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

Relationship with Microsoft and Buyout Synergies Aid RHP: 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. Despite economic headwinds due to COVID-19, RHP remained on track to invest in key growth strategies, which provided the company an opportunity to grow its market share and capitalize on the changing industry dynamics. The company’s FY20 results have shown a continued strong growth trajectory. Throughout the period, RHP 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 come out stronger during the COVID-19 global pandemic.

In FY20, the company delivered an operating profit of $15 million, which excluded the investments in rhipe Japan. Significantly, the operating profit of RHP’s core licensing business grew 36% year over year. The company remains invested in the platform to maintain a strong competitive position to attract new vendors. Licensing revenue comes in the form of margins earned from the customers for the services provided by rhipe Limited, along with sales incentives from the software vendor. Also, RHP invested in the development of both private cloud and public cloud businesses.

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 had declared a final dividend of 2 cents per share, which was paid 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. The company is performing well with DBITS acquisition and expects further opportunities for growth in the days ahead.

Looking at the performance over the period of FY17-FY20, the company’s EBITDA reported a CAGR growth of 42.6%. Gross sales reported a CAGR of 27.5% in the same time span, 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, and EBITDA trending upwards since FY17, with the growth rate increasing Year over year. The trend can be attributed to the continued growth delivered by the public cloud business and Microsoft CSP.

Gross Sales, Operating Profit, EBITDA, and Revenues Past Performance (Source: Company Reports)

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.

A Look at FY20’s 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 operating profit grew 17% year over year in FY20 led by a 36% increase in licensing operating profit.

FY20 Key Highlights (Source: Company Reports)

Relationship with Microsoft Aids RHP: 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. 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 Related Highlights (Source: Company Reports) 

RHP to Acquire Parallo: On 21 September 2020, the company announced that it has inked a deal to acquire 100% of the share capital of Parallo Pty for an initial consideration of NZ$4.25 million, payable in cash post the transaction is completed. Parallo is a New Zealand-based IT services provider that aids Independent Software Vendors (ISVs), Software as a Service (SaaS) businesses and other scale-based cloud partners to enhance performance, manage security, and many other related services. Prior to the buyout deal, Parallo delivered EBITDA of NZ$650,000 in the 12 months period and is likely to offer a growing EBITDA contribution to rhipe Limited via continued strong organic growth. The acquisition is in-line with RHP’s goals to offer its partners with the latest infrastructure technology, drive new growth prospects, innovate, and diversify their businesses. Notably, the acquisition is expected to complete on 19 October 2020. 

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 37.48% 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 4.78% 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 0.25x.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Risk Analysis: 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.

Future Expectations: 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.

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 9.02% in the last three months but went up ~8.12% in the past 6 months period. The stock of RHP has a market capitalization of ~$300.51 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$1.646 and a resistance level of ~A$2.189. 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 $1.88, up by 0.804% on 9 October 2020.

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

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