Initiating coverage on Vita Group

About the author:

Author name:

By Scott Murdoch

Job title:

Senior Analyst

Date posted:

19 September 2013, 7:57 AM

Sectors Covered:

Diversified Financials, Professional Services

Vita Group (VTG) is a national telecommunications and technology retailer, operating Australia's largest network of Telstra licensed stores. VTG also holds an Apple Premium Reseller agreement via its Next Byte brand.

We believe Vita Group's strategic alliance with industry leading brands, solid balance sheet and cash flow, and emerging SME opportunities position the group well for future earnings growth.

Bull points

• After a concentrated store roll-out, VTG is now well positioned to grow earnings through store maturity ramp-up.
• Optimisation of the store network.
• Turning around the performance of the Next Byte business.
• Opportunities in the SME segment via its Telstra Business Centres and the recent ICT acquisition of Camelon IT.
• The business has a strong balance sheet and operating cash flow to invest in growth and pay solid dividends.

Bear points

• The under-performance of the Next Byte brand poses some risk if not turned around (goodwill impairment possible).
• VTG is a licensee for Telstra and Apple and therefore, to an extent, has less control of its destiny.
• VTG holds a Master License agreement with Telstra which expires in 2018 - some risk of changes to terms or non-renewal exists.
• VTG's ICT growth avenue is unknown at this stage.

Forecasts

We forecast 49% NPAT growth in FY14. Over the next three years, we forecast 10% EBITDA CAGR and 26% NPAT CAGR.

FY14 metrics

• PE 11.1x
• EV/EBIT 6.8x
• Yield 5.8% fully franked

Recommendation

Buy. We believe VTG's growth profile is attractive compared to the current valuation of 11.1x PE and 5.9% yield.

If you are interested in Vita Group (VTG), please contact your nearest Morgans office.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.