Company Overview: Empired Ltd (ASX: EPD) was incorporated in Australia in 1999. The headquarter of the company is situated in Perth, Australia and it is being currently headed by Mr. Russell Baskerville – MD, CEO & Executive Director. It is one of the leading information technology (IT) services providers that specializes in integrated solutions services, such as cloud, cohesion enterprise content management (ECM) service, customer relationship management (CRM), data insight and business intelligence, digital and experience design, enterprise resource planning, expert guidance, identity and access management, infrastructure transformation, change management, Internet of Things (IoT), managed infrastructure, mobile solution, application, project management office, office accelerator, spatial, system integration, SNAP 365 and unified communication services. There are two main business verticals, i.e., outsourcing solutions and enterprise solutions, catering to various industries like automotive, education, financial services and insurance, health, mining, not for profit, oil and gas, public sector, retail and manufacturing, and utilities. Moreover, the company provides its integrated solutions services in North America and New Zealand regions along with the domestic market. The company currently employs approximately 1000 personnel offering a large range of professional and technical skills.
 

EPD Details

80/20 Strategy to Revive Growth Momentum: The company has a unique business model. The group generates revenue from two main business verticals i.e., outsourcing solutions and enterprise solutions. The targeted customers of the company are energy & natural resources, government, other, health & education, finance & insurance, manufacturing & transport, wholesale & retail trade, ICT sectors which contributed around 25%, 22%, 15%, 10%, 9%, 7%, 7% and 5%, revenue in total revenue respectively, in FY18. It equates to 80/20 rule which states that the company generates 80% of total revenue from 20% of clients/industry. The company is focussed on continuing to grow its business both organically and through strategic acquisitions which provide synergistic benefits to the Company and compliments its current growth strategy. The Company’s growth strategy focuses on the following key elements such as increasing staff skills and range of IT service offerings, expanding the outsourcing solutions business; and regional diversification. In our view, the group is well positioned to expand its product services in a number of large corporate and government organizations. As of now, the group focuses on new growth opportunities in the Finance & Insurance sector on the East Coast region. Hence, we trust the management’s ability to revive growth momentum ahead backed by its 80/20 approach.


Industry & Clients (Source: Company Reports)

Expecting double-digit growth in FY19: The company has continued to enhance its operating model and strengthen all of the key ingredients that ensure to maintain growth path ahead whilst improving its profit margins over time. Based on business enhancement, the company is anticipating a material rise in the revenue run rate of its both business segments i.e., outsourcing solutions and enterprise solutions businesses. Revenue contribution from these two businesses, which comprise about 67% of Australian operations, is expected to result into services Run-Rate to be more than 13% in FY19, when comparing forecast July 2018 services run-rate to that of July 2017. New Zealand business operation is assuming to come back to its growth in 2019 at the back of restarting the significant public-sector projects in early 2H FY18 and strong exposure in digital solution business. This places the company well as it enters FY19 and anticipates a return of 13% at CAGR basis to historical growth levels in New Zealand. Moreover, the company expects strong cash generation in FY19 through strong cash conversion and declining CapEx requirements. This is expected to drive a further reduction in net debt towards zero by the year-end. Based on aforesaid developments, the company expects to deliver double-digit earnings before interest, tax, depreciation and amortization (EBITDA), net profit after tax (NPAT) and earnings per share (EPS) growth in FY19.


Predictable Revenue (Source: Company Reports)

Secured customer experience transformation contract with the DIO: The company has recently secured $90 Mn worth of contract to develop customer experience digital transformation programme for the Department of Internal Affairs (DIO), New Zealand. The term of the contract is 5 years with 2 years extension option. As per the contract, the wholly owned New Zealand subsidiary of Empired, Intergen Limited will deliver two core components for the development of DIA’s Te Ara Manaaki transformation programme. It will include the delivery of Customer Centred management solution and customer identity and access management solution along with the assistance of additional services throughout the life of DIA’s programme. As per the management, it is just beginning of an exciting journey, where the company has a privilege of having the capacity to play a fundamental role in helping to transform the way in which New Zealander’s access Government services. The company has already started work on the programme. Hence, we expect that this contract will support the organic growth of the company in the forthcoming period with further opportunities in the government sector.
Marquee Clientele Base: EPD has a strong client base servicing a range of medium, large and blue-chip companies throughout Australia. These include Anvil Mining Australia Pty Ltd, BankWest, Racing and Wagering WA, Rio Tinto, Shell Australia, Co-Operative Bulk Handling Limited, Oxiana Limited, Woodside Energy, etc. The company expects to generate 90% revenue in FY19 from its existing clients/contracts.

An Experienced Board and Dedicated Management will Support Business Objective: The Executive team at EPD has an extensive experience in the IT sector. Currently, the group is headed by Mr. Russell Baskerville – MD, CEO & Executive Director. He has an extensive knowledge in the strategic growth and development of technology businesses balanced by strong commercial and corporate skills. He is an experienced business professional who has been exposed to the IT Industry for over 10 years. Moreover, the members of its senior management team have significant experience and expertise across IT service management, consulting practices, and sales and delivery; spanning outsourcing and large-scale complex systems integration projects, development, sales, marketing, distribution, and finance division, ensuring robust business growth by supporting and providing guidance to the employees.

Financial Highlights: FY18 was another progressive year wherein the Group executed its strategic and tactical plans efficiently. The company for FY18 reported a 4% growth in total net revenues to $ 174 Mn over the prior year. EBITDA stood at $17 Mn in FY18, marking the decent growth of 7% against PCP. The result reflected growing revenue and the Company’s ability to leverage its operational capacity while increasing its investment in the business. The company recorded net profit after tax of $4.9 Mn in FY18 compared to a profit of $3.2 Mn in FY17. On the margin front, Gross margin, EBITDA margin, and NPAT margin expanded by 141 bps, 55 bps, and 90 bps to 35%, 9.8%, and 2.8%, respectively in FY18 against the previous year. It reflects progressive growth across overall businesses along with lower finance cost during the year. On the balance sheet front, the Net debt was reduced from $13.8 Mn at 30 June 2017 to $9.3 Mn at 30 June 2018, with reduced gearing of 11% from 16% in the prior year, which strengthened the balance sheet for an exciting growth period ahead. Current ratio and Quick ratio stood at 1.54x and 1.21x, respectively in FY18 while the group enjoys virtual debt-free status.


Financial Highlights (Source: Company Results)
 
Stock Performance and Outlook: We are optimistic about the company performance at the back of improving financials, securing contracts, strong exposure in digital solutions and expecting a solid recovery in the New Zealand business. From the analysis standpoint, the company has a price-to-earnings ratio of 17.65x and has posted a return on equity (RoE) ratio of 6.6 per cent, return on capital employed (RoCE) of 5.3 per cent and has a debt-to-equity ratio of 0.30x and has cash conversion cycle ratio of 52 days which is below the industry median of 73 days. Moreover, the Company expects double-digit growth in FY19 in all P&L key metrics. On the valuation front, the company has price-to-book value ratio of 1.03x, and this may look to be on a lower side while comparing with the industry median of 2.14x and represent undervalued stock at the current juncture. On the stock performance front, the share price has risen 17.39% in the past six months (as at September 24, 2018) and traded close to the 52-week high of $0.695. However, we believe that EPD exhibits higher growth prospects and returns versus peers. Based on aforesaid facts and current trading level, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.545 (edged up by 0.926% percent on September 25, 2018).
 

EPD Daily Chart (Source: Thomson Reuters)

 
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