VTG - Vita Group Ltd

[Lizard]

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

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

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

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

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

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

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

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

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

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

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

[Snow Leopard]

Hi Liz

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

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

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

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

best wishes
Paper Tiger

[percy]

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

[Lizard]

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

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

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

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

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

[Lizard]

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

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

[percy]

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

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

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

[Lizard]

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

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

[macduffy]

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

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

[Lizard]

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

[stoploss]

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

[stoploss]

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

Cleaned out 40 cps today ...not a bad performance in the current market.

[Lizard]

Cleaned out 40 cps today ...not a bad performance in the current market.

Yes, I was thinking the same. Still holding with caution...

[stoploss]

Its been getting a plug on the Boat Fund - might be helping. Personally, I am not convinced there is a future is being a mobile phone reseller when every phone company out there is trying to drive sales through their online channel in order to cut costs. That combined with the flagship "touch and play" stores (ala Apple, Telstra) the whole retail environment is changing too.

Hi KW, just wondering can you elaborate, my understanging was VTG operated the Telstra stores under license ?

[Lizard]

Cleaned out 40 cps today ...not a bad performance in the current market.

Cleaned out 50cps yesterday and up to 55cps today... still there stoploss? Tempted to profit-take at this level...

[stoploss]

Cleaned out 50cps yesterday and up to 55cps today... still there stoploss? Tempted to profit-take at this level...

Hi Lizard, at + 100% couldn't resist sold a quarter of my position @ .54. I seeNAB was a big seller in the late 40ies.Payrolls number should have us buoyant next week as well.....

[Lizard]

Hi Lizard, at + 100% couldn't resist sold a quarter of my position @ .54. I seeNAB was a big seller in the late 40ies.Payrolls number should have us buoyant next week as well.....

Actually - according to the SSH - NAB were selling VTG at 39cps.... looks like they became a substantial holder in March 2010 at 26-29cps... maybe if they had waited another week, they could have made twice as much :D

[Lizard]

Sold a few at 56.5cps today, as feels too far too fast and is close to my current valuation. Will hold the rest for now though.

[stoploss]

Sold a few at 56.5cps today, as feels too far too fast and is close to my current valuation. Will hold the rest for now though.

Snap, was holding out for .58 for another 1/4 of my position but didn't like the parcels of 100K that kept coming up on the offer, so came down to mkt. Like you happy to hold the balance .

[stoploss]

Looks like a good result today- at least the market liked it. Might have got out too early on this one .......

[steve fleming]

Looks like a good result today- at least the market liked it. Might have got out too early on this one .......

One of the better results from the reporting season.

Some strong working cap management and really impressive margin expansion for a retailer.

Surprisingly a lot of retail stocks have done OK this half year.

[mark100]

Another good result. Still looks like there is value even at ATHs

[mark100]

The special divs have started

[DarkHorse]

Up over 9% today on very positive trading update - expect c19m first half underlying EBITDA compared to 27m for full year 14. Anyone else still holding and/or have any views? (esp those in Australia who've shopped in their stores)

[mark100]

Still holding. One of the few small caps still showing growth at a reasonable price

[percy]

I expect Pie Funds are enjoying the VTG upgrade.
They will also be happy with BAL's upgrade too.!

[mark100]

After a great upgrade last month VTG is back where it was before the upgrade! At $1.20 I estimate it's trading at around 10x FY15 with the promise of special dividends along the way (over and above normal divs) to release franking credits. The first half has benefitted from the iPhone 6 release but I take the view that in this day and age there will be regular releases of the next must have phone model, so far from a one-off

[mark100]

Apple releases new phones in 2 year cycles, so the next upgrade will be a "S" upgrade, or one that offers only minute improvements so doesnt really give consumers a compelling reason to upgrade. Most people stick to the 2 year cycle to get a new phone as that is also the length of the mobile phone operators contract period. The next driver would be a new Galaxy release, but as the iPhone 6 has shown there really isnt much that is new that can be added in to a phone that would make people trade in their old ones prior to contract expiry. Also bear in mind that the falling AU$ will make the Samsung and Apple phones even more expensive than they are now - something that both resellers and Telstra et al are going to have to come to grips with going forward when pricing subsidies into the contracts. And consumer spending in Aus is not exactly going to respond well to increased handset and contract pricing - suggesting that more people will sit on their old phones even after the 2 year contract term has expired.

Not sure there KW. I think the economy has to be pretty bad before it impacts consumers phone plans and upgrade cycle. Phones and coffee seem to be staple items these days!

[mark100]

Apple releases new phones in 2 year cycles, so the next upgrade will be a "S" upgrade, or one that offers only minute improvements so doesnt really give consumers a compelling reason to upgrade. Most people stick to the 2 year cycle to get a new phone as that is also the length of the mobile phone operators contract period. The next driver would be a new Galaxy release, but as the iPhone 6 has shown there really isnt much that is new that can be added in to a phone that would make people trade in their old ones prior to contract expiry. Also bear in mind that the falling AU$ will make the Samsung and Apple phones even more expensive than they are now - something that both resellers and Telstra et al are going to have to come to grips with going forward when pricing subsidies into the contracts. And consumer spending in Aus is not exactly going to respond well to increased handset and contract pricing - suggesting that more people will sit on their old phones even after the 2 year contract term has expired.

Not sure there KW. I think the economy has to be pretty bad before it impacts consumers phone plans and upgrade cycle. Phones and coffee seem to be staple items these days!

[DarkHorse]

Big drop today. A fairly large part of my portfolio following a few years of great performance. MF puts it down to foray into new market - "SDQ Athletica, a unique men's lifestyle brand" http://www.fool.com.au/2016/10/31/why-the-vita-group-limited-share-price-is-being-hammered-today/?_ga=1.73925842.1360366021.1404808461
CEO has a great track record but this is out of left field. Any holders still? What are your thoughts?

[Toulouse - Luzern]

Big drop today. ...

... CEO has a great track record but this is out of left field.

Any holders still?

What are your thoughts?...

I hold via mutual funds.

Agree CEO is very impressive with great skills and track record.

To me it does not look like a good strategic fit.

Technology and clothes.

Potentially a management diversion without significant upside.

A possible indicator there may be doubt of the core business going forward.

Reminds me of Michael Hill diversion into women's shoes several years ago.

The market does not seem keen, with an 11% fall.

However Maxine has been exceptional with her calls over the years.

If sales are via stores = Cost increases

Wait and see.

[Toulouse - Luzern]

OK.

For me it was obvious for several years...

IMHO Maxine has exceptional customer relationship skills...

and

The more stores Telstra gives to Vita to manage, the more money Telstra and Vita can make...

Upside for all stakeholders if Telstra gives Vita even more stores on same terms.

Downside for all if Telstra changes the terms or stops giving Vita more stores ...

and now the story is out ...

More to it than the move into clothes ...

((
By the way is anyone following the Kent and Lime side story of online clothes selling as an innovation/ disruptor.

https://kentandlime.com.au/?gclid=CNLz8t-Di9ACFZUsvQodLmkMOQ
))

Excerpts re Vita following from Sydney Morning Herald today.

"Is Australia's richest female CEO, Fone Zone founder Maxine Horne, getting a bit too rich for the likes of her business partner, Telstra?

That is what the sharemarket appears to be saying.

The good news for Horne is that the $49.5 million of shares she sold in September helped her escape some of the fallout.

She would have been $15 million worse off had she sold these shares on Tuesday.

At the time of the share sale in September, Vita pointed out that Horne remains the company's biggest shareholder with a 16.4 per cent stake.

Her remaining shares have lost around $30 million in value since Friday and are now worth $90 million"

Source and full article:

http://www.smh.com.au/business/cbd/is-maxine-horne-getting-a-little-too-rich-for-business-partner-telstra-20161102-gsg72k.html

[Toulouse - Luzern]

A quick chart

Volumes are fairly clear.

I wonder who bought the shares?


8427

[DarkHorse]

I sold most a couple of days ago. Look undervalued now but obviously greater uncertainty and risk attached.
CEO apparently had to sell for matrimonial settlement - SMHerald either didn't do their homework or didn't let the facts get in the way of a good story.
Another interesting point I've read is that Telstra terms with all resellers are routinely reviewed quarterley; as you say TL current arrangement seems a win-win, so combination of overprotective legal team and recent very negative sentiment around entire telco sector in Australia could have lead to a major overreaction.

[Toulouse - Luzern]

Thanks Dark Horse

Your revelation re Divorce Settlement was unknown to me till now.

Sadly it is potentially a risk factor for many investments, cest la vie.

Now this reason is known (a one off) and there more certainty of US election, Fed and other world & AU macro issues there is a potential for VTG SP to rerate ...

In a reply to the ASX enquiry re share price VTG advised along the lines of, re Telstra negotiations, when there is something finalised it will be reported.

Wait and see ...

[carrera]

I've held since under $1 and was quite annoyed by it, almost wrote my first angry shareholder letter. The new stores were just a brief mention by the chairman, no numbers or real info. just a few stores at the moment so doesn't seem they're going big.

It bugs me that shareholders weren't informed and begs the question why do they need to move into this segment - are there issues with telstra margins. I feel management has kept us in the dark and still no updates to calm things.

There may still be value here, but I'm down to a small holding while I see how it plays out.

[Toulouse - Luzern]

8436Hi Carrera,

Congratulations on a great share selection at $1.00.

Easy to understand your feelings about the information release of the new stores, room for improvement there...

Over the last few days the picture in the price chart has changed.

On 28 October 2016 there were 570,700 shares traded with the close at $4.71.

In the following 5 days a total of 13.6 million shares, on average 2.72 million shares per day traded. The price at close fell from $4.71 at close on 28 October to $3.37 at close on both Wednesday 2 November, and Thursday 3 November.

Yesterday Friday 4 November 2016 close price was up at $3.59 and plus 22 cents and 6.5%.

VWAP was $3.62.

so what happens next?

[carrera]

Good to see it recover definitely a bit of interest, hopefully some good news will come out.

http://moneymag.com.au/hot-stock-vita-group-benefit-telstra-license-changes/

interesting but we're still left guessing

[Joshuatree]

Any news re PIE holdings?I think they had VTG in re 3 of their funds

[stoploss]

Any news re PIE holdings?I think they had VTG in re 3 of their funds
No specific mention in the November update .
Growth was - 3.1% for the month , it obviously has TIL as well .Does say across all funds currently holding 30% cash . Would be surprised if they hadn't taken some money off the table . ... pretty good run from circa 20 cents ...

[Bilbo]

Any news re PIE holdings?I think they had VTG in re 3 of their funds

Compare their fact sheets from their Oct and Nov newsletters where they list the top 5 holding for each fund. From what I can see Vita was top 5 in 2 funds in Oct but not there in Nov. May just be the drop in value though that pushed out of top 5.
https://www.piefunds.co.nz/subscribe/

[Joshuatree]

Cheers Bilbo. looks like TIL has replaced VTG in three funds now.

[Toulouse - Luzern]

VTG has announced commercial terms and revised footprint are now agreed with Telecom.

Stock price rose AUD $0.61to $3.60 at close.
Up 16.5% for the day.

ASX announcement source:
http://www.asx.com.au/asx/statistics/displayAnnouncement.do?display=pdf&idsId=01806257

Opportunity for shareholders to participate in a dial in conference of one hour on Monday.

ASX announcement source:
http://www.asx.com.au/asx/statistics/displayAnnouncement.do?display=pdf&idsId=01806437

[Toulouse - Luzern]

Did anyone listen to the conference call today.

I note shareprice down 41 cents today.

[DarkHorse]

Interesting comments in PIE newsletter out today:

Uncertainty surrounding Vita Group
The best (or worst) example of this volatility was Vita Group
(ASX:VTG). Vita has fallen from a high of AU$5.47 recently
to end the month of November at $2.90 (and has traded
everywhere in between). This is on the back of uncertainty
about its remuneration structure with Telstra (ASX:TLS).
But VTG has worked with TLS for 21 years and learned to
adapt to changes like this in the past; we know this because
it’s what we’ve discovered, having owned VTG for 5 years.
Of late, there are a lot of new investors to the Vita
story, who don’t necessarily have the knowledge and
understanding of the business that we do and hence
they’ve just exited their positions. Often having berated
myself for selling VTG too early, I’m pleased to report that
(while it’s still a meaningful holding) Pie Funds has banked
substantial profits out of VTG. At one stage, we owned
around 13% of the company; at the end of November we
owned less than 2% but now we are back buying again.
This extreme mark-down in price is not a result of a
material earnings downgrade, but of uncertainty about the
relationship with TLS.
With uncertainty may come
opportunity
I believe this presents a tremendous opportunity, but not
one without risk. In the coming months, if we can gain
comfort that VTG will still flourish under the revised TLS
terms and maintain its growth trajectory, then we may look
to once again take a substantial stake in VTG.

[Joshuatree]

Well the uncertainty justified as TLS wants to cherrypick back the best
http://www.smh.com.au/business/reta...ng-stores-from-licensees-20170403-gvcp0g.html (http://www.smh.com.au/business/retail/leak-reveals-telstras-considering-taking-back-high-performing-stores-from-licensees-20170403-gvcp0g.html)

[Joshuatree]

VTG response . Changes have to be made by mutual agreement but if big boy TLS wants be heavy....Download Document 147.33KB (https://hotcopper.com.au/documentdownload?id=uOMxKKzFkiWRTLKhOROKAxjvSDYL4w 67zBL3v%2BFt%2BLFiGug%3D) disclose don't hold atp

[carrera]

i bought a few.. don't see how things can change with the agreement til 2020

[D. Fender]

i bought a few.. don't see how things can change with the agreement til 2020

It'll be interesting to see how Amazon's imminent arrival in Australia will impact companies like VTG, which is essentially a reseller for other brands. Plenty of US retailers have gone out of business this year already.

[carrera]

i haven't considered the amazon thing, vtg may be insulated somewhat assuming most users are looking for some level of customer service. also the amazon rollout won't be instant.

still i'm on a fairly modest holding, a few unknowns yet to play out

[Joshuatree]

i bought a few.. don't see how things can change with the agreement til 2020

Has kept dropping; tough luck there carrera. FWIW The Bull has a buy at these prices

Group revenue increased 8 per cent on last year’s corresponding period to $344.1 million for the 2017 first half. Net profit after tax increased 10 per cent to $21.4 million, while margins also improved. In the second half, management is targeting improving productivity from its retail network and a continuing strong performance of its business channels. Further, VTG will increase its retail presence with five more Telstra stores, taking its licensed store portfolio to 107.

[DarkHorse]

Sure looks cheap. Concerns seem overblown - Telstra's not able to cherry pick stores, and with Vita gaining small margins for smoothly run stores, it's hard to see anything but downside downstream for the less retail savvy Telstra were they to cut them out.

[carrera]

Wondering if some of it is down to tls and tpm maybe taking mobile customers. With tls managing to infuriate customers they really don't want any competition over mobiles. They've offered free data a couple of times over a few of their stuff ups, has made me wary of backing a pretty average product.

i've cleaned up on these in the past so i'm not too worried what happens, never a fan of tls so was always part of the risk for me.

[Toulouse - Luzern]

More news re Telstra ongoing relationship / remuneration.

Conference call today at NZT 3.00PM

Stock fell 33%.

ASX
News release:

http://www.asx.com.au/asx/statistics/displayAnnouncement.do?display=pdf&idsId=01856403

[Joshuatree]

Whoah $1.55 atm. Telstra strong arming ; pulling the strings.Some violent reactions in the mkt atm; savage like QIN.

[DarkHorse]

I got that one wrong! Lesson learned - if a dominant client's coming under pressure cut and run! (//when miners were squeezed mining service cos margins disappeared...). Also probably wrong to assume TLS will act rationally... Surely can't get much cheaper though

[Elles]

Another 30% off today... Any comments on the implications of today's announcement?

[D. Fender]

Another 30% off today... Any comments on the implications of today's announcement?

Potentially existential for VTG. Telstra is cutting VTG's commissions by 10% in each of the next 3 years. VTG will need to cut costs massively, reduce commissions to its sales people (risking staff exits), and possibly close less profitable stores. But the CEO will be OK - she took out close to $100m last year....

[carrera]

i sold the last few that i had, i've only made some rough guesses at a valuation but even trading below fair value, shares with these headwinds will stagnate below what they're worth. there may be new headwinds and i can only see TLS turning the screws and VTG with no bargaining power, it's gone too speccy and i wouldn't buy today.