Time to focus on erasure potential

Regenersis 16 February 2016 Update

Regenersis

Time to focus on erasure potential

Disposal of business

Tech hardware & equipment

 

16 February 2016

Price

192.50p

Market cap

£152m

Net cash (£m) at 30 June 2015

7.8

Shares in issue

79.0m

Free float

92.9%

Code

RGS

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

5.2

4.9

(10.5)

Rel (local)

5.5

10.6

3.7

52-week high/low

242.00p

139.50p

Business description

Regenersis provides a suite of support services and technologies designed to help companies and their customers deploy, protect, sustain, retire and reuse digital technology. Following shareholder approval of transactions and renaming the company Blancco, its focus will be solely on data erasure software.

Next event

Interim results

8 March 2016

Analysts

Ian Robertson

+44 (0)20 3681 2523

Dan Ridsdale

+44 (0)20 3077 5729

Regenersis is a research client of Edison Investment Research Limited

The €103.5m (£78m) price for the Repair Services business is more than 10% ahead of the estimate in our sum of the parts. We estimate that the return of £50m cash to investors could leave Blancco well-funded to drive growth of the data erasure business with net cash of approximately £10m. The disposal of the Digital Care business, the remaining part of the Aftermarket Services division placed under review in September 2015, should provide a relatively small but welcome further fillip to finances. The value of the legacy businesses is now clear and investor attention will be focused solely on the exciting opportunity for Blancco Technology Group, as it is to be renamed, as a leader in data erasure.

Year end

Revenue (£m)

PBT* (£m)

EPS* (p)

DPS (p)

P/E (x)

Yield (%)

06/14

197.5

9.9

16.2

4.0

11.9

2.1

06/15

202.6

14.5

16.2

5.0

11.9

2.6

06/16e

197.4

13.9

15.8

6.0

12.2

3.1

06/17e

208.3

16.1

17.6

7.2

10.9

3.7

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Deal shows the value in legacy businesses

Regenersis has announced that it has reached agreement with Communications Test Design Inc, a private US company, for the sale of the Repair Services business for €103.5m (£78) in cash. The completion is expected to occur in the second quarter of CY16. Management intends to return £50m of capital to investors via a tender offer following the completion. The nascent mobile phone insurance service, Digital Care, remains within the group for now, with management still in the process of selling it to other parties.

Future value in leadership in erasure

The anticipated disposal of the Digital Care business will leave Blancco Technology Group as a software company focused purely on the data erasure market. Following the acquisition of Blancco in 2014, management has added significantly to the business, investing in new products, acquiring key competitors for both market and technology access, and has created a clear leading player in a software segment that is expected to see rapid growth over the coming years – driven by technology, growing awareness of data security issues, increased data volumes and legislation.

Valuation: SOTP implies upside, more detail to follow

If we assume that shareholder and regulatory approval are granted for the Repair Services disposal and if, for illustrative purposes, we assume a disposal price for Digital Care of £5m, it yields a value of 221p per share (224p in our pre-deal SOTP). As the company further updates the market on Blancco’s progress, we will be shifting our valuation work towards more appropriate, and hopefully accurate, earnings multiples and reverse DCF techniques that should better capture the potential growth in profits that we anticipate.

Transformation almost complete, but value clear
Almost a done deal

The figure of €103.5m proceeds on completion is subject to potential adjustments for actual results and working capital. The disposal and return of funds are dependent on the agreement of Regenersis’s shareholders. Furthermore, competition clearance is also required from the relevant authorities in Germany, Poland and Russia. Given the increase in share price that has accompanied this disposal process, we do not expect shareholders to vote against the proposals. Management suggests that the competition clearance should not be much more than a formality.

Tender offer works best for investor base

The return of £50m of cash to investors is planned via a tender offer rather than a special dividend. The transformation of the Regenersis group in recent years from a repairs business to a software business has led to a relatively mixed investor base and using a tender offer rather than a dividend gives investors the option of reducing their exposure to Blancco Technology Group.

Digital Care disposal in due time

While the management had begun the disposal process of the division as a whole, it became clear that a separate sale of the Digital Care mobile phone insurance business could deliver greater overall value. The early-stage and rapid growth nature of Digital Care (management states FY15 revenues of c £3m with operating profits of c £100k, with strong growth anticipated in revenues and profits in FY16) makes estimating a disposal value for this business particularly difficult. We note that the statement refers to the potential purchasers having a strategic interest in the mobile insurance area. This gives us comfort not only that a deal will be achieved, but also that the purchasers will be willing to pay a price appropriate to the growth and opportunity in this business, rather than one that simply reflects current revenues and returns.

Transactions should leave Blancco well financed for growth

The £50m of capital to be returned to investors is the primary application of the £78m of disposal proceeds. We estimate the costs of the transaction, including miscellaneous associated costs, to be in the range of 10-15% of the proceeds, taking £10m for the purpose of this illustration. Repaying net debt of £8m (FY16 year-end) would leave Blancco with up to £10m of cash. Although the group has a £30m facility, we would not expect this to be supportable by the revised structure of the business, but management suggests that, given the underlying profitability of Blancco, a facility could be negotiated, providing further financing before any disposal proceeds from Digital Care. We regard this as an appropriate level of funding for organic and acquisition driven growth given the current strong growth and the value of recent acquisitions.

We have not reflected the transaction in our forecasts because it has not yet completed but, for illustrative purposes, we have reflected the transaction in the sum-of-the-parts calculation below. We apply our 5x EV/Sales multiple for the data erasure software business (see our October update note) and take a 1.75x EV/Sales for Digital Care, which we believe to be conservative, on a FY15 revenue figure of £3m. This yields a value per share of 221p (224p in our pre-deal SOTP). As the company further updates the market on Blancco’s progress, we will be shifting our valuation work towards more appropriate, and hopefully accurate, earnings multiples and reverse DCF techniques that should better capture the potential growth in profits that we anticipate.

Although we anticipate that the infrastructure costs of the group will be significantly reduced following the disposal, the exact level is as yet unclear, so we retain the use of an EV/Sales multiple. We look forward to gaining further insight into the earnings figures and an update on trading with the interim results on 8 March.

Exhibit 1: Illustrative SOTP scenario assuming a disposal price of £7.5m for Digital Services

Metric

Revenue (£m)

Multiple

Value (£m)

Value per share (p)

Aftermarket Services ex-Digital Care

78.0

Transaction costs

-10.0

Digital Care

EV/Revs (FY15)

3.0

1.75

5.3

73.3

Blancco

EV/Revs (FY16e)

22.0

5.0

109.9

Enterprise value

183.2

Debt (FY16e)

8.2

Equity value

175.0

221.4

Source: Edison Investment Research

 

Exhibit 2: Financial summary

Year end June

£'000s

2013

2014

2015

2016e

2017e

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

179,714

197,482

202,564

197,441

208,278

EBITDA

 

 

11,841

14,152

18,231

19,024

21,537

Operating Profit (before amort. and except.)

9,507

10,965

15,426

15,624

17,837

Intangible Amortisation

(90)

(589)

(3,349)

(3,350)

(3,350)

Exceptionals

(1,874)

(9,395)

(5,175)

(4,250)

0

Other

(465)

(518)

(1,277)

(950)

(750)

Operating Profit

7,078

463

5,625

7,074

13,737

Net Interest

(868)

(1,225)

(1,196)

(2,200)

(2,200)

Exceptional Financial

(539)

3,632

2,368

0

0

Profit Before Tax (norm)

 

 

8,645

9,859

14,501

13,924

16,137

Profit Before Tax (FRS 3)

 

 

5,671

2,870

6,797

4,874

11,537

Tax

(978)

381

(1,680)

(731)

(1,731)

Profit After Tax (norm)

7,667

10,240

12,821

13,193

14,406

Profit After Tax (FRS 3)

4,693

3,251

5,117

4,143

9,806

Average Number of Shares Outstanding (m)

44.6

54.6

77.2

79.0

79.0

EPS - normalised (p)

 

 

16.8

16.2

16.2

15.8

17.6

EPS - normalised and fully diluted (p)

 

16.8

16.2

16.2

15.8

17.6

EPS - (IFRS) (p)

 

 

10.5

5.5

7.0

5.6

12.4

Dividend per share (c)

2.5

4.0

5.0

6.0

7.2

EBITDA Margin (%)

6.6

7.2

9.0

9.6

10.3

Operating Margin (before GW and except.) (%)

5.3

5.6

7.6

7.9

8.6

BALANCE SHEET

Fixed Assets

 

 

52,957

117,548

119,086

128,086

128,786

Intangible Assets

45,029

110,270

110,198

120,148

121,998

Tangible Assets

4,381

5,341

6,355

5,405

4,255

Investments

3,547

1,937

2,533

2,533

2,533

Current Assets

 

 

38,497

68,674

56,179

42,669

46,249

Stocks

7,924

10,137

9,480

10,278

10,842

Debtors

26,054

37,742

34,556

36,243

39,373

Cash

4,519

20,795

12,143

149

534

Other

0

0

0

0

0

Current Liabilities

 

 

(34,316)

(46,598)

(41,486)

(38,375)

(37,538)

Creditors

(34,316)

(46,598)

(41,486)

(38,375)

(37,538)

Short term borrowings

0

0

0

(4,000)

(4,500)

Long Term Liabilities

 

 

(17,740)

(9,211)

(11,113)

(10,113)

(11,113)

Long term borrowings

(6,423)

(194)

(4,357)

(4,357)

(4,357)

Other long term liabilities

(11,317)

(9,017)

(6,756)

(5,756)

(6,756)

Net Assets

 

 

39,398

130,413

122,666

122,267

126,384

CASH FLOW

Operating Cash Flow

 

 

11,015

(4,224)

7,651

8,928

16,756

Net Interest

(368)

(706)

(758)

(1,700)

(1,700)

Tax

(795)

(816)

(963)

(731)

(1,731)

Capex

(4,181)

(6,457)

(6,347)

(7,250)

(7,750)

Acquisitions/disposals

(7,488)

(51,229)

(4,655)

(10,500)

0

Financing

4,065

90,808

(3,630)

0

0

Dividends

(799)

(1,530)

(3,381)

(4,741)

(5,690)

Net Cash Flow

1,449

25,846

(12,083)

(15,994)

(115)

Opening net debt/(cash)

 

 

2,877

1,904

(20,601)

(7,786)

8,208

HP finance leases initiated

0

0

0

0

0

Other

(476)

(3,341)

(732)

0

(0)

Closing net debt/(cash)

 

 

1,904

(20,601)

(7,786)

8,208

8,323

Source: Regenersis, Edison Investment Research

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