Each week I’ll be picking a random ASX stock that I’ve rarely seen discussed online – and that I do NOT hold – that you voted for, for us to dive into for some Due Diligence (“DD”).
This is for us to have a look at what it does, comb over their financials, and conduct some polling on general sentiment. Not all of these stocks may be sexy or appealing; the whole point is to shine a light on what companies are doing out there on the ASX which never get much coverage – for good or bad.
The main purpose being to add some more variety in coverage to the standard blue chips or meme stocks we see pumped day in and day out, and hopefully discover some hidden gems or innovative companies on the Aussie market.
Here’s this week’s Random Stock of the Week.
Company name: Vita Life Sciences
Ticker: VLS
Industry: Pharmaceutical Retail
Headquarters: Sydney, NSW
Market cap: ~$102m
Current share price: $1.94
P/E ratio: ~15
1-year Performance: +104%
What they do, smoothbrain version: sell fad diet pills to wannabe fitness influencers trying to gain more vapid followers on IG
What they say they do, wanky version: “We are Vita Life Sciences, a successful Australian owned pharmaceutical and healthcare company with established brands throughout Australia and Asia. We produce a wide range of premium supplements, vitamins, minerals, herbs and superfoods catered to all age categories and health conditions.” 🍆👋
What they do, actual version: From its name, you probably pictured a sexy experimental biotech performing life-changing clinical trials on various kinds of chimps.
In reality, this company is far more mundane – and far more fundamentally sound – than that.
Vita Life Sciences (VLS) are the umbrella/parent company for a range of sub-brands which create and distribute a wide array of over-the-counter medicines, vitamins, health food supplements & dietary pills domestically and abroad.
Despite listing on the ASX in the mid-2000’s, the company has been around for a long time. It was founded in 1947 and is based out of Kirrawee in Sutherland Shire (side note: I’m a Shire-born boy originally and I never knew this before… insert *the more you know.gif* and various Scomo jokes here) in southern Sydney.
VLS’ first retail brand, VitaHealth, was launched in Singapore as a pharmacy, and since that point the company has grown to have a significant brand presence in the greater South East-Asian region.
It now sells products not just here in Australia, but other key markets include Singapore, Malaysia, Thailand, Vietnam, Indonesia and – the newly-established – China; they also ship internationally via a range of eCommerce platforms.
They have expanded their footprint over the years via a mix of both organic growth and acquisitions, notably the Vita Health Malaysian & Singaporean businesses back in 2000.
As of writing, the company now has around 800 registered products on the market, with their distribution handled through a range of pharmacies & health food stores, as well as via an increasing number of 3rd-party online resellers.
Their main direct-to-consumer brands include Herbs of Gold, VitaHealth, VitaScience, and VitaLife, which each aim to address various chronic health conditions or general wellbeing – with formulas all “backed by science”, as they put it.
This includes things like stress reduction, cold & flu prevention, combined multivitamins, probiotics, sleep aids… basically any of the buzzword pills-in-pretty-jars you see at your local chemist. Domestically, they have expanded their distribution into pharmacies, with now around 1,000 pharmacies across Australia stocking their brands.
VLS’s performance on the ASX has been one of peaks and valleys.
It had a strong run for several years after listing, before it entered a ‘downturn’ doldrum period at the start of 2018, when the company began to use some of its funds to embark on a new awareness/acquisition/expansion strategy.
Shareholders seemed to become skeptical as to whether or not this would pay off, and the share price sold off hard & then stagnated for a couple of years as a result.
However, as a result of multiple recent profit upgrades and stable increases in revenue over the past few years, VLS’ performance broke through its’ glass ceiling from mid 2020 – and the company’s returns have been on a tear ever since.
Their growth, market expansion and brand strategies seem to be working, with both revenues and profits seeing a spike in financial year 2021 in particular and positioned for additional jumps in both figures in upcoming reports.
The company IPO’d in 2007, and has returned an average of 20.02% annualised p.a (including dividends) since listing – a very solid figure over nearly 15 years.
What looks good:
- As growing awareness of the impact of diet and lifestyle on quality of life and fighting off chronic diseases grows, the healthcare and “wellness” category has been entering something of a boom. The vitamins & minerals industry is much bigger than you probably think; it’s estimated to grow to a substantial $220 billion by the end of 2022.
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This appears to be far more than just a fad; since the onset of the 2020 pandemic, people have put more of a focus on personal wellness, with supplements a growing part of people’s regimens. The associated growth of ‘influencers’ (shudder) spruiking such products has likewise exploded, and contributed to the uptake in ‘superfoods’ and the like along with it.
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As mentioned above, VLS’ decision to invest in growth & marketing budgets has paid off; over the past ~2 financial years in particular it’s started to affect their bottom line with growing awareness, revenue and market share. This all culminated in record group sales of $46.5m last year – with the company predicting an additional ~15% growth in sales and ~20% increase in profits this coming reporting year of 2021-22:
- The company, particularly in its present form, simply just does well with shareholders’ investments. It’s no ‘rocket’ and probably never will be, however they delivered a very solid ~25% Return on Equity (ROE) in its most recent reporting financial year – a number which has continued to climb over the past 4 years. E.g: they’re not only giving you good returns, they’re getting better at it as years go on.
- After consistent repayments over the past few years, VLS now has zero debt. This is especially important as we be appearing to move into ‘inflation fear mania’ on the markets for the foreseeable future. They’re funding growth with their own profits – no cap raises required – and have performed multiple share buybacks to tidy up the register as well over the past couple of years.
- While revenue continues to grow in countries like Australia, Malaysia, Singapore & Indonesia, it’s China that remains their sleeping giant, and potential breakthrough market.
- They successfully launched in China in 2020 via partnership with a distributor, enabling them to go direct-to-market without as much red tape as China is known for. This already saw 300% year-on-year growth from 2020-2021, although its initial starting point was obviously from a low total base. If they can replicate even close to this progress moving forward, it’s a potential game-changer.
- This includes distribution on eCommerce sites such as Alibaba able to capitalise on Australia’s positive reputation for nutritional goods, which made up the majority of its online sales. They are also looking to launch a series of flagship stores under the Herbs of Gold brand there (solid brand name for the Chinese market for its direct translation into Chinese, by the way).
- VLS has a strong balance sheet, with around $27 million to play with in total. They also pay out a small dividend (around 3% yield), which was also an increase over the previous period, and is fully franked.
- The company stands out as one of the best-run businesses in its sub-sector of ‘wellness’ on the ASX. It’s a bit of a wasteland of companies here… the space is dominated by non-listed company Swisse, giant Blackmores (ASX:BKL) – which is likewise a quality business but way overpriced stock-wise, decent performing small-cap Clover Corporation (ASX:CLV), and a mixed bunch of otherwise mostly unprofitable small and microcap tiddlers pushing products which have largely gone nowhere.
- Here’s the list:
- Not only has VLS performed the best in its category over the past year in terms of returns, it’s also still the most reasonably-priced based on most recent reported earnings, trading at around ~15 P/E.
- The company has an interesting, very solid ownership profile, with retail investors actually comprising a minimal amount of total shareholders. ~45% insider ownership means execs with a lot of skin in the game; and there’s significant amount of investment from both private companies and insto’s with strong investment too. This is a great breakdown of investor confidence in our books.
- It’s basically the opposite of what we like to call in small-cap companies the “Scam Dream Ratio” (SDR – Patent Pending™) in which retail are often the ones left holding the bag while desperately praying for something to turn the business around. For comparison, here’s ASX:88E – one of the purest examples of the ‘SDR’ on the ASX:
Compare this to VLS, and the difference is obvious:
- Their growing percentage of export channels bodes well for further expansion. While Australia’s supplements market is fairly saturated, their ability to add more core markets (and grow China in the near-term) removes any artificial cap on their mid-term growth prospects.
What doesn’t look good:
- The company had remained relatively underground for the past year or two and was essential a massive bargain share price-wise before people caught on recently. It’s still “decent value”, but the share price has run hard and fast to where now it’s probably more “fairly valued” than “undervalued”… depending on if they achieve their upcoming anticipated earnings increases or not.
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As the handful of countries in the South-East Asian region comprise a large proportion of their business, the company is exposed to a fair degree of currency risk in which margins/profits can fluctuate based on the strength of the Australian dollar.
- Regulatory risk is likewise a factor, particularly in fickle markets such as China in which agreements and overlying rulesets can change on a whim. Each time the company looks to add new product (lines) to a foreign market, they are subject to approval by the country’s regulators, with a decline meaning a potential loss of revenue.
- This is a pretty illiquid stock. This can be seen as both good and bad – a sign that it’s not easy to buy into means that current holders aren’t itching to give their shares away. However it can also make it harder to get out should you want to sell in a hurry without accepting too much of a discount. Its multiple buybacks have done favours for current holders at the time, but made things a little more difficult for aspiring ones in this regard.
- There’s, quite simply, minimal coverage and promotion of this stock or company out in the wild. Whether that speaks to a lack of interest in the sector by media, or a lack of capable marketing/PR/investor relations by the company is debatable. However that typically translates to less eyeballs on the company = even positive results/announcements not leading to as much movement in share price as they probably should.
- This is compounded by the fact that the parent company is not known by consumers. While its child brands have a growing retail presence & brand recognition, there seems to be a disassociation between these brands and the listed company itself in the eyes of the general public. Contrast this with a rival like Blackmores – which trades on the ASX under its same retail name – and it’s doing itself no favours here.
Summary
VLS are currently in a place where they’re both running a strong business fundamentally, and also able to piggyback off sentiment.
Over the last couple of years, global sentiment towards using supplements to improve immune systems & generally be more ‘health conscious’ in light of Covid-19 and other variants has definitely worked in their favour. With no end in sight to the true ‘elimination’ of Covid, this doesn’t look like it’s going to be ending any time soon.
In addition, the continued shift to more online business should help improve margins while opening up broader potential distribution globally. Chinese growth in particular will be extremely interesting to watch going forward.
Will its proportion of revenue remain relatively insignificant despite the impressive %-based increase from the initial push into this gigantic market, or will it grow into another key pillar with a massive addressable customer base?
If it’s the latter, it could provide the ‘rocket fuel’ needed to turn this into a bigger player in its niche on the Australian exchange – assuming they continue to be careful with their marketing spend while continuing to establish a foothold.
There also still seems to be large potential for growth in the other South-East Asian nations VLS operate in, with Indonesia in particular an obvious big market for acquiring additional market share.
As a whole, a business that can compound sales growth at 20% per year while still being profitable and paying a dividend and doesn’t need to rely on debt to do so is quite rare on the ASX at the moment, regardless of which sector it happens to be in.
Conclusion: From every visible metric, this is just a solid, smartly-run, no-nonsense company that continues to quietly ‘go places’ and hit all its targets in an unassuming way.
I’m honestly a little pissed at myself that I didn’t dive deeper into this company sooner, as it’s got the vast majority of things I look for in companies to invest.
Solid levels of management holdings, institutional investment, growing revenues several years in a row, good management of capital, share buybacks, good ROE, easily visible future growth strategies, etc etc. are all going for it.
All told, this is a company which has increased its earnings per share (EPS) by 39% each year over the past 3 years while maintaining profit margins, and yet its share price has only gone up 15% each year over the same period. This would tend to scream ‘undervalued’ at a fundamental level.
Price-wise, while it still looks very solid compared to its same-sector peers, for those looking to invest in it now it may be a little bit of a matter of “too little, too late”. This would have been a pretty massive bargain just a year or two ago in 2020, or even the early parts of 2021.
Whether it still retains that status will depend on not only if VLS continues to hit its target sales & profit increase targets, but also how the market reacts to them. If they crank out the indiciated increases, and the market responds in a lukewarm way, this could swing back into undervalued territory. But if it jumps up in a big spike again, it becomes merely “okay” rather than “great” value.
A lot of this will depend on their investor relations / comms going forward; however as the company has already been maintaining its current IR strategy for many years, it doesn’t look like this is set to change any time soon. Some of these ASX-listed companies such as VLS need to learn that it is OK to shout about your business achievements a little bit more, without becoming pure ‘pumpers’.
In 2020, this could have been a strong prospect; as of now, it’s looks like it might be somewhere in between. Oh well… can’t invest in ’em all.
Company website: http://www.vitalifesciences.com/
MarketIndex page: https://www.marketindex.com.au/asx/vls
Feel free to add your own opinions on VLS in the comments below.
Would you buy this stock? Why or why not? Feel free to vote in the poll.
