VTG - Vita Group

[icemanmelb]

SKC,
Its hard to not talk up one's book to prove that they are indeed correct in their valuation. What's important is that management can communicate with shareholders in terms of future plans. Fluff like positive attitude should be left to motivators such as Anthony Robbins.

Ice

 

[Rainman]

10% reduction in commissions and fees this year and again for the next 2 years. If that happens (and assume that it will), what is VTG's sustainable earnings power? I estimated it elsewhere at around $17 million in EBITDA. Give VTG a 10 x multiple and you're look at an EV of around $170 million which works out to be around $1.15 a share.

But I readily admit this could be optimistic because there is a good chance that the market has woken up now and will never again accord VTG an EV/EBITDA multiple of 10 which is about standard for the retail industry.

 

[skc]

10% reduction in commissions and fees this year and again for the next 2 years. If that happens (and assume that it will), what is VTG's sustainable earnings power? I estimated it elsewhere at around $17 million in EBITDA. Give VTG a 10 x multiple and you're look at an EV of around $170 million which works out to be around $1.15 a share.

But I readily admit this could be optimistic because there is a good chance that the market has woken up now and will never again accord VTG an EV/EBITDA multiple of 10 which is about standard for the retail industry.

There isn't quite enough detail, but a crude first cut is something like this.

At half year VTG earned $103m fee and commission. Take a 30% cut on that which drops straight to the bottom line you basically get $0 PBT.

There will be potential areas to offset these... like higher cross sell (hard work with a less incentivised team) and lower costs. So I have $10m NPAT as a finger-in-the-air, best case guess. Compare that to the current market cap of $138m... it's not an obvious bargain.

Then you have got the looming footprint change... and the fact that the company might waste more capital and expand into grossly overpriced men's active wear.

Hard to make an investment case without wildly optimistic assumptions and outcome even at current prices.

P.S. The VTG logo has... believe it or not... bubbles.

 

[Ves]

At half year VTG earned $103m fee and commission. Take a 30% cut on that which drops straight to the bottom line you basically get $0 PBT.

If it's 10% at the start of every year is it a 27.1% cut in total?

I guess it only makes a few million bucks in difference, but every little bit counts...

 

[skc]

If it's 10% at the start of every year is it a 27.1% cut in total?

I guess it only makes a few million bucks in difference, but every little bit counts...

Yes but the back of napkin doesn't fit so many digits for calculations.

Either way, not really something you can hang your hat on....

 

[VSntchr]

SP on a tear the last few sessions.
A 6m unit cross trade at 85c seems to have sparked it. Then an announcement today on a 100k director buy at 87c.

 

[Rainman]

Lot of insider buying of this name at sub $1. Simpson, Osborne and Wilson are all directors and all have topped up their super and direct accounts via on-market purchases.

A sign that negotiations with Telstra are not as bad as the market perceives? Or merely insiders averaging down? Only time will tell.

 

[skc]

Lot of insider buying of this name at sub $1. Simpson, Osborne and Wilson are all directors and all have topped up their super and direct accounts via on-market purchases.

A sign that negotiations with Telstra are not as bad as the market perceives? Or merely insiders averaging down? Only time will tell.

There are 2 types of directors buying.

A. Directors see a real bargain and buy the stock.
B. Directors see share price taking big hits and buy the stock in hope of propping up the share price.

When multiple directors buy on-market at the same time and release the Appendix 3Y as soon as they could, I would guess the intent is more B than A. Doesn't mean the share price won't react, but implying too much into how the company is traveling fundamentally would simply be.... too much.

For the record, 3 directors bought recently: Osborne ~$60k, Simpson ~$18k, Wilson $87k. I'd be a lot more interested if Maxine buys a few $m on market.... that would be telling me something.

 

[Rainman]

There are 2 types of directors buying.

A. Directors see a real bargain and buy the stock.
B. Directors see share price taking big hits and buy the stock in hope of propping up the share price.

When multiple directors buy on-market at the same time and release the Appendix 3Y as soon as they could, I would guess the intent is more B than A. Doesn't mean the share price won't react, but implying too much into how the company is traveling fundamentally would simply be.... too much.

For the record, 3 directors bought recently: Osborne ~$60k, Simpson ~$18k, Wilson $87k. I'd be a lot more interested if Maxine buys a few $m on market.... that would be telling me something.

As I said, only time will tell.

 

[Ves]

Director buying/selling is an interesting topic.

I've never really taken either action because a director has done it first.

With relation to taking cues from directors even if you could trust their 'reputation' there's no visibility (unless they're willing to disclose) on all of the important stuff such as their valuation basis, their expected return hurdle, their time frame, their reasons etc. Just because they're a director doesn't mean they're an expert investor. It could be the exact opposite.

I'd be way more comfortable with coming up with my own thesis for buying/selling and holding myself accountable to this rather than reacting to what someone else is doing.

 

[skc]

I've never really taken either action because a director has done it first.

With relation to taking cues from directors even if you could trust their 'reputation' there's no visibility (unless they're willing to disclose) on all of the important stuff such as their valuation basis, their expected return hurdle, their time frame, their reasons etc. Just because they're a director doesn't mean they're an expert investor. It could be the exact opposite.

The ASX listing rule states that director trading must be disclosed for corporate governance reasons. And the reason that it is an important corporate governance issue is because all directors are insiders. If they are not insiders they are by definition not performing their director duties.

So director trading can be important, not because they may or may not be expert investors, but because they are insiders. Large director sales do matter, based on piece of research by Wilson in Jan this year which looked at Director activities in 2016.

I'd be way more comfortable with coming up with my own thesis for buying/selling and holding myself accountable to this rather than reacting to what someone else is doing.

Absolutely... It certainly isn't a sufficient condition for changing your investment, but it can provide further information.

 

[Rainman]

The ASX listing rule states that director trading must be disclosed for corporate governance reasons. And the reason that it is an important corporate governance issue is because all directors are insiders. If they are not insiders they are by definition not performing their director duties.

So director trading can be important, not because they may or may not be expert investors, but because they are insiders. Large director sales do matter, based on piece of research by Wilson in Jan this year which looked at Director activities in 2016.

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Absolutely... It certainly isn't a sufficient condition for changing your investment, but it can provide further information.

Agree. Insider buying or selling is one factor among many to look at in circumstances like the present when a company's stock has undergone a large decline and the market is still digesting the news. Market prices generally tend to overshoot on the downside and the upside following significant events like that which has hit VTG.

That said, the purchases by these directors at 0.90 cents per share or thereabouts so far appears to be proving fairly astute.

 

[Value Hunter]

Roger Montgomery (and his team who parrot his views) is a muppet who is always late to the party and backwards looking with his analysis and most of the time his analysis is incredibly flawed and leaves out vital risks. He and his team have no real conception of how to analyze businesses or business risk. He f***ed up many times. He was blatantly wrong about Matrix composites and Engineering, wrong about The Reject Shop, wrong about Vocus, wrong about Vita Group and so many others. He always tries to sound so smart and so assured with his analysis. He always makes high risk business that are having their moment in the sun sound low risk and dependable. Everyone makes mistakes from time to time but his arrogance and smugness really irks me.

Not too mention previously their software Skaffold gave Vita Group their highest rating of "A1" which mislead naive subscribers into thinking it was a top quality low risk business when it was plainly speculative and had a weak/risky business model all along. The team at Montgomery Investment Management really are a bunch of snake oil salesmen.

 

[Value Hunter]

I know this rant is a bit of topic but look at the marketing material on the page of one of their funds (Montaka Global Fund)

"In addition to the diversification benefits of international companies and foreign currencies, should the market suddenly drop by a hypothetical 10 per cent, the above example produces an expected decline of approximately four per cent.

As a result of this decreased net market exposure, Montaka carries significantly less market risk compared to many of its typical equity fund peers. In fact, some investors might view Montaka as a substitute for fixed income bonds, rather than as an equity investment."

They are trying to subtly imply that their global long short fund has the same risk profile as a bond fund. That is absolutely absurd.

 

[skc]

Roger Montgomery (and his team who parrot his views) is a muppet who is always late to the party and backwards looking with his analysis and most of the time his analysis is incredibly flawed and leaves out vital risks. He and his team have no real conception of how to analyze businesses or business risk. He f***ed up many times. He was blatantly wrong about Matrix composites and Engineering, wrong about The Reject Shop, wrong about Vocus, wrong about Vita Group and so many others. He always tries to sound so smart and so assured with his analysis. He always makes high risk business that are having their moment in the sun sound low risk and dependable. Everyone makes mistakes from time to time but his arrogance and smugness really irks me.

Not too mention previously their software Skaffold gave Vita Group their highest rating of "A1" which mislead naive subscribers into thinking it was a top quality low risk business when it was plainly speculative and had a weak/risky business model all along. The team at Montgomery Investment Management really are a bunch of snake oil salesmen.

ISD, LYC and ORL are three other names that come to mind. He has a formula that simply extrapolates the present without taking into account that the real world is dynamic and full of risks.

It's perfectly OK to trade/invest in business/industry trend and/or momentum... it's dangerously wrong to sell that like he's Buffet-lite.

Someone should run an analysis of all his A1 stocks over the years and see if there's an edge on the short side....

 

[Value Hunter]

Exactly. He really misleads people into thinking that they are taking less risk then they actually are. Nothing wrong with taking risks but do not try and sell high risk investments to naive investors as being low risk.

 

[Rainman]

I see Marine Horne has added to her position in VTG recently. She now controls 18.7% of the voting stock - up from 17%. Another director, Watts, also added.

That's five insider buys in the last week.

 

[Rainman]

... He really misleads people into thinking that they are taking less risk then they actually are...

Montgomery's biggest failing is that he blabs too much about his positions. And because he has a large retail following, the your-money-your-call crowd often buy his positions and get burnt when they tank - like they did with VTG, HSO, ISD. These are all stocks that Montgomery has talked about regularly as being top quality "A1" businesses. And a case can be made that they are, but not at 20, 25 or 30 times forward earnings.

I have actually discussed with Montgomery his apparent willingness to "pay up" for businesses that he perceives as being of quality. Montgomery and many other managers have really been influenced by Buffett in this regard after Buffett was himself influenced by Charlie Munger. Summed up, this investment philosophy is: It is far better to buy a wonderful business at a fair price than to buy a fair business at a wonderful price.

While this idea justifies "paying up" for a quality business, it can just as easily lead to overpaying for quality. But usually the overpaying only becomes apparent later when the business does not perform as well as it was priced to perform, resulting in the stock price tanking.

I am not sure what Montgomery paid for VTG but it is certainly higher than where it is trading today - a lot higher, I suspect. And yet, given VTG's risky business model, it is only at or around today's price (and probably lower) that I think any serious case can be made for it offering an excess of value over price.

 

[skc]

I see Marine Horne has added to her position in VTG recently. She now controls 18.7% of the voting stock - up from 17%. Another director, Watts, also added.

That's five insider buys in the last week.

Yes Maxine's purchase definitely pipped some interest.

Montgomery's biggest failing is that he blabs too much about his positions. And because he has a large retail following, the your-money-your-call crowd often buy his positions and get burnt when they tank - like they did with VTG, HSO, ISD. These are all stocks that Montgomery has talked about regularly as being top quality "A1" businesses. And a case can be made that they are, but not at 20, 25 or 30 times forward earnings.

A1 business is an A1 business, whether it trades at 5x, 30x or is unlisted. Share price doesn't come into the analysis of whether a business is A1. The price you pay affects the investment returns for the individual investor, but it doesn't affect the company's internal return.

Here's a list of A1 businesses back in Sept 2011... most of these names are not A1 businesses regardless of the share price or market multiple.

https://rogermontgomery.com/wp-cont...ompares-to-Goldman-Sachs-Top-10-Sept-2011.jpg

Indeed, the average return of these 10 stocks was -21% between Jan 2011 to yesterday, including dividends. The change in EPS between FY11 and FY16 for this basket was -51%. I challenge anyone to do worse with 10 randomly selected ASX300 stock.

 

[Value Hunter]

Skc that table should be mandatory viewing for all subscribers to his Skaffold service and for investors in his funds. From an earnings perspective even the best performer on the list, JB Hi-Fi only managed to increase earnings by around 4.5% per annum compound.