VTG is an Australian electronics and telecommunications reseller headed by Maxine Horne (deservedly Australia’s wealthiest female executive) comprising six brands; One Zero, Fone Zone, iConcierge, Vita Networks and Sprout Accessories. In addition, it operates 100 Telstra retail stores and 17 Telstra Business Centers (TBC’s) from which virtually all of the company’s earnings are generated. Vita Group-run Telstra stores are operated under a recently renewed Master Agreement (MA) between Telstra Corporation Limited (ASX: TLS) and VTG. The MA limits VTG to 100 retail outlets but before you conclude this will limit growth, read on.
VTG’s history provides a rich vein of learning for its management. The large network of FoneZone stores was an early beneficiary of increasing mobile penetration in Australia, but as smartphones began to dominate in 2007/2008, the chain was unable to secure stock and quickly lost market share. The franchise now contributes virtually no profit to Vita Group.
Having understood Fone Zone’s weakness, management developed a network of TLS retail stores, finding it easier to secure product, particularly iPhones, since the relationship with Apple Inc. (NASDAQ: AAPL) was managed by Telstra itself.
Competitive advantage can be attributed to two sources; First, the Telstra brand affords VTG a range of benefits including an ability to leverage Telstra’s substantial marketing budget ($421m in FY15).
The firm’s second and much harder to replicate competitive advantage is its sales culture. I believe without the right culture your business and your customers have nothing but under Maxine Horne’s passionate leadership, an incredibly successful and repeatable sales and service culture has emerged.
Originally, management expected that at maturity, the Telstra retail stores would generate average EBITDA of $250k p.a. This was soon exceeded, is now over $500k per store, and management expects further growth, boosted by product launches that have a positive impact on profitability. Operating cash flow is exceptional, like-for-like EBITDA growth of >20% has been evident for some years, and through Retail, SMB, and Vita Enterprise Solutions, the company is aiming for $100m of EBITDA compared to $33.5m in HY16.
VTG’s pursuit of growth in the small & medium enterprise market is anticipated to be followed by the enterprise business, neither of which have the limits imposed on the retail business. In our view appears to be value and upside based on even a conservative estimate of future earnings.