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Vita Group could benefit from Telstra license changes

telstra

Key statistics: ASX: VTG
Closing share price 02.11.16: $3.70
52-week high: $5.47
52-week low: $1.65
Most recent dividend: 8.21c

Annual dividend yield: 2.01%
Franking: 100%

It’s often the case that when interest rates are at record lows market valuations are at record highs.

After three decades of declining interest rates, it should be no surprise that across most measures, including price-to-earnings, CAPE Shiller P/E, Tobins Q and EV/EBITDA, cheap money has rendered the US and Australian markets expensive.

Under these conditions, value investors need to look for individual opportunities.

The best-quality companies tend to also be expensive and the only time they become cheap is when an event transpires that is temporary in nature but is treated by investors as permanent.

Such an event appears to have impacted the shares of at least one company that we have mentioned in this column previously.

In May we described the investment merits of Vita Group.

The share price at the time was about $3.32. Vita is an Australian telecommunications reseller headed by Maxine Horne.

It currently operates 103 Telstra retail stores and 17 Telstra Business Centres (TBCs), from which virtually all of the company’s earnings are generated.

Vita-run Telstra stores are operated under a master agreement with Telstra.

Since writing about Vita the shares touched $5.36 – a return of 61% in a few months excluding dividends.

But more recently the company has responded to a sharp share price decline and an ASX “speeding ticket” by disclosing that Telstra is seeking to change the terms of its licence agreements, which it is prone to do reasonably regularly.

On its own this news looks grim and suggests Telstra may have thought Horne and Vita were making too much money.

But in the context of wanting to reduce the number of licencees Telstra deals with from 160 to 50, the changes could be an opportunity for Horne and her fellow shareholders to grow the network to many more stores than the 100 that the company was previously believed to be limited to.

Roger Montgomery is the chairman and CIO of Montgomery Investment Management.

Written by Roger Montgomery

Roger Montgomery

Roger Montgomery is founder, chairman and chief investment officer of Montgomery Investment Management. Following a successful career as an analyst and public company chairman, Roger published the first edition of his stock market guide, Value.able, in 2010, becoming an Australian best seller in just 16 weeks. He holds a Bachelor of Commerce and is a senior fellow of the Financial Institute of Australasia.

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