Company Overview: rhipe Limited (ASX: RHP) 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

Strong Liquidity Position & Buyout Synergies Remain Key Catalysts: rhipe Limited (ASX: RHP) is a cloud-based, value-added software distributor, involved in supporting more than 3,000 IT resellers across the 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 ensures robust core operating metrics along with a healthy cash position. During 2HFY20, RHP undertook a capital raise of $32.5 million, to bolster its cash reserves, thereby aiding the company to pursue further strategic acquisitions. The company follows an annuity base model that allows RHP to make higher investments for sustainable growth of both revenue and profit.

The company continues to focus on geographic expansion, solution offerings, vendor, and partner expansion. The company’s cloud-based subscription business places RHP in the right shape to take advantage of the growing opportunity across the Asia Pacific. This was further demonstrated by the substantial increase in managed seats of Microsoft Office 365 and Microsoft Azure revenue in FY20 and 1QFY21. As on 30 June 2020, Microsoft O365 seats went up to more than 630,000, increasing by 40% since 30th June 2019. As on 30 September 2020, Microsoft Office365 seats were more than 680,000 including greater than 6,000 seats in Japan. The increase was further boosted by demand for new work from home infrastructure and business continuity solutions.

Key Strategies (Source: Company Reports)

The company posted robust FY20 results, with sales amounting to $325.2 million, an increase of 29% from the prior corresponding period. Operating profit stood at $15 million (excluding new joint venture in Japan), depicting a year over year increase of 17%. This strong performance depicts the company’s strong execution, leadership, and fiscal management across the business. The positive was primarily led by the company’s deep relationship with Microsoft and expects the same to continue in 2021. The company also continues to increase its value-added support services to its partners to drive higher customer engagement.

As the company moves into FY21, it has witnessed further investment in intellectual property through the acquisition of SmartEncrypt, continued investment in its Microsoft Dynamics offerings and higher investment in its support-as-a-service business unit. RHP has capitalised on the opportunity to build its market share and take advantage of the changing information technology industry via continued strategy to strengthen its footprint in key fast-developing Asian markets. 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. In September 2020, RHP 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. These acquisitions are likely to help the company to ride on its growth trajectory.

Over the period of FY15-FY20, gross revenue has reported a CAGR of 22.53%, with continuous upward progress. Group EBITDA for the same time span increased from a loss of $1.4 million in FY15 to a profit of $11.6 million in FY20. As depicted in the figure below, the company has seen the sales trending upward since FY15. The below trend has been strongly backed by continued growth delivered by the public cloud business and Microsoft CSP.

Key Trends (Source: Company Reports)

1QFY21 Sneak Peek: During 1QFY21, revenues increased by 16% year over year and came in at $14.7K, which increased ~16% year over year. Operating profit including Japan JV stood at $3.9K, suggesting an increase of 39% from the prior corresponding period figure of $2.8K. Gross profit for the period came in at $13.8K, up 16% on pcp. Operating expenditure excluding Japan JV for the period increased 7% year over year and came in at $9.6K. Operating expenses from the company’s Licensing business were flat year over year, with some increased investments in Japan and its business solutions The company continued to deliver robust revenue growth, thanks to strong growth in Microsoft public cloud products including Office365 and Azure. In 1QFY21, licensing margins remained stable at 13.6% compared to FY20 Licensing margin of 13.6%.

1QFY21 Key Highlights (Source: Company Reports)

Balance Sheet & Cash Flow Details: As on 30 September 2020, cash balance stood at $53.8 million, following the payment of $3.2 million fully franked dividend and NZ$4.25 million payment for the recently completed Parallo acquisition. The company ended FY20, with a 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. Further, during FY20, the company generated an operating cash flow of $13.7 million, up from an operating cash flow of $12.1 million in FY19, despite the economic turmoil imposed by the global pandemic.

Cash Flow Trend (Source: Company Reports)

Key Metrics: For FY20, the company reported EBITDA margin and net margin of 22.4% and 8.6%, respectively, higher than the respective industry medians of 23.3% and 6.3%. Debt to equity ratio for the period stood at 0.04x, lower than the industry median of 0.34x. Current ratio of the company stood at 1.95x, higher than the industry median of 1.57x, depicting a decent liquidity position.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table which together form around 34.33% 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)

Risk Analysis: During the COVID-led pandemic, where work from home trend continues to spur, some end-user clients and IT resellers witnessed a business decline, where employees were not being able to work from home. Further, higher demand witnessed from IT resellers for extended payment terms led to an increase in RHP’s provision for doubtful debt by $1.1 million, which continued in FY21. Further, the company’s Dynamics365 practice saw a significant decline. Also, a slowdown in travel, marketing and challenging economic conditions is expected to negatively impact the growth of the business in FY21. Further, stiff competition from peers poses a threat to its financial well-being.

Outlook: The capital raising is expected to 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 cost controlling measures. For FY21, the company expects to witness growth in its top-line owing to various opportunities, challenges, and uncertainties. Further, the company’s ongoing investment in licensing sales and solutions capabilities are key positives, going forward. The company also targets to generate operating profit in FY21, given its careful management of cost-cutting initiatives during the pandemic outbreak.

FY21 Outlook (Source: Refinitiv, Thomson Reuters)

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 3.01% in the last three months but went up ~9.3% in the last 9 months. The stock made a 52-week low and high of $1.155 and $2.42 and is currently trading slightly below the average of its 52-week trading range. 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. On the technical analysis front, the stock of RHP has a support level of ~$1.719 and resistance of ~$2.194.  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 robust FY20 and 1QFY21 results, decent outlook, synergies from acquisition, capital raising program and current trading level, we give a “Buy” recommendation on the stock at the current market price of $1.73, down by 2.26% on 4 December 2020.

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

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