Latest interim results from , an equipment supplier to the global broadcast and photographic markets, initially don't inspire. Profit/earnings are down over 16% and management appears to caution: "Although we see some signs of stabilisation, our markets are still uncertain." Yet the stock is edging up to test 630p in a 2015 range of 600-670p and the day before the results Royal London Asset Management declared it had gone over the 5% stake level.
It's an example of how stocks in firms that are strongly established in their markets, but undergoing some kind(s) of setback, offer genuine investment value. They are getting harder to find now the market is polarising between those affected by deflationary fears, and growth plays on very high ratings.
Risk/reward profile is attractive
Capitalised at £280 million in the FTSE SmallCap index, this is a business of substance - it made a pre-tax profit in a mid-£30 million range last year on over £300 million turnover. Its stock trades on a forward price/earnings (PE) multiple of 11, reducing to 10 times, and the prospective yield is 4%, expected to be covered 2.3 times by earnings. This implies limited downside risk, barring a major economic shock, as the dividend is meaningful and well-supported. As and when earnings improve, it will also help a re-rating as the market would see less need to price the stock modestly (i.e. to exact a 4% yield as compensation for risks). Admittedly, 2015 profit/earnings are expected to be down on 2014, reflecting weak photographic markets. However, there are reasons to be positive about the medium term.
|Year ended 31 Dec||2010||2011||2012||2013||2014||2015||2016|
|IFRS3 pre-tax proft (£m)||21.7||23.8||16.1||20.4||20.1|
|Normalised pre-tax profit (£m)||17.9||26.4||44.7||33.6||37.4||34.3||39.4|
|IFRS3 earnings/share (p)||41.9||33.9||13.4||31.8||29.3|
|Normalised earnings/share (p)||33.2||39.8||75.5||61.8||68.4||54.2||62.4|
|Earnings per share growth (%)||-12||19.8||89.9||-18.2||10.8||-20.8||15.1|
|Price/earnings multiple (x)||9.2||11.6||10.1|
|Cash flow per share (p)||76||60.7||56.3||91.9||79.7|
|Dividend per share (p)||18.5||19.4||21||22.4||23.4||25||26|
|Covered by earnings (x)||1.8||2.2||3.7||2.8||2.9||2.2||2.4|
|Net tangible assets per share (p)||164||126||106||99.6||71.1|
|Source: Company REFS.|
Vitec's long-term context involves a financial hangover from a severe downturn in the broadcast market during 2009, also various ill-considered acquisitions and strategic moves in the early 2000s. Yet a new chief executive since then has restructured the group, disposed of non-core loss-makers, re-focused R&D and moved manufacturing into low-cost countries. The effects are taking time to be recognised in the financial results due to variable markets, yet the chief executive has re-invested his bonus and dividends into the stock over the last two years, which bodes well.
The two equipment divisions are roughly equal in size and selling "everything but the camera" - e.g. tripods, bags, auto prompters, batteries and LED lighting. Vitec dominates both markets, especially broadcast where its share is over 80% in some segments, and tripods used at sports events and photographic trade shows are virtually all Vitec. The only exception is camera bags where it has just a 5% market share versus Lowepro with 30%, but this is growing. While Vitec's photographic side sells mainly to professionals, its distribution channel has been disrupted by a slump in the consumer market as people increasingly use smartphones or buy cameras online - hence industry stock levels have generally reduced.
Vitec has, therefore, done well simply to hold its operating profit in the photographic division over the last five years, via new products and market share gains. Photographic markets are now showing some signs of improvement as the downturn begets a new cycle and online drives new demand. Management is also optimistic about growth from new product sales. Broadcast should benefit from the 2016 Olympics, and possibly European commerce will see more benefit of the monetary stimulus underway: Vitec's first-half European revenue having reduced while America advanced. So it's a mixed bag, albeit favouring upside ahead
Higher costs reflect investment
At first sight the income statement is concerning, with a raft of modest cost increases. However, they appear mainly transitional. Cost of sales is up 5.1%, said due to adverse foreign exchange, the non-repeat of the winter Olympics and World Cup. Also operating expenses are up 2.6% as a result of acquisitions, new product development and other resources to drive future product sales. Further charges relating to acquisitions rose to £2.6 million, and the net finance charge has edged up £1.8 million as long-term debt rose 21% to £91.9 million. Altogether, that clipped interim pre-tax profit from £14.9 million to £12.0 million.
All this significantly reflects Vitec re-positioning as its markets change, where higher-tech items are growing strongly if partially offset by lower sales of those more mature: actions to streamline are estimated to mean one-off cash costs up to £6 million spread over 2015 and 2016 "with an approximate two-year payback". In strategic context, this should help Vitec drive better sales growth relative to sluggish top-line profile in the five-year table. Not to raise hopes prematurely, but Vitec is a cyclical/turnaround play whose re-positioning should be at or near the point where benefits start to flow, while its markets also have scope to improve from a cyclical trough. The stockmarket is anticipatory to some extent, hence a case exists for buying ahead of proof in the results - that is presumably Royal London's thinking.
Remains a sound tuck-away
Despite Vitec's recent challenges, its stock has a decent history with capital growth of 60% over five years since I drew attention to its turnaround potential and 4.5% yield in June 2010 - i.e. total return in the order of 80%. Admittedly, the full benefits of the CEO's efforts are taking time to become manifest, but now looks opportune to consider accumulating. A relatively tight market for retail investors means averaging-into the stock over time would be wise - Royal London's buying is likely a stake-switch between institutions. Similarly, as suggested in 2010, the stock is a useful tuck-away for a SIPP or ISA.
For more information see: vitecgroup.com.
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