Could we see Barbarians at the Gate at Vita Group (ASX:VTG)?

Marc Kennis Marc Kennis, April 21, 2022

What is Vita Group?

Vita Group (ASX: VTG) owns and operates a network of aesthetic clinics through its medical aesthetics brand, Artisan Aesthetic Clinics. The company provides medical-grade skin care treatments and products as well as men’s active and lifestyle apparel.

As of 30 June 2021, the company had 20 clinics across the east coast of Australia. Vita Group was founded in 1995 and is based in Albion, Australia.




The sale of the ICT retail business put the share price on a downtrend

We believe Vita Group’s share price is likely to retrace back to its previous low at 25 cents where it will offer great value for value investors.

But let’s start with Vita Group’s price chart and see what moved the share price since the start of 2021.


Vita Group

Vita Group, Daily Chart in Semi-log Scale (Source: Metastock)


❶ Telstra (ASX: TLS) announced its intention to transition the Telstra branded retail store network to a full corporate ownership model, meaning the end of Vita’s dealer agreement with Telstra on 30 June 2025. (Vita Group Market Update)

❷ Agreement with Telstra for the sale of Vita’s ICT business for $110m cash and an intention to pay a special dividend of 39 to 45 cents. (Sale of Retail ICT and Sprout Business)

❸ Vita Group completes the sale of its retail ICT business to Telstra and pays a 39-cent special dividend. (Dividend/Distribution – VTG)

❹ The market expects poor 1HY22 results due to the impact of COVID-19 lockdowns on Vita’s Artisan clinics.

❺ Buy pressure from Vita Group’s directors and Pinnacle Investment Management Group pushes up the share price. (VTG – Appendix 3Y – Maxine Horne)


Vita Group’s share price was dealing with the hits to the SHAW clinics business (Skin-Health and Wellness) because of COVID-19 lockdowns when the news came out that the company must give up its main ICT retail business segment. This understandably soured sentiment on the stock and pushed down the share price to a low of 25 cents where Vita’s directors and institutional investors found the share price attractive enough to buy shares on the market, pushing up the share price.


Artisan clinics are set to recover, but not VTG’s share price

The ICT retail business was the cash cow of Vita Group, funding the operations of the company’s loss-making SHAW clinics. The SHAW clinics took a further hit from COVID-19 lockdowns, but we expect to see a recovery in the clinics’ revenues to pre-pandemic levels as the COVID-related restrictions have been easing progressively. This potential revenue recovery, however, does not necessarily mean profitability for the business as Vita Group’s SHAW clinics were unable to generate profits prior to the pandemic either.

Therefore, selling the ICT retail business has left little hope of a meaningful recovery in the profitability of Vita Group and its share price in the short term, in our view.


Vita Group’s financials make up for a great takeover target

As of 31 December 2021, Vita Group had a market capitalisation of $55.1m with a book value of $70.7m, including $47.3m in cash and Short-Term Investment and a Total Debt outstanding of $13.8m, which gives VTG an Enterprise Value of only $21.6m. This means that a potential acquirer could theoretically acquire the entire company’s common stock and debt at a cost of only $21.6m at the current share price! However, that doesn’t include a takeover premium, which is usually at least around 30%.

Vita Group’s SHAW clinics’ operations have a considerable gross margin of more than 70% and the reason for the negative EBITDA is the company’s significant overhead costs. A possible acquisition by a larger skincare player will potentially decrease these large overhead costs in acquisition synergies, which could make Vita’s SHAW clinics operations profitable in their current state. Alternatively, Vita Group could fit nicely in a private equity (PE) roll up.

In our view, this is another reason Vita Group is an attractive takeover target.


How to play VTG

The company directors bought more than a million dollars’ worth of shares at 30 cents and lower in March 2022. At 30 cents, the SHAW clinics’ operations are practically valued at less than $10m. Once the buying pressure eases off, we expect the share price to decline under its own weight towards the previous low at 25 cents where it will once again offer a great value for a buy-and-hold strategy with a first target at 40 cents.

The 25-cent level was the low recorded in March and it can be used as a stop loss level, after adjustments for any possible further special dividends paid from the cash received from the sale of the ICT retail business to Telstra. A confirmed break below this level would suggest a long-waiting period is likely before seeing prices converge to value.


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