VTL - Vital Telecommunications (formerly Team Talk)

[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-websit...147/341118.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-websit...147/341118.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 Declared	Gross Dividends	Gross Dividend Total
FY2017	0c +0c	0c + 0c	0c
FY2018	0c +0c	0c + 0c	0c
FY2019	0c + 0c	0c + 0c	0c
FY2020	3.5c + 0c	4.86c + 0c	4.86c
FY2021	2.5c + 0c	3.47c + 0c	3.47c
Total			8.33c

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)?

	HY2020	HY2021	Increment (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