Company Overview: rhipe Limited (ASX: RHP) is involved in the wholesale of subscription software licenses to a variety of technology service provider resellers. The company offers cloud licensing and solutions for its software vendors across 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 Higher Investments and Strong Liquidity Position: rhipe Limited (ASX: RHP) is engaged in the sale and support of subscription software licenses to ~3,000 IT service provider throughout the Asia Pacific region. The company’s FY20 results have shown a continued strong growth trajectory. Throughout FY20, the company has grown across geographies, products and licensing programs and has been able to capitalise further on its 2019 profitability. This along with, robust subscription-based revenue, during the period, helped the company to stay afloat during the COVID-19 global pandemic.

During the 2HFY20, RHP undertook a capital raise of $32.5 million, in order to take advantage of future acquisition opportunities. Consequently, the company’s year-end cash position came in at $60.9 million, compared to a cash position of $25.5 million at the end of the previous year. Moreover, the company is further intending to bolster its position through the continued development of its Platform for Recurring Subscription Management (“PRISM”). Management opines that the cash position of the business will continue to be resilient and as a result, the Board has declared a final dividend of 2 cents per share, payable in September 2020.

The company had launched its cloud business in FY16. Since then, RHP has been a key provider to one of the renowned players in the software industry, Last year, the company acquired Microsoft Dynamics consulting business “Dynamics Business IT Solutions Pty Ltd (“DBITS”), to integrate the same in its business solutions, expanding the value-added services to its reseller clients. Results from the services delivered to Microsoft were a key contributor to growth during the period. The company is performing well with DBITS acquisition and expects further opportunities for growth in the days ahead.

Coming to the FY20, the company provided continued license sales growth and witnessed a positive contribution by Microsoft’s key products. The company also witnessed a larger uplift in non-Microsoft sales during the period than the previous years. During the period, the company began its joint venture operations in Japan where rhipe Limited owns 80% of the JV company, invested in Solutions business and unveiled the beta program for SmartEncrypt with the full market launched planned for Q3FY21.

Over the period of FY17-FY20, gross sales have reported a CAGR of 27.5%, with continuous upward progress. Revenues for the same time span increased at a CAGR of 24.52%. As depicted in the figure below, the company has seen the sales trending upwards since FY17, with the growth rate increasing in the year. The trend can be attributed to the continued growth delivered by the public cloud business and Microsoft CSP.

Gross Sales and Revenues Past Performance (Source: Company Reports)

The company’s 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. Moreover, RHP’s investments in these future growth areas ensure its competitive advantage over peers in the rapidly expanding cloud industry. 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.

FY20 Key Highlights: During the period, the company witnessed strong demand for public cloud software and infrastructure that boosted the sales by 29% as compared to a prior corresponding period and came in at $325.2 million. The company also reported revenue growth of 15%, backed by increased contribution from Microsoft Azure and in public cloud. The Group’s reported EBITDA came in at $11.6 million, an increase of 16% year over year. Net profit after tax decreased by 19% on Y-o-Y basis and came in at $5 million. The company’s robust operating profit growth in FY20 grew 17% year over year was led by a 36% increase in Licensing operating profit. Further, a number of significant investment in the Indirect Microsoft Cloud Solutions Provider (“CSP”) program for Office365, sustained expansion in operations across Asia, New Zealand and Australia, along with an investment in operations to support the expansion of Microsoft Azure were key catalysts for the period.

Key Highlights (Source: Company Reports)

Relationship with Microsoft Aids RHP: RHP continued to witness robust growth from Microsoft’s key public cloud products, Microsoft Office 365, and Microsoft Azure. O365 annual recurring sales during the period reported a growth rate of 56% year over year and came in at $92 million. As at 30 June 2020, Microsoft O365 seats went up to more than 630,000, increasing by 40% since 30th June 2019. Annual recurring sales for Azure went up by 87% to $39.2 million. Annual Run Rate (ARR) sales from Microsoft CSP, including Office365 and Microsoft Azure, came in at $131 million at the end of FY20, up from $80 million at end of FY19 and $42 million at the end of FY18.

Microsoft Highlight (Source: Company Reports)

Balance Sheet & Cash Flow Details: The company exited FY20, with a cash balance of $60.9 million. Total debt (lease borrowings) amounted to ~$3.9 million at the end of the period. During FY20, the company generated an operating cash flow amounting to $13.7 million, indicating an increase of 13% on prior corresponding period cash flow of $12.1 million. During the period, the company paid dividends of $2.8 million and invested ~ $2.1 million in its key subscription management platform, PRISM.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table which together form around 39.05% of the total shareholding. Tutus McDonagh Pty. Ltd. held the maximum number of shares with a percentage holding of 14.84%, followed by First Sentier Investors holding 5.82% of the shares.

Top Ten Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: For FY20, the company reported gross margin, EBITDA margin and net margin of 93.8%, 22.4% and 8.6%, respectively. Gross, EBITDA and net margins stood higher than the respective industry medians. This indicates a better profitability position in comparison to the broader industry. Debt to equity ratio for the period stood at 0.04x, lower than the industry median of 0.16x.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Key Risks: The rising level of uncertainty led by coronavirus outbreak, remains a potential headwind. Further, competitive pressure from existing competitors and their entrances in the new market pose a threat to its financial well-being. Moreover, higher reliance on Microsoft, failure to keep pace with ever changing technologies, failure to retain existing customers and attract new customers along with geopolitical risks add to the woes.

What to Expect: The company will continue to invest in new growth opportunities, with the earlier investments being validated by a strong business performance to date. The capital raising will strengthen the company’s balance sheet and will position it well to pursue future acquisitions and expand its existing cloud software subscription business. Going forward, RHP will focus on controlling its operating expenses to keep a proper balance between investing in new growth opportunities and delivering the desired level of operating profit. Substantial sales growth from Microsoft’s key cloud products is a key indicator of a prolonged strong competitive position in the market. Going forward, the company will focus on new opportunities, including expansion into new geographies, growth momentum across new and existing vendors, investments in the License and Solutions businesses. 

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

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

P/CF Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of the company gave a negative return of 23.68% in the last three months but went up ~10.83% in the past 6 months period. The stock of RHP has a market capitalization of ~$280.37 million. The stock made a 52-week low and high of $1.155 and $3.04, respectively, and is currently trading below the average of its 52-week trading range. On the technical analysis front, the stock has a support level of ~A$1.651 and a resistance level of ~A$2.221. As depicted in the financial performance, the company has delivered well on its strategic initiatives so far and has attained a strong competitive position in the market. We have valued the stock using the price to cash flow multiple based illustrative relative valuation method and for the purpose, have taken the peer group - Data#3 Ltd (ASX: DTL), TechnologyOne Ltd (ASX: TNE), and NEXTDC Ltd (ASX: NXT), to name few. As a result, we have arrived at a target price offering an upside of lower double-digit (in percentage terms). Hence, considering the above aspects, we give a “Buy” recommendation on the stock at the current market price of $1.73, down by 0.575% on 11 September 2020.

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

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