G3 Group — Q4 key operating metrics (KOMs)

G3 Group — Q4 key operating metrics (KOMs)

G3 Group (GGL) operates three businesses: document and data management in New Zealand and Australia, a unique UK-based tourist souvenir business and a business mail operation in NZ. The performance for the three months to 31 March 2017 was strong, with both gross and operating margins reported in line with recently increased targets. The company attributes its outperformance to strong revenues in the higher-margin document management and tourist collateral businesses versus the lower-margin business mail unit. Encouragingly, inventory days have continued to reduce as product is sold off after increasing with the buy-up of business mail products during Q1. Management stated that KOM results for FY17 were all close to the reset targets and within the allowable variation of 10%.

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G3 Group

Q4 key operating metrics (KOMs)

Industrials

NXT Company Spotlight

5 May 2017

Price

NZ$0.64

Market cap

NZ$35m

Share price performance

Share details

Code

GGL

Listing

NXT

Shares in issue

54.5m

Business description

G3 Group operates three principal business divisions: document and data management in NZ and Australia, a unique UK-based tourist souvenir business and a business mail operation in NZ.

Bull

Experienced board and management with the broad-based skills necessary to drive the acquisition strategy.

The businesses are currently profitable and there has been a track record of profitability and growth.

G3 has successfully acquired and integrated a number of businesses, especially in the last two years. Expansion from business mail in NZ has begun with the RocketMail data management acquisition.

Bear

Dependent on access agreements in NZ & UK where conditions may change and have an adverse impact on the business.

Transformation to new digital media is underway but is still early stage.

The nature of the current business mix limits the EBITDA margin to c 10%, but the planned move into the digital arena and further expansion into document and data management should enable G3 to bolt on higher-margin businesses.

Analysts

Jamie Aitkenhead

+44(0)20 3077 5746

Roger Johnston

+44(0)20 3077 5722

G3 Group (GGL) operates three businesses: document and data management in New Zealand and Australia, a unique UK-based tourist souvenir business and a business mail operation in NZ. The performance for the three months to 31 March 2017 was strong, with both gross and operating margins reported in line with recently increased targets. The company attributes its outperformance to strong revenues in the higher-margin document management and tourist collateral businesses versus the lower-margin business mail unit. Encouragingly, inventory days have continued to reduce as product is sold off after increasing with the buy-up of business mail products during Q1. Management stated that KOM results for FY17 were all close to the reset targets and within the allowable variation of 10%.

Already in line with increased operating targets

Overall, G3 Group’s Q417 KOMs were encouraging. Margins remained strong due to a mix effect in favour of document management and tourist collateral with a lower share from business mail. Gross margin was 26.5% over the quarter versus an increased FY17 target of 24.8%. The comparable figures for operating margins were 23.5% and 22.4% and for days’ sales of inventory the figures were 27.5 and 27.4. In short, the company is performing in line with its increased operating objectives. Document management in both New Zealand and Australia performed well, with market share gains credited with the growth. New Zealand business mail also performed well in Q4 with larger volume customers responding well to the offering. However, management did caution that the ‘soft start’ to the Q117 summer season witnessed in the UK tourist collateral business did have an impact, citing “external market factors around its stamp products” as the cause of the softness.

Acquisitions integrating well, others sought

The RocketMail acquisition is performing in line with management expectations. G3 Group’s management continues to look for complementary businesses to acquire.

Valuation: Trading at 11.2x trailing EBITDA

G3 Group’s current share price of NZ$0.64 gives a market capitalisation of NZ$34.88m and an EV of NZ$48.65 based on net debt of NZ$13.77. This implies a trailing EV/EBITDA of 11.2x (based on an FY16 EBITDA of NZ$4.34m), which is attractive for a company with a strong portfolio of businesses and growth outlook. We believe there is further value in G3, which will be realised as management opportunistically acquires complementary businesses in its core geographies.

Historical financials

Year
end

Revenue
(NZ$)

PBT
(NZ$)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

03/14

32.3

1.8

3.0

0.0

20.6

N/A

03/15

40.5

2.6

4.8

0.0

12.9

N/A

03/16

43.9

3.0

4.1

0.0

15.1

N/A

Source: G3 Group. Note: *EPS refers to diluted earnings per share.

G3 Group coverage is provided through the NXT Research Scheme

Business update

GGL highlighted the following in its Q417 business update:

Solid performance across all divisions in Q417.

KOMs strong: Q417 gross margins 26.5% versus a FY17 target of 24.8% and 21.5% in Q416. Q417 operating margins 23.5% versus an FY17 target of 22.4% and a Q416 figure of 19.4%. Days’ sales of inventory were 27.5 in Q417 versus 20.9 in Q416 and an FY17 target of 27.4.

Document management in both New Zealand and Australia performed well with market share gains credited with the margin expansion.

New Zealand business mail performed well in Q4, with larger-volume customers responding well to the offering.

RocketMail is performing in line with management expectations, with benefits from the head office relocation to G3 headquarters in Avondale, Auckland set to take effect.

Management cautioned that the ‘soft start’ to the Q117 summer season witnessed in the UK tourist collateral business did have an impact, citing “external market factors around its stamp products” as the cause of the softness.

Outlook

All New Zealand and Australian businesses continue to perform well. Management highlights an industry-wide cost increase that will be implemented by a supplier to its UK tourist collateral business. UK tourist collateral will have to consider how to mitigate the effect of this price rise, as the new pricing would result in a significant profit downgrade for the unit in the absence of mitigating management actions. As stated previously, the company continues to look for complementary acquisition targets.

KOMs in Q4

In the disclosure document, GGL defined its KOMs as:

gross margin: group revenue less cost of sales as percentage of revenue;

operating margin: revenue less gross margin less the direct variable costs of production as percentage of revenue; and

days' sales of inventory: the number of days’ sales it will take to clear the inventory.

Exhibit 1: G3 Group Q417 KOMs

2015

Q416

2016

Q417

2017

Actual

Actual

Actual

Actual

Target

Gross margin (%)

19.5%

21.5%

22.9%

26.5%

24.8%

Operating margin (%)

17.6%

19.4%

20.8%

23.5%

22.4%

Days' sales of inventory (no of days)

19.0

20.9

20.9

27.5

27.4

Source: G3 Group

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

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245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

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NSW 2000, Australia

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