure this contract, rather than presumably driving the existing business. Does anyone have any insights to the consequences for VTL of the contract:

- What is the expected annual turnover and what profitability could be expected?
- Who are VTL’s competition in this RFP.
- What is the timing for the outcome of the RFP process?
- What additional capital spend will be required if successful and how will this be funded?
- What revenue losses will arise from existing clients (e.g. St John and Wellington Free Ambulance) if VTL don’t win the contract?

[Snoopy]

The immediate challenge is the the Public Safety Network RFP. A lot of management focus is going into attempting to secure this contract, rather than presumably driving the existing business. Does anyone have any insights to the consequences for VTL of the contract:

- What is the expected annual turnover and what profitability could be expected?
- Who are VTL’s competition in this RFP.
- What is the timing for the outcome of the RFP process?
- What additional capital spend will be required if successful and how will this be funded?
- What revenue losses will arise from existing clients (e.g. St John and Wellington Free Ambulance) if VTL don’t win the contract?


Good questions Southern Lad

https://portal.fireandemergency.nz/notices-news-and-events/news/request-for-proposals-marks-next-step-for-the-public-safety-network-programme/

If you follow the fire service press release (above) on this topic,

"By moving communications services to cellular networks and Digital Land Mobile Radio (LMR), the PSN programme can improve Emergency Services’ performance, capacity and help ensure improved communication in some of New Zealand’s remotest areas."

If you believe what Vital have said in past annual reports, they are the only operators with a 'nationwide digital land radio network'. So you would have to assume that they will be a 'shoe in' for this service contract, provided the government is happy with whatever 'monopoly pricing' they build into their contract proposal. I presume whatever system they tender can piggy back on any remote physical tower infrastructure that has already been set up for the St John's contract. This would suggest to me that any PSN contract incremental capital spend would likely be built into the tender (termed customer capital spend), and paid for directly by the end users. St Johns and the Wellington Free Ambulance are not government owned. So I don't think this PSN contract would have any effect on any existing contract Vital has signed with either ambulance service.

The bidders for the cellular networks bit of the contract, I guess, would come down to Spark, 2 degrees and Vodaphone. Whether Vital has partnered with these three or just tendered for the digital radio piece of the contract on its own I do not know. But I remain a little confused as to how the contract splits between 'digital radio' and 'mobile'. Here is what Spark said in a 2019 podcast on St John Ambulance (my post 1799 in the Spark thread).

"St Johns Ambulance, in 2018 started on a 3 year 'digital transformation' of the St John organization. Ambulances have become their own mobile electronic terminal. Paramedics have their own linked tablets and information can be sent to the hospital before the patient arrives, and passed on directly back to the patients own personal doctor."

This sounds way better than any digital radio service. So does this mean that digital radio is only a back up when the cellphone network is down or the site to be reached is too remote for cell tower communications access? I don't really understand how digital radio dovetails with cellular networks in these emergency service applications.

On the timing of the contract, look at Section 3.1.4 of the "Statement of Performance Expectations 1st July 2021 to 30th June 2022"

https://www.crowninfrastructure.govt.nz/wp-content/uploads/CIP-SPE-2021-FINAL.pdf

It says the tenders are in and being evaluated and that procurement should be underway by the end of 2021.

As to expected turnover and profitability of this PSN contract, I have no idea!

SNOOPY

[Southern Lad]

Thanks Snoopy - appreciate your backgrounder which helps sets the PSN scene for me.

[financewiz]

Good questions Southern Lad


This sounds way better than any digital radio service. So does this mean that digital radio is only a back up when the cellphone network is down or the site to be reached is too remote for cell tower communications access? I don't really understand how digital radio dovetails with cellular networks in these emergency service applications.

On the timing of the contract, look at Section 3.1.4 of the "Statement of Performance Expectations 1st July 2021 to 30th June 2022"

https://www.crowninfrastructure.govt.nz/wp-content/uploads/CIP-SPE-2021-FINAL.pdf

It says the tenders are in and being evaluated and that procurement should be underway by the end of 2021.

As to expected turnover and profitability of this PSN contract, I have no idea!

SNOOPY



Any thoughts on what it would mean if Vital don't win the RFP. I guess it just means the loss of the St John's Ambulance part of the business...

[Snoopy]

Any thoughts on what it would mean if Vital don't win the RFP. I guess it just means the loss of the St John's Ambulance part of the business...


Vital only re-signed St John Ambulance a couple of years back and built their new digital radio network on the back of that contract. So I don't think the RFP contact under tender now will have any effect on this relationship.

What I do not know is if Fire or Police use any of Vital's legacy radio networks already. If they do, and the RFP contract is awarded to various local Radio Telephone operations instead of Vital, then Vital will be a loser.

SNOOPY

[Snoopy]

The key line in the above cashflow statement is the 'Payments to Suppliers' line. My contention then, is that, during the Covid-19 lock down, and in the months of doubt that followed, the cashflow was saved by not installing new customer equipment for the equivalent of several months. The ceasing of this work had a big effect on 'cash out'. But capital previously spent meant that the existing capital installations(*) were cash cows that kept churning out revenue. Thus capital spending (*) at suppliers stopped, but revenue kept coming. This is my explanation for the dramatic positive change in cashflow at the operational level over FY2020!


---------------------
(*) The 'capital installations' and 'capital spending' I am referring to here is what I call 'micro capital spending' on equipment dedicated to one customer that would be recovered from that customer as part of the operational business model. I am not talking about the generally larger spending on networks that service many customers with an indeterminate payback date that I would be class as 'Investment cashflow'.
---------------------

If I am correct in reading this situation, then once the FY2021 results are released, the operational cashflow will drop back by at least $5m, confirming we are not in a bold new era of generating large excesses of operational cash.


Well it looks like I called this one wrongly! Updating the operating cashflows.



FY2016FY2017FY2018FY2019
FY2020FY2021


Operating Free Cashflow$8.241m$7.121m$7.680m$7.102m$13.698m$13.35 1m



The Operating Free Cashflow over FY2021 continues to be strong. So let's have a look at the Cashflow Statements for the last three years to try and unpick this.




FY2021
FY2020
FY2019


Cash flows from Operating Activities


Cash provided from:


Receipts from Customers
$33.094m
$37.197m
$35.865m


Net GST Receipts
($0.114m)
$0.212m
$0.087m


{A}
$32.980m
$37.409m
$35.952m


Cash applied to:


Payments to Suppliers & Employees
$17.798m




Payments to Suppliers

$11.061m
$15.968m


Wages & Salaries

$9.840m
$9.659m


Interest Expense net of Realised FX Gain/Loss
$1.771m
$1.652m
$1.133m


Income Tax Paid
$0.060m
$1.158m
$2.090m


{B}
$19.629m
$23.711m
$28.850m


Net Cashflows from Operating Activities {A}-{B}
$13.351m
$13.698m
$7.102m



When discussing last year's Operating cashflow result I wrote:

---------------------

To figure out what has happened we need to step back and think about how this company operates. A new bespoke job will typically involve a large payment up front for hardware, software and installation. This money, plus a profit margin, is recovered by Vital gradually over some years.

From p2 of AR2020 we learn
"Overall, we did see an impact to revenue, and we are experiencing a delay in forecasted orders, with some projects being postponed out to future years."

--------------------

I wonder if the reason for the good operating cashflow remains the same (set up costs for new contracts postponed)? Perhaps, when making that AR2020 commentary, they had assumed the RFP contract bid would have been sorted out by now?

Looking at other costs, the suppliers and employees gobbled up $3m less cash over the year (that's good). The income tax cash payment was down a million, although that seems a payment timing issue. The thing that most concerned me about the result was that, although the cashflow is good, the depreciation and amortization is large and real with the wireless assets (wireless assets are not long lived assets like fibre in the ground). Almost all of the welcome new wireless revenue looks to be offset by an equally large increment in depreciation. Meanwhile wired revenue dropped by a million, but the running costs of Vital's 'fixed fibre broadband' wired network barely moved.

Capex is tipped to be $5.3m for FY2022, despite the company announcing that it has completed its own major capital investments. Granted that $5.3m is not 'operating cashflow'. But that figure does show there is considerable demand on redirecting the surplus operating cashflow Vital does have into reinvestment. Does the $5.3m include future investment, assuming an RFP win? In the new 'work from home' era, is there a path back to recover some of that inner city fibre revenue from city offices scaling down or closing? I don't know the answers. I also don't feel the compelling urge to own the shares!

SNOOPY

discl; I am not and have never been a holder

[Snoopy]

I happened to notice that testing for impairment modelling of goodwill has changed (AR2020 p27). Both the discount rate of future earnings of 9.69% ‐ 9.84% (c.f. 2019: 7.37% ‐ 7.71%) and terminal growth rate 1.0% (c.f. 2019: 0.0%) has gone up. However the overall goodwill on the books for both the wired and wireless networks has not changed. This would suggest to me that Vital needed the sales growth into the future to increase above past expectations, in order justify the same amount of goodwill on the books. If this is not happening, we could be looking for a goodwill write-down once the FY2021 accounts are done and dusted. I wonder if the announcement on 15th June 2021 that the Head of Sales and Marketing is to leave, with no indication of what 'the next phase of his career' might be (contrary to the announcement of the Chief Technology Officer leaving in March) is tied in to this sobering profit outlook picture?


Something a little odd going on here to justify the valuation of goodwill on the books. I am looking at note 14 in the FY2021 accounts, and have tabulated the equivalent figures from the previous two years.



Discount rate of Future EarningsTerminal Growth RateGoodwill on Books EOFY


FY20197.37%-7.71%0%$17.038m


FY20209.69%-9.84%1%$17.038m


FY202110.23%-10.28%1%$17.038m



The actual goodwill on the books hasn't changed. But to justify the goodwill valuation, the discount rate keeps going up! That could mean a couple of things (?).

1/ The modelled earnings power of the assets that contain the goodwill have not changed. But the modelled time needed to achieve the implied earnings power of those assets has been pushed further out into the future - hence the rise in the discount rate.
2/ The modelled earnings power of the assets that contain the goodwill have not changed and neither has the modelled time needed to achieve the implied earnings power of those assets. But in the interim profits are down more than expected. So this means from an 'annual growth ' perspective, the business will have to grow faster than last year to meet the book valuation goal. And because the business will have to grow faster, that introduces more uncertainty into the business model. Hence the increase in discount rate.

Is there any other way to interpret the changes in these figures? Is this confirmation of a 'hope the business improves' strategy? Is hope even a strategy?

SNOOPY

[Snoopy]

A claim from the Chairman and Chief Executive (AR2020 p4) is that of the $9m of capex spent over FY2020, around 80% of that is for new infrastructure (0.8 x$9 + or - $0.5m = $6.8m to $7.6m). This correlates well with the 'Assets under Construction' figure declared in the 'Property Plant & Equipment' note (AR2020 page 25 of $7.578m). So I think I can use this 'Assets Under Construction' figure over the years to get a pretty good idea of how much the 'transformation' of 'Vital', FROM 'analogue radio system' and 'overhead fibre' TO 'digital radio system' and 'underground fibre' has cost.



FY2016FY2017FY2018FY2019FY2020
FY2021fΣ(FY2017 to FY2021)Average


Assets Under Construction$5.267m$3.589m$5.110m$8.856m$7.578m
$3.750m$28.883m


Sustaining Capex$0.527m$1.955m$0.436m$0.598m$1.461m
$3.750m
$1.640m


Total Capex$5.794m$5.544m$5.546m$9.454m
$9.039m
$7.500m
$37.083m



Note

1/ I have not added the figure for FY2016 to the total. I believe the FY2016 'Assets Under Construction' relate principally to the construction of the 'RT Max' entry level radio network. As such, it does not represent part of the 'big two' ('undergrounding CityLink' and 'National Tier 3 Digital Radio') system upgrades. The undergrounding of Citylink had definitely not started in FY2016. Furthermore there was little investment in the now legacy 'ActionNet' two way radio arm, because it was not clear what technology would replace it. By elimination, the main infrastructure spend over FY2016 must have been on 'RT Max'.
2/ Capex for FY2021 is an estimate (refer AR2020 p4). The expectation is that after FY2021, the major transforming system upgrades will be finished.

Outside of the 'once in a system generation' upgrades, Capex normally relates to individual customer contracts. As such, it is normally recovered from those customers over the length of each supply contract. Such Capex is also 'lumpy', dependent on when new contracts are signed. Why does this matter? Because if the cashflow from any such 'initial investment' will not match the cashflow from the customer that is paying for it, then this means that once the hardware is in place cashflow should be greater than profits. And that offers the potential for paying out 'more than your earnings' as dividends on a sustainable basis. This is the basis for rival wholesale broadband provider Chorus indicating they will look to be paying dividends out of cashflow rather than profits. Nevertheless the publicly stated dividend policy at 'Vital' is to pay out no more that 50-70% of NPAT as dividends (AR2019 p2).


Whenever I read or make forecasts, I usually find it enlightening to go back over the forecast when the actual figures are released. A well known investor on this forum gives merit to companies that "do what they say they will do." So how did Vital square up against this 'dwtstwd' (wow a palindrome, I like it) test?

Here is the full text of what was forecast for FY2021 (from AR2020 p4)

"For the year ending 30 June 2021 Vital is forecasting Capital Expenditure to be around $7.5m with just over 50% of this going towards infrastructure and new services. This year a significant component of capital expenditure is for the St John Ambulance network following on from the contract we signed earlier this year."

"As we move forward into the future financial years, we will see capital expenditure go back to normal levels, with the majority being customer funded."



FY2016FY2017FY2018FY2019FY2020FY2021Σ(FY2017 to FY2021)Average


Assets Under Construction
$5.267m$3.589m$5.110m$8.856m$7.578m$7.725m$32.858m


Sustaining Capex$0.527m$1.955m$0.436m$0.598m$1.461m
$0.550m
$1.000m


Total Capex$5.794m$5.544m$5.546m$9.454m
$9.039m
$8.275m
$37.858m



Compared to the forecast (quoted post) Capex for FY2021 is $8.275m/$7.5m = +10.3% over budget

Back in AR2019, the current dividend policy was articulated:
"The policy is that we will pay in the range of 50 – 70% of net profit after tax ensuring the business remains
sustainable and able to make future investments to keep our infrastructure up to date."

Net profit after tax was $0.841m / 41.381m = $0.02cps

From AR2021
"Post 30 June 2021 the Group has declared a fully imputed dividend of $0.02 per share." (100% of NPAT)

I take it from this that the business is now unsustainable and the company lacks the capital for future investments to keep infrastructure up to date?

Meanwhile, Marilyn on the Chorus thread, highlights a press release today highlighting dramatically improved upstream and downstream data speeds for existing plan holders at no extra cost.

https://sp.chorus.co.nz/product-update/chorus-future-fibre-portfolio-confirmed-changes

That sounds like very tough competition for Vital who have traditionally pitched their broadband offering at a slightly higher speed than the former plans from Chorus.

The share price of Vital fell 5.5% today to 69c. That is very close to the March-April 2020 Covid-19 low point.

Yet if it goes below 40c, this hound may yet be interested.

SNOOPY

[financewiz]

Any thoughts on if the Amazon facility being planned for Auckland will be a positive or negative?

[Onion]

The Annual Report (https://www.directbroking.co.nz/DirectTrade/dynamic/announcement.aspx?id=5810011) is out.

I can't see anything particularly remarkable from a quick read.

Revenue is down but lower finance costs mean a growth in profit.

The next year or so will depend a lot on the outcome of their bid for the Public Safety Network. They say they are well equipped to win the competitive tender process. It is an opportunity for a bit of growth.

[Snoopy]

Vital 'Wired Networks'

Consists of two wholesale fibre communication networks, one around the CBD in Wellington (acquired) and the other around the CBD in Auckland (built in house). The electronics on the end of the fibre have concurrently been updated to produce a more flexible product package range that tops out for maximum speed at 10Gbps (slightly higher than the maximum 8Gbps offered by top line Chorus hyperfibre). 'Citylink' serves business (including Dimension Data and Datacom) and the telecommunications industry (including Spark, Vodaphone and 2 degrees). 'Citylink' also offer cloud based data storage capability to customers in Wellington and Auckland, and provide peering exchanges for ISPs to share data.




Any thoughts on if the Amazon facility being planned for Auckland will be a positive or negative?


I had forgotten that 'Citylink' did their own cloud storage, before looking back at my own post to confirm that they did.

Amazon proposes to spend $7.5billion on their NZ datacentres (although the fine print does say the $7.5 billion was calculated over 15 years, and included the cost of building at least three data centre zones and stocking them with hardware, plus operating costs including utilities and salaries). The total market value of Vital is $28.6m, and the Vital Data Centres would be worth just a fraction of that. This brings into sharp view what a niche player Vital is in 'cloud storage capability'[.

If you look at this Herald article:

https://www.nzherald.co.nz/business/amazon-says-it-will-spend-75-billion-on-giant-data-centres-in-auckland/CRD5RLISXWWRXEB5YJXKIT6S5A/

the overall picture is that Amazon AWS has 50% of the world data storage market. You would think with this kind of market power, Amazon AWS would have the capability to see of the likes of Vital as you or I might slap down a sand-fly that has just landed on our leg. But would Amazon even notice a competitor as small as Vital?

I get the feeling that Vital would supply 'data storage' as part of an overall internet access and connectivity package. My gut feeling is that they won't be affected by the likes of Amazon and Microsoft building giant big data storage centres in Auckland. But I could be wrong.

I found more information on other niche data centre providers here:

https://www.datacentre.co.nz/testimonials/

Feenix Communications?, Quickweb?, Solarix?, Vpscity?, Techday?, Netscope? I can't say I have ever heard of any of them. Are they all scheduled to be executed with the arrival of the Amazon AWS sword? Even Spark is getting into this data storage game! I am a little worried that everyone seems to have decided this is a profitable space to get into. I guess the key to survival for the small guys will be picking just the right niche.

SNOOPY

[Onion]

I had forgotten that 'Citylink' did their own cloud storage, before looking back at my own post to confirm that they did.

I think they offer connectivity to cloud storage, not the storage.

[Snoopy]

The next year or so will depend a lot on the outcome of their bid for the Public Safety Network. They say they are well equipped to win the competitive tender process. It is an opportunity for a bit of growth.


The result of the bidding process is out and Vital were not the successful bidder! This looks to be a disaster unfolding for a highly leveraged company seemingly being outcompeted by others in their core business area of expertise. Share price is down by 19% today so far at 55c. But bidders are only starting to line up at 50c. So more carnage to come.

Vital are putting on a brave face:

"Vital remains open to partnering with the down selected parties to assist in the outcomes that PSN and emergency services require."

But surely Vital must now use whatever cashflows remain (the St John's contract has a few years to run) to urgently pay down debt. I wouldn't be surprised to see the need for a cash issue to shore up the company. Truly a nightmare day for Vital shareholders. Thankfully I am not one of them. But I don't rule out getting on board as a 'white knight' at the right price of course. Sympathy to current holders!

SNOOPY

[Onion]

The next year or so will depend a lot on the outcome of their bid for the Public Safety Network.

It certainly went the wrong way for VTL.

[Onion]

The result of the bidding process is out and Vital were not the successful bidder!

I’m surprised the announcement is not flagged as price sensitive.

[financewiz]

I picked up some today, it's a buying opportunity at a reasonable discount to NTA.
They are a good team with a good business but felt that they were pinning too much of their hopes on this but you have to be in to win don't you. St Johns is only 8% of their revenue with doesn't impact them until 2025.
Losing this is not great but they can focus on other opportunities in the market. They are vulnerable to takeover at this price level which is not really a scenario I favour but we'll see

[Snoopy]

I picked up some today, it's a buying opportunity at a reasonable discount to NTA.
They are a good team with a good business but felt that they were pinning too much of their hopes on this but you have to be in to win don't you. St Johns is only 8% of their revenue with doesn't impact them until 2025.


Yes, I saw that "8% of operating revenue" figure in the CEO's AGM address.

'Operating Revenue' - 'Other Income' = $35.239m -$0.136m = $35.103m (AR2021 Note 7)

8% of that is 0.08 x $35.103m = $2.808m

In some ways I am surprised the annual revenue from St John is not higher. But I don't see all that much scope for reducing running costs in the future. This must be, from a Vital perspective, quite a significant historic capital expenditure, - with the ongoing operating costs contained to run on the smell of an oily rag.

The real problem with this underlying situation is that the segmented EBIT from the 'Wireless Network' was only $200k last year. Pull the St John revenue off that figure and this much trumpeted new digital radio network is now losing $3m per year. With overall EBIT for the whole company being $3m, that reduces overall company EBIT to zero. And annual interest bills of some $2m, which we know will increase are yet to be paid.

The size of the bank loan is $15m and growing and there is no income there to pay the interest in a rising interest rate market. It is hard to imagine a situation that is more dire than this.



Losing this is not great but they can focus on other opportunities in the market. They are vulnerable to takeover at this price level which is not really a scenario I favour but we'll see.


The last takeover offer from Spark was rejected when Grant Samuel suggested the company might be worth from $1.532 to $2.11 per share, subject to working through the business development plan. It now appears Spark was right as Vital management have failed to deliver. I understand the attraction of investing in a company when it falls into a hole financewiz. I use this same modus operandi myself. But if a company falls into a hole, the next question is, what is the spade they have to dig themselves out. With crumbling sales on their wired networks as well, I just don't see one.

SNOOPY

[flyinglizard]

numbers are not important now. where is SPARK or VODAFONE?

[Snoopy]

Well I have some good news. As a result of the declared dividend, that will be paid in FY2022, the 'capitalised dividend valuation' of this company has increased (was 28cps)!



Year
Dividends as DeclaredGross DividendsGross Dividend Total


FY20180c +0c 0c + 0c0c


FY20190c + 0c 0c + 0c0c


FY20203.5c + 0c 4.86c + 0c4.86c


FY20212.5c + 0c 3.47c + 0c3.47c


FY20222.0c +0c 2.78c + 0c2.78c


Total11.11c



Averaged over 5 years, the dividend works out at 11.11c/5 = 2.22c (gross dividend) per year.

I have considered a capitalised dividend rate of 5% as appropriate for Chorus. However, taking account of VTL being a much smaller beast with a concentrated two area geographical market for broadband, I feel a 6% capitalised dividend rate is more appropriate here. This assumption, combined with the five year average of earnings gives a 'fair value' for VTL shares as:

2.22c / 0.06 = 37cps :t_up:



Dismal half year result announced today, a loss of $799k. NTA down from 59c to 56c,

Vital Chairman, Roger Sowry, said: “Notwithstanding that factors outside our control have contributed to the result, the first half performance is disappointing. The Board will be undertaking a detailed review of Vital’s operations and ways in which performance can be improved.” “The findings of the review will be communicated to shareholders within the current financial year,” said Mr Sowry

That doesn't sound like a ringing endorsement of the operational management of the company does it?

Debt is down to $13.649m, so cashflow at least positive. Full year loss forecast for FY2022 ending 30-06-2022. Operational savings of $1.3m still on course over FY2023. D-day with the banks January 2024 (which really means June 2023, because no-one leaves negotiations until the day the bank bell rings).

A recovery prospect, or is this a death spiral? Someone on the buy side prepared to take the risk at 30c......

SNOOPY

[winner69]

Need to get David Ware back

[percy]

Need to get David Ware back

Leave him in peace.
Wore himself out there.

[Snoopy]

Dismal half year result announced today, a loss of $799k. NTA down from 59c to 56c,

Vital Chairman, Roger Sowry, said: “Notwithstanding that factors outside our control have contributed to the result, the first half performance is disappointing. The Board will be undertaking a detailed review of Vital’s operations and ways in which performance can be improved.” “The findings of the review will be communicated to shareholders within the current financial year,” said Mr Sowry

That doesn't sound like a ringing endorsement of the operational management of the company does it?

Debt is down to $13.649m, so cashflow at least positive. Full year loss forecast for FY2022 ending 30-06-2022. Operational savings of $1.3m still on course over FY2023. D-day with the banks January 2024 (which really means June 2023, because no-one leaves negotiations until the day the bank bell rings).

A recovery prospect, or is this a death spiral? Someone on the buy side prepared to take the risk at 30c......


Wow, only the SHAZ crowd left playing with this one? $19 worth of share traded this morning. Offer price an all time low 25.5c now, as the prospect of no profit for this year sinks in and no path to profit is obvious after that? Someone said in times of uncertainty 'follow the yellow brick road'. Was that the Wizard of Oz, or Elton John? And what does this imply about following the red brick road? The baraginmeister in me says buy a few and see what happens, 'folllow the red brick road'. What song should I sing while doing so? It seemed to work out OK for Dorothy, although if I remember the film ending correctly it ended up being all a dream.

What we have here is a 21st century state of the art broadband network in downtown Wellington and Auckland. Remember those places? I think pre-Covid-19, office workers used to go there. What is at the end of the red brick road? Or am I dreaming?

SNOOPY

[percy]

https://www.youtube.com/watch?v=LQiOA7euaYA
https://www.youtube.com/watch?v=OFgayzZ5KTM

[Snoopy]

https://www.youtube.com/watch?v=LQiOA7euaYA
https://www.youtube.com/watch?v=OFgayzZ5KTM


Ah 'The road to nowhere' by Talking Heads - a good song for the situation. But I think the road for VTL is actually becoming clearer, so I have found a even better song to hum along to as the share price 'slips away' - a real kiwi classic

https://www.youtube.com/watch?v=d08Cnyzi_iw

The high bid is up to 26.5c, but the actual share price has resumed it's downward trajectory with a last sale of 28c and shares on offer for 27.5c. Actually a $3 parcel traded at that latter price as I write this. Someone has sacrificed half a latte to buy into this Stowry!

SNOOPY

[stoploss]

Ah 'The road to nowhere' by Talking Heads - a good song for the situation. But I think the road for VTL is actually becoming clearer, so I have found a even better song to hum along to as the share price 'slips away' - a real kiwi classic

https://www.youtube.com/watch?v=d08Cnyzi_iw

The high bid is up to 26.5c, but the actual share price has resumed it's downward trajectory with a last sale of 28c and shares on offer for 27.5c. Actually $3 parcel traded at that latter price as I write this. Someone has sacrificed half a latte to buy into this Storey!

SNOOPY

Snoops check out this version ....and it was only the Sound check !!
https://www.youtube.com/watch?v=BIsZXx2AoL8

[percy]

Snoops check out this version ....and it was only the Sound check !!
https://www.youtube.com/watch?v=BIsZXx2AoL8

It would have to be my all time favourite Kiwi song.
Loved the sound check,.Never seen it before.

[nztx]

Now who might be a likely interested party to pick up a stressed VTL lock stock & barrel ?

Any one of the other 3 big telcos - if the price is right - perhaps even IFT ? ;)

SPK & Voda in past have had a little fun with VTL & Teamtalk .. with the upgraded Welly Loop
which VTL have sunk an arm & leg into in place - could this be of interest ?

[Snoopy]

https://www.youtube.com/watch?v=d08Cnyzi_iw



Snoops check out this version ....and it was only the Sound check !!
https://www.youtube.com/watch?v=BIsZXx2AoL8

Sorrry, I have gone a bit off topic here but I thought I would do a 'bit on the side review', since this song seems to have generated some interest.
Ferg has signed off on his music check list, but I was having some withdrawal symptoms so here is my own superficial research on this song.

Max Merritt (active 1956-2020) was a New Zealand-born singer-songwriter and guitarist. He is best known for his association with the group "Max Merritt & The Meteors", which performed as a group from 1959 to 1980. Naming a line up however is more difficult because 33 different individuals, including our own Bruno Lawrence, performed with the group over that time.

By 1975 the then current incarnation of 'Max Merritt and the Meteors' were an old guard act playing the pub circuit in London against the emerging punk scene. After 16 years on the road 'Slipping Away' became the groups biggest hit single making it to number 2 in the charts in Australia and number 5 in New Zealand over 1975/1976. 'Slipping Away' was released from the "A Little Easier" Album on the Aritsa label. The original video for Slipping Away was filmed at The White Hart in Harlesdon in London.

In a 2011 interview by Johnny Kempt, Max had this to say about the song
"l wrote Slipping Away at the time I had that band but I knew it wouldn’t suit the band. When I was writing that song I was trying to write a Phil Spector song, something like 'Be My Baby'. I wrote the thing in about five minutes, I really did. I played some drums on a pillow and all that sort of s?!t. I’m of the belief that if you write a song and you can’t remember it, then it ain’t worth keeping. That’s my working rule."

"I borrowed Dave Russell's bass and Stewie Speer’s drums and went into Command Studios, a little studio in London and did a demo of Slipping Away, with me playing drums and bass, as well as guitar and singing it. But it wasn’t until the band had actually broken up. Dave [Russell] picked up his bass from the studio, after I’d finished doing the demo, and went to the airport and back to NZ!"

"I took that demo to Andrew Bailey, who was at that time editor of Rolling Stone, and Slipping Away was the basis of getting that deal with Arista."

"It’s been covered maybe 20 or 30 times, but they all f?!k up, by trying to make it more than it is. It’s a nursery rhyme! We went in to mix it and I said we couldn’t cos we didn’t have a return phrase. Richard Dodd was the engineer and he took just the last words of the line and bounced them to another track to echo the line."

After 'Slipping Away' the group never reached such chart heights again.

After Max died on September 25th 2020, five fellow Australian musicians (Max was claimed by the Aussies as he left our shores to play there as early as 1965), -these being Marcia Hines, Andy Bull, Didirri, Russell Morris and Mia Wray- produced this montage tribute version of the song dedicated to Max.

https://www.facebook.com/TheMarciaHines/videos/slipping-away-on-the-sound/832675494192136/


SNOOPY

[percy]

1956–1962: Early career in Christchurch
Born in Christchurch, New Zealand, Merritt was interested in music from an early age and started guitar lessons at 12.[3][6] By 1955 he encountered the rock and roll of Bill Haley and Elvis Presley. After leaving school in 1956, aged 15, Merritt formed the Meteors with friends Ross Clancy (sax), Peter Patonai (piano), Ian Glass (bass) and Pete Sowden (drums).[3][5] Initially a part-time group, they played dances and local charity concerts, Merritt continuing his day job as an apprentice bricklayer in his father's business.[3][14] When his parents, together with local Odeon theatre manager Trevor King, developed the Christchurch Railway Hall into a music venue, The Teenage Club, they hired Merritt and the Meteors.[3][14] The Teenage Club drew hundreds of locals and increased their popularity in the city when most businesses and public venues closed until late on Sunday afternoon.[8][14]

Clancy was replaced by Willi Schneider during 1958, the band released their debut single, "Get a Haircut", in June on HMV Records.[3][14] By 1959, the Meteors had become a top youth attraction, regularly pulling crowds of 500 or more.[14] Merritt borrowed players from other bands if a Meteors' member was unavailable, one such band was Ray Columbus & the Invaders fronted by vocalist Columbus.[3][14] From this band Merritt recruited guitarist Dave Russell and bass guitarist / keyboardist Billy Karaitiana (a.k.a. Billy Kristian).[3][14] In January 1959, New Zealand's top rocker, Johnny Devlin, played in Christchurch. Devlin later saw Merritt at a "Rock'n'Roll Jamboree" charity concert where Devlin's manager Graham Dent was impressed enough to praise their performance to Auckland promoter Harry M. Miller.[3][8] Miller added the Meteors to Australian rocker Johnny O'Keefe's 1959 tour of New Zealand.[3][8]

Christchurch had been chosen as the site for a United States paramilitary base to access Antarctica. Code-named "Operation Deep Freeze", it had the only airfield large enough to handle the huge transport planes.[3][8] The US presence provided a greater influence of rock and roll music – young servicemen discovered The Teenage Club and the gravel-voiced young Kiwi singer, Merritt.[8] More rock and roll and R&B records entered local jukeboxes and were on radio.[8] From their US connections, both the Meteors and the Invaders were able to equip themselves with Fender guitars and basses, which were still rare in Australia and the UK due to import restrictions.[3] By 1959 the line-up for the Meteors had become Rod Gibson (saxophone), Ian Glass (bass guitar), Bernie Jones (drums) and Billy Kristian (piano). Early in 1960, HMV released their debut album, C'mon Let's Go.[3][8] Follow up singles were "Kiss Curl" and "C'Mon Let's Go" in 1960 and "Mr Loneliness" in 1961. They had local support but were almost unknown beyond the South Island.[3][8] In an effort to break into the more lucrative North Island market, both Max Merritt & The Meteors and Ray Columbus & the Invaders relocated to Auckland in November 1962.[3][5][

I am sure I older brother used to go to a hall in Spencer Street,Addington ,and not only Max played there,but later or other times so did Ray Columbus.

[nztx]

A very good read there - Snoopy & Percy - thanks for that & I do remember Max back
in past years :)

[Snoopy]

At 38 cents this company was in a shambles, a badly managed business that failed to generate appropriate return on assets for the past few years. Not to mention the heavy debt burden of $35 million played on the minds of investors. Through my time as an investor and watching companies fall apart nothing quite does it like massive debt on the balance sheet and secondly failing to even generate appropriate profits to service that debt. So yes at that time a terrible company in the view of everyone, with an uncertain business direction, uncertain debt management given earning power and just generally bad sentiment all round.

What changed? All recent developments show signs of progress.

Firstly we have a new CEO in Andrew Millar, which means a new direction.

The current business forecast $2 million in profit and next year to be $4-5 million, with the reduction in debt $2 million generated isn't too bad at present times and given improving business on their fibre network and possible cut in expenses it looks very good going into the future. Fibre is still making progress, but as we can witness with Chorus the profit is in Fibre and once everyone in Wellington converts to Fibre its only going to improve TTKs revenue and possibly profits (I hope). I'd expect their radio network business to decline slowly overtime unless tech is improved.

All these developments are quite recent, so yes you have share price jumping all of a sudden thanks to Spark's well you know spark on their share price (see what I did there^^). You have new management looking to change things up and focus on the core business, a road out of debt, better business focus with better profits on its way, a large asset base with a strong moat and good confirmation by Spark and Vodafone that TTK is still a competent business with assets still worth acquiring.


Sensational news! CEO - gone! Very pertinent observation from Silverblizzard that I have highlighted in the quoted text in bold.

Interesting to reflect on this quoted post from Silverblizzard888 in 2017. Today the company's name is changed to 'Vital', which may be appropriate, considering the Vital signs of the company need watching. Share price is now 29c, up 1c on the day with the announcement of CEO Andrew Millar's sacking today.

Debt is in the half year report listed at $14.850m. But over Andrew's reign:

1/ The Farmside business was sold ($13m of cash in),
2/ An $8.7m capital raising was conducted in 2018

If we add the capital raised to the company debt today I get $36.550m. IOW the only way the company was able to reduce debt since 2017 was to sell assets and tap shareholders for capital. Operationally the capital position of the company has gone backwards over 5 years, and the company expects to make a loss for the year. It is good to see the board chair act decisively to sack the CEO. But replacing the driver doesn't get you off the troubled road. The new 'fill in' driver, James Bull, will need to keep his eye on the road in this current storm. There are some steep hillsides in Wellington. One moment the road is there. Next, just like the emergency services radio contract, that road is 'slipping away'.

SNOOPY

[DarkHorse]

Brings to mind another of my favourite kiwi tracks
https://www.youtube.com/watch?v=qF2PxSQo3k4

[winner69]

Another exec bites the dust …Head of Sales leaving

Only been with Vital a few months

Chair says not fired or anything like that …was head hunted

https://www.nzx.com/announcements/393714

Share price up today …must be good news :t_up:

[Snoopy]

Something a little odd going on here to justify the valuation of goodwill on the books. I am looking at note 14 in the FY2021 accounts, and have tabulated the equivalent figures from the previous two years.



Discount rate of Future EarningsTerminal Growth RateGoodwill on Books EOFY


FY20197.37%-7.71%0%$17.038m


FY20209.69%-9.84%1%$17.038m


FY202110.23%-10.28%1%$17.038m



The actual goodwill on the books hasn't changed. But to justify the goodwill valuation, the discount rate keeps going up! That could mean a couple of things (?).

1/ The modelled earnings power of the assets that contain the goodwill have not changed. But the modelled time needed to achieve the implied earnings power of those assets has been pushed further out into the future - hence the rise in the discount rate.
2/ The modelled earnings power of the assets that contain the goodwill have not changed and neither has the modelled time needed to achieve the implied earnings power of those assets. But in the interim profits are down more than expected. So this means from an 'annual growth ' perspective, the business will have to grow faster than last year to meet the book valuation goal. And because the business will have to grow faster, that introduces more uncertainty into the business model. Hence the increase in discount rate.

Is there any other way to interpret the changes in these figures? Is this confirmation of a 'hope the business improves' strategy? Is hope even a strategy?





Discount rate of Future EarningsTerminal Growth RateGoodwill on Books EOFY


FY20197.37%-7.71%0%$17.038m


FY20209.69%-9.84%1%$17.038m


FY202110.23%-10.28%1%$17.038m


FY202211.80%-13.60%1%-2%$0.0m



AR2022 p27 on goodwill
"The base case recoverable amount approximately equals the carrying value of the net assets post impairment."

Chairman - gone. CEO - gone. It has been a tumultuous year, with the devastating blow of losing the new St John Ambulance contract, even if the old one has 3 years or so still to run. But to answer my last question first, hope isn't a strategy. The huge $17m of goodwill on the balance sheet has been carefully groomed through by the auditors and has formally been judged/confirmed to be worthless. I guess that represents a big thumbs down from the auditors about the company's fantastical future growth claims. Management makes brave talk in the Annual Report for FY2022. Talk that is based around how much more it would cost to roll out an equivalent radio network, -or indeed a central city broadband network in Wellington or Auckland today-, and how the whole company is now trading at well below network hardware replacement value. The important caveat being that these networks only have value if Vital can find the customers. But can they? Ah well, at least we have certainty on the goodwill issue.

SNOOPY

[Snoopy]

'Vital', as this company was rebranded in 2019, is a small niche overlooked share (you can tell that because since the company name changed from Teamtalk a couple of years ago, no-one has bothered to update the thread title). This indicates to me it might be 'worth a snoop'. So let me introduce them to you as a provider of infrastructure and communication services.

Vital has two divisions:

1/ 'Wired Networks' that principally consists of two wholesale fibre communication networks, one around the CBD in Wellington (acquired) and the other around the CBD in Auckland (built in house). Originally branded as 'Citylink', the Wellington network in particular, 32km of the 250km total, has been extensively rebuilt in the last few years. The 'old overhead cables' - that piggy backed on the now retired trolley bus line network - have migrated underground. They now goes through the old Powerco subterranean gas ducting. Of course the electronics on the end of the fibre have concurrently been updated to produce a more flexible product package range that tops out for maximum speed at 10Gbps (slightly higher than the maximum 8Gbps offered by top line Chorus hyperfibre). 'Citylink' serves business (including Dimension Data and Datacom) and the telecommunications industry (including Spark, Vodaphone and 2 degrees). Vital have a TAAS (Telecommunications as a service) contract with the Department of Internal Affairs to deliver telecommunications services for all government agencies. Further, 'Citylink' are contracted to operate Wellington's free Wi Fi service throughout the CBD. They also offer cloud based data storage capability to customers in Wellington and Auckland, and provide peering exchanges for ISPs to share data.

The original 'Citylink' Network was sold by the Wellington City Council in 1999 to investment firm 'Active Equities'. It was subsequently acquired by Teamtalk (as Vital was named then) in 2006.

2/ 'Wireless Networks' is New Zealand's only nationwide wholesale radio network for voice and data traffic, and it operates in the microwave spectrum. This division operates three networks, (1) 'ActionNet' the legacy network that is in the process of being replaced by a (2) new digital radio network equivalent (engineered by Tait Electronics of Christchurch). Customers may be found in the Civil Defence, Emergency Services, Health, Utilities, Public Transport Education and Logistics and Freight sectors. 'Wellington Electricity' and "Auckland Airport' are two of the more high profile customers. There is a dedicated network for emergency services too, with a new contract just signed for St Johns. In 2016, Vital launched (3) 'RT max' as an affordable entry level digital radio service based on Motorola's 'Linked Capacity Plus' technology.

A significant capital raise of $8.2m was made in FY2019 to go towards funding these upgrades, and a new computerised management system to support them. The current company policy (AR2019 p2) is to pay out 50-70% of NPAT as dividends to ensure enough cash is retained to keep investing in the networks.

For those students of history, there was a third division 'Farmside' that concentrated on selling satellite and fixed wireless internet in rural areas. However this division was sold to Vodaphone in two tranches of 1/ 70% on 1st June 2017, and 2/ 30% on 31st May 2018.

Conclusion: As (1) the only nationwide wholesale provider of a digital radio service and as (2) one of the top three in the fibre Wellington market (with Vodaphone and Chorus) and Auckland (with Vector and Chorus) , Vital PASSes this first test.


New management, and there has been a subtle repositioning of the 'market presence statement'. Fundamentally the story remains the same:

VTL operates in the communications networks market, across different network technologies:
• Wired: provides fibre networks in Auckland and Wellington; and
• Wireless: mobile radio technology. (Note: The legacy 'Action Net' network which started the company in 1994, and has now been replaced by the new digital network, was closed down in June 2021).

From the director and CEO commentary in AR2022
"Recurring revenue also declined, more so on the Wired,(i.e. fibre) network.(-12.1%),"
"The degree of work-from-home activity has likely played some part in soft demand for CBD fibre capacity in Auckland and Wellington."

Ouch! This is the part of the business that will have to carry Vital forward, once they lose the St John Ambulance Wireless contract. So not only did Vital Wireless get a huge sucker punch over FY2022. The rest of the business is bleeding profusely as well! The 'customers work from home' explanation is a worry, because that indicates to me there are less Vital Ltd connections, rather than just less data being shared over the network. IOW the reduction in business is permanent.

"The Company was unsuccessful with its tender for the PSN (Public Safety Network) contract, "
"Commenced remedial action during the year, including moving to change the sales model for the Wireless division."

What is interesting is that the successful PSN contract tenderer, a company called Silverstripe -which is also headquartered in Wellington and is a similar sized company to Vital-, does not appear to have a wireless radio network of their own. So Silverstripe will either have to build an equivalent (a very expensive exercise), or negotiate a contract to run across an existing operational network.

From Vital AR2022
"Mobile radio is utilised by organisations that supply critical services (e.g. electricity network providers) that require “always available” reliability, or have remote work in areas outside cellular coverage."
"Vital provides the only commercial nationwide mobile radio infrastructure across New Zealand."

Hmmm, I wonder who Silverstripe will have at the top of their network negotiation list?

Here is what AR2022 says about Vital's change in market presence emphasis:
"A key strategy change in Wireless during FY2022 has been the move to utilise channel partners."
"Wholesale agreements have been put in place with a number of regional mobile radio operators with the intent they will take over the servicing and support of a long tail of smaller clients that currently contract directly with VTL."

I read that to say that "it is expensive to deal with a plethora of rag tag retail customers" and "it makes more sense for Vital to 'concentrate on running the network' " and transition towards being a wholesale company only.

From the October 2021 market release on their emergency services tender failure:
"Vital remains open to partnering with the down selected parties along with NGCC (Next Generation Critical Communications) (NGCC is the government agency overseeing this project) to assist in delivering the outcomes that PSN (Public Safety Network) and emergency services require."

From the June 2022 newsletter:
"We are excellent at delivering fibre and radio networks while our partners – who are our customers– are best placed to build and maintain the end consumer relationships. This not only shows we understand where we fit within the development of our clients’ communications ecosystems, but it also mitigates the risk of being seen as a direct competitor by those we need to be working with more."

"This could see Vital step back from what could be described as a hybrid wholesale/retail model, placing a greater emphasis on our core position as a specialist utility network operator with both our niche radio and fibre network assets."

This sounds to me as though Vital are positioning themselves to offer their services to Silverstripe as a PSN system sub-contractor. So maybe not all is lost on the PSN job?

In conclusion, nothing has happened to upset the strong hardware position of both Vital's 'nationwide wireless network' and the 'CBD fibre networks'. Particularly so when Vital have redefined their business in a way that says losing end line retail customers does not matter. So as far as Buffett would be concerned, 'Vital' has PASSED this first test.

SNOOPY

[Snoopy]

I did manage to solve this issue for Skellerup at the transition date.

https://www.sharetrader.co.nz/showthread.php?4091-Skellerup-(SKL)-Fundamentals&p=926124&viewfull=1#post926124

However, doing the same exercise at Vital is proving trickier.



I wonder if anyone got to the bottom of the implementation of IFRS16 on leases on the Vital result from 2020? The answer to this question is not trivial as it affects the adjusted Net Profit after Tax by between 60% and 109%.

From AR2020 p4

"As with our interim results earlier this year, IFRS 16 which although non-cash impacting does impact our results. Our Net Profit after Tax at $0.734m takes into account the IFRS16 impact to Net Profit after Tax of ($0.44m)."

However, this is the only time the figure $0.44m appears in the annual report. So where did it come from?

From AR2020 p17
"For judgements relating to NZ IFRS 16 refer to the Changes in Significant Accounting Policies (Note 3a), and the disclosure notes in relation to Leases (Note 21)."

Note 3 talks about changes to the balance sheet. But in note 21 there appears the following table:


]$
2020


2020 Leases Under IFRS16]$


Interest on Lease Liabilities$1.412m


Expense Related to Short Term/Low Value Leases$0.219m


Depreciation of Right-to-use Asset$5.619m]$


2019 Leases Under NZ IAS 17


Lease Expense$6.136m



Now what I think this table is saying is that under IFRS16, the total lease expenses are:

$1.412m+$0.219m+$5.619m= $7.250m

WHEREAS under NZ IAS 17, the lease expenses would have been $6.136m.


OK, there is an error here of mine I have identified, brought on by the layout of a table in AR2020 p31 (reproduced in the quoted text box above). That figure of $6.136m I quote above relates to FY2019, not FY2020, - even though it appears under a column header '2020'. How do I know this? Because when I go to the equivalent page in AR2021 (p29), there is no equivalent column header '2020' (it should be there reading '2021' if the two reports were consistent).

In the AR2021 report equivalent table on p29, this time looking at row headers, the two row headers read '2021' and '2020'. Now going back to AR2020, the information along the row header '2020' p29 AR2021 is exactly the same as the information alongside the row header '2020' on p31 AR2020. IOW each report is comparing lease information of the current year with the previous year, which is kind of what you expect annual reports to do.

Then on p18 of AR2020 we learn:
"The Group applied NZ IFRS 16 using the modified retrospective approach, under which the cumulative effect of initial application is recognised in retained earnings at 1 July 2019. Accordingly comparative information is not restated ‐ i.e. it is presented as previously reported."

The fact that 'comparative information is not restated', means that the full process of transitioning from NZ IAS17 to IFRS16 remains opaque. To someone like me trying to understand this, is extremely annoying ):-(



This means upon adopting the IFRS16 standard, lease expenses have increased by: $7.250m - $6.136m = $1.114m
As a result NPAT would reduce by 0.72x$1,114m = $0.802m.

That is rather more than the $0.44m reduction suggested on AR2020 p4. So I remain confused :-(


Because I misunderstood where the $6.136m figure in the above quoted calculation came from, the above quoted calculation is nonsense. Yet another factor causing confusion is that the rent due in any current year remains as an expense, and is not been capitalised as a 'right of use asset' alongside the longer term rental liabilities. When things get as confusing as this, I believe it is better to go back to what we do know for sure, rather than try guessing figures that we don't know.

One source of real world information that can by pass all this IFRS16 stuff (IFRS16 is simply an accounting construct that has little meaning in the day to day running of a business) is to look at the cashflow statement. Real money paid out as rent should be recorded there. Unfortunately in AR2020 for Vital, this information is not there in its entirety. $5.619m cash paid out is listed as "Principle Element of Lease Payments" (are these other payments that have been renamed for reporting purposes as lease payments?)

Right, 'back to the facts' that we know.....

AR2020 p4 tells us the overall 'answer' we seek - the NPAT impact.
"The IFRS16 impact to Net Profit after Tax ($0.44m)."
I believe that to mean that the Vital profit reduced over FY2020 because of IFRS16 by $0.44m. It should be possible to derive the missing annual rent information - that I will term 'R'- using this number, because the after tax difference effect in the two rent calculations (IFRS16 and NZ IAS17) we are told is $0.44m.

We also need to keep in mind that this unknown 'R' only captures the rent from the 'non current term' lease agreements. The current term lease agreement rent is still listed separately as an expense (I hope readers can now see how annoying all of these little details are becoming). Bringing all of this information together, produces an exercise in algebra to solve for the missing rent - if I haven't made another mistake which is not guaranteed! (to see where I pulled these numbers from look at the first quoted text above):

$0.44m = 0.72[($7.250m -(R + $0.219m)]
=> $0.611m = $7.031m - R
=> R = $6.420m

Add onto that the 'current period rent' and I get a 'total rent contracted' rent bill over FY2020 to be: $6.420m + $0.219m = $6.639m

The comparative figure for FY2019 under NZ IAS 17 was $6.136m (AR2020 p31). So my figure for rent payable over FY2020 of $6.639m passes the 'in the ballpark' test, even if it is 8% higher.

As a double check, I took the $6.136m of 'rent' from FY2019 that was back referenced from AR2020 and tried to find it in AR2019. But I couldn't find it :-(. And that leaves me feeling both stupid and annoyed at the same time. ):-(

SNOOPY

P.S. Just in case any readers are wondering why any of this matters, unless I solve this, it means that I can't adjust the profit figures from FY2021 and FY2022 back to pre-IFRS16 figures either. And why do I need to do that? Because the banks do not accept IFRS16 compliant profit reporting, even though it is the current accounting standard!

From AR2021 p28
"The secured bank loans are subject to various covenants such as debt coverage and interest coverage. Throughout the year the Company has complied with all debt covenant requirements. With the implementation of NZ IFRS 16 all covenants are calculated exclusive of NZ IFRS 16."

[Snoopy]

Just in case any readers are wondering why any of this matters, unless I solve this, it means that I can't adjust the profit figures from FY2021 and FY2022 back to pre-IFRS16 figures either. And why do I need to do that? Because the banks do not accept IFRS16 compliant profit reporting, even though it is the current accounting standard!

From AR2021 p28
"The secured bank loans are subject to various covenants such as debt coverage and interest coverage. Throughout the year the Company has complied with all debt covenant requirements. With the implementation of NZ IFRS 16 all covenants are calculated exclusive of NZ IFRS 16."


It looks like I have been thrown a lifeline by Vital itself, in my quest to get around IFRS16 distortions

From AR2022 p6:
"The Company’s results are complicated by IFRS 16 Accounting for Leases, which means that rent expense on the sites leased is predominantly shown under Depreciation (and partly in Net Interest) in the Financial Statements. The following Summary Financial Performance restates the composition of the Income Statement to reflect what the directors believe better represents the economic performance of the Company in the sense of EBITDA in relation to free cash flow (noting that EBITDA is a non-GAAP accounting measure)."

This is effectively a two fingered salute to the current accounting standards, as my translation from the above paragraph written in 'accounting speak' into plain English will reveal.

"The published accounts are bollocks and give an inaccurate picture of the business. So we have gone back to the old accounting standards and redrafted the accounts 'as they should be' ourselves."

So how does the 'new' income statement presentation compare with the accounting body sanctioned one?



Income Statement FY2022Vital Presentation {A}
IFRS Sanctioned Presentation {B}
Difference {A}-{B}


Revenue$31.456m$30.719m

I
add Other Income$0.737m


less Staff Costs$9.878m


less Other Selling General/Admin Costs$8.264m


less Administrative Expenses$12.494m


less Operating Costs (excluding D&A)$8.283m


less Lease/Rent Costs$7.691m


equals EBITDA$5.623m
$10.679m
-$5.056m


less Depreciation$6.745m
$6.258m
$0.487mI


less Amortisation on Right of Use Asset$5.072m


equals EBIT (operating)-$1.123m-$0.651m


less Impairment Charge$17.038m$17.038m


equals EBIT (reported)-$18.161m-$17.689m


less Net Finance Cost$0.673m
$2.194m
-$1.521m


equals Net Profit Before Tax-$18.834m-$19.883m


add back Income Tax refund-$0.503m-$0.790m


equals Net Profit After Tax-$18.331m


less Lease Adjustment Accounting Loss after tax -$0.762m


equals Net Profit After Tax (reported)-$19.093m-$19.093m



Discussion

Both sides add up to the same ultimate number, which is always a good start.

EBITDA is considerably greater on the IFRS side. This is to be expected, because IFRS16 introduces an artificial construct called a 'Right of Use' asset that is amortised. This 'right of use asset' may be thought of as a reflection of a capitalised rent contract (IFRS16 requires companies to captalise any long term rental contracts in this way) . Through the years, this long term 'Right of Use' asset is amortised annually. However, in the 'Vital' way of looking at things, this 'Right of Use' asset does not exist. And because it does not exist, there is no long term asset relating to 'rent' to amortise each year. This explains why the EBITDA (where 'A' stands for the amortisation that we have been discussing) is so much higher on the IFRS approved side of the table.

Depreciation is $0.487m different from each perspective. I do not understand why this should be so.

Moving on to 'net finance cost', the operating cost of 'rent' in the Vital view is seen as a 'lease expense' (a financial 'interest cost' under IFRS16). This 'Interest expense on lease liabilities' of $1.588m may be found under Note 11 of AR2022. Nevertheless $1.588m is not quite the same difference in 'net financial cost' as found in the table above of $1.521m. I am unsure why there is a discrepancy.

The FY2022 'Amortisation of the Right to Use' of $5.072m when added to the 'lease expense' of $1.588m comes to $6.660m. This adds up to less than the $7.681m rent charge on the Vital side of the table. This surprises me, because although both methods of treating rents over the length of any rent contract are equal, the IFRS16 method tends to see these costs front loaded. That in turn reduces company profits in the early years of a rent contract. I can think of two possibilities to explain this unexpected result.

1/ On average we are in the latter years of these rent contracts, not the early years.
2/ It is a fact that for some reason this IFRS16 treatment of 'right of use assets' excludes 'current year rent contracts' that are separately expensed (AR2022 note 23a ii. - Why this is allowed to happen, I do not know). So it may be that such contracts need to be added back separately to get a like with like comparison between methods.

Finally there is the 'Lease Adjusted Accounting Loss' that squares up both the totals on the second to last line. But is it the lease that is being adjusted? (IOW changes in leasing arrangements were renegotiated during the year). Or is it the way that information is being fed into the accounts that is being adjusted? I find this adjustment ambiguous.

Regardless of how or why all this tabled information fits together, Vital have given shareholders a clear message that the representative after tax profit (excluding the goodwill adjustment) for FY2022 was:

-$18.331m + $17.038m = -$1.293m

There are still a few unanswered questions in this analysis. Fortuitously Vital have done a comparative redraft for FY2021 as well. So I am going to look at that too, in the interests of trying to learn more.

SNOOPY

[Snoopy]

There are still a few unanswered questions in this analysis. Fortuitously Vital have done a comparative redraft for FY2021 as well. So I am going to look at that too, in the interests of trying to learn more.



Income Statement FY2021Vital Presentation {A}
IFRS Sanctioned Presentation {B}
Difference {A}-{B}


Revenue$35.239m$34.559m

I
add Other Income$0.681m


less Staff Costs$9.117m


less Other Selling General/Admin Costs$8.208m


less Administrative Expenses$11.386m


less Operating Costs (excluding D&A)$7.920m


less Lease/Rent Costs$8.057m


equals EBITDA$9.858m
$15.934m
-$6.076m


less Depreciation$7.824m
$7.306m
$0.518mI


less Amortisation on Right of Use Asset$5.642m


equals EBIT (operating)$2.034m$2.985m


less Impairment Charge$0m$0m


equals EBIT (reported)$2.034m$2.986m


less Net Finance Cost$0.618m
$1.822m
-$1.204m


equals Net Profit Before Tax$1.416m$1.164m


less Income Tax$0.397m$0.323m


equals Net Profit After Tax$1.019m
.

less Lease Adjustment Accounting Loss .after tax -$0.178m


equals Net Profit After Tax (reported)+$0.841m+$0.841m



Discussion

Both sides add up to the same ultimate number, which is always a good start.

EBITDA is considerably greater on the IFRS side. This is to be expected, because IFRS16 introduces an artificial construct called a 'Right of Use' asset that is amortised. This 'right of use asset' may be thought of as a reflection of a capitalised rent contract (IFRS16 requires companies to captalise any long term rental contracts in this way) . Through the years, this long term 'Right of Use' asset is amortised annually. However, in the 'Vital' way of looking at things, this 'Right of Use' asset does not exist. And because it does not exist, there is no long term asset relating to 'rent' to amortise each year. This explains why the EBITDA (where 'A' stands for the amortisation that we have been discussing) is so much higher on the IFRS approved side of the table.

Depreciation is $0.518m different from each perspective. I do not understand why this should be so.

Moving on to 'net finance cost', the operating cost of 'rent' in the Vital view is seen as a 'lease expense' (a financial 'interest cost' under IFRS16). This 'Interest expense on lease liabilities' of $1.203m may be found under Note 11 of AR2022. $1.203m is the same difference in 'net financial cost' between the two reporting scenarios as found in the table above of $1.204m (within the bounds of rounding error).

The FY2021 'Amortisation of the Right to Use' of $5.642m when added to the 'lease expense' of $1.203m comes to $6.845m. This adds up to less than the $8.057m rent charge on the Vital side of the table. This surprises me, because although both methods of treating rents over the length of any rent contract are equal, the IFRS16 method tends to see these costs front loaded. That in turn reduces company profits in the early years of a rent contract. I can think of two possibilities to explain this unexpected result.

1/ On average we are in the latter years of these rent contracts, not the early years.
2/ It is a fact that for some reason this IFRS16 treatment of 'right of use assets' excludes 'current year rent contracts' that are separately expensed (AR2022 note 23a ii. - Why this is allowed to happen, I do not know). So it may be that such contracts need to be added back separately to get a like with like comparison between methods.

Finally there is the 'Lease Adjusted Accounting Loss' that squares up both the totals on the second to last line. But is it the lease that is being adjusted? (IOW changes in leasing arrangements were renegotiated during the year). Or is it the way that information is being fed into the accounts that is being adjusted? I find this adjustment ambiguous.

Regardless of how or why all this tabled information fits together, Vital have given shareholders a clear message that the representative after tax profit for FY2021 was $1.019m.

SNOOPY

[Ferg]

Depreciation is $0.518m different from each perspective. I do not understand why this should be so.
Nice work Snoopy but the depreciation line in the P&L immediately caught my eye and then I saw your comment. Is there any explanation given as to why this would change? That seems peculiar and not an adjustment I would expect to see moving from pre-IFRS16 to post-IFRS16 compliant. My only thought was maybe there were some leasehold improvements that have been disestablished under the new rules that have disappeared from fixed assets and they are now sitting in leased assets.....perhaps?

[Snoopy]

Nice work Snoopy but the depreciation line in the P&L immediately caught my eye and then I saw your comment. Is there any explanation given as to why this would change? That seems peculiar and not an adjustment I would expect to see moving from pre-IFRS16 to post-IFRS16 compliant. My only thought was maybe there were some leasehold improvements that have been disestablished under the new rules that have disappeared from fixed assets and they are now sitting in leased assets.....perhaps?


Yes the IFRS16 rules as applied have 'apparently' reduced depreciation (even though I agree with your assessment Ferg that it should have made no difference). A problem I see with your theory (unless I am misunderstanding what you wrote) is that moving assets from the 'fixed asset' box into the 'leased asset' box only means that instead of being 'depreciated' the asset becomes 'right of use amortised'. And I don't think Vital distinguishes between 'depreciation' and 'amortisation'. AR2022 p31 states the "Depreciation of a Right of Use Asset" when they must mean "Amortisation of a Right of Use Asset".

I have been reading the report again. On p6 of AR2022, where the depreciation is outlined from the 'Vital' perspective, the sub note referring to depreciation says:

"Excludes IFRS 16 adjustments resulting from changes to lease profiles."

If a customer relationship was lengthened by mutual agreement, as an example, then with disestablishment happening later, the depreciation on the mutually required equipment that was bespoke to that customer would have to be slowed down. IOW the equipment would be depreciated over five years (say) and not four. Of course, such a change would not affect cashflow. And Vital seems very clear that it sees cashflow as important.

Again from AR2022 p6:
"The following Summary Financial Performance restates the composition of the Income Statement to reflect what the directors believe better represents the economic performance of the Company in the sense of EBITDA (Adjusted) in relation to free cash flow."

So the change I described would produce lower 'depreciation' from an 'external accountant perspective'. But because it did not affect the budgeted for depreciation at the time the deal was struck (the operational performance), then Vital has chosen to ignore it. Of course, none of what I am discussing here has any connection to IFRS16....

SNOOPY

[Ferg]

And I don't think Vital distinguishes between 'depreciation' and 'amortisation'.
But there are separate lines in your analysis for Depreciation on fixed assets and Amortisation of right to use assets - did you source those from the AR or somewhere else?

The terms "depreciation" and "amortisation" can be used interchangeably so if either phrase is used to describe the reduction in value of leasehold assets, then consider it a spreading of the "IFRS16 cost" of the leasehold asset over its useful life. Do not get hung up on the word that is used.

Convention is that 'depreciation' is used for fixed assets, 'amortisation' is used for intangible assets and leasehold assets can use either phrase. The most important aspect is the amortisation and/or depreciation of leasehold assets are bundled together under the heading "xxx of leasehold assets" in the P&L.

If an item is classified as (or reclassified as) a leasehold asset, then the associated spreading of the cost will be under the "xxx of leasehold assets" in the P&L. However, prior to the introduction of IFRS16 the cost of leasehold improvements (such as office changes, new despatch office etc) was classified as a fixed asset and it was depreciated as a fixed asset which shows on the depreciation line. That may no longer be the case under IFRS16.

So if a leasehold asset was transferred from fixed assets to leasehold assets, then the depreciation charge would reduce given the fixed asset no longer exists from an accounting perspective (which is what you observed) but it has been replaced with an intangible asset. So the amortisation of the right to use assets would increase (relative to not doing the transfer or reclassification). The quickest way to determine if this happened would be to find the 2021 comparative values for fixed assets notes in the AR for 2022, and compare those to the values that were originally used in the AR for 2021. If the comparative values in AR2022 vary to the AR2011, there is your answer. If they don't then it is something else.

[Snoopy]

But there are separate lines in your analysis for Depreciation on fixed assets and Amortisation of right to use assets - did you source those from the AR or somewhere else?


The 'amortisation' for FY2022 that I put in my comparison table was listed as a 'Depreciation of Right‐to‐use Asset' $5.072m (p31 AR2022). I made an 'executive analyst decision;' to rename it as amortisation, because I regard a 'Right of Use Asset' as a theoretical construct (i.e. not a tangible asset). I am more comfortable to see an intangible asset amortise, rather than depreciate.

Somewhat confusingly, in the same annual report, but this time under Note 8 'Operating Costs' p21, we see 'Amortisation on Right of Use Assets' was noted as $5.072m.




The terms "depreciation" and "amortisation" can be used interchangeably so if either phrase is used to describe the reduction in value of leasehold assets, then consider it a spreading of the "IFRS16 cost" of the leasehold asset over its useful life. Do not get hung up on the word that is used.

Convention is that 'depreciation' is used for fixed assets, 'amortisation' is used for intangible assets and leasehold assets can use either phrase. The most important aspect is the amortisation and/or depreciation of leasehold assets are bundled together under the heading "xxx of leasehold assets" in the P&L.


I very much appreciate your clarification. The bit in bold about leasehold assets being either amortisable or depreciable I did not know about. I am fairly sure that I have seen 'Right of Use Assets' amortised before in other reports, which is why I changed the label for my Vital analysis. However, as I have noted above, Vital seem quite relaxed about using either term. They have used both the terms 'depreciation' and 'amortisation' to describe the same thing in the same report! How crazy is that?



If an item is classified as (or reclassified as) a leasehold asset, then the associated spreading of the cost will be under the "xxx of leasehold assets" in the P&L. However, prior to the introduction of IFRS16 the cost of leasehold improvements (such as office changes, new despatch office etc) was classified as a fixed asset and it was depreciated as a fixed asset which shows on the depreciation line. That may no longer be the case under IFRS16.

So if a leasehold asset was transferred from fixed assets to leasehold assets, then the depreciation charge would reduce given the fixed asset no longer exists from an accounting perspective (which is what you observed) but it has been replaced with an intangible asset. So the amortisation of the right to use assets would increase (relative to not doing the transfer or reclassification). The quickest way to determine if this happened would be to find the 2021 comparative values for fixed assets notes in the AR for 2022, and compare those to the values that were originally used in the AR for 2021. If the comparative values in AR2022 vary to the AR2011, there is your answer. If they don't then it is something else.

OK so now we are looking at the 'depreciation/amortisation of leasehold assets' for FY2021, and the balance sheet representation of the underlying assets. I compare the figures quoted in AR2021 with the reference retrospective view of the same thing in AR2022.



Operational Expenses FY2021from AR2022 (Note 8, p21)from AR2021 (Note 8, p20)


Amortisation of Right of Use Assets$5.642m$5.642m


Depreciation of Network Assets$7.306m$7.306m


Premisis Expenses$0.143m$0.143m





Balance Sheet FY2021from AR2022 (Balance Sheet, p15)from AR2021 (Balance Sheet, p13)


Property Plant & Equipment$44.550m$44.550m


Right to Use Asset$19.157m$19.157m



Conclusion: "It is something else' (?)

SNOOPY

[Ferg]

OK so now we are looking at the 'depreciation/amortisation of leasehold assets' for FY2021, and comparing that figure quoted in AR2021
Not quite. Per my post:


fixed assets notes in the AR for 2022You are looking for the note in the AR under the fixed assets heading (assuming there in one, I have not looked) where they show cost and accumulated depreciation with opening values, additions, disposals, depreciation/amort etc and closing balances for various asset categories. It will be quite a long and detailed boring note. You are not looking in the P&L for this reclassification. The easiest way to find it is find the Balance Sheet in the AR, locate the line "fixed assets", and there will be a note number on that line - it will be something like note 16 or note 24 etc. Then find that particular note in the notes.

If the comparative values have changed in that note, then you have possibly found the answer.

[Ferg]

Nice detective work. But the loop is not quite closed. Per post #893 you had 2021 depreciation at $7.8m in the left hand column. However the 2021 notes to the accounts had depreciation of $7.3m per post #897. This suggests the $7.3m in the right hand column per post #893 is correct. I (mistakenly?) thought the $7.8m was the true or correct figure - I have not looked at the AR's. So something still does not tie up.

If the $7.3m is from the actual 2021 AR, where did the $7.8m come from? If that was a "presentation" rather than the AR, then it appears they are making pro-forma adjustments to the presentation comparatives...I would say perhaps for leasehold improvements? IOW they acquired some leasehold improvements in that year which were immediately classified as leasehold assets, but under the old method they would have been depreciated. I wonder if that is what they did?

But the more I look at post #893, the more I think the comparatives are a dog breakfast. Even the 2 opex lines shown 2 different ways do not sum to eachother.....oh dear. And the tax provision changes. There are a lot more moving parts than I anticipated. That can only be solved if they supplied detailed notes behind that "presentation" to show how they derived that version / interpretation.

[Snoopy]

Nice detective work. But the loop is not quite closed. Per post #893 you had 2021 depreciation at $7.8m in the left hand column. However the 2021 notes to the accounts had depreciation of $7.3m per post #897. This suggests the $7.3m in the right hand column per post #893 is correct. I (mistakenly?) thought the $7.8m was the true or correct figure - I have not looked at the AR's. So something still does not tie up.


$7.306m is the depreciation over FY2021 signed off by the auditors.



If the $7.3m is from the actual 2021 AR, where did the $7.8m come from? If that was a "presentation" rather than the AR, then it appears they are making pro-forma adjustments to the presentation comparatives...


The $7.824m depreciation for FY2021 comes from exactly the same document, -the same annual report for FY2022-, not a presentation. In the discussion by the directors, before you come to the officially sanctioned figures, a 'Summary Income Statement' is presented, on p6.

From p6
"The following Summary Financial Performance restates the composition of the Income Statement to reflect what the directors believe better represents the economic performance of the Company in the sense of EBITDA in relation to free cash flow (noting that EBITDA is a non-GAAP accounting measure)."

This means shareholders reading the Annual Report come to the 'Summary Income Statement' first, which is different to what the auditors have signed off in the annual accounts. The implied hint being that:

'We the management have included the audited annual accounts because we have to. But actually shareholders should ignore that and read our own Summary Income statement instead.'

It really is quite extraordinary to see a whole 'alternative income statement' presented in this way. I have been around the markets a while now and I don't ever recall seeing such a thing.



But the more I look at post #893, the more I think the comparatives are a dog breakfast. Even the 2 opex lines shown 2 different ways do not sum to each other.....oh dear.


Yes,

Management Preferred Statement: $9.117m (Staff Costs) +$8.208m (Other selling general admin costs) = $17.325m
Accounts Audited Statement: $11.386m (Administrative expenses) + $7.920m (Operating Costs) = $19.306m

(where 'Operating costs -excluding D&A' - are from Note 8: $20.868m-$7.306m-$5.642m = $7.920m)

The two totals don't match.



And the tax provision changes.


Yes, you would think a company would know how much tax they were due to pay for a financial year that is all wound up. But there are two alternative tax figures shown:

$0.397m (management) or $0.323m (audited)



There are a lot more moving parts than I anticipated. That can only be solved if they supplied detailed notes behind that "presentation" to show how they derived that version / interpretation.

Explanation as to why management have re-presented their accounts p6 AR2022:

"The key adjustment relates to how lease/rent costs are reallocated from the Depreciation and Net Interest categories into the Lease/rent costs line prior to EBITDA (Adjusted). This is to reflect the fact that lease/rent costs are cash costs while depreciation is traditionally a non-cash charge against prior costs."

Note that $1.588 million of the Lease/rent charge relates to Net Interest expense on leases/rent agreements ($1.203 million in FY2021)."

SNOOPY

[nztx]

Perhaps Liquidators Fire Sale values might present a less confused picture of
all things Vital ? ;)

[Snoopy]

eps = Normalised Profit / No. Shares on Issue at End of Financial Year

FY2016: 0.72( $4.569m + $0.229m ) / 28.369m shares = 12.2cps
FY2017: ($4.144m - 0.72($0.457m) ) / 28.369m shares = 13.5cps
FY2018: ($4.512m - 0.72($0.195m) ) / 28.369m shares = 15.3cps
FY2019: ($4.054m + 0.72($0.205m) ) / 41.381m shares = 10.2cps
FY2020: ($0.734m + $0.44m +0.72($0.211) ) / 41.381m shares = 3.2cps
BT2/ INCREASING EARNINGS PER SHARE TREND (one setback allowed) [perspective 2020]
Notes

1/ FY2016, FY2017 and FY2018 results have had operating returns from the now sold 'Farmside' division removed. Any profits from the sale of this division have also not been included in these earnings figures.
2/ In every year I have adjusted for the 'after tax effect' of any gain or loss in the fair value of derivatives (found in the 'Finance and Expense' note in each respective annual report).
3/ In FY2020 I have added back the claimed 'after tax effect' of the adoption of adoption of IFRS 16 on the treatment of leases. Reading p4 of AR2020, the contempt with which IFRS 16 is held is remarkable. The Chairman in effect says it is a non-cash adjustment that should be ignored!
4/ For years FY2016 and FY2017 I have changed the tax rate to the standard corporate rate of 28%. This removes the effect of previous years tax losses skewing the operational results for the current year.

Conclusion: Things were going well until the 'set back' of FY2019, which was 'Covid compounded' by the deferring of customer upgrades in FY2020. FAIL test!


There has been much discussion over the last few days about reconciling earnings against the changes brought about by IRFS16. IFRS16 brings leased assets onto the balance sheet, and reclassifies what was formerly known as rent as an 'amortisation of a right to occupy' charge. At the time of writing I have failed to fully get to the bottom of the maths around this. At this point I am prepared to accept Vital's own view on how earnings were affected. That means, for FY2021 and FY2022, starting from Vital's own opinion of how to interpret these effects as listed on p6 of AR2022 in the 'Summary Financial Performance Statement' for FY2021 and FY2022.

eps = Normalised Profit / No. Shares on Issue at End of Financial Year

FY2018: ($4.512m - 0.72($0.195m) ) / 28.369m shares = 15.3cps
FY2019: ($4.054m + 0.72($0.205m) ) / 41.381m shares = 10.2cps
FY2020: ($0.734m + $0.44m +0.72($0.211) ) / 41.381m shares = 3.2cps
FY2021: ($1.019m - 0.72($0.321m) ) / 41.381m shares = 2.1cps
FY2022: (-$18.331m + $17.038m - 0.72($0.228m) + 0.72($0.870m) / 41.548m shares = -2.0cps

Notes

1/ FY2018 results have had operating returns from the now sold 'Farmside' division removed. Any profits from the sale of this division have also not been included in these earnings figures.
2/ In every year I have adjusted for the 'after tax effect' of any gain or loss in the fair value of derivatives (found in the 'Finance and Expense' note in each respective annual report).
3/ Over FY2020 I have added back the claimed 'after tax effect' of the adoption of adoption of IFRS16 on the treatment of leases. Reading p4 of AR2020, the contempt with which IFRS16 is held is remarkable. The Chairman in effect says it is a non-cash adjustment that should be ignored!
4/ Over FY2021 and FY2022 I have also used pre-IFRS16 accounting, as outlined on p6 of AR2022, to determine my baseline profit figure for those respective years. This means all comparative profit analysis has been done under the same accounting rules.
5/ Over FY2022, I have reversed the $17.038m write down in goodwill (a non-cash, non-operational item).
6/ From p2 AR2022
"The result included several items of a one-off nature including executive exit costs. Lease accounting adjustments and culmination of St John upgrade project had a material impact when compared to the prior year. Collectively, these impacts exceeded $2 million."
I have accounted for the CEO exit costs by comparing his FY2021 salary of $475k with his FY2022 salary of $1,345k. This is a difference of $0.870m which I have added back to company profits. Expenditure on the St John upgrade project may have been unusually large. But I regard this as part of the normal Vital business model, and so have made no adjustment for it. I am assuming any 'lease accounting adjustments' refer to IFRS16. These have already been adjusted for, because I have used the 'Summary Financial Performance' on p6 AR2022 when selecting my base earnings figure that already accounts for IFRS16

Conclusion: In aerial terms, this five year trend amounts to a unrelenting nose dive in profits, every year worse than the last. FAIL test!

[Snoopy]

Return on Equity = Normalised Profit / End of Year Shareholder Funds

FY2016: $3.455m / $20.209m = 17.1%
FY2017: $3.815m / $25.327m = 15.1%
FY2018: $4.372m / $29.766m = 14.7%
FY2019: $4.202m / $42.095m = 10.0%
FY2020: $1.326m / $41.740m = 3.2%

Conclusion: You could say within rounding errors that things were OK until the 'setback' of FY2019. This was then compounded by an even bigger setback in FY2020. FAIL test!


Return on Equity = Normalised Profit / End of Year Shareholder Funds

FY2018: $4.372m / $29.766m = 14.7%
FY2019: $4.202m / $42.095m = 10.0%
FY2020: $1.326m / $41.740m = 3.2%
FY2021: $0.878m / $41.783m = 2.1%
FY2022: -$0.831m / $21.667m = -3.8%

Notes

1/ The big drop in shareholder funds for FY2022 is largely due to the $17.038m write of network goodwill on the books over that year.

Conclusion: A descent from a respectable return on net assets into misery. FAIL test!

SNOOPY

[Snoopy]

Net Profit margin = Normalised Profit / Normalised Revenue

FY2016: $3.455m / $32.923m = 10.5%
FY2017: $3.815m / $34.766m = 11.0%
FY2018: $4.372m / $34.225m = 12.8%
FY2019: $4.202m / $34.771m = 12.1%
FY2020: $1.326m / $32.868m = 4.0%

Conclusion: Good profitability gains between FY2016 and FY2018 which proves it can be done. PASS test!



Net Profit margin = Normalised Profit / Normalised Revenue


FY2018: $4.372m / $34.225m = 12.8%
FY2019: $4.202m / $34.771m = 12.1%
FY2020: $1.326m / $32.868m = 4.0%
FY2021: $0.878m / $35.239m = 2.5%
FY2022: -$0.831m / $31.456m = -2.6%

Conclusion: A post pandemic slide into ever lower margins, reflecting the under-utilisation of the networks. FAIL test

SNOOPY

[Snoopy]

Well I have some good news. As a result of the declared dividend, that will be paid in FY2022, the 'capitalised dividend valuation' of this company has increased (was 28cps)!



Year
Dividends as DeclaredGross DividendsGross Dividend Total


FY20180c +0c 0c + 0c0c


FY20190c + 0c 0c + 0c0c


FY20203.5c + 0c 4.86c + 0c4.86c


FY20212.5c + 0c 3.47c + 0c3.47c


FY20222.0c +0c 2.78c + 0c2.78c


Total11.11c



Averaged over 5 years, the dividend works out at 11.11c/5 = 2.22c (gross dividend) per year.

I have considered a capitalised dividend rate of 5% as appropriate for Chorus. However, taking account of VTL being a much smaller beast with a concentrated two area geographical market for broadband, I feel a 6% capitalised dividend rate is more appropriate here. This assumption, combined with the five year average of earnings gives a 'fair value' for VTL shares as:

2.22c / 0.06 = 37cps :t_up:



No dividend declared for the FY2022 financial year. In previous years the final dividend for the year ended June was paid out early in the following financial year in October. Given the operational turnaround required for FY2023, i think it is a fair bet that there will be no dividend paid within the FY2023 financial year.



Year
Dividends as DeclaredGross DividendsGross Dividend Total



FY20190c + 0c 0c + 0c0c


FY20203.5c + 0c 4.86c + 0c4.86c


FY20212.5c + 0c 3.47c + 0c3.47c


FY20222.0c +0c 2.78c + 0c2.78c


FY20230c +0c 0c + 0c0c


Total11.11c



The new five year picture removes one historical dividend free year(FY2018) and adds in a new one (FY2023).

Averaged over 5 years, the dividend works out at 11.11c/5 = 2.22c (gross dividend) per year, unchanged from last year.

I now considered a capitalised dividend rate of 5.5% as appropriate for Chorus, NZs communication network provider market leader. However, taking account of VTL being a much smaller beast with a concentrated two area geographical market for broadband, I feel a 6.5% capitalised dividend rate is more appropriate here. This assumption, combined with the five year average of earnings gives a 'fair value' for VTL shares as:

2.22c / 0.065 = 34cps

Despite the annual report noting, VTL’s net tangible assets per share being $0.52, the realisation of this value is predicated on a very successful year of business expansion, to ensure the network is better utilised. With a somewhat patchy 'post pandemic start' business record, and the company in an underlying loss making position - even after adjusting for one offs - I believe a market valuation discount to asset backing is justified and my 34c value, calculated above, is realistic. Consequently at a market price of 38c, I consider the company around 12% overvalued.

SNOOPY

[Snoopy]

Well it looks like I called this one wrongly! Updating the operating cashflows.



FY2016FY2017FY2018FY2019
FY2020FY2021


Operating Free Cashflow$8.241m$7.121m$7.680m$7.102m$13.698m$13.35 1m



The Operating Free Cashflow over FY2021 continues to be strong. So let's have a look at the Cashflow Statements for the last three years to try and unpick this.




FY2021
FY2020
FY2019


Cash flows from Operating Activities


Cash provided from:


Receipts from Customers
$33.094m
$37.197m
$35.865m


Net GST Receipts
($0.114m)
$0.212m
$0.087m


{A}
$32.980m
$37.409m
$35.952m


Cash applied to:


Payments to Suppliers & Employees
$17.798m




Payments to Suppliers

$11.061m
$15.968m


Wages & Salaries

$9.840m
$9.659m


Interest Expense net of Realised FX Gain/Loss
$1.771m
$1.652m
$1.133m


Income Tax Paid
$0.060m
$1.158m
$2.090m


{B}
$19.629m
$23.711m
$28.850m


Net Cashflows from Operating Activities {A}-{B}
$13.351m
$13.698m
$7.102m



When discussing last year's Operating cashflow result I wrote:

---------------------

To figure out what has happened we need to step back and think about how this company operates. A new bespoke job will typically involve a large payment up front for hardware, software and installation. This money, plus a profit margin, is recovered by Vital gradually over some years.

From p2 of AR2020 we learn
"Overall, we did see an impact to revenue, and we are experiencing a delay in forecasted orders, with some projects being postponed out to future years."

--------------------

I wonder if the reason for the good operating cashflow remains the same (set up costs for new contracts postponed)? Perhaps, when making that AR2020 commentary, they had assumed the RFP contract bid would have been sorted out by now?

Looking at other costs, the suppliers and employees gobbled up $3m less cash over the year (that's good). The income tax cash payment was down a million, although that seems a payment timing issue. The thing that most concerned me about the result was that, although the cashflow is good, the depreciation and amortization is large and real with the wireless assets (wireless assets are not long lived assets like fibre in the ground). Almost all of the welcome new wireless revenue looks to be offset by an equally large increment in depreciation. Meanwhile wired revenue dropped by a million, but the running costs of Vital's 'fixed fibre broadband' wired network barely moved.

Capex is tipped to be $5.3m for FY2022, despite the company announcing that it has completed its own major capital investments. Granted that $5.3m is not 'operating cashflow'. But that figure does show there is considerable demand on redirecting the surplus operating cashflow Vital does have into reinvestment. Does the $5.3m include future investment, assuming an RFP win? In the new 'work from home' era, is there a path back to recover some of that inner city fibre revenue from city offices scaling down or closing? I don't know the answers. I also don't feel the compelling urge to own the shares!

SNOOPY

discl; I am not and have never been a holder

As the company resets its direction, time to update the operating cashflow position.



FY2016FY2017FY2018FY2019
FY2020FY2021FY2022


Operating Free Cashflow$8.241m$7.121m$7.680m$7.102m$13.698m$13.35 1m$10.949m



The Operating Free Cashflow over FY2022 is down by 18%. So let's have a look at the Cashflow Statements for the last four years to try and unpick this.




FY2022
FY2021
FY2020
FY2019


Cash flows from Operating Activities


Cash provided from:


Receipts from Customers
$31.702m
$33.094m
$37.197m
$35.865m


Net GST Receipts
$0.245m
($0.114m)
$0.212m
$0.087m


{A}
$31.947m
$32.980m
$37.409m
$35.952m


Cash applied to:


Payments to Suppliers & Employees
$19.616m
$17.798m




Payments to Suppliers


$11.061m
$15.968m


Wages & Salaries


$9.840m
$9.659m


Interest Expense net of Realised FX Gain/Loss
$1.170m
$1.771m
$1.652m
$1.133m


Income Tax Paid
$0.212m
$0.060m
$1.158m
$2.090m


{B}
$20.998m
$19.629m
$23.711m
$28.850m


Net Cashflows from Operating Activities {A}-{B}
$10.949m
$13.351m
$13.698m
$7.102m



When discussing the FY2022 financial results (AR2022 p6), management comment"

"Additionally, a number of one-off matters totalled over $2 million, including staff exit costs, lease accounting adjustments, and some PSN tender costs."

If you believe that these one off costs won't be repeated, then this takes operating cashflow nearly back to what it was in the previous year. But I don't buy it. Who is to say that staff retention and acquisition costs are not going to be a staffing issue over 2023? And just because a whole lot of work was put into the PSN network tender that was lost, that is not a one off. That is people doing their prescribed job, but coming up short. If they weren't doing that, then they would have presumably been working on other jobs. So no 'one off ' job positions have been dis-established here. No related 'future savings' are to be had!

Structurally, the leadership team has already reduced from 7 to 4 over the year. It is hard to imagine that level of loss continuing over FY2023.

Net finance costs, excluding lease expenses were: $2.194m - $1.588m = $0.606m.
The average 'loans and borrowings balance' over FY2022 was: ($15m+$14.5m)/2 = $14.75m

That is an indicative interest rate of: $0.606m/$14.75m= 4.1%

If I was the CFO (noting at the moment that Vital do not have one), I would be budgeting on my interest repayments doubling if the size of the debt is not seriously reduced (although Vital have noted they aim to direct free cashflow from now on to reduce debt). Nevertheless I think it going to be a battle to keep costs under control, despite the company's CEO saying at the AGM "The Company is on target with the turnaround metrics over the first three months."

Vital themselves are planning around a $0.5m revenue lift for the year (AR2022 p7). Add that to the 86% percent recurring revenue streams year on year (CEO Address AGM2020):

0.86 x $31.456m = $27.052m. I get this to be a 'new business to be won' target of: ($31.456m-$27.052m) + $0.5m = $4.904m.

So a bit of work there for the sales people to do. The company's auditors , by writing off the company's goodwill, have suggested that an EBITDA gain of 10% is not realistic. This equates to somewhere near a $1m lift in profit over the year. But a $0.5m target for an increase in revenue, which would largely flow straight through to EBITDA if achieved, is not 'pie in the sky'.

Overall CAPEX is forecast to be $4.1 million over FY2023. This is $1.0 million down on FY2021 (CEO AGM address for FY2022), which should leave $1m more for debt repayment. Nevertheless there is too much debt and too many unknowns for me to be drawn to VTL as an investment. I think teh sahre price is low (in historical terms) for a good reason.

SNOOPY

discl; I am not and have never been a holder

[winner69]

Jeez, an announcement from Vital

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/VTL/414103/397772.pdf

Obviously still in existence :)