company: vita group · in their small to medium business division, vita group operates under the...

Copyright © Colin Nicholson

Stock Investment Journal

Company: Vita Group

Important I am publishing stock investment journals of stocks I own (or consider owning, but decide against doing so) only to provide examples to teach the way I think about investing. In doing so, I am neither making nor implying any recommendation for anyone to invest in this or any other stock.

Therefore, the stock discussed in this journal may not be a suitable investment for you at this or any other time. I will only be discussing its suitability, or otherwise, for my investment plan.

You need to assess the relevance of anything in this journal to your investment plan, seeking advice from a licensed adviser if you are not able to make such an assessment for yourself.

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Understanding the Business Company Profile

In researching Vita Group one encounters a forest of acronyms and management jargon terms that are generally not explained. Where possible, I have worked out what they are and spelled them out in full below. Researching Vita Group at times is like trying to translate a foreign language.

Scope of Operations

Introduction Vita Group Limited is an Australian electronics and telecommunications retailer, comprising six brands: Fone Zone, One Zero, Next Byte, iConcierge, Vita Networks and Sprout Accessories along with selected Telstra Shops and Telstra Business Centres.

Fone Zone (began 1995) Fone Zone is a specialist communications retailer specializing in mobile phones, accessories and wireless data technologies. The products include mobile phone, accessories, internet services, ring tones and logos, home offices, prepaid phone, Telstra plan, special offers, and fone zone exclusive.

One Zero One Zero provides tailored solutions from the full range of Telstra mobiles, internet, data and fixed line products and services.

Next Byte Next Byte is Australia's Apple Premium Reseller which provides Apple solutions to retail, corporate, and education customers across Australia. These solutions range from recommending the Apple solution, pre and post sales service and engineering support, training of the end users and all backed up by a national service and repair facilities. However, note that the Next Byte stores are to be closed January - February 2016. Other divisions will continue to provide Next Byte products and services to business customers.

iConcierge iConcierge is Apple repair agent. The iConcierge consultants are available to help customers with all service and solution needs from backing up data, installing Wi-Fi at home, upgrading or fixing Mac product, as well as facilitating the repair iPad, iPhone and iPod. The company offers home or services with personalized technology solution.

Vita Networks Vita Networks provides business solution for communication and infrastructure needs as well as auditing, specialised support, video security and audio visual systems. Vita Networks manages the full process including maintenance and on-going technical support.

Sprout Accessories Sprout Accessories, which was Established in 2011 and founded in Brisbane, provides mobile phone accessories, power/charging solutions and protective cases.


Camelon In September 2013, the Company acquired Camelon IT, a specialist provider of information and communications technology (ICT) services.

The above summary is from Stock Doctor and company announcements, while the following is from the 2015 Annual Report:

Vital Group is set up in three divisions, which aim at different markets:

Retail Division

In the retail portfolio, Vita Group operates under the brands of Telstra, Fone Zone and One Zero (for telecommunications) and Next Byte (for computing). Retail is at the heart of the business. It’s where the Vita Group began and it’s where it has driven continued success over the last 20 years. Vita Group have a national footprint of stores with 1,100 customer-facing team members, providing products and services such as mobile technology, broadband and media solutions, computing solutions and accessories.

2015 highlights: Vita Group Retail division opened new Telstra stores as part of Vita’s strategic geographical outlook and closed less profitable stores as part of a long-established practice of reviewing store profitability. Vita’s effort to stay ahead of the game underpinned 24 retail store changes in the past year (openings, closures and re-fits), demonstrating agility and executional excellence as core capabilities.

Vita Group is a custodian of the Telstra retail brand. Telstra’s focus on providing a personalised service is clearly aligned with Vita’s core capabilities and Vita Group continues to add value to Telstra customers. The Vita Group retail team works closely with Telstra to share best practice tips while also collaborating on growth activities, such as new store formats, national broadband network (NBN) growth and new products and services.

Small to Medium Business Division

In their Small to Medium Business division, Vita Group operates under the Telstra brand with 18 Telstra Business Centres across 10 geographical territories and via contact centre operations. Customers in the SMB segment range from single operators through to medium-sized businesses. Vita Group helps them meet their business needs through products and services such as mobile and fixed line solutions, data, unified communications and cloud-based technologies.

The Small to Medium Business division demonstrated great traction in FY15, with revenue up 79% on last year. In the last 12 months the division’s focus has been on transforming the Small to Medium Business division so it will be a significant contributor to the Group in future years.

As with the retail division, the focus in the Small to Medium Business division is to transform their physical footprint, adding scale through Telstra Business Centres.

Note: prior to 2015, Vita Group combined Small and Medium Business and Enterprise (see below) in one division. They have now been divided into two separate divisions.


2015 highlights: Four new Telstra Business Centres were opened, providing coverage of additional geographical areas. The expanding Telstra Business Centre team is well supported by a growing Contact Centre team as well as product specialist teams.

Enterprise Division

In the enterprise market, Vita Group operates under the Vita Enterprise Solutions brand with a team of approximately 40 specialists. Working closely with Telstra’s business teams, Vita Enterprise Solutions provides a range of products and services to some of Australia’s larger businesses and government departments. Vita Enterprise Solutions specialises in managed-mobility solutions, fixed connectivity, data, cloud and collaboration products.

The enterprise channel is in the early days of growth and is focused on building the foundations that will set it up for sustained growth in the longer term. Vita Enterprise Solutions delivered a 60 per cent revenue improvement in 2015, off the back of significant account wins with major Australian clients such as the Royal Society for the Prevention of Cruelty to Animals and a number of public agency clients.

Over the last 12 months, significant investments were made in leadership, sales capability and technical talent to support a broader product offering, which will set up the division for profitability over the coming year. The team grew significantly with a focus on creating a deeper skillset in core products as well as a growth in technical capability, such as solutions architecture and project management.

Along with the growth in people and capability, new product offerings were created in-house and added to the suite, including a mobility managed service product. This product provides an end–to-end solution for large customers with a mobile device fleet and has been exceptionally well received in the market. Some slides from the recent investor presentation assist understanding of the Vita Group business model:

Retail Division Optimisation Driving Growth:

• Improvements in physical portfolio • Continued like-for-like growth • Geographic cluster strategy effective • Investment in people paying off

Small-to-Medium Business Division Building Scale:

• Increase in physical scale • Organic performance improvement • Advocacy up • New Customer Relationship Management software


Enterprise Division Gaining Traction:

• Growth in managed services • Investment in leadership, sales capability, technical domain skills • New Customer Relationship Management software

Activity Cycle

As a basically retail business, I would judge Vita Group as having a short activity cycle.

Industry

Retailing information and telecommunications services

Market Share

No information available

Segmentation Analysis

Vita Group is primarily a retailer:

However, within that, the composition of the business is changing quite rapidly:

Note the increasing dependence on Telstra and the decline to insignificance of Fone Zone, Next Byte and One Zero.


There are two reportable segments for financial statement purposes, being Telecommunications and Computing.

The Telecommunications and Computing segments sell different products and as a result have different risk profiles.

The products sold in the Telecommunications segment comprise mobile phones and related products and services as well as third party voice and data services. The telecommunications segment contributes 90% of revenue and 104% of underlying EBITDA.

The products sold in the Computing segment comprise laptop and desktop computers, associated products and services and service and rental contracts. This segment also sells limited third party voice and data services (specifically in relation to Apple mobile products). The computing segment contributes 10% of revenue and loses 4% of underlying revenue.

The Group operates in Australia and thus the Chief Executive Officer and the board do not consider the business from a geographical perspective.

It is interesting to see how the business has changed in the last two years:

So Vita Group seems to be becoming almost entirely a telecommunications company.

This is also reflected in Assets employed:

Suppliers

There is an obvious large dependence on Telstra (and Apple to the extent that Next Byte continues).

However, it seems the Vita Group is also heavily biased towards services, which comes from their own staff.

They have also referred to introducing Customer Relationship Management software – this may be with a large corporate supplier.

Customers

The retail division activity would seem to be with numerous customers, but the developing small-to-medium business and enterprise divisions may be more concentrated on larger customers. However,


against that guess, the company reported on the level of concentration: Revenues of approximately $153,731,732 (FY14: $107,047,786) are derived from a single external customer. [These revenues are attributed to both segments.]

In other words, one customer is 26% of revenue.

Competitors/Substitutes/Disruptors

I would assess this business as being in a very competitive market that is changing constantly and as such will be prone to all three of these potential threats.

Management

The business is run and controlled by Maxine Horne, who owns 26% of the business. On the one hand, it is very dependent on her abilities, but I like investing in businesses where the management has a significant stake.

Competitive Advantage

Rivalry among Existing Competitors

Must be high.

Bargaining Power of Customers

Probably low in the retail area, though the retail customers could be backed by Telstra.

However, against that, as reported above one single customer accounts for 26% of revenue in the latest year and must therefore have considerable bargaining power. Small-to-medium business and enterprise customers will be fewer and larger, so may have more bargaining power.

Bargaining Power of Suppliers

Telstra and Apple would be very strong.

It is difficult to know other suppliers and their relative strength.

Threat of New Entrants

Must be high, though the Telstra relationship should be protective in the retail division.

Threat of Substitute Products or Services

In the telecommunications area, it must be high and a constant threat.

Note: 2016 flow amounts below are annualised.


Trend of Sales and Earnings

Sales revenue is growing, having tripled in 10 years, though somewhat unevenly.

After a net decline over 8 years, statutory profit has surged in the last two years.

EBITDA growth has been strengthening over the last four years.


After 8 sideways years, operating cash flow has picked up strongly in the last two years very much reflecting the growth in NPAT and EBITDA.

Free cash flow has been impacted by capital expenditure and expansion, however it has strengthened in the last two years.


Financial Risk

Working Capital

No sign of problems here.

Low inventory is held, presumably because of the high services content in the business. Nevertheless, there is no problem here.

Receivable control looks good.


The payables picture is stable.

Days cash conversion is negative because of the high cash or near cash element in the business. The trend is favourable.

Similarly, days working capital is negative, though in this case it is tightening somewhat.


Cost of doing business is edging down, showing good management control.

Debt and Equity

Debt levels are very low and there is no net debt.

Debt is naturally also low on these measures.


Naturally, interest cover is also very strong and strengthening.

Profitability

Level and Trend of Profit Margins

Margins are relatively low, but strengthening.


Shareholder Return

All three returns are quite high. However, the (minimal) use of debt is not contributing to return on equity.

After 8 flat years, earnings and dividends per share have increased strongly over the last two years. Note: 2015 and to a lesser extent 2016 are inclusive of special dividends.


Even with the special dividend, the 2016 dividend payout ratio has been brought back to a reasonable level.

Even the special dividends have been covered by free cash flow.


Summary: Price versus Value and Returns

Vita Group is not outstanding value at the present price (this was done the day I decided to buy), but neither is it very over-valued.

Return on equity is outstanding against my cost of capital (required rate of return).

Grossed up Dividend Yield All Ordinaries index Average 5.90% Vita Group 4.66%

The dividend yield is not high, but is acceptable if the stock continues to grow strongly.

This is a strong picture, but much of the strength has been in the last few years.

RatiosChart Model ValueMarket-based CriteriaAll Ordinaries AveragePrice/Earnings 14.36

Data for Vita GroupMarket Price $2.95

Price/Earnings 17.03

EV/EBITDA 8.5

Margin of Safety - Price versus Value

My Cost of Capital 12.5%Return on Equity 49.3%Recent ROE trend rising

Return on Equity v Cost of Capital

Growth % 10 Years 5 Years

Operating Revenue 215.1% 52.9%Earnings per Share 213.4% 729.2%Return on Equity 100.7% 507.9%Dividends per Share 252.1% 674.7%


Market Liquidity

Vita Group has a liquid market for my account size.

Pulling everything together, I have some reservations about this business, which have to be offset against the things I like about it, which are many. My main reservations are around its lack of a strong competitive advantage and its vulnerability to large suppliers and customers. It is also a business that is changing rapidly, which with good management is OK, but can also mean it can fail very rapidly.

I decided to take a small position (2% of capital and watch how things unfold).

Timing and Risk Management

How I Found This Stock

Vita Group had come up repeatedly on my scans for new 52-week highs from 2012 onward. I have to admit that I mistook it for a different business that I was not interested in and had never given it more than a cursory look. However, more recently, two friends drew my attention to it and I realised my mistake and took a deeper look.

Which Model?

Market LiquidityMarket Capitalisation $m 446Av Buy/sell spread % 0.8Annual Turnover % 73.2Annual Turnover $m 326Av trade/day last year $000 1,306Av trade/day last 20 days $000 1,273Top 20 Ownership % 73.3

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

0.050.060.070.080.090.10

0.20

0.30

0.400.500.600.700.800.901.00

2.00

3.00

4.00EXP MOV AVS 12(0) mnth 2.0497 M @ M 301105-290216 VTG - VITA GROUP LTD > -1% -0.03 to 3.12


Vita Group has a classic value model chart

Chart Analysis

Vita Group is in a strong uptrend from 2012.

Clearly, on my models, there was an initial set-up of a break upward from an accumulation pattern in late 2012. I would ideally have considered purchase then, but as I said above I thought it was a different business that did not have any interest for me. Since then an upward trend has unfolded. My investment plan allows buying into the upward trend, although that is less preferred than buying the breakouts. It will depend on whether the stock is still selling at good value. In this case, I am pushing the envelope somewhat in that it is not great value. However it does not seem to be over-valued for a stock with growth characteristics.

Set Stops

Low price used to base stops $2.32 Soft stop (one minimum bid lower) $2.31 Hard stop (2% below soft stop) $2.26

I situated my stops for my position size calculation a little higher than the January 2016 trough low in error – I misread the chart and had set put my stops on the chart at that point, which would have exposed the error. I meant to base them on the $2.17 low. This is how the stops look on the chart:

JFMAMJ J ASOND2011

J FMAMJ J ASOND2012

J FMAMJ J ASOND2013

J FMAMJ J ASOND2014

J FMAMJ J ASOND2015

J FMAMJ J A SOND2016

0.10

0.20

0.30

0.400.500.600.700.800.901.00

2.00

3.00

4.00EXP MOV AVS 52(0) week 2.0069 W @ W 250311-080316 VTG - VITA GROUP LTD > -1% -0.03 to 3.12


This is where I meant to put my stops:


This is how the correct stops look on the chart:

JFMAMJ J ASOND2011

J FMAMJ J ASOND2012

J FMAMJ J ASOND2013

J FMAMJ J ASOND2014

J FMAMJ J ASOND2015


0.10

0.20

0.30

0.400.500.600.700.800.901.00

2.00

3.00


96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

0.050.060.070.080.090.10

0.20

0.30

0.400.500.600.700.800.901.00

2.00

3.00

4.00EXP MOV AVS 12(0) mnth 2.2144 M @ M 301105-310316 VTG - VITA GROUP LTD > -1% -0.03 to 3.12


Calculate Position Size

I did not discover that the stops were in the wrong place and therefore my position size calculation incorrectly based until I wrote the journal up today (16 March), but I had bought it on 9 March. So, I must live with a slightly higher risk until my investment plan allows me to raise my stops. This was the position size calculation based on the wrongly positioned stops and on which I made the initial purchase:

To invest 2% of capital, I am risking 0.5% of capital back to my hard stop.

JFMAMJ J ASOND2011

J FMAMJ J ASOND2012

J FMAMJ J ASOND2013

J FMAMJ J ASOND2014

J FMAMJ J ASOND2015


0.10

0.20

0.30

0.400.500.600.700.800.901.00

2.00

3.00


Position size 1st trancheTotal Capital 2,510,552

Buy Price 3.010Hard Sell-Stop 2.260Risk 0.750

% Capital to Invest 2Position it buys 16,681

Max % Capital to Risk 0.5Maximum Position 16,737

Position allowed 16,680

% capital at risk this tranche 0.50Cumulative % capital at risk% capital invested 2.00


On 9 March I bought 16.860 shares at $3.01. I had my buy order in the market for two days below the last sale price awaiting a fill.

Managing the Investment

Updated to 22 July 2016 Since I bought Vita Group the company has made presentations to Pie Group in New Zealand and to Morgans, which were superficial and added nothing to the investor presentation after the last results announcement.

However, what has happened is that the share price has advanced very strongly while I was travelling overseas and since my return:

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

0.050.060.070.080.090.10

0.20

0.30

0.400.500.600.700.800.901.00

2.00

3.00

4.005.00EXP MOV AVS 12(0) mnth 3.111

M @ M 301105-290716 VTG - VITA GROUP LTD > -0.2% -0.01 to 4.45

JFMAMJ J ASOND2011

J FMAMJ J ASOND2012

J FMAMJ J ASOND2013

J FMAMJ J ASOND2014

J FMAMJ J ASOND2015


0.10

0.20

0.30

0.400.500.600.700.800.901.00

2.00

3.00

4.005.00EXP MOV AVS 52(0) week 2.9313

W @ W 050811-220716 VTG - VITA GROUP LTD > -0.2% -0.01 to 4.45


The result has been that my stops are now a very long way from the current price. However, during this strong advance, there has not been a significant trough form that would be an obvious place under which to raise my stops.

Looking closely at the price action on the daily chart (which I rarely do):

The two obvious places are under the May low or under the sideways pattern of June and July.

I also looked at a 2c point and figure chart:

This suggests strongly that the most recent trough low in the May-June period is the obvious base for my stops. The equivolume chart (not shown) reinforced this decision. This has been an interesting puzzle and shows the benefit sometimes of looking at different chart types.

JUL AUG SEP OCT NOV DEC2015

JAN FEB MAR APR MAY JUN JUL AUG2016

1.40

1.60

1.80

2.00

3.00

4.00

5.00D @ D 270715-220716 VTG - VITA GROUP LTD > -0.2% -0.01 to 4.45

1.40

1.60

1.802.00

2.20

2.402.60

2.80

3.00

3.20

3.40

3.60

3.80

4.00

4.20

4.40

4.60

S D16

M J

D @ D 270715-220716 VTG - VITA GROUP LTD > -0.2% -0.01 to 4.45 .02x1



This is how the new stops look on the chart:

Vita Group is due to release its full-year earnings report on 31 August 2016.

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

0.050.060.070.080.090.10

0.20

0.30

0.400.500.600.700.800.901.00

2.00

3.00

4.005.00EXP MOV AVS 12(0) mnth 3.111

M @ M 301105-290716 VTG - VITA GROUP LTD > -0.2% -0.01 to 4.45

D2014

J F M A M J J A S O N D2015

J F M A M J J A S2016

1.00

1.20

1.40

1.60

1.80

2.00

3.00

4.00

5.00EXP MOV AVS 52(0) week 2.9313 W @ W 051214-220716 VTG - VITA GROUP LTD > -0.2% -0.01 to 4.45


Updated to sale on 26 August 2016 On 25 August 2016, the price of Vita Group shares spiked sharply lower after recent weakness:

This was a concern at a time leading up to the release of the full your report next week. Companies with bad news often leave their report until the last day, hoping it will be lost from sight in the last minute flood of reports. Vita Group may be innocent here, but there have been no announcements to explain the move.

In purely charting terms, one of my oldest teachers was David Fuller and one of his trend ending signals was a larger than normal correction. This is clearly the case on the daily chart:

Since I use charts to protect capital, the prudent course is to stand aside.

JFMAMJ J ASOND2011

J FMAMJ J ASOND2012

J FMAMJ J ASOND2013

J FMAMJ J ASOND2014

J FMAMJ J ASOND2015


0.10

0.20

0.30

0.400.500.600.700.800.901.00

2.00

3.00

4.005.006.00EXP MOV AVS 52(0) week 3.2616

W @ W 020911-260816 VTG - VITA GROUP LTD > -3.1% -0.15 to 4.65

AUG SEP OCT NOV DEC2015

JAN FEB MAR APR MAY JUN JUL AUG SEP2016

1.40

1.60

1.80

2.00

3.00

4.00

5.00

6.00D @ D 270815-250816 VTG - VITA GROUP LTD > -3.1% -0.15 to 4.65


The other consideration is that Vita Group has now become quite highly priced with a grossed-up dividend yield of 3.12% against a market average of 5.14% and a PE ratio of 25+ times against a market average of 17+ times.

On 26 August 2016 I sold my holding at $4.54.

Evaluation Against Investment Plan Model identification Correctly identified as Value Capital invested 2% Diversification In the same broad sector I invested 2% of capital in TPG Telecom – well

within my guideline Max % capital risked 0.5% - according to rule Liquidity Liquidity was adequate for my position size Buy Signal Uptrending Margin of safety PE ratio a bit high and dividend yield a bit low. I was late buying into the

trend because I had mistaken the stock for one in a sector I don’t like investing in

Position building NA Profit-taking NA Sell-stop Not strictly the plan – based on judgement of chart and situation

Result of investment $Total sale proceeds 75,651less Total purchase cost 50,244Realised capital gain/loss 25,407plus Dividends & Franking Credits 1,373Net total return 26,780% of capital 1.07

company: vita group · in their small to medium business division, vita group operates under the...

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