Company Overview: rhipe Limited (ASX: RHP) is involved in providing cloud licensing and solutions for its software vendors throughout the Asia Pacific region. Its divisions are focused on cloud licensing, cloud solutions, and cloud operations. The company holds intellectual property in the form of PRISM (Platform for Recurring Subscription Management) to boost the consumption of its cloud license programs.

RHP Details

RHP Rides on Partnership with Microsoft & Decent Liquidity Position: rhipe Limited (ASX: RHP) is a cloud-based, value added software distributor, involved in supporting IT resellers across Asia Pacific. The company’s business model is mainly focused on pay-as-you-consume cloud software subscriptions, which, in turn, maximises RHP’ customer’s investment in cloud software. The company remains well equipped to perform and certifies robust core operating metrics along with healthy cash position. In September 2020, the company acquired Parallo, a New Zealand-based Azure and specialist IT services provider. The acquisition is likely to assist RHP to develop and bolster its Services portfolio and offer its partners with further capabilities to support their growth opportunities.

RHP remains on track to focus on geographic expansion, solution offerings, vendor, and partner expansion. Further, the company’s cloud-based subscription business places RHP in a right shape to further take advantage of the growing opportunity across Asia Pacific. This was further demonstrated by the substantial increase in managed seats of Microsoft Office 365 and Microsoft Azure revenue in FY20 and 1HFY21. As on 30 June 2020, Microsoft O365 seats went up to more than 630,000, increasing by 40% since 30th June 2019. As on 31 December 2020, Microsoft Office365 seats were ~720,000 including greater than 11,000 seats in Japan. The overall Office365 seat count increased ~90,000 since June30, 2020. The increase was further boosted by demand for new work from home infrastructure and business continuity solutions.

Looking at the past performance over the period of FY17-FY20, the company reported a CAGR of 69.2% in Microsoft O365 ARR Sales, with continuous upward progress. Microsoft Azure ARR sales for the same time span increased at a CAGR of 135.5%. As depicted in the figure below, the company has seen the sales trending upward since FY17. The below trend has been strongly backed by continued growth delivered by the public cloud business and Microsoft CSP.

Key Trends (Source: Company Reports)

1HFY21 Sneak Peek: During 1HFY21, revenues increased by 15% year over year and came in at $30.5K. The company’s robust growth continues in Microsoft public cloud products and in its solutions business. Operating profit for the period stood at $8.8K, suggesting an increase of 34% from the prior corresponding period figure of $6.6K. Increase in operating profit was primarily due to solid revenue growth as well as stringent cost management. Also, higher Licensing business, owing to its acquisition of Azure services business, Parallo, at the beginning of second quarter, aided the results.  Gross profit for the period came in at $27.7K, up 11% on pcp. Operating expenditure for the period increased 3% year over year and came in at $19K. Costs increased due to expanded investments in Japan and its business solutions as well as expenditure related to drive future growth opportunities. The company continued to deliver robust revenue growth, thanks to strong growth in Microsoft public cloud products including Office365 and Azure. In January 2021, RHP won Microsoft APAC Services Partner of the Year, a prize that offers confirmation of rhipe’s strategy to add cloud-based Professional Services to its revenue portfolio.

1HFY21 Key Results (Source: Company Reports)

Healthy Balance Sheet and Decent Liquidity: In FY20, the company had a current ratio of 1.95x, higher than the FY19 figure of 1.4x, representing a decent liquidity position. Gross margin in FY20 stood at 93.8%, higher than the industry median of 58.1%. EBITDA margin came in at 22.4% in FY20, higher than the FY19 figure of 21.7%. Net margin came in at 8.6% in FY20, higher than the industry median of 7%. This indicates a better profitability position in comparison to the broader industry. Debt to equity in FY20 came in at $0.04x, lower than the industry median of 0.25x. As on 31 December 2020, cash balance stood at $57.5 million, up from $53.8 million reported at the end of 30 September 2020. The cash balance was recorded following the payment of $3.2 million fully franked dividend and NZ$4.3 million payment for recently completed Parallo acquisition.  Coming to FY20 end, the company had cash balance of $60.9 million, compared to a cash position of $25.5 million at the end of the previous year. Total debt (lease borrowings) amounted to ~$3.9 million at the end of the period. The company’s healthy balance sheet and skilled management team along with its long-term nature of client relationships place the company for considerable long-term growth.

Growth Profile and Profitability Metrics (Source: Refinitiv, Thomson Reuters), Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form around 32.69% of the total shareholdings while the Top 4 constitutes the maximum holding. Tutus McDonagh Pty. Ltd. held the maximum number of shares with a percentage holding of 14.84%, followed by First Sentier Investors holding 4.79% of the shares, as also highlighted in the chart below: 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Risk Analysis: RHP continues to acquire a large number of companies, which adds to integration risks. It can also adversely impact its balance sheet in the form of an elevated level of goodwill and intangible assets. Moreover, stiff competition in the markets where RHP operates and regulatory concerns may dampen financial performance. Further, foreign currency fluctuation risks and government restrictions add to the woes. During the COVID-led pandemic, where work from home trend continues to spur, some end-user clients and IT resellers witnessed business decline, where staff were not being able to work from home. Further, the company’s Dynamics365 practice saw significant decline. Also, slowdown in travel, marketing and challenging economic conditions are expected to negatively impact the growth of the business in FY21.

Outlook: The company’s business has proven to be resilient to the impacts of COVID-19, owing to extensive reseller base across many countries. Going forward, the company expects the positive results to be continued in the 2HFY21. RHP also intends to increase investments in numerous key growth pillars of its business to drive further opportunities in FY22 and beyond.  Although the company has witnessed a lengthy sales cycle due to COVID-19, it remains strong with a robust long-term sales pipeline, including significant opportunities to attract new customers across key markets and increase technology spend amongst existing customers. Also, higher investment in operations to support the expansion of Microsoft Azure is expected to aid growth in sales, revenue, and gross profit for the Group in the days ahead. Considering these factors, the company expects operating profit for the financial year ending 30 June 2021 to be approximately $17.5 million, depicting a rise of around 27% on a year over year basis.

Valuation Methodology: P/CF Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the last three months, the stock went down by ~9.95%. The stock made a 52-week low and high of $1.155 and $2.42, respectively, and is currently trading slightly above the average of its 52-week trading range. On the technical analysis front, the stock has a support level of ~$1.626 and a resistance level of ~$2.179. We have valued the stock using the P/CF multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digit (in percentage terms). We believe that the company might trade at a slight premium to its peer average, considering its strong 1HFY21 operating profit, decent, top-line performance, relationship with Microsoft, decent cash postion and encouraging outlook. We have taken peers like Superloop Ltd (ASX: SLC), TechnologyOne Ltd (ASX: TNE) to name a few. Considering the above factors, acquisition synergies, decent 1HFY21 financial performance, increasing margins, and positive long-term outlook, we give a “Buy” recommendation on the stock at the current market price of $1.800, down by 0.553% on 12 February 2021.  

RHP Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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