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Regenersis — Update 22 March 2016

Regenersis — Update 22 March 2016

Regenersis

Analyst avatar placeholder

Written by

Regenersis

Visibility on Blancco's value

Interim results

Software & comp services

22 March 2016

Price

211.50p

Market cap

£167m

Net debt (£m) at 31 December 2015

8.9

Shares in issue

79.0m

Free float

76.2%

Code

RGS

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

9.1

16.0

2.9

Rel (local)

4.8

14.1

14.8

52-week high/low

231.25p

139.50p

Business description

After completing the disposal of the Aftermarket Services business, Regenersis, which will be renamed Blancco Technology Group, will focus on developing and exploiting its leadership position in providing data erasure software to enterprises and government bodies worldwide.

Next events

Transaction completion

Expected Q2 CY16

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

Regenersis’s interim results show the Blancco data erasure software business as the sole continuing operation for the first time, allowing us to assess more fully the quality, potential and value of the business. We are encouraged by what we find in both the financial and operational data. Based on traditional earnings multiples, the shares trade at a discount to listed comparators, while our reverse DCF scenario is substantially less optimistic about the widespread adoption of Blancco that management anticipates in the medium term.

Year end

Revenue (£m)

Operating
profit* (£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

06/15

15.0

4.0

2.8

5.0

75.5

2.4

06/16e

22.0

5.8

5.3

2.0

39.9

0.9

06/17e

28.1

7.1

10.3

2.1

20.5

1.0

06/18e

34.3

8.7

12.6

2.2

16.8

1.0

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. The above figures reflect the pro forma Blancco business only due to the disposal expected to complete in Q2 CY16.

Operations and strategy on track

The interim results on 8 March contained little in the way of fresh news but did allow, for the first time, visibility into the ongoing core Blancco business, its revenue mix and its cost base. The breakdown in revenue shows the exciting traction that Blancco is gaining for its live environment products (invoiced sales up 350% H1-on-H1, to £0.9m) and the operational metrics shown in the presentation demonstrate the underlying quality and direction of the business, with trailing 12-month client retention of nearly 90% and repeat sales of c 115%.

Forecasts reflect disposal but small hurdles remain

The disposal of the Aftermarket Services business is still subject to competition authority approval in Germany, Poland and Russia but management does not anticipate any material issues and expects completion in Q2 CY16. We have revised our forecasts to reflect the completion of the disposal and the £50m share buyback at the end of June. We assume a share buyback price of 211.5p.

Valuation: Visibility on value in Blancco

Now that we have modelled both revenue and cost forecasts for Blancco, we have undertaken a more detailed valuation analysis of the company. We have applied both traditional earnings multiples and a reverse DCF to do this. Both methods suggest that at the current share price the shares are attractively valued. The shares trade on P/E discounts to a selection of small and medium-sized security software companies with strong market positions listed in the UK and overseas that have less impressive consensus forecast earnings growth profiles. The reverse DCF scenario we find to match the current share price is substantially less ambitious than the increase in revenues which management anticipates as data erasure moves to the mainstream and mass adoption.

Visibility on Blancco’s value

One last set of small hurdles on disposal

Having obtained shareholder approval for the disposal of the Aftermarket Services business on 2 March, management anticipates that it will receive the required clearances from the Russian, Polish and German authorities in Q2 CY16. We expect completion will follow soon after and the £50m tender offer share buyback will be launched.

Following the interim results, we have removed the Aftermarket Services business from our forecasts and now treat them as discontinued operations.

Our forecasts assume all goes to plan and, for simplicity’s sake, we assume the events are concurrent on the last day of FY16. We assume the share buyback will be priced at the current share price, 211.5p, leading to 23.6m shares being repurchased. The impact of a 5% change in the share buyback price on our EPS estimates (FY17 onwards) is approximately 2%.

Limited fresh operational news, but insight on key metrics

The results actually contained little fresh non-financial information about Blancco. They did, however, include information on several important metrics that reassured us about the quality and the direction of the business. Most notably, both trailing 12-month client retention rates of nearly 90% and repeat sales rates of over 110% suggest Blancco has satisfied, loyal customers who are willing and able to buy more. Furthermore, the presentation slides suggest the trend for these measures, together with average spend per customer, is on an upward path.

Changes to forecasts

Previously our forecasts for Blancco’s revenues were based on summary figures for the division. The interim results included a breakdown of the revenues across Live Environment Erasure (LEE), Mobile and IT & Other, and we have adapted our forecasts accordingly. The only comparable figures between the new and old forecasts are the overall revenues for Blancco and the divisional operating margin.

Revenue forecasts edged up

We maintain our revenue forecast for Blancco for FY16, but we have raised FY17 from £27.5m to £28.1m and introduced a forecast for FY18 of £34.3m. Although the progress of both Mobile, with invoiced sales up 50% H1-on-H1, and IT & Other, up 23% H1-on-H1, was impressive, the take-off in revenues for LEE, up 350% H1-on-H1 at £0.9m, was the standout performance. LEE is one of the most exciting areas of data erasure both because the end markets to which it applies (cloud computing, virtual machines and hosting) are growing rapidly, but also because they are areas where both service providers and end users are very sensitive to issues of data security.

Margins edged down

Although the 35% divisional operating margin achieved by Blancco in H116 was ahead of our previous estimate of 32%, we only edge our forecasts for FY16 up to 33%. Management has stated that although the process of finding the correct management and sales resource in the US had been a bit slower than expected, it is now back on track and the cost base will increase accordingly. We maintain our 31% divisional operating margin forecast for FY17, but reduce this to 30% for FY18, in line with management’s long-term guidance.

New long-term tax

The change in the corporate structure means we are also changing our tax assumptions for the group, moving from 15% to 20%.

Balance sheet strong with cash generation

Our cash flow and balance sheet forecasts now show the transaction and share buyback and as a result, our estimate of year end cash for FY16 is £9.6m. Furthermore, our forecasts also show the ongoing cash generation of Blancco with year-end net cash estimates for FY17 and FY18 of £12.3m and £16.6m, respectively.

Management has stated it believes a financing facility of £10m for investment and acquisitions would be appropriate and available. This would give Blancco approximately £20m of headroom, which we would regard as a more than adequate resource to drive the growth of the group.

Valuation

Now that we have modelled both revenue and cost forecasts for Blancco, we have undertaken a more detailed analysis of the valuation of Regenersis and have applied both traditional earnings multiples and reverse DCF to do this. Our historical sum-of-the-parts valuation is now redundant. Both our methods suggest Regenersis is attractively valued at the current share price.

Digital Care no longer features in our forecasts, but negotiations for its disposal continue. We suggested in our 16 February note, Time to focus on erasure potential, that a price in the region of £5m might be achievable and we believe that, although not material to the investment case, it would be a welcome fillip to the finances.

Discount on multiples approach

Looking to FY16e and FY17e, Blancco’s shares trade on P/Es of 27.7x and 20.5x, respectively (adjusted for share buybacks). As the only listed player in its market, there are no direct comparators for Blancco. However, if we look to a selection of other small or medium-sized security software companies with strong market positions listed in the UK and overseas we find that, particularly when looking to FY17e, Regenersis trades at significant discounts despite its stronger short-term forecast earnings growth compared to all but Sophos. We note that the FY17e forecasts for Regenersis still only include the relatively early steps that data erasure software is taking in the enterprise environment from niche market to widespread, if not universal, adoption.

Exhibit 1: Comparator earnings multiples

Share price (local cur)

Market cap (local m)

Currency

Year end

P/E 2016 (x)

P/E 2017 (x)

Regenersis/Blancco

211.5

117*

GBP

Jun-16

27.7*

20.5

Sophos

213.0

1006

GBP

Mar-16

52.7

26.2

Acxiom Group

21.8

1698

USD

Mar-16

42.0

31.7

Barracuda Networks

15.5

822

USD

Feb-16

44.0

36.5

GB Group

253.0

317

GBP

Mar-16

33.7

27.2

NCC

254

700

GBP

May-16

23.3

20.0

F-Secure

2.4

416

EUR

Dec-16

21.9

19.3

Source: Bloomberg, Edison Investment Research. Note: *Regenersis market cap and FY16 P/E are shown adjusted for share buyback (£50m at 211.5p) and on a pro forma Blancco only basis. Priced as at 18 March.

Undemanding reverse DCF scenario

In our reverse DCF we assume a cost of capital of 10% and roll our model forward from FY19 to FY27 with a terminal growth rate of 2.5%. The scenario we find that yields the current share price of 211.5p is one in which growth in all three business areas (LEE, Mobile, IT & Others) fades to 5% pa by 2023, with divisional operating margins of 30%.

Given the current strong growth, the latent demand for data erasure solutions and the high level of recurring revenues, we would regard this as far from overly optimistic or operationally demanding. We note that for FY18 all that is required to achieve the £34.3m revenues we forecast is for Blancco to add approximately £6.2m on top of the recurring licence and subscription base, compared to the £6.1m we forecast it to add in FY17. Furthermore, if the data erasure market were to ‘cross the chasm’ (cf Geoffrey A Moore 2002) to become a mass adoption, must-have application across the enterprise IT industry, then these figures could be significantly short of the actual outcome, not only with regard to revenues but also operating margins.

Exhibit 2: Reverse DCF scenario for 211.5p – revenue mix (£m)

Source: Edison Investment Research

Exhibit 3: Reverse DCF scenario for share price 211.5p

(£m)

FY16e

FY17e

FY18e

FY19e

FY20e

FY21e

FY22e

FY23e

FY24e

FY25e

FY26e

FY27e

FY17e

FY18e

FY19e

FY20e

FY21e

FY22e

FY23e

FY24e

FY25e

FY26e

FY27e

LEE

2.0

4.2

6.7

10.1

14.1

18.3

21.1

22.2

23.3

24.4

25.6

26.9

LEE revenue growth

110%

60%

50%

40%

30%

15%

5%

5%

5%

5%

5%

Mobile

3.8

4.9

6.1

7.4

8.7

9.7

10.7

11.3

11.8

12.4

13.0

13.7

Mobile revenue growth

30%

25%

21%

18%

13%

10%

5%

5%

5%

5%

5%

IT and Other

16.3

19.0

21.5

24.0

26.4

28.7

31.0

32.6

34.2

35.9

37.7

39.6

IT and Other revenue growth

17%

13%

12%

10%

9%

8%

5%

5%

5%

5%

5%

Divisional operating margin

33%

31%

30%

30%

30%

30%

30%

30%

30%

30%

30%

30%

Group operating margin

26%

25%

25%

26%

26%

27%

27%

27%

27%

27%

27%

27%

Source: Edison Investment Research

Exhibit 4: Financial Summary

Year end June

£000s

Restated 2015

2016e

2017e

2018e

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

15,013

22,000

28,088

34,298

EBITDA

 

 

10,177

6,390

7,912

9,617

Operating Profit (before amort. and except.)

4,023

5,760

7,147

8,667

Intangible Amortisation

0

2,600

2,600

2,600

Exceptionals

2,900

1,286

300

300

Other

371

750

650

575

Operating Profit

7,294

10,396

10,697

12,142

Net Interest

(796)

(900)

(600)

(500)

Exceptional Financial

0

0

0

0

Profit Before Tax (norm)

 

 

2,652

5,060

6,922

8,617

Profit Before Tax (FRS 3)

 

 

(2,397)

558

3,372

5,142

Tax

(869)

(550)

(674)

(1,028)

Profit After Tax (norm)

1,670

4,410

6,148

7,489

Profit After Tax (FRS 3)

5,116

1,110

2,698

4,114

Post Tax Result from Discontinued Operations

8,382

1,102

Average Number of Shares Outstanding (m)

77.6

76.6

76.6

53.0

EPS - normalised (p)

 

 

2.8

5.3

10.3

12.6

EPS - normalised and fully diluted (p)

 

2.8

5.3

10.3

12.6

EPS - (IFRS) (p)

 

 

(3.8)

(0.6)

2.6

6.3

Dividend per share (c)

5.0

2.0

2.1

2.2

EBITDA Margin (%)

67.8

29.0

28.2

28.0

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

26.8

26.2

25.4

25.3

BALANCE SHEET

Fixed Assets

 

 

119,086

65,232

64,482

63,957

Intangible Assets

110,198

63,078

62,153

61,353

Tangible Assets

6,355

343

443

568

Investments

2,533

1,811

1,886

2,036

Current Assets

 

 

56,179

34,787

38,771

44,483

Stocks

9,480

228

228

228

Debtors

34,556

4,822

6,156

7,517

Cash

12,143

29,737

32,387

36,738

Other

0

0

0

0

Current Liabilities

 

 

(43,219)

(10,336)

(12,209)

(13,820)

Creditors

(43,219)

(10,336)

(12,209)

(13,820)

Short term borrowings

0

0

0

0

Long Term Liabilities

 

 

(9,380)

(24,735)

(24,615)

(25,190)

Long term borrowings

(4,357)

(20,098)

(20,098)

(20,098)

Other long term liabilities

(5,023)

(4,637)

(4,517)

(5,092)

Net Assets

 

 

122,666

64,948

66,429

69,431

CASH FLOW

Operating Cash Flow

 

 

8,640

4,426

8,451

9,867

Net Interest

(758)

(599)

(600)

(500)

Tax

(963)

(609)

(674)

(1,028)

Capex

(6,347)

(2,150)

(2,540)

(2,875)

Acquisitions/disposals

(4,362)

54,385

(770)

0

Financing

(3,630)

(50,000)

0

0

Dividends

(3,381)

(2,565)

(1,217)

(1,112)

Net Cash Flow

(10,801)

2,708

2,650

4,351

Opening net debt/(cash)

 

 

(20,601)

(7,785)

(9,639)

(12,289)

HP finance leases initiated

0

0

0

0

Other

(2,015)

(854)

0

(0)

Closing net debt/(cash)

 

 

(7,785)

(9,639)

(12,289)

(16,640)

Source: Company accounts, Edison Investment Research

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