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Long Time Investment, page-61

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Inferno31

3,790 Posts.

218

01/11/16

09:22

Post #: 20272421
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Originally posted by g41 ↑

Very ironic!
VTG has been very successful with its Telstra stores and now the Testra SME strategy and have generated a lot of cash. Like a lot of successful companies they have decided to now expand into something distantly related. (Think from previous decades: ANZ expansion into asia, NAB into UK, WOW into Masters, all now unwinding at a loss). The best practice approach now is that successful companies should return surplus cash to shareholders and if shareholders wish to invest in greenfields projects they can takeup an IPO or capital raising to fund the new venture - the franking credit system makes this the most sensible approach. Montgomery instead advocates that companies should not distribute cash but instead reinvest retained earnings attempting to achieve the same ROIC to grow the enterprise - which is what VTG appears to be attempting to do.

VTG is able to choose to invest in this venture without shareholders having the benefit of a decision on taking up a capital raising because it is controlled by a founding shareholder (another example was HVN buying dairy farms)
We don't know if its a good idea or not - it might be like Murdoch's decision to get News Corp to buy Fox. Meanwhile the market is pricing in a discount because it has just seen that VTG is not managing the company in accordance with best practice. Simply paying out surplus cash and having a full payout ratio then coming back to the market for a capital raising or an IPO would have resulted in the share price still above $5. Blundy and Bevan Slattrey have never had trouble getting backers for their next new ventures and they don't try to tie them to existing profitable operations. Investors would have been fighting to participate in a new Maxine Horne backed retail venture, instead over $100m has evaporated rather than been created

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While not the ideal course of action, one reason I continue to stay invested is the company culture and quality management- Maxine is still in charge and why can't she repeat the Telstra success with other ventures ?They have only opened up one store and one pop up. Let's give them the benefit of the doubt and see what happens.

VTG Price at posting: $4.09 Sentiment: Buy Disclosure: Held
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Long Time Investment, page-61

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