Fool's Eye View

[ March 10, 2000 ]

Revitalising Vitec

By Stuart Watson (TMFTiger)

Great Titchfield Street, London -- There are a number of companies on the stock market that appear to be good investments, having many attractive qualities, but their share prices seem to be permanently stuck in the doldrums. One such unloved company is Vitec Group (LSE: VTC), which makes a variety of equipment for the TV, photographic and retail markets. It has a dominant market position in most areas in which it operates yet its share price, even after a fillip from today's results announcement, is the same it was over six years ago. The company seems to find it hard to drum up investor interest, languishing just outside the FTSE 250. Even its discussion board on this site got deactivated due to a lack of posts.

The problem with Vitec is that, although it has a dominant market position, it finds sales growth hard to come by. Although its sales figures have increased over the last few years, in the main part this has been due to acquisitions. It is hard to calculate the underlying annual rate of growth over the last few years but it is probably no more than 5%. Investors are looking for a bit more spice these days. Because Vitec already dominates its markets it is also finding it hard to increase its profit margins. In fact profits actually fell 5% last year due to weak demand in the US.

The table below shows Vitec's progress over the last few years.

Figures in £m             1996    1997    1998    1999
Sales                      134     145     160     171
Operating profit          33.7    38.4    40.0    38.2
Operating margin           25%     26%     25%     22%

Of the £37m increase in sales over this period, acquisitions have accounted for over half at £20m. But there are many bright spots as well. After the fall off in demand earlier in the year, Vitec saw a turnaround that continued into January and February. The company is also continuing to produce good cash flow, as it has done for many a year. The dividend was increased by 15% for the sixth year in a row, although the shares still only have a dividend yield of just over 3%. Vitec could probably triple its dividend payout and still be left with enough cash to fund its ongoing business.

Last year the company also bought back a lot of its shares in order to make better use of the cash piling up in its bank account. It spent over £50m buying back 16.5% of its shares, unfortunately at almost 15% higher than the current price. The group now has debt of £35m, after a couple of small acquisitions since the year end. However this level of debt still looks pretty comfortable, given the amount of cash that the group generates.

Partly due to the share buyback and partly due to organic growth, the group's earnings per share figures are expected to increase over the next couple of years. Vitec is currently valued on about nine time forecast profits for 2000 and just over eight times for the year after. That doesn't look very expensive, but then most other companies in the engineering sector, where Vitec plies its trade, are on similar valuations.

But could changes be afoot? The group's chief executive, Malcolm Baggott, is retiring after ten years at the helm. He is to be replaced by Philip Cushing, formerly the chief executive of Inchcape (LSE: INCH) although, rather disappointingly, he is no relation to the horror film star; not that I'm aware of, anyway. Inchcape underwent a significant restructuring of its operations under Cushing. Could he be looking for a repeat performance with Vitec, albeit on a much smaller scale?

The company does have a number of divisions, although they are rather less diverse than the mixed bag that was Inchcape. If anything, Vitec appears to be using the cash generated by its mature operations to spread its wings even further, such as the relatively new communications and audio division. However, profits from this part of the business are still relatively small. Perhaps another option would be to take the group back into private hands. It has all the right characteristics, namely solid cash flow and a few major shareholders, which is just what the typical venture capitalist is looking for. But it would be sad to see yet another company fall under the hammer due to a lack of investor interest.

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