VitaGroup Update
We understand many investors have been watching the recent share price action of Vita Group closely. Many have expressed dismay at the slump following ‘news’ that Telstra was renegotiating its terms with its licencees – something that Telstra does every quarter and ‘more than 50 times’ with VTG.
One of our brokers follows the company closely and to save reinventing the wheel and in order to be able to report to you in a timely fashion, here is that broker’s take on today’s update:
“Overall: Vita Group (VTG) have released an update statement regarding changed commercial terms with Telstra. They have noted changed terms but additions to the group’s network of Telstra retail stores (not specified as yet).
“Whilst specific earnings clarity has not been provided we believe:
1) the company would have to provide guidance if earnings expectations were to be materially different from consensus estimates;
2) VTG note they expect to accelerate its physical optimisation program with the number of additional stores to be communicated in due course; and
3) VTG expect to see volume improvement, offset by some margin pressure as a result of the changes. Maintain BUY.
“Whilst today’s statement has not provided definitive earnings clarity, we do believe it should reassure the market that the majority, if not all, of the remuneration construct changes may be offset from a combination of net store additions and other favourable remuneration changes. Whilst further investigation is necessary we believe at current levels the risk-reward suggests a strong investment proposition. Based on our estimates the stock is trading on a FY17F PE of 12.6x with 16% EPS growth.”
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.
Kelvin Ng
:
Hi Roger, I want to delve a bit more into VTG’s moat. Is it its contract with Telstra, or its stores, or its brand? Or is it Maxine Horne’s retail methods and processes which can potentially be transferred to other retail sectors?
Thanks very much.
Kelvin
Roger Montgomery
:
Retailing can arguably have deep, but usually not wide, moats. Typically the competitive advantage of a retailer is quickly mimicked but when multiple systems and process are combined (with no single individual being privy to all of them) with the right culture, copying is much harder and outsized returns can be sustained for longer. VTG enjoys the benefits of customer loyalty through TLS’s retail branding, positioning and loyalty programs (plans); information systems, unique merchandise (network and bundles), vendor relations (TLS’s best distributor) and customer service.
Mark
:
Hi Roger
Appreciate your commentary here.
Forgive me if this is obvious, but is the changing remuneration structure with Telstra only potentially impactful to the ‘commission’ part of VIta’s revenue?
My understanding this was 27% of total business revenue LY. If the market is reacting to ‘possible’ compression in commission that forms only 27% of total Rev, and this has driven the SP down by over 40%, if I’m understanding correctly, this seems like a grossly gross overreaction?
Being a retailer myself there’s a whole swag of levers to pull to affect net margin (volume, conversion, optimising staff hours etc). Vita seem well and truly capable of managing these for, at minimum, a net even margin impact, whilst continuing to grow too line.
Thanks
Roger Montgomery
:
We’re on the same page Mark.
Greg Bradford
:
Aren’t now diversifying away from their core competencies in selling men’s clothing (SQD Athletica) and IT services? A mature business model without a moat.
Kelvin Ng
:
Hi Greg, I tend to agree. At today’s price VTG is probably approaching deep value. But generally, it seems to me that VTG’s moat consists mainly of Maxine Horne’s drive, discipline and charisma. While all of that is very admirable, it makes for a weak and unstable moat.
Kelvin
Roger Montgomery
:
I am most interested in the tendency for these negative views to only be voiced AFTER a share price decline.
simon
:
hi Roger
I know you like VOCUS but after todays terrible performance, do you cut losses?
– its just another growth stock thats been killed, down 50% in 3 months
any thoughts on VOC looking forward ?
Roger Montgomery
:
We don’t own Vocus Simon.
Matthew Wilkinson
:
Hi Roger, Have your thoughts changed following the conference call with management?
Roger Montgomery
:
Not at this stage. The conference call offered very little new information and in fact the comments about the terms of the contracts for new stores being similar if not the same in nature to their original 100 stores is encouraging. VTG confirmed there’ll be some margin loss but product/service mix shift and cross selling, as well new stores will fill the gap.
Greg Scott
:
Hmm. Having listened to the company’s phone in today, ( as did you I know), it seems that even management are unsure of the financial impact at this stage.
I guess the share price is taking a hammering due to this increased uncertainty. The question, as always, is whether the market has overreacted to the increased risk.
However, one thing seems certain. Vita has little pricing power and seems at the mercy of a much bigger company. Not an attribute of an extraordinary business. Maybe one for the traders? Or maybe I am not fully understanding the business dynamics?
Roger Montgomery
:
That’s right Greg, They cannot tell you how the product mix shift combined with the new cross selling by staff required will turn out. The market has however assumed it will be negative. Forced to choose between A) the interpretation by the market and 2) Maxine and her systems and teams, I’d back Maxine.
Peter Briggs
:
Interesting CEO had insired $10 mill share sale in September at $5 per share while talking up the company and that on the afternoon prior to share drop there was a movement down and on the day prior to 15% climb there was a movement up. Some commentators have made comments about “confidentiality”. ASX response appears to be simple question answer with the company. Does anyone do any serious investigation in these circumstances. Whether or not anything untoward was happening is impossible to tell as a shareholder however it does little to instil confidence.
Kelvin Ng
:
Hi Roger, that’s looking good for VTG. But just one question out of curiosity, why would VTG diversify into other lines of business if there is still a long runway of growth in its core telecoms business to reinvest its capital? I still don’t understand that.
Thanks very much.
Kelvin
Roger Montgomery
:
Hi Kelvin, reading of the history of the company reveals they have a long history of side projects which are attempt to leverage their core competencies. Vita have been involved in a number of ventures such as Sprout (mobile phone accessories), iConcierge, Twelp Tribe (twitter based help service)and Finga (an application developed to help streamline and manage small businesses). Management however have made relatively large mistakes before and survived. You might recall the purchase of NextByte in 2007 for example. As an aside, investors should recall that back in 2009 the commission structure was changed by Telstra from trailing commissions to higher upfront payments. As a result Telstra agreed to pay Vita $23.6m over an 18 month period in lieu of Vita’s then current future trailing commission entitlements.
Kelvin Ng
:
Thanks very much Roger.