We certainly are in strange markets where in this Australian reporting season we have seen many “sell the fact” responses to good earnings results. We are also seeing low liquidity, which is leading to order-flow having a far greater impact that it usually does. However, in that combination there is clearly stock specific investment opportunity. Today I want to revisit the investment case for Vitaco (VIT), a recent small cap IPO that is on track to beat prospectus forecasts yet whose share price has been driven to new lows.
For its first result as a listed company VIT reported a stronger than expected result, experiencing strong sales and market share gains across its two key segments. Since the result VIT shares have fallen around 23%, which appears completely out of sync with the fundamentals and outlook for the company.
The clear highlight of the result was the +77% EBIT growth in the vitamins and supplements division. This was driven by strong sales growth and Chinese sales growth growing 233% from a low base vs. pcp.
Perhaps some institutional investors were disappointed that FY16 full year guidance wasn’t upgraded beyond the prospectus forecast, but it wasn’t downgraded either and the stock has traded like it had a profit warning, which it clearly didn’t. If anything, we and others who analyse the stock, believe the guidance is conservative and should be beaten at the full year result in August. We feel the Musashi acquisition and integration is going well and the trends in the existing businesses remain strong.
To be clear, VIT reiterated its FY16 prospectus forecast for revenue growth of 22.6%, EBITDA growth of 15% and NPAT growth of 14.4% to $12.7m. We feel those numbers should be beaten by around +5% at the full year result all things being equal.

Funnily enough, despite the post results share price fall, broker analysts continue to recommend the stock with a median consensus share price target of $2.75 and consensus earnings forecasts marginally above guidance and the prospectus forecasts.
On that basis I tend to believe the share price damage in VIT is more a liquidity event than a fundamental event and that’s why I recommend taking advantage of it. It simply appears to me that one or two institutions have headed for the exit and have had the effect of an elephant in a strawberry patch. This tends to happen in small caps and makes people wonder what is wrong with the stock in question.
In this case I genuinely believe there’s nothing wrong with the company in question other than the share price itself. The share price is a liquidity event and when the selling ends, and I suspect it will end shortly, a recovery will start. What you also find is when the elephant leaves the strawberry patch the recovery can be quite swift as there is no marginal seller of the stock in any real scale.
So let’s just remind ourselves of the VIT investment case. Let’s focus on the fundamentals in what I believe is nothing more than a liquidity event in the share price. Below are VIT’s brands by segment.

Quite simply, we believe VIT is a structural growth at a reasonable price stock (SGARP). Actually, post the share price correction VIT is a structural growth at a VERY reasonable price stock (SGAVRP).
In our forecasts VIT will report strong double-digit growth for many years to come.
We believe there is structural growth in demand for nutritional products, which VIT will capture a disproportionate level of share from as it launches new products and expands its distribution network in Australia and around the world.
We also believe cost savings from in house manufacturing are under-estimated in terms of an earnings growth driver.

Below are our financial forecasts for VIT for the next 3 financial years.

Those forecasts, if delivered over the next few years, place VIT on very undemanding Price to Growth ratios (PEG) of between .52x and .68x. Yes, it’s only a recently listed company and it takes time for investors to get confidence in newly listed companies, but I think those PEG ratios will prove cheap and a re-rating will occur over the months and years ahead as VIT delivers these forecasts.
Roughly 50% of VIT’s earnings come from the Vitamins and Dietary Supplements segment and the other half from Sports Nutrition and Health Food.

After reading the results presentation, all subsequent analyst research and attending a management presentation, I firmly believe VIT’s growth prospects are intact yet the share price doesn’t seem to currently agree.

As I said at the opening, this can happen in small caps when a big seller operates in the market, but therein lies the contrarian opportunity for believers in the medium-term growth story.
In summary, I believe VIT is very well positioned to continue to enjoy continued GROWTH. The domestic business is growing, China sales are growing, the Musashi acquisition will deliver earnings from April this year, while the balance sheet and cash flows are strong which also allows the potential for growth by sensible acquisition.
At current prices I believe VIT will prove cheap over the short, medium and long-term.
The AIM Global High Conviction Fund owns VIT shares.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.