Vitec (LON:VTC) shares are up 26 per cent since we recommended them in March’s GCI at 790p. Speaking to management after a solid set of interim results it’s pleasing to report that the story remains on track and that there should be more to go for.
The company sells accessories to photographers and broadcasters. These are modestly growing markets which have seen a lot of change during the digital revolution. Vitec is doing well by occupying some good niche positions within them, such as a 55 per cent market share in broadcast camera supports and a 31 per cent share in camera tripods. The strategy is to refine the product portfolio by disposing of lower-return, non-core activities, and use the company’s strong cash flow to support acquisitions of good quality bolt-on businesses.
This is delivering improving margins, which rose to 11.3 per cent during the first half, up from 10.2 per cent a year earlier. Management are targeting the mid-teens and plan to get there through more high-tech content in the sales mix, as well as generating economies in sales and distribution. More product retailed directly through Vitec’s own ecommerce sites helps and while big online sellers like Amazon might demand keen prices, high volumes and the ease of servicing them brings greater efficiencies.
On the demand front, the photographic market is picking up with camera sales starting to recover after a period of decline. This reflects some product innovation with the introduction of compact system cameras and the shift to smartphone usage having worked its way through. Broadcast has had a tougher time in the US but management expect a better second half helped by new product introductions. The Wooden Camera acquisition is outperforming expectations and we should expect further M&A, with debt levels down due to disposal proceeds and good operating cash flow.
CEO Stephen Bird was upbeat when we discussed the numbers and sees good momentum in the business. Given the tough comparatives for broadcast given the fact that 2016 was an Olympics and US election year, that’s very encouraging. Vitec is raising margins and return on capital while simplifying the business, which is a nice combination. At £10 the shares offer decent value on a prospective p/e of 14 and yield 3 per cent.