Company Overview: Empired Limited is an information technology (IT) services provider. The Company is engaged in design, development and integration of business knowledge, information technology and creativity. The Company operates through two segments: Australia and New Zealand. The Company's business solutions include Cloud Services, Identity and Access Management, Systems Integration, Data Insights and Business Intelligence, Internet of Things, Spatial Services, Mobile Solutions, Digital and Experience Design, Enterprise Content Management (ECM), Enterprise Resource Planning (ERP), Customer Relationship Management (CRM), Digital and Experience Design, Infrastructure Transformation Services, Managed Infrastructure Services, Project Management Office (PMO) and Unified Communications. The Company operates in various industries, including retail and manufacturing, public sector, financial services and insurance, health, mining, oil and gas, utilities, transport and education.


EPD Details

First Half FY 18 Financial Performance affected due to the protracted New Zealand election period: Empired Ltd (ASX: EPD) in the first half of FY 18 reported a 2% growth in the revenue to $85 million and revenue (Excluding Wellington) is up 10%. All the major regions were performing well outside of Wellington, which was disrupted due to the protracted New Zealand election period. The company has posted strong performance in growth regions with NSW Revenue up 15% and Auckland up 18%. US turnaround is evident as the region’s revenue showed a solid rise of 21% in the first half of 2018. Moreover, the underlying EBITDA grew 14% to $7.3 million and underlying EBITDA margin expanded from 7.6% to 8.5% while managing a decline in Wellington. The EBITDA to Operating cash conversion is of 80% and EBITDA / OCF (operating cash flow) is of 100% when adjusted for $2 million of work delivered during the H1 FY18 that was pre-paid by clients in H2 FY17. In 1H 2018, the operating Cash Flow (OCF) is of $5.3 million up from $0.9m. The CAPEX fell $0.5 million in the first half of 2018 against the prior period and CAPEX is running below DA in H1. The interest is reduced in the first half 2018 and expected to reduce further in the second half of FY 18 as debt levels continued to reduce. Additionally, for 1H 2018, EPD’s Receivables and WIP reduced from June 17 levels, net debt reduced to $13.5m, current assets to current liabilities improved to 108% while gearing was at 16%. With this backdrop, the company seems to be poised for solid growth in the second half of FY 18.
 

1H FY 18 Financial Performance (Source: Company Reports)
 
Secured multi-million -dollar contract with Catholic Education WA: EPD has secured a multi-million -dollar contract with Catholic Education Western Australia (CEWA) to develop its ‘Administration of Schools’ (AoS) Platform. The system is based on Microsoft technologies and will form the core engine for CEWA’s “Leading Lights” digital transformation. Moreover, the digital transformation is expected to provide the entire CEWA school network with access to an integrated suite of best-in class learning tools, educational software, storage, communications, collaboration, student management systems and a professional learning and development environment. AoS is expected to deliver a vast array of benefits and opportunities to the 80,000 students in CEWA schools, as well as their parents, teachers and school staff right across Western Australia, covering the 170 school and office locations.

Catering to diversified industry and clients’ base: EPD for the first half of FY 18, had no over-reliance on any key sector. The Energy & Natural Recourses was up as the major contracts expanded in WA. The public sector is down as a result of NZ government elections. The company’s 80% of revenue comes from 20% of clients, Moreover, the company has positioned strongly in a number of large corporate and government organizations. The company’s year on year growth will be underpinned by the existing major clients.
 
 

Diversifying client base (Source: Company Reports)
 
Solid Predictable Revenue: The Company derives over 60% of revenue from multi-year contracts. EPD is focused on continuing to deliver services that generate recurring style revenue. The company’s sales pipeline of multi-year contracts will be contested over coming 12 months.
 

Predictable Revenue (Source: Company Reports)
 
Future Outlook: NZ is expected to strengthen with a building sales pipeline. EPD expects strong revenue growth in the second half of FY 18, over H2 FY17. Further, the company expects the second half 2018 EBITDA to be significantly stronger than the first half. There is an expectation of strong operating cash flow in the second half to continue to reduce net debt. Additionally, EPD is well placed to deliver strong earnings growth in FY19. In addition, the second half growth will come from the growth underpinned by continued demand from major enterprise clients for Empired’s core service offerings including Cloud, Modern Applications, and Data & Analytics. The Enterprise Solutions is continuing to perform with growth in billable headcount. Further, the company is ramping up Dynamics Practice as Microsoft ERP/CRM platform adoption accelerates. The Lifecycle Services is also steady with building opportunities.

Market drivers: The group’s target industry growth continues to benefit from the proliferation of data, mobile devices and accessibility of high speed communications driving the ‘Digital Economy’ Clients embracing analytics, online and mobile services and technology driven business models to drive productivity and competitive advantage. As a result, the M&A in the Australian sector by international strategic buyers was also been buoyant with a number of Empired’s key competitors being acquired in creating a major market opportunity for Empired. The group forecasts that Empired’s contestable market will be over $30 Billion. The group is well positioning itself to tap this opportunity especially in high growth segments of the market including Managed Services, Cloud, Mobility, and Data & Analytics.

Stock performance: EPD stock has fallen 15.1% in the last three months as on February 26, 2018 placing them at a reasonable level in terms of price to earnings scenario. EPD did not declare a dividend for the half year ended 31 December 2017, and the company did not pay a dividend for the previous financial year. On the other hand, the company has grown its business in key areas while carefully managing the decline in Wellington to protect the earnings in the first half of FY 18 and capacity to quickly ramp up in the second half of FY 18. In the first half of FY 18, EPD has posted modest revenue increase on prior corresponding period due to soft public-sector revenue in NZ during protracted election period. However, other areas of business are performing as per the company’s expectation. Further, the company expects that restart of significant public-sector projects in early second half will provide the confidence on improved earnings performance in New Zealand across the second half. The reduction of non-billable overhead costs by an annualized amount of circa $2.5m per annum will benefit in the second half of FY 18. Moreover, the net debt is tracking in line with the management expectations. As per usual business cycle, working capital movements will see a slight increase in net debt for the half year period, followed by strong H2 operating cash flow leading to a reduction in net debt at the full year. We give a “Speculative Buy” recommendation on the stock at the current price of $0.44
 

EPD Daily Chart (Source: Thomson Reuters)

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