Glennon is a shareholder in Vita Group (VTG.ASX) and this week we caught up with CEO Maxine Horne and CFO Andrew Leyden.
Vita operates just over 100 Telstra stores and has recently extended its business into selling Telstra’s product suite into small and large corporations. It is Telstra’s largest partner and has demonstrated a strong history of out performance since taking on the brand. In May this year Telstra made the decision to cut cost by 30% across the board and that included the commissions it pays its partners, including Vita. It has had a material impact on Vita’s earnings, most notably in FY18 and FY20, and certainly tested the relationship. The Telstra management that delivered that edict has already moved on and as recompense for the dramatic nature of the cuts Vita has been granted permission to increase its store numbers to in FY18 and 115 in FY20. We suspect further consolidation will take place amongst Tesltra stores owners, who by nature are typically small, leading to more opportunity for Vita.
Vita has made a significant investment in its Business division and is now working with Telstra to tailor its product suite to suit smaller enterprises. Telstra is under pressure from the NBN and has to develop other parts of its operation to make up lost ground – for example, the soon-to-be launched 5G capability. We suspect this and Telstra’s heavy marketing budget will continue to help Vita’s penetration of the market. The division is profitable.
The company has demonstrated good cost discipline which leads us to believe the impact of Telstra’s cuts will not eliminate growth and the balance sheet is a picture of health (net cash).
Within a couple of months we expect the company to announce a new retail initiative that it has been working on for some years. It has pinpointed a concept that fits with the company’s proven capability in consultative selling and is close to the first of what may be two or three acquisitions. Maxine describes the concept as; an own brand, high margin, growth industry, product pipeline, expanding market, highly fragmented, prestigious but at the same time mass market, global. The idea is to start with six stores and then grow that via acquisition and organically to 60-70 nationally. It will leverage off the group’s services. At this stage we consider this looming announcement as a free option that doesn’t influence our investment decision today.
The stock has recovered from its lows but is still a relatively cheap proposition (PER of 8x) with a strong dividend yield (8.1% fully franked in FY18). It typically pays out 65% of earnings. The spectre of Telstra plays a part in the subdued valuation but we do expect earnings to resume a growth pattern from FY19 – after all Telstra needs its partners to thrive if it is to defend itself against the competition generated by the NBN as they are its conduit to the market.