YPB Group — Update 10 June 2016

YPB Group — Update 10 June 2016

YPB Group

Analyst avatar placeholder

Written by

YPB Group

Upgrading on guidance

Earnings upgrade

Industrial support services

10 June 2016

Price

A$0.24

Market cap

A$46m

Net debt (A$m) at 31 March 2016
(excludes Lanstead receivable)

1.8

Shares in issue

191.9m

Free float

65%

Code

YPB

Primary exchange

ASX

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

2.0

(3.8)

(3.8)

Rel (local)

0.5

(8.0)

(2.6)

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 events

Interim results

July 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 (YPB) combines patented anti-counterfeiting technology with security packaging solutions, consulting and forensic services to help businesses protect their brands from the risks of counterfeiting and product diversion. The company recently completed a A$4.54m share placement and provided guidance to the market for FY17 profit before tax of A$5m. We have incorporated this guidance and the effect of the share placement into our forecasts, resulting in a 24% upgrade to our FY17e PBT to A$5.4m. Our DCF valuation is A$0.43/share (A$0.44 previously) following the upgrade and after incorporating the additional 18.91m shares in issue.

Year end

Revenue (A$m)

PBT*
(A$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/14

0.1

(1.9)

(1.8)

0.0

N/A

N/A

12/15

1.7

(5.7)

(4.5)

0.0

N/A

N/A

12/16e

10.8

(2.1)

(1.1)

0.0

N/A

N/A

12/17e

26.9

5.4

2.6

0.0

9.2

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

FY17 guidance for A$5m PBT

YPB announced on 19 May that it expects to reach cash flow break-even by end Q117 and deliver profit before tax of A$5m for the year ending 31 December 2017. This is the first time the company has given guidance for FY17 and follows a spate of successful contracts for the group, the latest being a memorandum of understanding to supply its technology to global packaging group Orora, a A$1.2m three-year supply contract to Comtech Solutions for New Zealand exports to China and the fourth Mexican contract through its Affyrmx JV. YPB noted that its forecast was achievable across a range of revenue outcomes due to the flexibility of its costs base. A key assumption of the profit guidance is that the company would have sufficient access to capital until it reaches break-even and is self-sustainable.

Share placement raises A$4.54m

The company has bolstered its cash position with an 18.91m share placement at A$0.24/share to raise A$4.54m (before expenses) to accelerate conversion of its business opportunity pipeline into recurring revenues, expand into new markets and enhance its solutions suite through R&D investment. The A$4.54m share placement, announced on 24 May, was oversubscribed, we understand, by at least A$500,000, and was supported by both existing and new shareholders, including six new institutional investors.

Valuation: DCF valuation of A$0.43/share

Our DCF valuation is A$0.43/share (previously A$0.44/share) after incorporating the profit upgrade and the impact of shares issued. On the same basis, and after including the future value of in-the-money options, YPB is trading on FY16e EV/sales of c 2.7x (or 3.4x excluding the value of options) and FY17e EV/sales of c 1.1x (1.4x), which compares to the 12-month forward EV/sales multiple of 2.9x of its listed peers.

Earnings adjustments

We have adjusted our forecasts to take into account the company’s guidance for A$5.0m profit before tax in FY17. YPB has highlighted in its release to the market on 19 May that business from existing clients and advanced opportunities could potentially convert into FY17 revenue of A$37.8m. However, it noted that its profit forecast was achievable across a range of revenue outcomes.

We have assumed that YPB adds another A$2.3m to its forecast FY16 revenue base and A$4.7m to its forecast FY17 revenue base, which in turn is expected to convert to PBT of A$5.4m, a little ahead of the company’s guidance. We believe the contract momentum being demonstrated by the company will enable it to beat its FY17 guidance.

Our EPS forecasts have also been adjusted to take into account the increased shares in issue as a result of the share placement. Exhibit 1 details our earnings adjustments.

Exhibit 1: Earnings adjustments to FY16 and FY17

FY16e new

FY16e old

% chg

FY17e new

FY17e old

% chg

Revenue (A$m)

10.8

8.5

27.9

26.9

22.2

21.3

Gross profit (A$m)

5.7

4.7

22.0

14.3

12.2

16.9

EBITDA (A$m)

(1.9)

(2.5)

(24.1)

5.5

4.5

22.0

PBT normalised (A$m)

(2.1)

(2.7)

(23.0)

5.4

4.3

24.4

NPAT normalised (A$m)

(2.1)

(2.7)

(23.0)

5.4

4.3

24.4

EPS normalised (c)

(1.1)

(1.6)

(31.0)

2.6

2.0

28.5

Average number shares (m)

191.3

171.4

11.6

204.6

185.0

10.6

Source: Edison Investment Research

Valuation

We use the DCF methodology to value YPB Group, arriving at A$0.43/share based on a WACC of 12.6% and a terminal growth rate of 2%. We also dilute for 40.1m in-the-money options, which have a conversion price of A$0.20/share and expire on 31 October 2017. Our FY17 forecasts incorporate the cash due from these options. Exhibit 2 sets out our valuation.

Exhibit 2: DCF valuation

Present value of cash flows (A$m)

43.5

Terminal value (A$m)

38.9

Net cash* (A$m)

9.3

PV of cash from 31 October 2017 options (A$m)

7.1

Net equity value (A$m)

98.8

Fully diluted shares in issue (m)

231.3

Net equity value per share (A$)

0.43

Source: Edison Investment Research. Note: *Includes the $5m in staggered payments from Lanstead Capital for its shareholding and the A$4.54m raised in the share placement. Net debt at 31 December was A$0.2m.

Peer comparison

YTB’s peer group, which predominantly comprises large corporations, is trading on a 12-month forward EV/sales multiple of 2.9x. By comparison, YPB (adjusted for the shares issued, the in-the-money options and the Lanstead receipts) is trading on an FY16e EV/sales multiple of c 2.7x and an FY17e EV/sales multiple of c 1.1x. Exhibit 3 highlights the peer group. If we exclude the A$7.1m future value we place on the in-the money-options, YPB is trading on an FY16 EV/Sales multiple of 3.4x and FY17 EV/Sales multiple of 1.4x.

Exhibit 3: Peer comparison on 12-month forward earnings

Company

Country

Currency

Price

Market cap m (local)

Market cap (US$m)

P/E
(x)

EV/sales (x)

EV/ EBITDA (x)

EBITDA margin

Operating margin

3M CO

US

US$

169.99

103,101

103,101

19.6

3.7

12.6

29.4%

24.6%

AMCOR LIMITED

Australia

A$

16.35

18,936

13,564

28.7

2.3

15.8

14.8%

11.2%

APPLIED DNA SCIENCES INC

US

US$

2.95

71

71

N/A

4.9

N/A

0.0%

N/A

AVERY DENNISON CORP

US

US$

74.91

6,680

6,680

18.3

1.3

9.9

12.7%

9.7%

CATALENT INC

US

US$

29.06

3,623

3,623

23.4

2.9

12.9

22.4%

12.7%

DIGIMARC CORP

US

US$

27.17

247

247

N/A

8.2

N/A

N/A

N/A

DUPONT FABROS TECHNOLOGY

US

US$

42.12

3,135

3,135

25.4

7.8

12.6

61.7%

41.1%

ESSENTRA PLC

UK

£

8.36

2,196

3,211

15.0

2.0

10.4

18.9%

13.9%

HONEYWELL INTERNATIONAL INC

US

US$

114.72

87,430

87,430

16.3

2.2

10.4

21.5%

18.9%

INTEL CORP

US

US$

31.39

148,224

148,224

12.5

2.6

6.8

39.0%

26.1%

THERMO FISHER SCIENTIFIC INC

US

US$

151.16

59,483

59,483

17.5

3.8

14.9

25.6%

23.5%

THIN FILM ELECTRONICS ASA

Norway

NOK

4.91

3,339

400

N/A

14.0

N/A

N/A

N/A

ZEBRA TECHNOLOGIES CORP-CL A

US

US$

51.76

2,704

2,704

8.9

1.4

8.0

17.6%

15.5%

Anti-counterfeit companies

Median

431,872

16.9

2.9

11.5

18.9%

13.9%

Source: Bloomberg. Note: Prices as at 26 May 2016.

Exhibit 4: Financial summary

A$000s

2014

2015

2016e

2017e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

85

1,637

10,829

26,937

Cost of Sales

0

0

(5,107)

(12,660)

Gross Profit

85

1,637

5,723

14,277

EBITDA

 

 

(1,776)

(5,458)

(1,934)

5,501

Operating Profit (before amort. and except.)

 

 

(1,785)

(5,533)

(1,961)

5,427

Intangible Amortisation

(306)

(827)

(1,727)

(1,526)

Exceptionals

(2,206)

0

0

0

Share based payments

(113)

(282)

(374)

(393)

Other

0

0

0

0

Operating Profit

(4,410)

(6,642)

(4,062)

3,508

Net Interest

(68)

(120)

(147)

(68)

Profit Before Tax (norm)

 

 

(1,853)

(5,653)

(2,108)

5,359

Profit Before Tax (FRS 3)

 

 

(4,478)

(6,762)

(4,209)

3,440

Tax

0

0

0

0

Profit After Tax (norm)

(1,853)

(5,653)

(2,108)

5,359

Profit After Tax (FRS 3)

(4,478)

(6,762)

(4,209)

3,440

Average Number of Shares Outstanding (m)

103.7

124.3

191.3

204.6

EPS - normalised (c)

 

 

(1.8)

(4.5)

(1.1)

2.6

EPS - (IFRS) (c)

 

 

(4.3)

(5.4)

(2.2)

1.7

Dividend per share (c )

0.0

0.0

0.0

0.0

Gross Margin (%)

100.0

100.0

52.8

53.0

EBITDA Margin (%)

N/A

N/A

N/A

20.4

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

N/A

N/A

N/A

20.1

BALANCE SHEET

Fixed Assets

 

 

11,122

18,142

17,351

15,097

Intangible Assets

11,096

16,176

14,449

12,923

Tangible Assets

26

313

1,249

2,174

Receivable from Lanstead for shares

0

1,653

1,653

0

Current Assets

 

 

2,715

7,624

9,886

27,232

Stocks

136

179

389

678

Debtors

174

1,221

1,820

4,527

Cash

2,405

2,877

7,206

22,027

Lanstead receivable for shares

0

3,347

472

0

Current Liabilities

 

 

(364)

(1,418)

(2,184)

(5,432)

Creditors

(364)

(1,418)

(2,184)

(5,432)

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

21,244

21,949

33,793

CASH FLOW

Operating Cash Flow

 

 

(2,075)

(5,767)

(1,977)

5,753

Net Interest

10

76

(147)

(68)

Tax

0

0

0

0

Capex

(161)

(299)

(962)

(999)

Acquisitions/disposals

0

(462)

0

0

Financing

4,900

7,145

4,540

8,011

Dividends

0

0

0

0

Other*

0

(221)

2,875

2,125

Net Cash Flow

2,674

472

4,329

14,822

Opening net debt/(cash)

 

 

125

343

227

(4,102)

HP finance leases initiated

0

0

0

0

Other

(2,456)

(356)

0

0

Closing net debt/(cash)

 

 

343

227

(4,102)

(18,923)

Source: YPB Group accounts, Edison Investment Research. Note: 2017 forecast assumes exercise of 40m in-the-money options. *In FY16 and FY17, YPB will receive a total payment of $5m for shares issued to Lanstead Capital. This is reflected in the ‘Other’ line.

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by YPB Group and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

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

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Research: Healthcare

Deinove — Update 10 June 2016

Deinove

Continue Reading

Subscribe to Edison

Get access to the very latest content matched to your personal investment style.

Sign up for free