Company Overview: rhipe Limited (ASX: RHP) is engaged 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

Higher Investment & Synergies from Acquisitions Aid RHP: 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 enhances RHP’ customer’s investment in cloud software. Talking about 1HFY21 results, the company reported revenues of $30.5 million, which depicted an increase of 15% year over year. The company continues to witness robust growth in its Microsoft public cloud products and in its solutions business. Operating profit for the period stood at $8.8 million, suggesting an increase of 34% from the prior corresponding period, owing to solid revenue growth as well as stringent cost management. Also, Licensing business, owing to its acquisition of Azure services business, Parallo, at the beginning of the second quarter aided the results.  Gross profit for the period came in at $27.7 million, up 11% on pcp.

In whole, the company recorded a strong performance despite the adverse impact of COVID-19 on numerous small and midsize businesses (“SMB”). The company continued to deliver robust revenue growth, thanks to strong development in Microsoft public cloud products, including Office365 and Azure. The company’s ongoing momentum in Microsoft public cloud capabilities has aided the growth impetus in the company’s financial results, with Microsoft CSP now representing more than 75% of the growth in software licensing sales in 1HFY21.

The company remains on track to invest higher in its Solutions business, thus aiming to increase its revenue and profitability. Further, it focuses more on expanding its consultancy services, technical “support as a service” offering and investment in its encryption software product, SmartEncrypt. The said product was formally unveiled at the starting of February 2021. It is worth mentioning that Microsoft Office365 seats were ~720,000, including greater than 11,000 seats in Japan as of 31 December 2020. The installed base as at 31 December 2020 was more than 720,000 seats, up from ~547,000 O365 seats as at 31 December 2019. 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 1HFY18-1HFY21, the company reported a CAGR of 22.9% in revenues, with continuous upward progress. Reported EBITDA for the same time span increased at a CAGR of 43.1%. Management opines that the cash position of the business will continue to be resilient and as a result, will aid the company to come out stronger during the COVID-19 pandemic.

Revenues Trend (Source: Company Reports)

Acquisitions Remain a Key Growth Catalyst: In September last year, the company bought 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. In FY20, the company entered into a joint venture with Japan Business Systems Inc. (“JBS”). The company expects FY21 to be continued as a year of investment to accelerate the growth of its business in Japan. Further in 2019, the company acquired 100% of Network2Share Pty Ltd. Recently, the company announced that it has inked a deal to acquire 100% of the share capital of emt Distribution Pty Ltd (Australia) and emt Distribution Pte Limited (Singapore) (together “emt”). The acquisition is in-line with RHP’s goals to offer its partners the latest infrastructure technology, drive new growth prospects, innovate, and diversify its security software distribution businesses along with stronger foothold in the enterprise market. The company expects to complete the acquisition in the next two months and expects emt to contribute ~$2 million of operating profit before accounting in the financial year to 30 June 2022.

A Look at 3Q YTD FY21 Key Highlights: Coming to 3Q YTD FY21 update, revenues increased by 15% year over year and came in at $46.8 million. Sales during the period came in at $273.1 million, up 15% year over year. Operating profit including Japan JV stood at $13.2 million, suggesting an increase of 36% from the prior corresponding period.  The company continued to deliver robust revenue growth, thanks to strong growth in Microsoft public cloud products including Office365 and Azure as well as growth in its solutions and services business. Gross profit for the period increased 13% year over year and came in at $43.1 million. Operating expenditure for the period increased 5% year over year, due to expanded investments in Japan and its business solutions as well as expenditure related to drive future growth opportunities. As at 31 March 2021, Microsoft Office 365 seats was over 775,000, with an addition of ~16,000 seats per month in the current financial year.

Key Results (Source: Company Reports)

Key Metrics and Decent Liquidity Position: The group has also built a decent balance sheet position with total assets reaching $158.77 million as at 31 December 2020, up from $148.97 million reported at the end of 30 June 2020. RHP has a cash and cash equivalents of $57.5 million at the end of 1HFY21. The company remained on track to invest in the Solutions business. Total debt (lease borrowings) amounted to ~$3.92 million at the end of the period. Net cash from operating activities came in at $6.11 million in 1HFY21, depicting a rise from $5.8 million reported in the year-ago period. In 1HFY21, the company recorded gross margins of 90.9% as compared to the industry median of 73.6%. Debt to equity multiple for the same time span stood at 0.04x, lower than the industry median of 0.18x. EBITDA Margin in 1HFY21 stood at 27.5%, higher than the industry median of 18.6%.

Growth and Profitability Profile (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

Key Risks: On the flip side, rising costs, and changing consumer spending habits may weigh on the financial performance, going forward. The company is also a part of a highly regulated industry. The company operates in a highly competitive environment. Thus, entrants or existing competitors who deliver superior solutions and customer experience, remain a potential headwind. Further, COVID-19 led disruptions and foreign currency fluctuation risks add to the woes. Also, slowdown in travel, marketing and challenging economic conditions are expected to negatively impact the growth of the business in FY21.

Future Expectation: Going forward, the company expects to retain a strong balance sheet with significant cash reserves. It is also maintaining appropriate liquidity in an increasingly volatile and uncertain time. The growth potential foreseen in the group’s business is enabling it to invest in infrastructure and resources to build a larger and more resilient organisation.  The company remains well focused to pursue strategic acquisitions, invest in core products, implement delayed rollouts, and continue its current growth trajectory and leverage on growth opportunities from the emerging cloud-based industry, through its strong execution. 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 a robust strong performance in the third quarter, the company now predicts FY21 operating profit for the financial year ending 30 June 2021 to be more than $18 million, up from the prior outlook of $17.5 million.

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 of RHP went down by ~5.78%. The stock made a 52-week low and high of $1.545 and $2.35, respectively. 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 can trade at a slight premium to its peer median, considering its strong third quarter and 1HFY21 results, decent, top-line performance, relationship with Microsoft, decent cash position and encouraging outlook. We have taken peers like Appen Ltd (ASX: APX), TechnologyOne Ltd (ASX: TNE), to name a few. Considering the current trading levels, strong liquidity position, acquisition synergies, higher investments, decent 1HFY21 financial performance, and an encouraging long-term outlook, we recommend a ‘Buy’ rating on the stock at the current market price of $1.815, up by ~1.396% on 7 May 2021.

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

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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