YPB Group
Written by
YPB Group |
Connecting in the Americas |
Company update |
Industrial support services |
30 March 2016 |
Share price performance
Business description
Next event
Analysts
YPB Group is a research client of Edison Investment Research Limited |
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YPB Group has secured a three-year contract to provide its invisible supply chain authentication solution to a major US casual footwear brand, with its tracer technology set to be incorporated in 70% of the brand’s entire production. The contract, believed to be with Crocs, is the second major transaction secured by YPB in the Americas this quarter. It follows further support for YPB’s product in China with Beijing Sandun Card Technology choosing YPB’s anti-counterfeit technology for security passes for the People’s Procuratorate of Beijing Municipality. Our DCF valuation is A$0.44/share, having incorporated the recently completed A$7.8m capital raise.
Year end |
Revenue |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/14 |
0.1 |
(2.3) |
(2.2) |
0.0 |
N/A |
N/A |
12/15 |
1.7 |
(5.5) |
(4.5) |
0.0 |
N/A |
N/A |
12/16e |
8.5 |
(2.7) |
(1.6) |
0.0 |
N/A |
N/A |
12/17e |
22.2 |
4.3 |
2.0 |
0.0 |
12.0 |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
New directions and contracts
YPB has cemented new relationships and contracts this quarter which will take the company’s anti-counterfeit technology into new regions. In addition to its contracts with Crocs and Sandun Card Technology, YPB has forged an exclusive joint venture with US-based Affyrmx Group focused on the protection of government documents in Latin America. The joint venture agreement, which has a six-year life, has already yielded two revenue producing orders, with YPB to provide high-security vital record documents to the states of Jalisco and Guanajuato, Mexico.
New leadership
YPB has promoted Jens Michel, its global chief operating officer, to chief executive officer, allowing executive chairman and founder John Houston to focus on driving the company’s strategy and building investor relationships. Mr Michel joined YPB in September 2015 and has extensive experience across Asia, Australia, New Zealand and Europe including regional leadership in multi-billion dollar technology companies. YPB has also strengthened its board with the appointment of veteran capital markets executive Gerard Eakin as a non-executive director. Current director Dr Geoff Raby has announced he will not stand for re-election at the 2016 annual general meeting but will continue to support YPB as a consultant in China.
Valuation: DCF valuation revised to A$0.44/share
We have revised our DCF valuation to A$0.44/share from A$0.50/share previously, after taking into account the December placement to raise c A$7.8m at A$0.26/share and including in-the-money options expiring in October 2017 and the cash forthcoming on these options. We have also made a number of earnings adjustments to our FY16 and FY17 forecasts following the reported FY15 results, reflecting higher than expected opex.
Results summary and earnings adjustments
YPB Group reported a net loss before share-based payments of A$5.5m for the 12 months to 31 December 2015, which was greater than our forecast for a net loss of $4m for the period. The chief difference between the reported result and our forecast was the timing of revenue generation and higher opex. The company generated revenue of A$1.7m for the period, versus our forecast for A$3.3m as Exhibit 1 highlights.
Exhibit 1: FY15 reported versus Edison’s FY15e forecast
A$m |
FY15e |
FY15a |
% difference |
Revenue |
3.3 |
1.7 |
(48.6) |
Gross profit |
2.1 |
1.7 |
(19.6) |
EBITDA |
(2.7) |
(4.4) |
62.0 |
EBIT |
(3.2) |
(5.0) |
59.7 |
PBT normalised |
(3.3) |
(5.5) |
70.4 |
EPS normalised (c) |
(3.2) |
(4.5) |
41.5 |
Source: YPB Group, Edison Investment Research
Costs were also higher than we had forecast, in large part due to higher consulting costs (A$1.4m versus our forecast of A$0.6m) as YPB tapped into specialists to complete its acquisitions and strategic partnerships. Employee salaries were also higher than we expected (A$1m versus A$0.6m) as YPB beefed up its senior management team for the year ahead. Offsetting the higher opex were foreign currency gains of A$0.7m for the period.
We have adjusted our forecasts for FY16 and FY17, predominantly for higher operating costs and higher depreciation and intangible amortisation, generated by the company’s several acquisitions. As Exhibit 2 demonstrates, the higher share count following the A$7.78m equity raise in December has resulted in a reduced forecasted EPS loss for FY16. Our FY17 EPS forecast has been reduced by 15.1% after taking into account higher opex costs.
Exhibit 2: Earnings adjustments to FY16e and FY17e
A$m |
FY16e new |
FY16e old |
% chg |
FY17e new |
FY17e old |
% chg |
Revenue |
8.5 |
8.5 |
0.0 |
22.2 |
22.2 |
0.0 |
Gross profit |
4.7 |
4.7 |
0.0 |
12.2 |
12.2 |
0.0 |
EBITDA |
(2.5) |
(1.1) |
133.6 |
4.5 |
4.9 |
(7.7) |
EBIT |
(4.3) |
(2.4) |
81.2 |
2.9 |
3.7 |
(21.6) |
PBT normalised |
(2.7) |
(1.1) |
145.0 |
4.3 |
4.8 |
(10.6) |
NPAT normalised |
(2.7) |
(2.4) |
15.4 |
4.3 |
4.8 |
(10.6) |
EPS normalised (c) |
(1.6) |
(1.7) |
(7.4) |
2.0 |
2.4 |
(15.1) |
Average number of shares (EFPOWA) |
171.4 |
137.6 |
24.6 |
185.0 |
170.4 |
8.6 |
Source: Edison Investment Research
As at 31 December, the company had cash on hand of A$2.9m with another A$5.0m due from Lanstead Capital over the course of 2016 and 2017 and being held as a current and non-current receivable.
Capital raising
YPB completed a A$7.78m share placement in December 2015 to fund the A$1.39m initial cash consideration for the acquisition of Motif Micro as well as for working capital and further investment in growth.
The placement included a A$5m investment by Lanstead by way of a placement of 19.23m shares at A$0.26/share, which after an initial A$0.75m upfront payment (received on 7 January 2016) will be paid in 18 monthly cash instalments, hence the receivable on the balance sheet.
The placement took YPB’s shares in issue to 170.4m. YPB also has 40.1m options with a conversion price of A$0.20, which expire on 31 October 2017.
Valuation
Given its early stage, we use a DCF methodology to derive a valuation. Our DCF valuation, using a WACC of 12.6%, a beta of 1.5x and a terminal growth rate of 2%, is A$0.44/share (previously A$0.50/share). Our DCF also incorporates the A$5m receivable from Lanstead which, together with the A$2.9m cash on hand at 31 December 2015, offsets the A$3m loan from executive chairman John Houston. We have also included the 40.1m in-the-money options that are exercisable at 31 October 2017 at A$0.20/share and the cash that will be generated from these options.
Exhibit 3: DCF valuation
WACC |
12.6% |
Terminal growth rate |
2% |
Present value of cash flows, A$m |
81.7 |
Net cash at 31 December 2015 (includes A$5m receivable from Lanstead Capital), A$m |
4.8 |
PV of cash due from 31 October 2017 in-the-money options, A$m |
7.1 |
Net value for shareholders, A$m |
93.6 |
Number of shares in issue (including in-the-money share options) |
211.5 |
Fully diluted equity value per share, A$ |
0.44 |
Source: Edison Investment Research
We also consider YPB’s peer group, but given that it is not expected to be profitable until FY17, it is not really meaningful to apply the profit-based multiples to our forecasts.
Most of the companies that fall into the peer group are well-established multinationals. Those smaller in size, such as Applied DNA Sciences, Digimarc and Thin Film Electronics, are still not profitable and are trading on forward 12-month EV/Sales multiples of 4-8x.
Exhibit 4: Peer Comparison (using prospective 12-month forward consensus estimates)
Company |
Country |
Currency |
Price |
Market cap |
Market cap (US$m) |
Prospective 12-month forward |
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P/E |
EV/sales (x) |
EV/EBITDA |
EBITDA |
Operating |
||||||
3M Co |
US |
US$ |
161.81 |
97,901 |
97,901 |
18.5 |
3.5 |
12.0 |
29.5% |
24.8% |
Amcor Ltd |
Australia |
A$ |
14.12 |
16,353 |
12,428 |
24.7 |
2.0 |
13.8 |
14.9% |
11.2% |
Applied DNA Sciences Inc |
US |
US$ |
3.05 |
73 |
73 |
N/A |
4.2 |
N/A |
0.0% |
N/A |
Avery Dennison Corp |
US |
US$ |
69.23 |
6,184 |
6,184 |
17.0 |
1.1 |
9.1 |
12.5% |
9.5% |
Catalent Inc |
US |
US$ |
26.34 |
3,280 |
3,280 |
16.7 |
2.6 |
11.4 |
23.2% |
14.5% |
Digimarc Corp |
US |
US$ |
27.64 |
251 |
251 |
N/A |
7.9 |
N/A |
N/A |
N/A |
Dupont Fabros Technology |
US |
US$ |
37.64 |
2,509 |
2,509 |
24.3 |
8.0 |
13.1 |
61.4% |
41.5% |
Essentra Plc |
UK |
£ |
8.50 |
2,229 |
3,188 |
15.0 |
2.0 |
10.4 |
19.1% |
14.3% |
Honeywell International Inc |
US |
US$ |
108.51 |
82,612 |
118,136 |
15.3 |
2.1 |
9.5 |
21.7% |
19.1% |
Intel Corp |
US |
US$ |
31.43 |
148,475 |
212,320 |
12.0 |
2.4 |
6.0 |
39.7% |
27.3% |
Scansource Inc |
US |
US$ |
38.62 |
1,012 |
1,012 |
12.7 |
0.3 |
7.7 |
3.6% |
0.0% |
Thermo Fisher Scientific Inc |
US |
US$ |
139.77 |
55,386 |
55,386 |
16.3 |
3.6 |
13.9 |
25.8% |
23.6% |
Thin Film Electronics Asa |
Norway |
NOK |
3.58 |
1,991 |
239 |
N/A |
7.1 |
N/A |
N/A |
N/A |
Zebra Technologies Corp |
US |
US$ |
65.83 |
3,433 |
3,433 |
9.7 |
1.5 |
8.0 |
18.4% |
16.3% |
Anti-counterfeit companies |
Median |
|
516,339 |
15.3 |
2.5 |
10.4 |
18.7% |
14.4% |
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Source: Bloomberg. Note: Prices at 15 March 2016.
If we apply the median forward 12-month EV/sales multiple to YPB’s FY17 estimated sales, we arrive at an implied equity value of A$0.32, fully diluted, as Exhibit 5 demonstrates. This is a ~35% premium to the current share price.
Exhibit 5: Implied EV/sales using peer comparison on FY17 sales (A$m)
YPB market cap |
41.1 |
Less net cash (includes Lanstead receivable and options due) |
11.9 |
EV |
29.2 |
FY17e sales |
22.2 |
EV/sales (x) |
1.3 |
Applied peer multiple (x) |
2.5 |
Implied EV |
55.7 |
Add net cash (includes Lanstead receivable and options due) |
11.9 |
Implied equity value (A$m) |
67.6 |
Implied fully diluted equity value per share (A$) |
0.32 |
Source: Edison Investment Research
Exhibit 6: Financial summary
A$000s |
2014 |
2015 |
2016e |
2017e |
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Year end 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
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Revenue |
|
|
85 |
1,714 |
8,464 |
22,207 |
Cost of Sales |
0 |
0 |
(3,775) |
(9,997) |
||
Gross Profit |
85 |
1,714 |
4,689 |
12,209 |
||
EBITDA |
|
|
(1,889) |
(4,420) |
(2,548) |
4,508 |
Operating Profit (before amort. and except.) |
|
|
(2,204) |
(5,322) |
(2,574) |
4,434 |
Intangible Amortisation |
0 |
0 |
(1,727) |
(1,526) |
||
Exceptionals |
(2,206) |
282 |
0 |
0 |
||
Other |
0 |
0 |
0 |
0 |
||
Operating Profit |
(4,410) |
(5,040) |
(4,301) |
2,908 |
||
Net Interest |
(68) |
(222) |
(165) |
(125) |
||
Profit Before Tax (norm) |
|
|
(2,272) |
(5,544) |
(2,739) |
4,309 |
Profit Before Tax (FRS 3) |
|
|
(4,478) |
(5,826) |
(4,466) |
2,783 |
Tax |
0 |
0 |
0 |
0 |
||
Profit After Tax (norm) |
(2,272) |
(5,544) |
(2,739) |
4,309 |
||
Profit After Tax (FRS 3) |
(4,478) |
(5,826) |
(4,466) |
2,783 |
||
Average Number of Shares Outstanding (m) |
103.7 |
124.3 |
171.4 |
211.5 |
||
EPS - normalised (c) |
|
|
(2.2) |
(4.5) |
(1.6) |
2.0 |
EPS - (IFRS) (c) |
|
|
(4.3) |
(4.7) |
(2.6) |
1.3 |
Dividend per share (c ) |
0.0 |
0.0 |
0.0 |
0.0 |
||
Gross Margin (%) |
N/A |
N/A |
55.4 |
55.0 |
||
EBITDA Margin (%) |
N/A |
N/A |
N/A |
20.3 |
||
Operating Margin (before GW and except.) (%) |
N/A |
N/A |
N/A |
20.0 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
11,122 |
17,906 |
17,115 |
15,097 |
Intangible Assets |
11,096 |
16,176 |
14,449 |
12,923 |
||
Tangible Assets |
26 |
313 |
1,249 |
2,174 |
||
Non-current Debtors |
0 |
1,417 |
1,417 |
0 |
||
Current Assets |
|
|
2,715 |
8,178 |
6,373 |
21,960 |
Stocks |
136 |
398 |
317 |
539 |
||
Debtors |
174 |
4,905 |
1,422 |
3,732 |
||
Cash |
2,405 |
2,875 |
4,634 |
17,689 |
||
Other |
0 |
0 |
0 |
0 |
||
Current Liabilities |
|
|
(364) |
(1,531) |
(1,707) |
(4,478) |
Creditors |
(364) |
(1,531) |
(1,707) |
(4,478) |
||
Short term borrowings |
0 |
0 |
0 |
0 |
||
Long Term Liabilities |
|
|
(2,748) |
(3,104) |
(3,104) |
(3,104) |
Long term borrowings |
(2,748) |
(3,104) |
(3,104) |
(3,104) |
||
Other long term liabilities |
0 |
0 |
0 |
0 |
||
Net Assets |
|
|
10,725 |
21,449 |
18,677 |
29,474 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
(2,075) |
(5,976) |
1,192 |
4,748 |
Net Interest |
10 |
(144) |
(165) |
(125) |
||
Tax |
0 |
0 |
0 |
0 |
||
Capex |
(17) |
(329) |
(962) |
(999) |
||
Acquisitions/disposals |
(163) |
(414) |
0 |
0 |
||
Financing |
4,506 |
7,145 |
3,583 |
9,431 |
||
Dividends |
0 |
0 |
0 |
0 |
||
Net Cash Flow |
2,261 |
282 |
3,648 |
13,055 |
||
Opening net debt/(cash) |
|
|
125 |
343 |
229 |
(1,530) |
HP finance leases initiated |
0 |
0 |
0 |
0 |
||
Other |
(2,043) |
(168) |
(1,889) |
0 |
||
Closing net debt/(cash) |
|
|
343 |
229 |
(1,530) |
(14,585) |
Source: YPB Group accounts, Edison Investment Research. Note: 2017 accounts include 40m in-the-money options exercise.
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