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

FY19 performance in-line with given guidance: Empired Ltd (ASX: EPD) is an IT services provider with a broad range of capabilities that are targeted at delivering enterprise IT solutions which improve efficiency, productivity and competitive advantage for the clients. As on August 13, 2019, the market capitalisation of Empired Ltd stood at ~$48.84 million. The company recently released its earnings report for FY19 in which its revenue witnessed a rise of 1% on a YoY basis and stood at $176 million and its Australian revenue was $116 million while its New Zealand revenue amounted to $61 million. The company stated that its financial results for the year ended June 2019 were in line with the guidance which was provided. The company’s reported net profit after tax (or NPAT) was a loss which amounted to $15.3 million, that includes non-cash impairment charge amounting to $25.4 million. EPD stated that the non-cash impairment charge is primarily related to the software assets which are being superseded through the new technologies and changes in market trends. The company is well-positioned to get benefited from continued growth in IT sector, especially with the growing trends which are dominated by adoption of technology in order to help the business growth and transformation.

EPD is confident of the success of its SaaS based Cohesion platform. Cohesion happens to be Empired’s proprietary cloud-based system for the provision of Enterprise Content and Collaboration Management (or ECCM) and is the leading platform when it comes to delivery of these services to New Zealand Government. The company has had a period of robust growth throughout the Australian East Coast, where it has delivered approximately 10% growth YoY for 3 years up to the FY18 end. However, FY19 growth was modest and was up only 2%. The company is confident that several growth initiatives which are being implemented would be a re-igniting expansion in the Australian East Coast. Throughout the year, the company has made deployments toward its managed services offerings in order to capitalise on rapid adoption of cloud technologies.

The company has witnessed a CAGR growth of 21.4% in its top-line in the time frame of FY14- FY19, which reflects that it is possessing decent revenue-generation capabilities. Moving forward, operational and revenue generation capabilities, tight management of overheads, reduction of the capex, scalable platform, multi-year services contracts, extensive capability, and growth in IT sector are expected to act as tailwinds.


Summary of Financial Results (Source: Company Reports)

Top 10 Shareholders: The following table provides a brief overview of the top 10 shareholders in Empired Ltd:  


Top 10 Shareholders (Source: Thomson Reuters)

Improvement Witnessed in Key Financial Ratios: The key ratios of Empired has witnessed an improvement on YoY basis, which reflects that the financial position is enhancing with each passing year. The company’s net margin stood at 2.5% in 1H FY19, which reflects a YoY rise of 0.7% and, thus, it can be said that its capabilities to convert its top line into bottom line has been improved. The company EBITDA margin stood at 9.3%, which implies a rise of 1.4% on a YoY basis.

The company’s current ratio was 1.72x, which reflects an increase of 60.7% on a YoY basis and, thus, it can be said that EPD has decent liquidity levels and it can meet its short-term obligations. Additionally, the company would be able to make deployments towards the key business activities, which could further help the company in achieving long-term growth.

The company’s Debt/Equity ratio stood at 0.28x in 1H FY19, which is lower than the industry median of 0.54x and, therefore, it looks that the company is having lesser debt component on its balance sheet as compared to the broader industry. The lower debt on the balance sheet reflects that the company balance sheet is relatively stabilised in comparison to the concerned industry. Also, the company’s long-term debt as a percentage to total capital stood at 19.7% in 1H FY19, lower than the industry median of 31.1%. The company’s net debt at June 30, 2019 amounted to $14.3 million, and there are expectations that it would be declining materially throughout the course of FY20.


Key Metrics (Source: Thomson Reuters)

Announcement About Undertaking On-Market Share Buy Back: Empired Limited has recently made an announcement about the intention to undertake on-market share buy-back of up to a maximum of 15,269,298 shares over 12-month period. EPD is of the view that an on-market share buy-back happens to be an effective method when it comes to returning the capital to shareholders. Additionally, it was added that the company anticipates that the buyback would be earnings per share positive. Euroz Securities Limited will act as broker in relation to the buy-back event.

Understanding EPD’s Cash Flow Position: The company’s operating cash flow for the financial year ended June 30, 2019 stood at $8.5 million as compared to $15.5 million in the previous financial year. It was also added that the adverse variance is attributable to the lower profitability and adverse capital movements. The following picture provides an idea of the company’s cash flow:


Cash Flow (Source: Company Reports)

The company’s cash from operating activities has witnessed a CAGR growth of 10.0% in the time span of FY14- FY19, which reflects that the company is possessing decent operational capabilities Also, during the same period, EPD’s cash receipts encountered a CAGR growth of 24.91% and, thus, it can be said that the company has decent capabilities to generate cash. There are expectations that operational capabilities, together with the cash generation abilities, might help the overall company in witnessing decent growth levels. Additionally, there are expectations that FY20 operating cash conversion / reported EBITDA would be above 90% and capex will be approximately $6 million. Also, as stated by EPD, its interest expense might witness a reduction in FY20, and it might also witness robust free cash flow.

EPD Not Over-relies On Any Key Sector Or Client: As per the investor presentation, EPD stated that it does not over-rely on any key sector or client and, we expect, that this might act as a primary growth catalyst moving forward. It was added that the public sector has witnessed growth, primarily because of NZ performance and it remains a reliable and consistent sector throughout all the parts of the business. For Empired, energy & natural recourses sector happens to be a consistent industry which is having numerous growth opportunities. The company is focused towards growth opportunities in Finance & Insurance across East Coast.
 

Industry & Clients (Source: Company Reports)

What to Expect From EPD: The comprehensive review of the company has been undertaken and clear priorities and targets have been set for FY20 in order to deliver improved operational performance. It included a review of the balance sheet, capital management, operating costs, and deployment in sales growth. The company is committed towards delivering revenue growth and also focuses towards reducing the overhead expenses and achieving a significant reduction with respect to the capex. These improvements will reduce net debt through improved cash flows and profit. Additionally, it was added that a significant reduction in capex would lead to the lower depreciation and amortisation expense, which would be improving NPAT. During FY19, 63% of the revenue was either recurring or garnered with the help of multi-year contracts. As a result, it gives a stable, predictable base of revenue at the start of each financial year, which improves the predictability and significantly enhances YoY growth prospects.

The company’s pipeline of the large multi-year contracts happens to be healthy, and it would be competing on around $200 million in strategic opportunities throughout FY20. The company has made deployments towards the right assets and have positioned itself to compete and win in the market. Accordingly, there are expectations that it would be capturing its share of the market and deliver long-term growth. It was also stated that the growth along with the overhead cost reductions and improved cash generation would help in delivering shareholders an attractive investment proposition as well as would create sustainable value in short and long term.


Key Valuation Metrics (Source: Thomson Reuters)

Stock Recommendation: The stock of Empired Ltd has delivered the return of 1.67% in the span of the previous three months. Currently, the company’s stock is trading towards the 52-week lower levels of $0.235 with reasonable PE multiple of 8.660x, indicating a decent opportunity for accumulation. Moreover, the company is placed for strong improvement with respect to financial performance in FY20, which could help it in gaining traction among the market players. There are expectations that the company would be delivering a material increase in its net profit after tax, and it might witness reduced capex and robust positive cash flow. The company also added that New Zealand has been performing well, and the growth trajectory is expected to expand.

The company stated that it is focused on building a multi-year contract and recurring revenue base through the range of annuity style services. With respect to the financial position, it was stated that its balance sheet is poised for the enhanced ROE (or Return on Equity). Considering the above-stated facts, operational and cash-generation capabilities, decent liquidity levels, expectations of reduction in the interest expense in FY20 and lower Debt/Equity ratio in 1H FY19 as compared to industry median, we are affirmative on the stock and believe that EPD might witness respectable growth levels moving forward. Hence, in view of aforesaid facts and current trading levels, we give a “Buy” recommendation on the stock at the current market price of A$0.295 per share (down 3.279% on 13 August 2019). 

 
EPD Daily Technical Chart (Source: Thomson Reuters)

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