VTG - Vita Group

[Tightwad]

they're opening the sqd stores selling fitness clothing and accessories, was only a brief mention in the chairmanl's address. seems there are only 3 of them at the moment and online. it seems the kind of thing people would go for.. but i'd rather a lot more detail. I've been in since .38c and it's a bit of a slap in the face, reluctant to sell now it's pulled back.

hopefully they're testing the waters and not going crazy with it, but seems an odd sideline and quite competitive. i'm figuring the business is still strong, and this will work or they'll ditch it. just would have preferred to hear some noises about other ventures first.

 

[Newt]

I'm scaling out too.
Bit of info here:
http://www.fool.com.au/2016/10/31/why-the-vita-group-limited-share-price-is-being-hammered-today/

 

[peter2]

Reminds me of a successful grocery retailer who thought they could sell hardware. Wow.

 

[Tightwad]

yeah i'll be taking a bit more off the table, they should really release some more details to calm things down.

 

[Knobby22]

Saw in announcements today that Telstra are renegoiating the deal with them.
I think that has a lot to do with it also. Such is the sharemarket. It's annoying to hand back 1/3 of your profit. Glad I got out, the price is continuing to fall. Maybe get back after it settles down.

 

[kid hustlr]

This was the only shining light left in my portfolio and it has just been crunched.

This mkt seems incredible of late some of these mid cap industrial type shares the minute the mkt has any nerves bang 30% drop

 

[Tightwad]

it's a horrible look from management, back to a small spec holding for me.

 

[skc]

Saw in announcements today that Telstra are renegoiating the deal with them.
I think that has a lot to do with it also.

Yeah... I think it has everything to do with the recent share price movement.

This was the only shining light left in my portfolio and it has just been crunched.

This mkt seems incredible of late some of these mid cap industrial type shares the minute the mkt has any nerves bang 30% drop

Got to put it in a bit of context though... the stock is up from $1.7 12 months ago to a high of $5.80. It's been sold off in the last few sessions but really just going back to the levels it traded since June.

 

[Klogg]

it's a horrible look from management, back to a small spec holding for me.

The risk has always existed... Much like when regulatory risk hit MMS. It was overlooked until it actually threatened to happen.

Given Telstra's potential earnings hole, they may look to plug it by restructuring the agreement... I haven't been able to find anything on the specifics between the VTG/TLS (I assume it's confidential), but it must be profitable in its current state for TLS to maintain it for so long.

Given the agreement exists until 2020, and VTG have so many stores, I think TLS have less of an upper hand than the market believes...

 

[skc]

The risk has always existed... Much like when regulatory risk hit MMS. It was overlooked until it actually threatened to happen.

Given Telstra's potential earnings hole, they may look to plug it by restructuring the agreement... I haven't been able to find anything on the specifics between the VTG/TLS (I assume it's confidential), but it must be profitable in its current state for TLS to maintain it for so long.

Given the agreement exists until 2020, and VTG have so many stores, I think TLS have less of an upper hand than the market believes...

The negotiations should be done confidentially but it was leaked by someone... and hence the share price hammering before the announcement. I'd be look for the stock to reverse for signs that negotiation has worked out for VTG... assuming that if it leaked once it would leak again.

Re: relative power between TLS and VTG. Do you have an idea what % of revenue / profits come from Telstra for VTG? I can't find that information after 10 minutes in the last annual report... is there any meaningful diversification at all? Someone like RCG would be an example of someone who's done much better job a diversification.

There's an analysis framework called Porter's 5 forces re relative power along a supply chain. All else being equal, the relative business between the 2 entities is an important factor. Whilst I haven't found the exact number, I bet you TLS is a bigger part of VTG's business than VTG is for TLS.

Perhaps the relationship is not dis-similar to say CKF having licenses for KFC / Yum! or CCL with licenses to bottle coke. But in TLS's case there seems to be little reason why they can't run their own retail stores.

VTG is trading like the concentration risk is being priced-in but not quite that the market has bet on a negative outcome. Interesting to see how this works out.

 

[Klogg]

The negotiations should be done confidentially but it was leaked by someone... and hence the share price hammering before the announcement. I'd be look for the stock to reverse for signs that negotiation has worked out for VTG... assuming that if it leaked once it would leak again.

Hadn't considered that, good point.

Re: relative power between TLS and VTG. Do you have an idea what % of revenue / profits come from Telstra for VTG? I can't find that information after 10 minutes in the last annual report... is there any meaningful diversification at all? Someone like RCG would be an example of someone who's done much better job a diversification.

Not really sure if this is the best way of doing it, but this line should be correct:
"Revenues of $183,768,546 (FY15:$151,828,811) are derived from a single customer."

That seems to be somewhat in line with the "Fee and commission revenue" line on the P&L:
FY16: $179.7m
FY15: $147.2m

I'd need to go further back to have confidence that correlation stands, but it would make sense.

Also, the definition of Fee and Commission revenue from Note 3:

Fee and commission revenue

Fee and commission revenue from the telecommunications provider is recognised when a customer contracts to an
eligible plan with the telecommunications provider using the Group as an agent for the telecommunications provider.

At a guess, it'd be this revenue + some of the the "Cooperative advertising revenue" listed in Note 3.

VTG is trading like the concentration risk is being priced-in but not quite that the market has bet on a negative outcome. Interesting to see how this works out.

Agreed, not much of a discount on offer from what I currently know, but needs more work on my behalf.

 

[Sway]

The CEO selling 10m shares on 20th Sep (at around $5.15) has failed to raise many eyebrows?

 

[Klogg]

The CEO selling 10m shares on 20th Sep (at around $5.15) has failed to raise many eyebrows?

FWIW - they were sold at $4.95.
I agree it's not a good look, but she still holds ~25m shares. I don't think timing had anything to do with it though - at that point it was trading close to 20* earnings...

Another director sold 71k shares at the time as well.

 

[Sway]

I agree it's not a good look, but she still holds ~25m shares. I don't think timing had anything to do with it though - at that point it was trading close to 20* earnings...

I still had enough confidence to top up during the late August dip, but when the CEO pulled $50m off the table a month later, I got cold feet. Luckily!

 

[skc]

The negotiations should be done confidentially but it was leaked by someone... and hence the share price hammering before the announcement. I'd be look for the stock to reverse for signs that negotiation has worked out for VTG... assuming that if it leaked once it would leak again.

Interesting how this panned out. Last Thursday it went on a surge with some conviction (up >8.5%), and what do you know... an announcement was made the very next day which saw the stock spike another 20% upon resumption.



Today's action was a bit unexpected. I actually dialled into the conference call (anyone can do it as a private investor). The call actually revealed very little information - everything was commercial-in-confidence and will be advised in due course. Nothing about how much margin is reduced, or how many new stores they'd get. The market is left with no choice but to make it's own interpretation. With the stock reversed some 20% south thru the day, the interpretation was not bullish!

The Chairwoman Maxine did mention something to the effect that "We are aware of analyst forecasts for the company and we are aware of our disclosure obligations". But I don't know how much comfort one can take from that. VTG is not a well covered stock, and the proposed changes won't take effect until Feb next year. So the chance of VTG's next set of numbers falling within the range of analyst estimates at the next report is pretty high.

I think the market probably has this one more right than wrong... i.e. still not a bargain. Been decent trading this name but borrow is hard to come by at times.

P.S. The conference call audio quality was soooo terrible. Seriously... in 2016, the age of internet, Siri, Fakebook and the like... and we get a conference call with poorer audio clarity than "One small step for man, one giant step for mankind". AND by the Telco company FFS What's wrong with a webcast so everyone can listen in on their computer rather than a phone for starters?! Were they just trying to be retro?!

 

[Klogg]

The Chairwoman Maxine did mention something to the effect that "We are aware of analyst forecasts for the company and we are aware of our disclosure obligations". But I don't know how much comfort one can take from that. VTG is not a well covered stock, and the proposed changes won't take effect until Feb next year. So the chance of VTG's next set of numbers falling within the range of analyst estimates at the next report is pretty high.

I think the market probably has this one more right than wrong... i.e. still not a bargain. Been decent trading this name but borrow is hard to come by at times.

P.S. The conference call audio quality was soooo terrible. Seriously... in 2016, the age of internet, Siri, Fakebook and the like... and we get a conference call with poorer audio clarity than "One small step for man, one giant step for mankind". AND by the Telco company FFS What's wrong with a webcast so everyone can listen in on their computer rather than a phone for starters?! Were they just trying to be retro?!

That sums it up very well. After the call, your statement (in bold) is very accurate.

The only thing I'd add to this is there were a few analysts keen on asking about their pilot, over and over and over...
One of them even asked if the charges for TWO stores would be charged as capex or opex. Given it's two stores, how much can the damn thing even cost?

 

[Knobby22]

As you say we really are in the dark.
when you don't know what is happening then it's important to look at the price action.
In this case it is not very positive so I am going to continue to stay out and wait.

 

[skc]

As you say we really are in the dark.
when you don't know what is happening then it's important to look at the price action.
In this case it is not very positive so I am going to continue to stay out and wait.

6 months on and a horrid month for VTG... announcement out today that Telstra wants to reduce remuneration by 10% come July, then 10% in FY19 and FY20.

VTG's response? We have absolutely nothing to fall back on... so we will just keep a positive attitude and roll over and cop it. Anyone who thought VTG might have some clout in their discussion with TLS were sadly mistaken, and that probably included the CEO.

I am assuming that VTG can still make money based on these metrics? How much fat was in there in the first place? Or may be TLS's goal is simply to offer them no return, so VTG will just give up on their stores when the master agreement expires in 2020?

Even if they can continue beyond 2020, what's their store footprint going to be like? What business (or share price) can survive a 30% reduction in income AND some uncertain cut to the number of stores?

What a tragic business model...

 

[Ves]

What a tragic business model...

There's lot of these kinds of stories littered through out the history of retail. You gain an exclusive right to do something with someone else's product or brand (ie. open stores and sell it in a certain region or area). Generally that someone granting the rights is an industry elephant, but the region or area in question, is outside of their core operations.

It's fantastic on the way up, the smaller company gets to piggy back the big brand exposure, and sometimes it looks like a kind of a temporary competitive advantage.

But there comes a time when something has to give. You become way too successful, the exclusive rights become more appealing to the owner or someone else. You might lose them.

Alternatively, the brand owner's business hits industry head winds and you're still reaping a decent margin? They'll just reduce the cut you get. It's free money to them. What leverage do you have over them? Not much, I'd have thought.

There's so many potential doomsday scenarios in these types of operations that the tail risk is too hard to ignore.

It's OK to buy them, but make sure you account for sizeable risk in your valuation.

 

[skc]

Here's a piece from Roger Montgomery's team from 2 days ago.

https://rogermontgomery.com/why-we-continue-to-hold-vita-group/