Shares in Vita Group Limited (ASX: VTG) are up 15% today after the company finally updated the market on its negotiations with Telstra Corporation Ltd (ASX: TLS).
Vita Group stated that as a result of a changing remuneration structure with Telstra, the group would have several Telstra stores added to its network. However, it would also experience compression in its profit margins as a result of a reduction in some incentives that were deemed to be less effective.
Management expects to see higher volumes overall, and stated that the actual impact on earnings is difficult to forecast given that much of Vita's remuneration is performance-driven. Vita's total profit margins (Net Profit After Tax as a percentage of revenue) were just 5.5% at the last full-year report. Any reduction to these margins would result in a hefty hit to profit, and would conversely require a big lift in revenues to offset smaller margins. This is concerning because Vita has previously noted that it may only be able to generate revenue growth from its current stores for another couple of years.
Although shares were up 15% today on the news, they began surging at around 2.30pm yesterday, rising from $2.80 to $3.10 before closing and reopening stronger this morning. A similarly suspicious move in Vita Group shares was seen 3 weeks ago, when shares began plunging from $5 and the company was forced to answer a 'please explain' letter from the ASX. Vita Group subsequently explained that it was involved in 'confidential' negotiations with Telstra over changes to its remuneration.
Given that shares have twice moved significantly in response to specific events – and in advance of those events being released to the market – readers must surely be wondering how confidential the company's discussions really were.
CEO Maxine Horne's decision to dispose of $10 million shares at $5 per share at the end of September is looking inspired in hindsight. She is still a very significant shareholder in the company, and her decision may mean nothing. However, her decision to sell was in direct contrast to her public bullishness on Vita's prospects.
Although Vita looks attractive at today's prices, it's certainly burned through a fair amount of investor trust. Readers should bear that in mind before considering a purchase.
