Regenersis
Written by
Regenersis |
Time to focus on erasure potential |
Disposal of business |
Tech hardware & equipment |
16 February 2016 |
Share price performance
Business description
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Analysts
Regenersis is a research client of Edison Investment Research Limited |
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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* |
EPS* |
DPS |
P/E |
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 |
Multiple |
Value |
Value per |
|
Aftermarket Services ex-Digital Care |
78.0 |
||||
Transaction costs |
-10.0 |
||||
Digital Care |
EV/Revs |
3.0 |
1.75 |
5.3 |
|
73.3 |
|||||
Blancco |
EV/Revs |
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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