YPB Group — Update 30 March 2016

YPB Group — Update 30 March 2016

YPB Group

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YPB Group

Connecting in the Americas

Company update

Industrial support services

30 March 2016

Price

A$0.24

Market cap

A$41m

US$0.76/A$

Net cash (A$m) at 31 December 2015

4.8

Shares in issue

171.4m

Free float

27%

Code

YPB

Primary exchange

ASX

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(14.3)

(15.8)

(22.6)

Rel (local)

(16.5)

(11.8)

(10.2)

52-week high/low

A$0.40

A$0.18

Business description

YPB Group has developed a three-pronged strategy designed to detect and protect brands from counterfeiters. The company owns four Chinese patents over invisible tracers and has secured several contracts for its technology.

Next event

AGM

May 2016

Analysts

Finola Burke

+61 (0)2 9258 1161

Moira Daw

+61 (0)2 9258 1161

YPB Group is a research client of Edison Investment Research Limited

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
(A$m)

PBT*
(A$m)

EPS*
(c)

DPS
(c)

P/E
(x)

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
(local, m)

Market cap (US$m)

Prospective 12-month forward

P/E
(x)

EV/sales (x)

EV/EBITDA
(x)

EBITDA
margin

Operating
margin

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%

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

Year end 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

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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