G3 Group
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G3 Group |
Margins ahead of expectations
Industrials |
NXT Company Spotlight
11 February 2016 |
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G3 Group operates three businesses: a New Zealand-based business mail operation, a unique UK tourist mail business (Universal Mail UK) and document management in New Zealand and Australia. The performance for the third quarter that ended 31 December 2015 showed gross margin and inventory levels for the quarter and year to date above the key operating milestone (KOM) targets. The volume of items processed in the third quarter was below the KOM target, but is expected to increase in the fourth quarter with the resumption of services to a major bulk customer.
Key operating milestones
The quarterly update provides a progress report on G3's performance compared to the KOMs stated in the disclosure document. The reported 9M16 (to December 2015) operating margin of 21.5% (19.8% in Q316) is 140bp above the full-year target of 20.1%. In turn, the overall gross margin came in at 23.5% in 9M16 (21.9% in Q316) compared to the full-year target of 21.9%. The company expects the number of items processed for the full year will be 58.5m, some 5.8% below the original target of 62.1m. The UK business continues to perform well and in line with company expectations.
Acquisition of Formfile
G3 has acquired Australia-based Formfile Records Management Group for A$3.4m funded by the issue of ~656,000 shares at NZ$0.80 per share (A$500,000) and A$2.9m from the group’s bank funding lines. The acquisition of Formfile is in line with G3’s strategy of investing in transitional and complimentary ‘new technology’ services. Formfile’s business includes document and data management, which includes the conversion of physical paper documents into automated digital workflows. G3 sees its existing high-growth options as the UK tourist mail business and document management in New Zealand and Australia. It believes there are near-term industry consolidation opportunities in the physical mail business in both New Zealand and Australia.
Valuation: Trading at a discount to the market
The current share price of NZ$0.83 implies a market capitalisation of NZ$45.4m and an EV of NZ$54.2m based on September 2015 net debt of NZ$8.75m. This translates into an adjusted FY15e EV/EBITDA multiple of 12.6x (assuming FY15 pro forma full-year contributions from Filecorp and Eureka) compared with a peer group FY15e EV/EBITDA multiple of 12.0x (see Exhibit 4).
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Historical financials
Source: Company data |
Update for the period to 31 December 2015
Key operating milestones (KOMs)
In the disclosure document G3 defined its KOMs as:
■
gross margin: group revenue less cost of goods sold as percentage of revenue;
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operating margin: revenue less gross margin plus the direct variable costs of production as percentage of revenue;
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days sales of inventory: the number of days’ sales it will take to clear the inventory; and
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number of units processed: encompasses all product units sold including stamps, postage permits, envelopes and filing products.
The quarterly business update and 9M16 (to 31 December 2015) update showed that the company is on track to achieve all KOMs stated in the disclosure document with the exception of the number of units processed metric, which is now expected to be 3.6m units below the original full-year estimate of 62.1m. The margin improvement suggests that the margin estimates included in the disclosure document may have been conservative.
Exhibit 1: G3 Group – key operating metrics
2015 |
2016e |
9M16 to |
2017e |
|
Actual |
Target |
Actual |
Estimate |
|
Gross margin (%) |
19.5 |
21.9 |
23.5 |
22.0 |
Operating margin (%) |
17.6 |
20.1 |
21.5 |
20.2 |
Days sales in inventory |
19.0 |
22.0 |
18.3 |
22.00 |
Number of processed units (m) |
60.32 |
62.1 |
41.8 |
75.31 |
Source: G3 Group data
Acquisition of Formfile
The A$3.4m acquisition of Formfile Records Management Group is the first acquisition made by G3 since listing on the NXT. Key features of the business include:
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Established for 30 years and based in Melbourne, Australia
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Offers data management solutions for businesses of all sizes
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Services allow customers to comply with Australian regulatory requirements for data retention and security
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The services include advice on best-practice document workflows
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Own storage facilities provide customers with an off-site storage option
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Storage may also available at the customers’ premises or using the cloud
No acquisition metrics have been provided but the company has stated that the acquisition will not have a significant impact the KOMs for the year ending 31 March 2016. The acquisition is expected to be EPS positive.
Business segments
The current business of G3 comprises:
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business mail in New Zealand (NZ Mail, Pete’s Post, Fastway Post and SEND);
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tourism mail in the UK; and
■
filing and document management in New Zealand and Australia.
The table below uses data from G3 Group’s FY15 audited accounts, adjusted to include revenue and EBITDA from acquisitions made during FY15.
Exhibit 2: G3 Group – segment revenue and EBITDA FY15
(NZ$000) |
Revenue |
EBITDA |
EBITDA margin |
NZ Mail operations |
35,078 |
1,766 |
5.0% |
UK Mail operations |
5,449 |
1,983 |
36.4% |
Filing and document management |
1,978 |
374 |
18.9% |
Total |
42,505 |
4,123 |
9.7% |
Source: G3 Group disclosure document
Selected financial information
The table below combines the data from G3 Group’s disclosure document and its audited financial statements.
Exhibit 3: G3 Group selected financial information FY15
(NZ$'000) |
Actual |
Reported |
Including |
Pro forma |
|||
FY12 |
FY13 |
FY14 |
FY15 |
FY15 |
FY15 |
||
NZ Mail |
27,643 |
35,078 |
35,078 |
35,078 |
|||
UK Mail |
4,617 |
5,449 |
5,449 |
5,449 |
|||
Filing and document management |
1,978 |
3,500 |
|||||
Total revenue |
19,289 |
25,605 |
32,260 |
40,527 |
42,505 |
44,027 |
|
EBITDA |
2,199 |
2,868 |
3,215 |
3,749 |
4,123 |
4,294 |
|
EBIT |
513 |
2,781 |
3,050 |
3,593 |
N/A |
N/A |
|
NPAT |
-545 |
1,176 |
1,363 |
1,909 |
N/A |
N/A |
|
Dividends |
196 |
4 |
|||||
Total assets |
21,075 |
23,290 |
24,328 |
27,999 |
|||
Cash and cash equivalents |
2,460 |
2,339 |
2,455 |
815 |
|||
Total liabilities |
19,964 |
21,076 |
20,717 |
18,060 |
|||
Total debt |
12,395 |
16,132 |
14,266 |
9,148 |
|||
Net cash flow from operations |
1,431 |
-389 |
4,182 |
3,365 |
|||
EBITDA margin |
11.4% |
11.2% |
10.0% |
9.3% |
|||
EBIT margin |
2.7% |
10.9% |
9.5% |
8.9% |
|||
NPAT margin |
N/A |
4.6% |
4.2% |
4.7% |
|||
Net debt |
9,935 |
13,793 |
11,811 |
8,333 |
|||
Equity |
1,111 |
2,214 |
3,611 |
9,940 |
|||
Average net debt |
11,864 |
12,802 |
10,072 |
||||
Average equity |
1,663 |
2,913 |
6,776 |
||||
ROCE |
20.6% |
19.4% |
21.3% |
||||
ROE |
70.7% |
46.8% |
28.2% |
||||
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Source: G3 Group disclosure document, G3 Group financial statements; *Note: Acquisition comprises Filecorp and Eureka. |
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Comparative company analysis
There are no relevant, directly comparable listed companies. We believe the best comparator is Salmat (SLM.ASX) because its business includes aspects of the mail business and digital data management. It does have other businesses, including its letterbox delivery business (junk mail including catalogues). Freightways has a directly comparable business. However, it is a small part of the overall business, which is in the main a freight/courier business. Both Iron Mountain and Recall are only partially relevant because of their size and the emphasis on document management rather than mail.
Exhibit 4: G3 Group – comparable companies
Ticker |
CCY |
Price |
Market |
P/E |
EV/EBITDA (x) |
EV/EBIT (x) |
Yield (%) |
|||||
($) |
($m) |
FY15e |
FY16e |
FY15e |
FY16e |
FY15e |
FY16e |
FY15e |
FY16e |
|||
Recall Holdings |
REC.ASX |
A$ |
6.57 |
2,070 |
25.8 |
18.1 |
12.7 |
9.16 |
21.0 |
13.6 |
2.8 |
3.7 |
Salmat |
SLM/ASX |
A$ |
0.65 |
104 |
- |
15.9 |
0.0 |
3.9 |
- |
9.8 |
0.0 |
2.6 |
Iron Mountain |
IRM.NYSE |
US$ |
25.83 |
5,450 |
23.3 |
20.6 |
11.1 |
10.1 |
17.5 |
16.1 |
7.4 |
7.6 |
Freightways |
FRE.NZX |
NZ$ |
6.21 |
961 |
20.7 |
17.3 |
12.3 |
10.9 |
14.7 |
12.7 |
4.1 |
4.5 |
Peer group average |
23.3 |
18.0 |
12.0 |
8.6 |
17.7 |
13.1 |
3.6 |
4.6 |
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Source: Bloomberg. Note: Prices as at 28 January 2016.
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