Perhaps Liquidators Fire Sale values might present a less confused picture of
all things Vital ? ;)
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Perhaps Liquidators Fire Sale values might present a less confused picture of
all things Vital ? ;)
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!
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
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
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 Declared Gross Dividends Gross Dividend Total FY2019 0c + 0c 0c + 0c 0c FY2020 3.5c + 0c 4.86c + 0c 4.86c FY2021 2.5c + 0c 3.47c + 0c 3.47c FY2022 2.0c +0c 2.78c + 0c 2.78c FY2023 0c +0c 0c + 0c 0c Total 11.11c
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
As the company resets its direction, time to update the operating cashflow position.
FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 Operating Free Cashflow $8.241m $7.121m $7.680m $7.102m $13.698m $13.351m $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
Jeez, an announcement from Vital
http://nzx-prod-s7fsd7f98s.s3-websit...103/397772.pdf
Obviously still in existence :)
Hey Snoops ….one of ol favourites Vital have received an offer to buy 50%
Wonder who it is?
https://www.taitcommunications.com/
Would be natural fit?
Who would be stupid enough to want to buy 50% of this?
I remember fondly a meeting held by this company about 8 years ago where the shareholders rejected a very generous takeover offer. That was a bad decision.
Having an ex politician chairing this company for so long was obviously also a bad decision by shareholders.
Lurching from one to the next..