vtc from iii11 Aug 2015 20:46
Latest interim results from Vitec (VTC), 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.
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.
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