Here’s why the Vita Group Limited share price is surging

Credit: Telstra

The Vita Group Limited (ASX: VTG) share price surged more than 13% this morning after the telecommunications retailer announced a positive trading update.

In the half-year to 31 December 2015 (1H16), Vita Group said it expects to report earnings before interest, tax, depreciation and amortisation (EBITDA) of between $25.5 million and $27.5 million.

The stronger than previously expected profit performance will be underpinned by Vita’s network of Telstra Corporation Ltd (ASX: TLS) stores, the company said. Further, Vita said its revenue from small-to-medium business and enterprise channels continues to grow.

However, Vita’s upbeat profit outlook includes some one-off items; for example, the group’s discontinued Extended Swap and Warranty Product (ESP), “which has benefited from a reduction in the cost of servicing existing plan holders.”

Also, the closure of Vita’s embattled Apple retail stores, Next Byte, will cost $3.2 million at the EBITDA level. These costs are included in Vita’s forecast profit range.

While Vita will continue to provide products and services to customers of the eight Next Byte stores it’ll close, the closures are expected to result in asset write-downs of around $1.1 million. Together with the other costs, it’ll bring the total charges to $4.3 million at the profit before tax level.

“The welfare of our team members and customers is our most important concern and we are working to manage the impact of this decision as responsibly and respectfully as possible,” Vita Group CEO, Maxine Horne, said. “I would like to sincerely thank the Next Byte team members and leadership team for their efforts over recent years”.

On completion of the Next Byte store closures, Vita Group expects benefits of around $1.6 million annually. In the second half of FY16, the company expects to recognise $0.6 million in benefits.

Buy, Hold or Sell?

Despite rising strongly today, Vita Group is a quality retailer, and its share price trades at a very reasonable level considering its potential for growth. With a 4.4% fully franked dividend yield to boot, I think it’s worthy of a spot on long-term investors’ watchlists – at least.

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Motley Fool writer/analyst Owen Raszkiewicz has no position in any stocks mentioned.

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Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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