iPhone 6 – Why we expect Vita Group (VTG) to be a major winner

18 Sep 2014

With the hype surrounding the new iPhone 6, we thought we’d turn our attention as to how investors might best profit from the significant sales of the new flagship device.

There has been a measurable impact on the economy each time a new iPhone has been released. However with the new iteration is arriving in two significantly larger sizes (up by 20% and 40% with 4.8 and 6.0 in screens), we are confident that these new devices will smash previous sales records.

A recent Bank Of America report suggested that iPhone 6 shipments will be so significant that they might boost China’s GDP by 1%. Link here.

And, as of this week, Apple is reporting that pre-sales of the iPhone 6 have reached record levels. Link here.

Clearly the obvious investment play is to take a direct exposure to the NASDAQ listed headstock Apple (NASDAQ:AAPL). However investors would rightly be wary of the elevated valuation metrics attached to this bellwether IT stock. AAPL currently pays a modest dividend yield of just 1.6%. Further, domestic investors face both burdensome brokerage and custody fees by dealing in internationally equities along with awkward time differences.

Staying local, the next obvious play would be taking a position in Telstra (ASX:TLS). Boasting Australia’s largest 4G network, it is likely that the majority of new iPhone customers will sign up to Telstra’s expansive 4G network. The disadvantage of the Telstra play is leverage. Less than 40% of Telstra’s revenue is derived from mobile with the remainder comprising the declining fixed line division, Foxtel, NBN and its International operations. Any uplift in revenue from strong iPhone sales will be diluted by the modest performance in these diversified business segments and the sheer market capitalisation of this $67bn business.

In our opinion we see the greatest investment leverage by getting in at street level, so to speak, and playing the mobile retail market through an investment in no less than Telstra retail stores. Not by purchasing Telstra shares but through an investment in the Brisbane based Vita Group (ASX:VTG), which manages nearly 100 Telstra branded stores, plus an additional 45 One-Zero and Fone Zone mobile phone stores throughout Australia.

VTG has an impressive recent record managing their network of retails stores. So much so, that they we able to add an additional 12 Telstra stores to their portfolio during FY14, helping to increase revenues by 4% and underlying after tax earnings by an impressive 66%.

With iPhone sales representing an estimated 40% of all new phone sales, and customer take-up of the new devices expected to be significant, we estimate that the launch of the new device later this month could boost sales in the second half of this year by up to $30m. Whilst the margin on iPhones (and all Apple products for that matter) is low, the margin on accessories is massive, often with mark-ups in well in excess of 100%. And this is where the cream is going to be on these devices. With punters dropping up to $1249 on the high end iPhone 6 Plus, most will also walk out the store with a highly marked up protective case and screen saver in their Telstra bag.

In our estimates, these accessories sales, combined with a modest contribution from handset sales, could add $2-3m in gross margin to VTG’s bottom line in the half, boosting like-for-like profit growth by more than 10-20% in the first half of financial 2015. This would be a huge boost for this $150m market cap company. We fail to see another domestic business with such direct leverage to the new iPhone.

With VTG’s impressive record of growth in recent years, over $40m in franking credits on its balance sheet and a forecast yield nearing 5% for FY15, we believe that the medium-term return from this stock could grow by even more than the ever expanding iPhone screen size.

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