Vitec provides the hardware for the content age

Vitec (VTC), a producer of hardware and software products for the creative industries, has bounced back from a tough 2020. Fewer people were on the move in 2020 which meant less demand for cameras to capture content. However, last year saw strong recovery in its markets which helped sales increase 36 per cent and operating margin recover to 11.7 per cent, up from 3.4 per cent last year.

Compared with 2019 its revenue is now just ahead of where it was while adjusted gross margin was flat. There were cost headwinds because of rising shipping and raw material costs but these were offset by price increases – which suggests a degree of pricing power to tackle future inflation down the line, though discretionary incomes are being squeezed.

Management is confident that it will be able to improve its operating margin into the mid-teens while maintaining strong cash conversion, which was over 100 per cent. The crisis in Ukraine may disrupt supply chains further, but Shore Capital pointed out that the company sells only a tiny proportion of its group revenue into Russia so the sanctions shouldn’t impact demand badly.

The one thing the Ukraine crisis has shown is the power of content creation. In this age, the demand for equipment to film high quality footage will only keep rising and the return of travel – which has remained persistently subdued – should increase demand from amateur travel photographers in the coming years.

FactSet consensus has Vitec currently trading at a 13.8 forward PE. Given the growing content market, potential uplift when travel returns and the pricing power it showed last year, this seems to be a reasonable entry point. The record year end order book is handy too. Buy.  

Last IC View: Hold, 850p, 28 Feb 2020