VTL - Vital Telecommunications (formerly Team Talk)

[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	$30.8m	$38.5m
Enterprise Value - Citylink	$44.6m	$52.7m
Equity Proportion of Corporate Costs	($5.7m)	($5.7m)
Combined Enterprise Value	$69.7m	$85.5m
Net Debt for Valuation Purposes	($12.1m)	($12.1m)
Capital Expenditure Adjustment	($7.8m)	($7.8m)
Equity Value	$49.8m	$65.6m
No. Shares on Issue	41.4m	41.4m
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 Revenue	FY2020 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.

	FY2016	FY2017	FY2018	FY2019	FY2020	FY2021f	Σ(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.

	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 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.

	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

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