Blancco Technology Group — Update 25 April 2016

Blancco Technology Group — Update 25 April 2016

Blancco Technology Group

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Blancco Technology Group

Now fully armed

Acquisition and contract win

Software & comp services

25 April 2016

Price

232.50p

Market cap

£184m

Net debt (£m) as at 31 December 2015

8.9

Shares in issue before the tender offer

79.0m

Free float

76.2%

Code

BLTG

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

9.4

35.6

5.7

Rel (local)

7.7

27.2

16.1

52-week high/low

240.5p

139.5p

Business description

Blancco Technology Group is focused on developing and exploiting its leadership positions in providing software for data erasure and for mobile phone diagnostics.

Next event

Close of tender offer

4 May 2016

Analysts

Ian Robertson

+44 (0)20 3681 2523

Dan Ridsdale

+44 (0)20 3077 5729

Blancco Technology Group is a research client of Edison Investment Research Limited

The major contract win for Xcaliber shows the value and potential of its mobile diagnostics solution and Blancco’s (formerly Regenersis) move to bring Xcaliber fully within a broader security and diagnostics offering makes sense. We have raised our earnings forecasts accordingly and continue to believe the shares are attractively valued.

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

83.0

2.2

06/16e

22.7

5.8

5.8

2.0

40.1

0.9

06/17e

31.2

7.5

11.4

2.1

20.4

0.9

06/18e

37.4

9.2

14.0

2.2

16.6

0.9

Note: *Operating profit and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. The figures reflect the ongoing Blancco businesses only.

Acquisition and contract progress

Blancco has announced the acquisition of, and a significant new contract win for, Xcaliber. Blancco already held 49% of the venture but has purchased the remainder for a consideration of $5.5m (£3.8m), $4.7m (£3.3m) of which is deferred and contingent upon certain revenue targets being met. We expected Blancco to acquire Xcaliber when it moved from early-stage loss making to profitable on a sustainable basis, but the contract win appears to have triggered Blancco to take control. The contract is multi-year for the roll-out of Xcaliber’s mobile phone diagnostics software across the 5,000+ North American retail base of a major mobile operator and is an extension of an existing 200 store trial. This news follows the announcements of the aftermarket services business disposal completion on 4 April, then the start of the £50m tender offer process on 6 April, which is based on a 215p to 250p range with a close on 4 May.

Earnings estimates raised

We have adjusted our forecasts to reflect the new contract and the purchase of Xcaliber. The changes to key figures are shown in Exhibit 1. The effect on adjusted EPS is to increase our FY17 and FY18 estimates by over 11%. It should be noted that the effect on estimates of recent events is not purely positive because the increased share price means the impact of the share buyback on per-share estimates is reduced. We now assume a share buyback at the current share price of 232.50p, rather than 211.5p when we last published on Blancco in March.

Valuation: Remains attractive

Our estimates have not increased as much as the share price has since we published our last note but even so, on FY17e P/E 20.4x the shares remain attractively valued compared to the small and medium-sized listed security software companies international comparators in March.

Earnings forecasts raised

Exhibit 1: Changes to forecasts

Rev £m

Rev £m

Change

Op profit £m

Op profit £m

Change

Adj EPS p

Adj EPS p

Adj EPS p

Change

Net debt £m

Net debt £m

Change

Old

New

Old

New

%

Old

New pre share price impact

New post share price impact

%

Old

New

%

FY16e

22.0

22.7

3.2%

5.8

5.8

0.0%

5.3

5.8

5.8

5.7%

-9.6

-7.9

-17.7%

FY17e

28.1

31.2

11.0%

7.1

7.5

5.6%

10.3

12

11.4

10.7%

-12.3

-11.3

-8.1%

FY18e

34.3

37.4

9.0%

8.7

9.2

5.7%

12.6

14.8

14

11.1%

-16.6

-15.8

-4.8%

Source: Edison Investment Research

The effect on revenues and operating profit is due to the consolidation of Xcaliber’s figures and in turn it has improved revenues and profit due to the new contract win. We estimate Xcaliber FY17 revenues will be approximately £3.1m: a combination of the previous revenues of £0.6m and the contract extension benefit of £2.5m. The impact on operating profit is£0.3m in FY17e, but without the contract extension we believe Xcaliber would have still been loss making. Below the operating profit line, the impact is seen through the decline to zero of the share of results of associates and jointly controlled entity figures.

As noted above, the increase in the share price since our last estimates in March means the relevant number of shares to be purchased in the buyback is now lower, which has a slight negative effect on per share measures.

On the balance sheet, our estimates now include the payment of the initial £0.5m, an increase in intangible assets, an assumed working capital increase (£1.5m) to fund growing Xcaliber operations and an increase in provisions for the deferred consideration of £3.3m.

Peer valuation

Based on our upgraded estimates, Blancco shares trade at 21.1x FY17e P/E (see Exhibit 2 below), which remains attractive compared to its global, small and medium-sized listed security software peers (see below).

Exhibit 2: Comparator earnings multiples

Share price (local cur)

Market cap (local m)

Currency

Year end

P/E FY16e
(x)

P/E FY17e
(x)

Blancco (Regenersis)

240.0

139

GBP

Jun-16

31.1

21.1

Sophos

220.0

995

GBP

Mar-16

52.7

26.6

Acxiom Group

21.8

1691

USD

Mar-16

41.3

33.5

Barracuda Networks

15.3

810

USD

Feb-16

43.4

36.1

GB Group

290.0

358

GBP

Mar-16

38.7

31.1

NCC

253.0

698

GBP

May-16

23.2

19.9

F-Secure

2.7

430

EUR

Dec-16

27.9

23.2

Source: Bloomberg, Edison Investment Research. Note: Blancco’s market cap and FY16e P/E are adjusted for £50m share buyback on a pro forma Blancco-only basis, assuming the share buyback took place at the beginning of FY16. Prices as at 20 April.

Exhibit 3: Financial summary

Year end June

£ '000s

2015

2016e

2017e

2018e

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

15,013

22,700

31,188

37,398

EBITDA

 

 

8,151

6,394

8,249

10,173

Operating Profit (before amort. and except.)

4,023

5,764

7,484

9,223

Intangible Amortisation

2,026

2,600

2,600

2,600

Exceptionals

2,481

852

0

0

Other

371

750

650

575

Operating Profit

(1,601)

1,462

4,234

6,048

Net Interest

(796)

(900)

(600)

(500)

Exceptional Financial

419

434

300

300

Profit Before Tax (norm)

 

 

2,652

5,064

7,184

9,023

Profit Before Tax (FRS 3)

 

 

(1,232)

1,096

3,934

5,848

Tax

(869)

(551)

(727)

(1,110)

Profit After Tax (norm)

1,670

4,413

6,358

7,813

Profit After Tax (FRS 3)

5,116

1,113

2,908

4,438

Post Tax Result from Discontinued Operations

8,382

1,102

0

0

Average Number of Shares Outstanding (m)

77.6

74.2

55.8

55.8

EPS - normalised (p)

 

 

2.8

5.8

11.4

14.0

EPS - normalised and fully diluted (p)

 

2.8

5.8

11.4

14.0

EPS - (IFRS) (p)

 

 

(3.8)

(0.3)

5.2

8.0

Dividend per share (c)

5.0

2.0

2.1

2.2

EBITDA Margin (%)

54.3

28.2

26.5

27.2

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

26.8

25.4

24.0

24.7

BALANCE SHEET

Fixed Assets

 

 

119,086

69,532

68,707

68,032

Intangible Assets

110,198

69,128

68,203

67,403

Tangible Assets

6,355

343

443

568

Investments

2,533

61

61

61

Current Assets

 

 

56,179

34,653

39,884

45,835

Stocks

9,480

228

228

228

Debtors

34,556

6,468

8,288

9,682

Cash

12,143

27,957

31,368

35,924

Other

0

0

0

0

Current Liabilities

 

 

(43,219)

(10,698)

(13,571)

(15,005)

Creditors

(43,219)

(10,698)

(13,571)

(15,005)

Short term borrowings

0

0

0

0

Long Term Liabilities

 

 

(9,380)

(27,535)

(27,415)

(27,990)

Long term borrowings

(4,357)

(20,098)

(20,098)

(20,098)

Other long term liabilities

(5,023)

(7,437)

(7,317)

(7,892)

Net Assets

 

 

122,666

65,952

67,605

70,872

CASH FLOW

Operating Cash Flow

 

 

8,640

3,146

9,302

10,212

Net Interest

(758)

(599)

(600)

(500)

Tax

(963)

(610)

(727)

(1,110)

Capex

(6,347)

(2,150)

(2,540)

(2,875)

Acquisitions/disposals

(4,362)

53,705

(770)

0

Financing

(3,630)

(50,000)

0

0

Dividends

(3,381)

(2,565)

(1,254)

(1,171)

Net Cash Flow

(10,801)

927

3,411

4,556

Opening net debt/(cash)

 

 

(20,601)

(7,785)

(7,859)

(11,270)

HP finance leases initiated

0

0

0

0

Other

(2,015)

(854)

0

0

Closing net debt/(cash)

 

 

(7,785)

(7,859)

(11,270)

(15,826)

Source: Blancco, Edison Investment Research. Note: Forecasts assume share buyback at strike price of 240p.

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Schumannstrasse 34b

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Germany

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United Kingdom

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US

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NSW 2000, Australia

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New Zealand

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

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

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Wellington 6011

New Zealand

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