Blancco Technology Grouphttp://www.blancco.com/en TICKER: BLTG EXCHANGE: AIM
Blancco Technology Group is a leading, global provider of mobile device diagnostics and secure data erasure solutions.
Blancco is the world's leading global developer of 'data erasure' software, used to protect governments & corporates from ID/data theft and cyber-crime, along with being a pioneer in smartphone diagnostics (Xcaliber). The wider Regenersis group is in the process of selling its Depot Solutions (repair and refurbishment of electronic devices), Digital Care (insurance against damage to mobile phone screens) and set-top-box diagnostic operations.
Strong H1 results today delivered Headline Operating Profit (HOP) margins (pre central costs) of 35.4%, compared to our estimates of 33%, and trading was said to be in line with FY expectations. Indeed, we think there is a decent chance that Blancco could exceed our FY16 adjusted PBTA of £5.0m, having delivered £2.4m in H1.
Cyber-crime is so serious that corporates and governments are ploughing billions into protecting their IT networks - a market estimated to be worth $109bn this year and expanding at an 11.3% rate. Blancco has carved out an almost impregnable position in the 'sweet spot' of data erasure. Consequently, for the 6 months ending December, Blancco - assisted by the SafeIT and Tabernus acquisitions - saw turnover, HOP and adjusted EPS soar 46% (£9.9m), 109% (£2.7m), 285% (2.43p) respectively.
Blancco also achieved a world first by launching its 'smartphone erasure-and-diagnostics solution' incorporating Xcaliber technology (49% owned, and co-located in Atlanta). Xcaliber is moving towards EBITDA breakeven in H2'16, and as such we suspect it might become majority controlled by Blancco sometime in FY17. Strategically too, once the disposals of the non-core Repair Services Business (RSB to CTDI for €103.5m, or £78.4m) and Digital Care have been concluded, the group will be a 100% pure play software developer, backed by unique IPR.
Net debt closed December at £8.9m (vs net cash of £7.8m in June 2015), as a result of acquisitions (Tabernus), transaction fees, lower than expected cash conversion at the discontinued activities (50%) and dividends. However, we expect this to bounce back in H2, with net cash seen closing June 2016 at £9.9m, reflecting the receipt of the £78.4m in RSB proceeds, offset by the £50m tender offer.
We predict turnover to jump 43% this year to £21.5m and by another 29% to £27.7m in FY17, along with delivering adjusted EPS growth of >30% pa for the foreseeable future. Our valuation of Blancco nudges higher to £120m on the back of the higher H1'16 margins and stronger FY17 top line growth. This is equivalent to a FY17 EV/sales multiple of 4.6x and generates an updated share price target of 240p per share (vs 227p before).
NB you can see the RGS management present at a webinar this Thursday 10th at 4.45pm: Click here to register
Today's results showed group FY15 turnover (y/e June) at £202.6m (+2.6%, or +16.5% in constant currency), headline operating profit of £15.4m (+40%, or +52.7% CCs) and closing net cash at £7.8m. All of these outcomes were in line with our estimates, and this was despite suffering significant forex headwinds (stronger £ vs €, Polish Zloty and other EM currencies).
Encouragingly too, Headline Operating Profit margins rose from 5.6% to 7.6%, as a greater proportion of profits were generated from Software and Advanced Solutions. Cash conversion improved to 75% from 41% LY in spite of opening of several new locations - while the dividend was hiked 25% to 5p/share, equivalent to a 3.6% yield and >3x covered by adjusted EPS of 16.19p.
Looking ahead, both YTD trading and the outlook for the remainder of FY16 are said to be "in line with expectations" - with Blancco expanding rapidly and delivering "excellent margins in a buoyant market". FY17 should witness a significant jump in profits, as the drag from the legacy Nokia Europe contract diminishes.
Most importantly, the Board also announced that it was "exploring various strategic alternatives, including the potential sale" (or perhaps even spin off) of its Depot Solutions, set-top-box diagnostics and DigitalCare (handset screen insurance) operations - under the umbrella of a new Repair services organisation, headed by CEO Ian Powell.
This will help focus attention on Blancco, Regenersis' unique 'data erasure' division. It is the undisputed world leader in this field (>7x bigger than closest rival) which reported: FY15 turnover of £15.0m up 30% (or +40.9% LFL in constant currency), adjusted EBITA of £5.4m and margins of 36%. On its own, we think the software division is worth 166p per diluted share, or more than the market capitalisation of the entire group; based on a 6x FY16 sales multiple for the enlarged software arm (ie including today's $12m acquisition of US rival Tabernus), along with adding another $4.9m for RGS' 49% stake in mobile diagnostics firm Xcaliber. This is conservatively pitched towards the bottom end of cyber security peers, which trade on an average of 8.4x revenues.
Adopting a similar cautious view with regards to our sum-of-the-parts (SOTP), and valuing the Repairs unit at £71.4m, we still reach a revised target price for the whole group of 232p per diluted share, which is 66% above yesterday's level.
REMINDER - Matthew Peacock and Jog Dhody will discuss these results and changes in a webinar tomorrow, Wednesday 23rd, at 11.45am