Vita Group (VTG) COMPANY REPORT. Vitality in question

Transcription

1 18 May 2017 INTERNAL ONLY RECOMMENDATIONS Rating HOLD Risk High Price Target $0.85 Share Price $0.90 SNAPSHOT Monthly Turnover $79.4mn Market Cap $137mn Shares Issued 152.6mn 52-Week High $ Week Low $0.79 Sector Consumer Discretionary BUSINESS DESCRIPTION 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. 12-MONTH PRICE & VOLUME RESEARCH ANALYST Josh Kannourakis jkannourakis@baillieuholst.com.au Nick Caley ncaley@baillieuholst.com.au Nicolas Burgess, CFA nburgess@baillieuholst.com.au Disclosure The author owns no shares in VTG. Vita Group (VTG) COMPANY REPORT Vitality in question Overall: VTG has announced that Telstra has proposed further changes to its remuneration construct. In its release VTG said, From 1 July 2017, Telstra intends to reduce remuneration by approximately 10 per cent. It also announced an intent to reduce remuneration by a further 10 per cent at the start of each of the FY19 and FY20 financial years. VTG now faces a heavily declining earnings profile medium-term (until FY20F). Financial impact: We understand the remuneration changes relate to retail commissions, which we estimate to be ~$160m. A 10% per year impact on this reflects a FY18/19/20 EBITDA impact of ~$16m, $14.4m and $13.0m respectively and a cumulative impact of ~$43.4m. Whilst VTG s historical performance suggests an ability to offset some changes through improving network performance and store growth, at this stage we have chosen to only model negative changes and an offset through a cost out program of $10m over three years, which we clearly hope to be conservative. We have shown changes and revised assumptions in FIG.1. Changes to EPS: We reduce EPS materially over our forecast period. FY18F and FY19F EPS reduce by 28.6% and 52.5% respectively. Management commentary: VTG noted they are well versed in managing remuneration changes. They also commented they are concerned about the extent of these changes and are currently addressing these concerns with Telstra, along with other commercial constructs. TLS noted changes could be partially mitigated through higher volume, improved mix, increased up-sell and cross-sell opportunities. Investment view: Restoring investor confidence in the VTG story will not be easy post recent announcements. We do have some concerns that the flow-on effect of the changes may impact VTG s ability to keep its highperforming sales staff. Valuation becomes difficult given medium-term earnings headwinds (EBITDA -57% from FY17F to FY20F). We expect to gather more clarity on the financial impacts of the changes. However, in the absence of any changes to the proposed remuneration, M&A or capital management initiatives, we see minimal positive catalysts for the stock short-term. HOLD on valuation grounds but reiterate our HIGH risk rating. Our price target discount is maintained, while our revised price target is $0.85 (prev. $1.35). Whilst near-term valuation looks attractive, based on our preliminary FY20 estimates (post remuneration changes), the stock is trading on a less enticing PE of 13.1x, EV/EBITDA of 4.4x and yield of 5% FF. INVESTMENT SUMMARY Year End: 30 June 2015 (A) 2016 (A) 2017 (E) 2018 (E) 2019 (E) Revenue $mn EBITDA $mn EBIT $mn Reported Profit $mn Adjusted Profit $mn EPS (Reported) EPS (Adjusted) EPS Growth % PER (Reported) x PER (Adjusted) x Dividend Yield % Franking % Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 1

2 Financial summary Vita Group (VTG) Analyst: Josh Kanourakis Rating: HOLD Date: 17-May-2017 Price Target: $0.85 Share Price ($A): $0.90 Upside/(Downside): -5% Year End: 30 June Risk: High PROFIT & LOSS (A$mn) FY15A FY16A FY17E FY18E FY19E EARNINGS FY15A FY16A FY17E FY18E FY19E Total Revenue EPS - Basic (Underlying) Total Cash Operating Expenses EPS - Diluted (Underlying) Underlying EBITDA EPS - Reported Depreciation & Amortisation EPS Growth (%) 72% 85% 8% -41% -32% Underlying EBIT DPS (ordinary) Net Interest Expense DPS (including special) Underlying NPBT Franking (%) Income Tax Expense Payout Ratio (%) 64% 61% 65% 65% 65% Underlying NPAT Non-recurring items (incl. ESP) VALUATION FY15A FY16A FY17E FY18E FY19E Reported NPAT P/E (x) BALANCE SHEET (A$mn) FY15A FY16A FY17E FY18E FY19E PEG Ratio Cash Price/ FCF Receivables EV/EBIT (x) Inventories EV/EBITDA (x) Total Current Assets Dividend Yield (%) 8.9% 15.5% 17.9% 10.6% 7.2% Property, Plant & Equipment Dividend Yield (including special) (%) 15.5% 15.5% 17.9% 10.6% 7.2% Deferred Tax Franking credits returned (cps) Intangibles Price/Book (x) Total Non Current Assets GROWTH FY15A FY16A FY17E FY18E FY19E Total Assets Total Rev. Growth (% pcp) 34% 7% -3% -1% -1% Payables Cash Op. Exp. Growth (% pcp) 33% 4% -4% 2% 1% Loans & Borrowings EBITDA Growth (% pcp) 45% 58% 4% -30% -23% Other EBIT Growth (% pcp) 69% 85% 5% -40% -33% Total Current Liabilities NPBT Growth (% pcp) 77% 92% 6% -40% -32% Loans & Borrowings NPAT Growth (% pcp) 76% 92% 8% -41% -32% Other Reported NPAT Growth (% pcp) n/a 39% 7% -41% -32% Total Non Current Liabilities Total Liabilities MARGINS & RETURNS FY15A FY16A FY17E FY18E FY19E Contributed Capital EBITDA Margin (%) 6.5% 9.6% 10.3% 7.3% 5.6% Reserves EBIT Margin (%) 4.6% 7.9% 8.5% 5.1% 3.5% Retained Earnings NPBT Margin (%) 4.3% 7.7% 8.4% 5.1% 3.5% Total Equity ROE (%) 37% 51% 46% 26% 9% CASH FLOW (A$mn) FY15A FY16A FY17E FY18E FY19E ROA (%) 13% 22% 22% 14% 9% Cash at Start Effective Tax Rate (%) 30% 30% 29% 30% 30% EBITDA Working Capital GEARING FY15A FY16A FY17E FY18E FY19E Interest Paid Net Debt (A$mn) Income Tax Paid Net Debt/Equity (%) -5% n/a n/a n/a n/a Other Int. Cover (x) - EBITDA/Net Int Cash Flow From Operating Cash Flow From Investing SEGMENTALS FY15A FY16A FY17E FY18E FY19E Cash Flow From Financing EBITDA Movement In Cash Flow Retail Cash At End Of Period SMB Enterprise Total Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 2

3 Appendix FIG.1: KEY OPERATING ASSUMTPIONS AND ESTIMATED COMMISSION CHANGE IMPACT FY16A FY17F FY18F FY19F FY20F FY21F Retail Stores at start Stores at end Prior assumptions EBITDA per store ($m) LFL EBITDA growth 25% -7% -16% -1% 0% 0% EBITDA New assumptions Commision impact Cummulative impact EBITDA pre cost out Cost out assumption ($10m) Revised EBITDA EBITDA per store ($m) SMB Geo-zones EBITDA per geo-zone ($m) LFL EBITDA growth (per store) 8% 7% 9% 12% 14% 15% EBITDA growth per geo-zone % 42% 24% 32% 12% EBITDA Enterprise Revenue ($m) Revenue growth 4% 10% 10% 10% 10% 10% EBITDA Margin 0% 1% 5% 10% 10% 10% EBITDA ($m) Group EBITDA Source: Baillieu Holst estimates FIG.2: CHANGES TO EARNINGS FY17F FY18F FY19F Previous Revised Change % Previous Revised Change % Previous Revised Change % Revenue % % % Underlying EBITDA % % % Underlying NPAT % % % Underlying EPS % % % Ordinary DPS % % % Target Price % Source: Baillieu Holst estimates Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 3

4 FIG.3: LONG TERM MOMENTUM INDICATORS Source: Iress FIG.4: SHORT TERM MOMENTUM INDICATORS Source: Iress Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 4

5 This document has been prepared and issued by: Baillieu Holst Ltd ABN Australian Financial Service Licence No Participant of ASX Group Participant of NSX Ltd Analysts stock ratings are defined as follows: Buy: The stock s total return is expected to increase by at least percent from the current share price over the next 12 months. Hold: The stock s total return is expected to trade within a range of ±10-15 percent from the current share price over the next 12 months. Sell: The stock s total return is expected to decrease by at least percent from the current share price over the next 12 months. Baillieu Holst Analysts stock ratings distribution as of 3 March 2017: Buy: 66% Hold: 29% Sell: 5% Disclosure of potential interest and disclaimer: Baillieu Holst Ltd (Baillieu Holst) and/or its associates may receive commissions, calculated at normal client rates, from transactions involving securities of the companies mentioned herein and may hold interests in securities of the companies mentioned herein from time to time. Your adviser will earn a commission of up to 55% of any brokerage resulting from any transactions you may undertake as a result of this advice. When we provide advice to you, it is based on the information you have provided to us about your personal circumstances, financial objectives and needs. If you wish to rely on our advice, it is important that you inform us of any changes to your personal investment needs, objectives and financial circumstances. If you do not provide us with the relevant information (including updated information) regarding your investment needs, objectives and financial circumstances, our advice may be based on inaccurate information, and you will need to consider whether the advice is suitable to you given your personal investment needs, objectives and financial circumstances. Please do not hesitate to contact our offices if you need to update your information held with us. Please be assured that we keep your information strictly confidential. No representation, warranty or undertaking is given or made in relation to the accuracy of information contained in this advice, such advice being based solely on public information which has not been verified by Baillieu Holst Ltd. Save for any statutory liability that cannot be excluded, Baillieu Holst Ltd and its employees and agents shall not be liable (whether in negligence or otherwise) for any error or inaccuracy in, or omission from, this advice or any resulting loss suffered by the recipient or any other person. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Baillieu Holst Ltd assumes no obligation to update this advice or correct any inaccuracy which may become apparent after it is given. Baillieu Holst Ltd ABN Australian Financial Service Licence No Participant of ASX Group Participant of NSX Ltd Melbourne (Head Office) Address Level 26, 360 Collins Street Melbourne, VIC 3000 Australia Postal PO Box 48, Collins Street West Melbourne, VIC 8007 Australia Phone Facsimile melbourne@baillieuholst.com.au Adelaide Office Address Ground Floor, 226 Greenhill Road, Eastwood SA 5063 Postal PO Box 171 Fullarton SA 5063 Phone Facsimile adelaide@baillieuholst.com.au Bendigo Office Address Level 1, Forest Street Bendigo, VIC 3550 Postal PO Box 84 Bendigo, VIC 3552 Phone Facsimile bendigo@baillieuholst.com.au Geelong Office Address 16 Aberdeen Street Geelong West Vic 3218 Postal PO Box 364 Geelong Vic 3220 Australia Phone Facsimile geelong@baillieuholst.com.au Gold Coast Office Address Suite 202 Level 2, Eastside Building 6 Waterfront Place, Robina QLD 4226 Phone Facsimile goldcoast@baillieuholst.com.au Newcastle Office Address Level 1, 120 Darby Street Cooks Hill, NSW 2300 Australia Postal PO Box 111 The Junction, NSW 2291 Australia Phone Facsimile newcastle@baillieuholst.com.au Perth Office Address Level 10, 191 St Georges Terrace Perth WA 6000 Australia Postal PO Box 7662, Cloisters Square Perth, WA 6850 Australia Phone Facsimile perth@baillieuholst.com.au Sydney Office Address Level 40, 259 George Street Sydney, NSW 2000 Australia Postal PO Box R1797 Royal Exchange, NSW 1225 Australia Phone Facsimile sydney@baillieuholst.com.au Baillieu Holst Ltd ABN Page 5