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Vita Group Investor Report

Vita Group Investor Report

Here at the insights blog we like to encourage deep thought and facilitate genuine community.  To that end we have been thinking carefully about how we publish Harley’s research report on Vita Group – or should I see ‘tome’.  Its great and we really appreciate Harley’s work.  I think you will too.  We have resolved to produce a pdf for you to download and read at your leisure.  Harley, well done and keep them coming.  We now have a system and process for publishing your reports.  If anyone else would like to share their research with the tens of thousands of unique investors who visit the Insights Blog each week and the hundreds of thousands who visit each month, including CEO,s planners, advisors and fund managers, then feel free to submit your reports to Feedback & Support.


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Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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  1. Correction to last post, I should have said Sprout is turning over $1 million per month not selling 1 million pieces a month. Big difference!

  2. Further to my earlier post I thought readers might be interested to hear that Sprout branded accessories are now selling at approx 1 million units per month with a very large profit margin (around 80% or so) – a nice little business in it’s own right. The next move will be to sell the brand into other phone stores beyond Telstra and Fone Zone so plenty of upside yet. I think this is a great example of design adding real value and bottom line profit to a business.

  3. andrewjmaloney

    Thanks Harley. You are indeed correct. Vita is a leveraged play on some big trends. The difference between your analysis and mine comes down to the risk factor you place on Apple or Telstra doing something that harms vita. If that doesnt happen, its a great play. I just prefer management to be more in control of their destiny.

    And just for everyone’s interest, my company did a national survey over the weekend with 18,000 uni students. We do this every year. I can report that 87% of Austn uni students now have a smart phone. Of these 63% are iPhone – up from 57% last year. that increase surprised me.

    And 32% have a tablet. The tablet number doubled in the last 12 months. My guess is will almost double again in the next 12 months.

    • Thanks for sharing those stats Andrew. As Tablets usage increase and more subscriptions are taken out with Vodafone, Telstra and Optus, will fixed wireless continue to be as popular?

  4. Hi Roger & Harley

    Great report on Vita Group, I’m very interested in the company as I provide graphic design services to them and have created the new Sprout branding currently rolling out across their portfolio of stores. This is a very high margin range and should add considerable profit to the group this year. I’d also add to Harley’s analysis that I’ve also created a new logo for Fone Zone and this and a new store fit out will shortly be rolled out which will lead to some new capital expenditure in the coming year.

    Tim Moore

  5. Jake Van Praag

    Harley, thank you for your very detailed report. It has been a very interesting read and will assist me and others to research this company further. Jake

  6. First thanks to Harley for putting in the time to to write the report and generously sharing it. It got me thinking this morning. Much appreciated

    However, I disagree with the conclusion.

    1. Top level analysis:
    Harley says “VITA has harnessed itself to two of the biggest brands in technology, Telstra and Apple”. Sounds good.

    Putting it another way, the company’s future is not in the hands of management, but instead to two corporate behemoths. Any change in policy by just one of these, and big chunk of the business is threatened.

    2. Telstra business
    VITA says the Telstra store role out is pretty much complete, with a vague reference to more, if Telstra lets them, maybe. So growth in the Telstra business wont come easy – it requires higher sales-per-store. And Harley makes a good case for the “store maturity” process to deliver some more growth over the next two years.

    But what after that? VITA’s future is in others hands – they are pretty much the tail on the Telstra dog. If Telstra goes well, they will too. And… vice versa.

    3. Apple reseller business
    The other half of the story is tied to Apple (25% of revenues). Alarm bells!! Ask anyone who has been an Australian Apple reseller over the past twenty five years what their experience was – it’s a history of horror stories and bankruptcy. Anyone remember the short lived Buzzle group?

    Maybe that was then… Lets look at Apple retail strategy in the last 18 months in Sydney;

    Take the Next Byte store at Bondi Junction? 18 months ago Apple dropped a flagship store 10 metres away. It had to shut.

    Or how about the poor Next Byte store on Broadway opposite Sydney Uni? Last year Apple dropped a company owned store into the Broadway Shopping Centre next door. Still glad to be hitched to Apple?

    But maybe future Next Byte stores will be better placed to avoid Apple’s own expansion plans?

    The report quotes the CEO in an analyst conference about this;
    “one can assume that through Vita’s meetings with Apple management their plans for store locations are unlikely to conflict with Apple itself”

    Phew. Problem solved. Or is it?

    Apple knows exactly what NextByte’s store-by store sales are, and when a Next Byte location becomes highly profitable, boom! they’ll drop another store on top of you. They dont neeed to plan new locations, they have NB to test them for them. Next Byte can either become a free market-tester for Apple Retail, or huddle in marginal locations. Not a great choice.

    And don’t forget JB HiFi selling Apple products at big discounts -so they’ll have to dodge these stores too.

    And there are cheap online offers abounding on top of that – Sadly you cant use smart store locations to dodge the internet.

    OK, there might be a 1-2 year time frame to make some money from VITA as the Telstra stores mature, but by then the market, ever looking forward, might not like the lack of store growth after that. Everything else is in the hands of Telstra and Apple.

    Harley summed it up best with this;

    “Essentially Vita is in a low margin business acting as a sales agent for both Telstra and Apple.” I completely agree.

    PS: Plus any management team that talks about “…optimisation of the income statement” scares me a little.

    • Hi Andrew,

      Thanks for your comments.

      Yes I agree Vita are in the hands of Apple and Telstra, and I am less confident in the relationship with Apple than with Telstra, for reasons you outlined and because of the past relationships with Telstra. A few things reduce this risk for me 1) the payout from Telstra should the contract be cancelled, and how the NPV of these are attractive relative to the current SP. 2) that the entire result so far has been driven by the telecommunications sector ie no contribution from Next Byte. 3) The price – most important. Trading at a discount to the NPV of a downside scenario ie stores from Telstra taken back ASAP and no contribution from Next Byte. The upside, should it occur, should take care of itself.

      That is only my opinion. Thank you very much for your feedback and thoughts.


    • I might also add, in reference to your concerns re growth in two years time, that this is very much an investment in a strong trend that I expect to continue. Hardware (iPhone’s, tablets, etc) has developed and will continue to develop, rapidly. I still do not believe that we have become fully aware of the potential software applications that can be delivered through such technology, but I believe in time we certainly will. And two of the companies that will be responsible for delivering that to consumers are Apple and Telstra. Smartphones are only 50% of all mobiles, I have no doubt that number will reach 100% in the coming years – that is a doubling of the market, with a new phone for each consumer every two years (typically) – that is enough potential growth for me. In fact I am of the belief that ‘smartphones’ is the wrong term – they are computers on which just one of the applications is to make phone calls and texts – but they deliver far more applications than that, and the number of applications will continue to develop exponentially – keys, remote controls for garage doors, GPS, etc, on and on. The term ‘Smartphones’ doesn’t give full credit to what these technologies will eventually be capable of doing. Vita are leveraged to this trend.

  7. Exceptionally written and researched Harley. More value for investors in that report than any analyst report I have seen before in my 12 years as a broker!

  8. What is Harley’s background? There’s no bio on the report or disclosure of any interests/non interest in VITA.

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