Company Overview: RXP Services Limited is engaged in providing information and communication technology consulting, development, support and maintenance services. The Company's practices include RXP Collective, RXP Engaged, RXP Insight, RXP Develop and RXP Optimise. The Company uses design thinking to determine the customer experience based on the behaviors and the needs of the customers. RXP Engage provides changemanagement services ranging from small project related change to whole of enterprise change. It provides governance, risk and compliance (GRC) services to financial institutions, government departments and businesses. It provides independent oversight of projects and change programs, post implementation reviews, risk analysis and mitigation services, as well as a range of health checks, compliance testing, and penetration testing. RXP Insight solutions offer cloud hosting and managed service. RXP Develop delivers enterprise software applications for cloud and on premise environments.


RXP Details

Delivered a decent FY17 performance: RXP Services Ltd (ASX: RXP) has been able to reap benefits from its digital evolution with outcome-focused work. The group has reported a revenue rise of 11% to $140.5 million for fiscal year of 2017 as compared to $127.1 million in prior corresponding period. Their EBITDA surged 10% to $18.3 million during the period from $16.6 million in same period last year. The group’s NPAT surged 10% to $11.6 million during the year on a year on year (yoy) basis while Earnings per share (EPS) enhanced 9% to 8.3 cents. Underlying EBITDA margin reached 13.8%. RXP showed an ongoing operating cash flow growth of 23% on a yoy basis to $18.1 million in fiscal year of 2017 from $14.8 million in same period last year. At the back of the robust result, RXP declared a fully franked dividend of 3.0 cents per share (cps), which would be payable on October 05, 2017, leading to the overall FY17 dividend to 4.5 cps. The group has a decent cash balance of $17.6 million as of June 30, 2017 while their net cash position reached $2.2 million. 

Repeated work from client base: RXP Services is seeing a solid rise of clients for their User Centered Design/CX/UX/UI capabilities, for their Experience Hub. Clients are benefitting from the integration of the collaborative workspaces and their User Centered Design/CX/UX/UI design labs into their programs of work. In FY17, the group added rxpOperate to their set of practices; a practice focused on offering near-shore managed support capabilities. The group’s pipeline is strong with 82% of FY18 revenue expected to come from current clients (recurring, contracted, extensions). The group is enhancing their Sydney base via The Works acquisition, which is expanding the presence in FY18.



Strong business from existing customers (Source: Company reports)

Strengthening the digital business with The Works acquisition: In August 2017, the group announced about acquiring The Works, which is one of the Australia’s leading independent digital and creative agencies. The core product of The Works is On Message which is based on BOT conversational platform; and with this acquisition move, RXP has indicated to speed-up their Innovative Digital Consulting business as the acquisition would extend their digital customer services’ delivery capability, as well as enhance their presence within NSW, where over 85% of The Works’ revenues are derived from. Via this acquisition, RXP’s “end-to-end” digital services delivery capability is also said to enhance. The group believes that this strategic move would enable them to leverage Australia’s rapidly growing digital economy. Moreover, The Works would be a strategic fit to their evolving business model and would drive the business forward with respect to digital services offering. The group’s initial payment has been $17.5 million for the acquisition and this was said to be funded by the institutional placement that was very well supported. Remaining payment would be made from their current cash reserves and debt facilities, while future payments would be funded by a combination of debt and cash. The group had also indicated to have a more efficient and flexible debt facility by September 2017. Overall purchase price is capped at $33 million (wherein $25 million is fixed, up to $6 million is based on EBITDA in 12 months, while further payment is based on EBITDA in 24 months). It is estimated that the deal will be EPS accretive by 10+%, with EBITDA synergies of $1.5 million in FY18. 

Rising digital revenue mix: The group ispositioning itself as a major digital delivery partner for their clients as well as, is building a strong pipeline while deepening their client relationships. RXP derived 50% of revenues from Digital/Project/Outcome based segment in fiscal year of 2016. But with their ongoing focus on digital business, their Digital/Project/Outcome based revenue contributed 56% in FY17. Their average revenue per consultant has nonetheless improved on the back of a better value work and the group aims to maintain this improving trend. Consequently, the group’s margin also improved, with part of the increase invested back into additional Practice/Sales capabilities to drive top line growth by RXP. The group also invested in their ‘cross-practice/digital’ go-to-market capability. In fiscal year of 2018, the group is aiming for a Digital/Project/Outcome based revenue contribution of 64%, driven by The Works acquisition. 


Expanding digital business margins (Source: Company reports)

Potential opportunity for digital business: Digital transformation is a major driver for clients across several industries and sectors showing great opportunities for the group for development and growth. With their recent acquisition, RXP is well positioned to target Australia’s rapidly growing digital economy which is valued at a percentage of GDP bigger than traditional industry sectors like agriculture, retail and transport. The digital economy was also said to grow to $139 billion by 2020 which is 7.3% of GDP. There is thus a huge opportunity from consumer benefits in terms of greater choice and convenience driven by digital. Accordingly, RXP is targeting clients from diverse industries which would drive their efficiencies and add new revenue streams, while the company leverages data/insights to drive connection with their customers.


Constantly evolving in line with changing trends (Source: Company reports)

FY18 Outlook: For fiscal year of 2018, the core group’s financials are expected to continue to see a solid revenue and earnings growth. The group expects their top line to grow by 10%+ in FY18 to $155 million while has an EBITDA margin target of 13.8%. The Works acquisition is expected to contribute a revenue of $16.5 million in fiscal year of 2018 while EBITDA is forecasted to be $3.9 million. Overall revenue would be $174.7 million for combined fiscal year of 2018. The group continues to see a thriving digital solutions/services driving convergence (consultancies digital agencies) and enhancing their opportunities. The acquisition of The Works would further support their growth objectives, which is expected to have a margin of 23.5% in FY18 much higher than the core group’s margin of 13.8%. The combined entity’s margin is expected to be 15.2% (normalised). The group is expecting revenue Synergies of $5 million and EBITDA Synergies of $1.5 million for fiscal year of 2018. 

Stock performance: The shares of RXP rose over 16.4% in the last three months (as of September 25, 2017) driven by The Works acquisition. The group’s latest strategic acquisition, strong balance sheet as well as solid capabilities in high demand areas are expected to drive performance in the coming period. Given the lucrative target market, the group is aiming to further push into Digital Services and Creative Digital Consultancy as well as speeding their growth in Sydney. They also see major opportunities for cross-selling combined capabilities across their current client base. The group is holding its Annual General Meeting on October 17, 2017. RXP stock is currently available at a bargain price to earnings ratio, and we believe that investors can leverage this level. Trading at a decent dividend yield and material discount, we give a “Buy” recommendation on the stock at the current price of $ 0.86.


RXP Daily Chart (Source: Thomson Reuters)

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