Vitec Group plc (LON:VTC)

I am currently researching Vitec Group plc (LON:VTC) for the UK Portfolio. The company makes camera accessories and most of its brands are market leaders in their respective product categories. The industry is undergoing some interesting changes with the rise of independent content creators (ICCs) and the decline of traditional broadcast networks. Overall, the internet should mean an increase in the addressable market for camera accessories. However, many of Vitec's products are for the professional market whereas growth could be restricted to the amateur segment. The quality of cameras in today's smartphones has led to a decline in the SLR sales which has impacted Vitec and its revenue growth has been in the low single digits in recent years.

Over the past decade management has been investing in higher growth sectors of the market both internally and via acquisitions. At the same time it has been increasing the proportion of high tech products in Vitec's portfolio which has improved margins. The 2018 acquisition of Amimon could be pivotal as it makes the industry standard hardware and software used for wireless video. The technology enables zero delay wireless transmission of HD filming. This is an attractive feature for film production as it enables the director and crew to see the camera in realtime enabling fast changes on set.

So both Vitec and its market have evolved over time and the company looks well positioned for the future. I support the acquisitive aspect of its strategy as there are synergies available from combining innovative niche brands with an established and far reaching distribution network. I know of other cases where this idea has been successful (eg Halma plc, Judges Scientific PLC) and I think it is one of the few ways that roll-ups can work.

I have reservations about the accounting of Vitec. In particular, the company reports underlying operating profit after stripping out amortisation of acquired assets. These acquired assets relate to products which need to be continually improved to remain competitive. Vitec capitalises the cost of this intangible investment and so it is incorrect to exclude acquired amortisation when calculating operating profit in my view. Statutory profits and dividends have grown in recent years, debt is manageable and ROCE is healthy so I do not think this accounting treatment a major issue, but is a red flag nonetheless.

Vitec looks like a good company selling for a reasonable price (forward price-to-earnings ratio of 12.1). I am thinking about buying shares but am taking my time. I have been guilty of overtrading in the past and it is arrogant to make purchases without doing sufficient work. The market is usually right.

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