Why we continue to hold Vita Group
Vita Group Limited (ASX: VTG) released an announcement that spooked the market, but was the news really that bad or did the market over-react? In this post we cover the main points of the announcement.
Last week I discussed Woolworths Group (ASX: WOW) with a view to continuing that discussion today. Wednesday’s news on Vita Group Limited (ASX: VTG) however and our subsequent conversations with the CFO and CEO Maxine Horne, validates the postponing of our Woolworths discussion to focus on VTG in a little detail today.
The main points of VTG’s announcement are;
- Telstra Corporation Limited’s (ASX: TLS) changes to the remuneration structure have softened the firm’s economics such that the run rate in EBITDA is lower.
- The firm expects to “retain a sizeable portion of the network, of which it currently owns and runs 107 retail stores…”.
- The firm is suspending its plans to expand its number of stores in the network.
The announcement was poorly worded, particularly as to point 2 above, and we forcefully asked CEO Maxine Horne & CFO Andrew Leyden whether they were deliberately obfuscating.
The market’s reaction reflected a belief that TLS could reduce the size of VTG’s network unilaterally. Maxine and Andrew assured us that this is not the case.
The decline in the EBITDA run rate clearly has a negative impact on the valuation that can be ascribed to the shares of VTG. VTG is still in the process of negotiating a new commission structure with TLS and because of this, a great deal of uncertainty has been incorporated into the current share price (i.e. there is the potential for further declines in the EBITDA run rate to come)
On Wednesday, VTG’s share price fell from roughly $2.25 to around $1.50. Factoring in the possibility of very poor outcomes, our valuation in VTG is well in excess of the current share price. Given such a large differential between our estimate of intrinsic value, we are retaining our investment in VTG, however the lower market capitalisation prevents us from acquiring more.
Montgomery funds hold share in Vita Group.
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.INVEST WITH MONTGOMERY