Ann: Financial Results 31 December 2018, page-2

Having first bought shares in VRT in last 2017 and early 2018, I got caught in a bit of a cyclical downdraught with this business's earnings, which has coincided (as it so often does) with a quite meaningful de-rating in the valuation multiples of the stock over the past 12 months.

Turns out the discretionary spend slowdown in Australia impacted their business more than I initially thought it would, with Australian EBITDA in DH2018 falling by 7% (following a 3.5% fall in JH2018 on pcp).

At the same time the valuation multiple has fallen from around 16x P/E in early 2017 to a little over 12x today.

So, a case of the dreaded cyclical investment double-whammy.


However, as cyclical investments go, one can do a lot worse than this business, in terms of technical expertise, market positioning, and cash generating ability.


Going forward, assuming:

1.  no recovery in Australian operating earnings (which are today running at 10% lower than their 2016 peak), and

2. no further acquisitions of practices internationally (Net Debt to EBITDA is now ~2.6x, so some consolidation of the balance sheet over the next 12 months is probably in order),


... the stock is currently valued at a little over 12x P/E and 8x EV/EBITDA, which I think is appealing from a potential investment return vs downside risk.

Those sorts of discount-to-market valuation multiples are, to my way of thinking, to be expected more near the top of a cyclical business's earnings cycle, as opposed to closer to the bottom.

I think that an appropriate average valuation multiple for a business like VRT should be on par with the broader market (based on a view that VRT is not a below-average business), but because it is cyclical, the multiple should be at a discount to the market's multiple at the top of VRT's earnings cycle, and at a premium to - or at least in line with - the valuation multiples for the overall market.

So, given where I sense VRT is today in terms of its earnings cycle, I think the stock should be rated at closer to 15x P/E, instead of its current 12x P/E.  


I have not added to my position for some time because of the anecdotes of stalling discretionary spending during the course of 2018, but I today resumed buying.

It's not an investment in which one will double one's money over the next 2 or 3 years, but it is one that is likely to generate 10%-12% pa capital growth, plus ~6% in dividends.

..