Blancco Technology Group
Written by
Blancco Technology Group |
Now fully armed |
Acquisition and contract win |
Software & comp services |
25 April 2016 |
Share price performance
Business description
Next event
Analysts
Blancco Technology Group is a research client of Edison Investment Research Limited |
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The major contract win for Xcaliber shows the value and potential of its mobile diagnostics solution and Blancco’s (formerly Regenersis) move to bring Xcaliber fully within a broader security and diagnostics offering makes sense. We have raised our earnings forecasts accordingly and continue to believe the shares are attractively valued.
Year end |
Revenue (£m) |
Operating profit* (£m) |
EPS* |
DPS |
P/E |
Yield |
06/15 |
15.0 |
4.0 |
2.8 |
5.0 |
83.0 |
2.2 |
06/16e |
22.7 |
5.8 |
5.8 |
2.0 |
40.1 |
0.9 |
06/17e |
31.2 |
7.5 |
11.4 |
2.1 |
20.4 |
0.9 |
06/18e |
37.4 |
9.2 |
14.0 |
2.2 |
16.6 |
0.9 |
Note: *Operating profit and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. The figures reflect the ongoing Blancco businesses only.
Acquisition and contract progress
Blancco has announced the acquisition of, and a significant new contract win for, Xcaliber. Blancco already held 49% of the venture but has purchased the remainder for a consideration of $5.5m (£3.8m), $4.7m (£3.3m) of which is deferred and contingent upon certain revenue targets being met. We expected Blancco to acquire Xcaliber when it moved from early-stage loss making to profitable on a sustainable basis, but the contract win appears to have triggered Blancco to take control. The contract is multi-year for the roll-out of Xcaliber’s mobile phone diagnostics software across the 5,000+ North American retail base of a major mobile operator and is an extension of an existing 200 store trial. This news follows the announcements of the aftermarket services business disposal completion on 4 April, then the start of the £50m tender offer process on 6 April, which is based on a 215p to 250p range with a close on 4 May.
Earnings estimates raised
We have adjusted our forecasts to reflect the new contract and the purchase of Xcaliber. The changes to key figures are shown in Exhibit 1. The effect on adjusted EPS is to increase our FY17 and FY18 estimates by over 11%. It should be noted that the effect on estimates of recent events is not purely positive because the increased share price means the impact of the share buyback on per-share estimates is reduced. We now assume a share buyback at the current share price of 232.50p, rather than 211.5p when we last published on Blancco in March.
Valuation: Remains attractive
Our estimates have not increased as much as the share price has since we published our last note but even so, on FY17e P/E 20.4x the shares remain attractively valued compared to the small and medium-sized listed security software companies international comparators in March.
Earnings forecasts raised
Exhibit 1: Changes to forecasts
Rev £m |
Rev £m |
Change |
Op profit £m |
Op profit £m |
Change |
Adj EPS p |
Adj EPS p |
Adj EPS p |
Change |
Net debt £m |
Net debt £m |
Change |
|
Old |
New |
Old |
New |
% |
Old |
New pre share price impact |
New post share price impact |
% |
Old |
New |
% |
||
FY16e |
22.0 |
22.7 |
3.2% |
5.8 |
5.8 |
0.0% |
5.3 |
5.8 |
5.8 |
5.7% |
-9.6 |
-7.9 |
-17.7% |
FY17e |
28.1 |
31.2 |
11.0% |
7.1 |
7.5 |
5.6% |
10.3 |
12 |
11.4 |
10.7% |
-12.3 |
-11.3 |
-8.1% |
FY18e |
34.3 |
37.4 |
9.0% |
8.7 |
9.2 |
5.7% |
12.6 |
14.8 |
14 |
11.1% |
-16.6 |
-15.8 |
-4.8% |
Source: Edison Investment Research
The effect on revenues and operating profit is due to the consolidation of Xcaliber’s figures and in turn it has improved revenues and profit due to the new contract win. We estimate Xcaliber FY17 revenues will be approximately £3.1m: a combination of the previous revenues of £0.6m and the contract extension benefit of £2.5m. The impact on operating profit is£0.3m in FY17e, but without the contract extension we believe Xcaliber would have still been loss making. Below the operating profit line, the impact is seen through the decline to zero of the share of results of associates and jointly controlled entity figures.
As noted above, the increase in the share price since our last estimates in March means the relevant number of shares to be purchased in the buyback is now lower, which has a slight negative effect on per share measures.
On the balance sheet, our estimates now include the payment of the initial £0.5m, an increase in intangible assets, an assumed working capital increase (£1.5m) to fund growing Xcaliber operations and an increase in provisions for the deferred consideration of £3.3m.
Peer valuation
Based on our upgraded estimates, Blancco shares trade at 21.1x FY17e P/E (see Exhibit 2 below), which remains attractive compared to its global, small and medium-sized listed security software peers (see below).
Exhibit 2: Comparator earnings multiples
Share price (local cur) |
Market cap (local m) |
Currency |
Year end |
P/E FY16e |
P/E FY17e |
|
Blancco (Regenersis) |
240.0 |
139 |
GBP |
Jun-16 |
31.1 |
21.1 |
Sophos |
220.0 |
995 |
GBP |
Mar-16 |
52.7 |
26.6 |
Acxiom Group |
21.8 |
1691 |
USD |
Mar-16 |
41.3 |
33.5 |
Barracuda Networks |
15.3 |
810 |
USD |
Feb-16 |
43.4 |
36.1 |
GB Group |
290.0 |
358 |
GBP |
Mar-16 |
38.7 |
31.1 |
NCC |
253.0 |
698 |
GBP |
May-16 |
23.2 |
19.9 |
F-Secure |
2.7 |
430 |
EUR |
Dec-16 |
27.9 |
23.2 |
Source: Bloomberg, Edison Investment Research. Note: Blancco’s market cap and FY16e P/E are adjusted for £50m share buyback on a pro forma Blancco-only basis, assuming the share buyback took place at the beginning of FY16. Prices as at 20 April.
Exhibit 3: Financial summary
Year end June |
£ '000s |
2015 |
2016e |
2017e |
2018e |
|
|
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||
Revenue |
|
|
15,013 |
22,700 |
31,188 |
37,398 |
EBITDA |
|
|
8,151 |
6,394 |
8,249 |
10,173 |
Operating Profit (before amort. and except.) |
4,023 |
5,764 |
7,484 |
9,223 |
||
Intangible Amortisation |
2,026 |
2,600 |
2,600 |
2,600 |
||
Exceptionals |
2,481 |
852 |
0 |
0 |
||
Other |
371 |
750 |
650 |
575 |
||
Operating Profit |
(1,601) |
1,462 |
4,234 |
6,048 |
||
Net Interest |
(796) |
(900) |
(600) |
(500) |
||
Exceptional Financial |
419 |
434 |
300 |
300 |
||
Profit Before Tax (norm) |
|
|
2,652 |
5,064 |
7,184 |
9,023 |
Profit Before Tax (FRS 3) |
|
|
(1,232) |
1,096 |
3,934 |
5,848 |
Tax |
(869) |
(551) |
(727) |
(1,110) |
||
Profit After Tax (norm) |
1,670 |
4,413 |
6,358 |
7,813 |
||
Profit After Tax (FRS 3) |
5,116 |
1,113 |
2,908 |
4,438 |
||
Post Tax Result from Discontinued Operations |
8,382 |
1,102 |
0 |
0 |
||
Average Number of Shares Outstanding (m) |
77.6 |
74.2 |
55.8 |
55.8 |
||
EPS - normalised (p) |
|
|
2.8 |
5.8 |
11.4 |
14.0 |
EPS - normalised and fully diluted (p) |
|
2.8 |
5.8 |
11.4 |
14.0 |
|
EPS - (IFRS) (p) |
|
|
(3.8) |
(0.3) |
5.2 |
8.0 |
Dividend per share (c) |
5.0 |
2.0 |
2.1 |
2.2 |
||
EBITDA Margin (%) |
54.3 |
28.2 |
26.5 |
27.2 |
||
Operating Margin (before GW and except.) (%) |
26.8 |
25.4 |
24.0 |
24.7 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
119,086 |
69,532 |
68,707 |
68,032 |
Intangible Assets |
110,198 |
69,128 |
68,203 |
67,403 |
||
Tangible Assets |
6,355 |
343 |
443 |
568 |
||
Investments |
2,533 |
61 |
61 |
61 |
||
Current Assets |
|
|
56,179 |
34,653 |
39,884 |
45,835 |
Stocks |
9,480 |
228 |
228 |
228 |
||
Debtors |
34,556 |
6,468 |
8,288 |
9,682 |
||
Cash |
12,143 |
27,957 |
31,368 |
35,924 |
||
Other |
0 |
0 |
0 |
0 |
||
Current Liabilities |
|
|
(43,219) |
(10,698) |
(13,571) |
(15,005) |
Creditors |
(43,219) |
(10,698) |
(13,571) |
(15,005) |
||
Short term borrowings |
0 |
0 |
0 |
0 |
||
Long Term Liabilities |
|
|
(9,380) |
(27,535) |
(27,415) |
(27,990) |
Long term borrowings |
(4,357) |
(20,098) |
(20,098) |
(20,098) |
||
Other long term liabilities |
(5,023) |
(7,437) |
(7,317) |
(7,892) |
||
Net Assets |
|
|
122,666 |
65,952 |
67,605 |
70,872 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
8,640 |
3,146 |
9,302 |
10,212 |
Net Interest |
(758) |
(599) |
(600) |
(500) |
||
Tax |
(963) |
(610) |
(727) |
(1,110) |
||
Capex |
(6,347) |
(2,150) |
(2,540) |
(2,875) |
||
Acquisitions/disposals |
(4,362) |
53,705 |
(770) |
0 |
||
Financing |
(3,630) |
(50,000) |
0 |
0 |
||
Dividends |
(3,381) |
(2,565) |
(1,254) |
(1,171) |
||
Net Cash Flow |
(10,801) |
927 |
3,411 |
4,556 |
||
Opening net debt/(cash) |
|
|
(20,601) |
(7,785) |
(7,859) |
(11,270) |
HP finance leases initiated |
0 |
0 |
0 |
0 |
||
Other |
(2,015) |
(854) |
0 |
0 |
||
Closing net debt/(cash) |
|
|
(7,785) |
(7,859) |
(11,270) |
(15,826) |
Source: Blancco, Edison Investment Research. Note: Forecasts assume share buyback at strike price of 240p.
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