Vitaco Holdings Ltd (ASX: VIT) listed on the ASX in September last year at $2.10 and recently garnered a position in the S&P/ASX 300 Index (ASX: XKO), as part of S&P's quarterly rebalance. With market commentators likening its prospects to that of market darling Blackmores Limited (ASX: BKL), the recent pullback in share price provides a good opportunity to reassess Vitaco's long-term outlook.
The new kid on the block
About Vitaco
Vitaco is unlikely to be a household name, given it acts as a holding company and does not produce anything using its own name. Nonetheless, the group owns a number of well-established brands such as Nutra-Life, Wagner, Aussie Bodies and Musashi, most of which are market leaders by sales revenue in their respective segments throughout Australia and New Zealand.
Vitaco's brand diversification allows it to operate in the vitamins and dietary supplements, sports nutrition and health and wellness categories, commanding a vertically integrated business model in a $570 billion industry (according to its prospectus released last year).
Financials
With a market capitalisation of approximately $240 million, the company currently trades on a price to earnings (PE) multiple of about 10, down from its proforma forecast PE of 12.1.
Management provided a half-year trading update in February, reporting record net revenue of $110.5 million for the half, up 37.6% on prior corresponding period. Pro-forma earnings (EBITDA) were up 10.8% in line with forecasts to $10.4 million, and sales to China increased a massive 233% (off a low base), indicating its growth strategy is on track.
Importantly, management confirmed that the group is on track to meet full year pro forma forecasts of $12.7 million net profit after tax, with its second half of 2016 expected to perform stronger than the first. This makes the stock a compelling investment at current prices.
Beware the private equity seller
One thing to remain cognisant about is that Vitaco has been listed for just over six months. Whilst it indeed provided an upbeat first half to 2016 in February, any purchase of a recent IPO stock should come with the obvious question – why is the vendor selling?
Generally, most prospectuses include generic reasons such as "to provide the Vitaco Group with access to a strengthened balance sheet and to improve capital management flexibility and capacity to fund future growth initiatives". However, these reasons should be met with some scepticism given vendors won't sell unless they think they're getting a fair price. This is even more important when dealing with private equity sellers like Next Capital, an Australian private equity firm which sold down its stake in Vitaco (from 70.7% to 15.3%) in the float.
Recent examples like Dick Smith Holdings Limited (ASX: DSH) and Spotless Group Holdings Ltd (ASX: SPO) show that private equity IPOs can lead to skeletons being revealed down the track, immediately destroying shareholder wealth. Accordingly, the fact that Vitaco trades below its IPO price should not be the sole reason to buy its shares.
Foolish takeaway
Without sounding too cynical, the fact that Vitaco is ex-private equity owned means I'm not jumping at the opportunity to buy its shares now that they're below its IPO price. Despite this, the business looks sound and growing demand for its products, especially in Asia, should bode well for its share price over the long term (provided no negative news comes out).
Its recent trading update was solid, with management confirming that the group is on track to meet full-year prospectus targets, making Vitaco one company to definitely keep an eye on for long-term investment.
