Vita Group undergoes major turnaround

This week Money asks Skaffold for a hot stock pick - Vita Group (ASX:VTG)

Key statistics:

05/04/16 closing share price: $3.120 52 week high: $3.400 Most recent dividend: 5.76c Annual dividend yield: 2.99% Franking: 100%

When you hear Vita Group you probably think of vitamins and wonder if they are as hot a stock as Blackmores. In actual fact Vita Group has nothing to do with vitamins but a lot to do with mobile phones. Vita Group is a technology retailer but a very different business to JB Hi-Fi or the ill-fated Dick Smith.

Vita generates the majority of its revenue through the operation of Telstra Stores. It manages 100 Telstra-branded retail stores and 21 Telstra Business Centres. Having a large proportion of revenue tied to one partner can be risky, however in March the Master license agreement with Telstra was extended to the end of 2020.

Since 2012 Vita has undergone a major turnaround. In 2012 the business made a loss and the share price was languishing around 25 cents at June 30. By December that year the share price had more than doubled and it is now trading above $3.

Earnings per share (EPS) has grown from 5 cents to 18 cents over the past two years. This has occurred in an environment where the number of stores has actually been declining. The focus has been on growing profitable stores and closing or refitting unprofitable ones. EPS is forecast to continue growing at 12%pa through to 2018 based on the analysis of the three market analysts that cover the stock.

Their ability to generate cash flow is also very strong. Over the past 10 years it has generated sufficient cash to meet all its expenses and investing needs, pay dividends and reduce its net debt.

The dividend payout in 2015 was high on the back of a special dividend. It is forecast to decline a little in 2016 but is still trading on a healthy dividend yield of 4.2% fully franked.

Recently CEO and founder Maxine Horne reduced her stake in the business from 37% to 28% netting $42 million in the process. Whilst that might be a worrying sign, it appears the outlook for the business remains bright. The estimated intrinsic value jumped by about 30% following the release of the half year results and is now about 20% above the share price.

Disclosure: The author's related parties have holdings in VTG. Chris Batchelor CFA

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