VTL - Vital Telecommunications (formerly Team Talk)

[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 Declared	Gross Dividends	Gross Dividend Total
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
FY2022	2.0c +0c	2.78c + 0c	2.78c
Total			11.11c

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

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

[Snoopy]

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

	FY2016	FY2017	FY2018	FY2019	FY2020	FY2021
Operating Free Cashflow	$8.241m	$7.121m	$7.680m	$7.102m	$13.698m	$13.351m

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.

	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

[winner69]

Jeez, an announcement from Vital

http://nzx-prod-s7fsd7f98s.s3-websit...103/397772.pdf

Obviously still in existence