Company Overview: Spirit Technology Solutions Ltd (ASX: ST1) is engaged in the provision of telecommunication services, cloud services, managed IT services and cyber security services to small and medium-size businesses. The company has a decent mix of customers where revenue is not concentrated on a select few clients. It has no individual customers, which account for more than 5% of the sales during the first half of FY21.

ST1 Details

Decent Rise in Revenue Streams & Acquisitions to Complement Growth: Spirit Technology Solutions Ltd (ASX: ST1) provides IT&T services which include telecommunication services, cloud services, to name a few. The market capitalisation of the company as on 05 March 2021, stood at ~$207.97 million. As per a recent update, the company has announced that its acquired entity Trident Technology Solutions has achieved the earn-out target to receive the maximum incentive payment for the first earn-out period ended 30 November 2020. The acquisition of the company was completed on 18 February 2020.

The company has been able to secure larger value recurring revenue contracts of long duration owing to its ability to cross-sell premium managed services and cyber security offerings, along with a comprehensive range of data products. The Spirit X platform enables the company to provide the right data products at attractive price points.

The company delivered robust results during the first half of FY21, with decent performance across most of the key metrics. It reported total revenues of $44 million during the period, an increase of ~253% from $12.5 million in the previous corresponding period. The increased sales reflect the demand in the SMB and corporate markets with B2B TCV of $23.1 million for H1FY21, which is an increase of ~221% on the pcp. There was a corresponding increase in the EBITDA by ~320% to $3.4 million and the NPAT stood at $0.5 million, compared to a loss of $0.7 million in the prior period. There was a positive operating cash flow of $4.3 million during the period. The cash position of ST1 stood at $12.90 million as on 31 December 2020, compared to $6.40 million on 30 June 2020.

H1FY21 Financial Performance (Source: Company Reports)

Decent Growth in Revenue Streams: ST1 has reported impressive core revenue growth during H1FY21 to $43.1 million, an increase of ~246% Y-o-Y. Recurring revenues grew by ~99% to $21.1 million, and there was a significant increase of ~1,089% in Solutions & Projects (S&P) revenue to $22.1 million during the same period under consideration. S&P revenue includes government grant infrastructure revenue. The revenue from managed recurring services grew at a robust rate of ~598% to $7.7 million. The data services recurring revenue stood at $7.9 million during H1FY21 and voice services recurring revenue at $2.4 million, reflecting an increase of ~40% on the previous corresponding period.  

Growth in Revenue (Source: Company Reports)

Intalock Acquisition to Complement Growth: On 3 December 2020 the company has announced that it has completed the acquisition of Intalock, which is a managed cyber security service business. The acquisition positions ST1 in a comfortable position to take a greater share of the Corporate and Government markets. Intalock will enable the company entry into a new segment and its cyber products & services will complement ST1’s range of IT & Telco bundled products. A number of distinguished professionals from Intalock will join Spirit as per agreement, along with a blue-chip customer base. Spirit Technology Solutions Ltd paid an upfront consideration of $15 million as a combination of cash (85%) and equity (15%), along with a provision for deferred consideration component. EBITDA multiple of the transaction stood at ~6.5X.

Top 10 Shareholders: The top 10 shareholders together form around 47.57% of the total shareholding, while the top 4 constitute the maximum holding. Regal Funds Management Pty. Ltd. and Diamond (Peter John) are holding a maximum stake in the company at 11.22% and 9.50%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Key Metrics: During H1FY21, the company reported an improvement in net margin performance to 1.2% from a negative 6% in H1FY20. There was also a corresponding improvement in the ROE to 0.9% during the period. It maintained a decent liquidity profile with a current ratio of 0.90x, compared to an industry median of 0.70x. The cash cycle was at a comfortable level of negative 20.8 days in H1FY21. There was also an improvement in the debt to equity ratio of the company to 0.11x in H1FY21, compared to 0.16x in H1FY20.  

Revenue and Margin Profile (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

Key Risks: The company has borrowings on its balance sheet and is thus exposed to variable interest rate risk. It manages the liquidity risks by maintaining adequate cash reserves and available borrowing facilities by keeping track of forecasted cash flow requirements and matching the maturity profiles of financial assets & liabilities. The impact of the COVID-19 pandemic did not have a significant impact on the company's operations, and it continues to monitor and manage operations, keeping an eye on the wellbeing of its employees. ST1 operates in a space where it has to keep updated with the latest technological trends and has to deliver projects based on detailed client customisations and specifications. As such, it has to make continued investments in R&D for delivering enhanced products and solutions to its clients.

Outlook: The company has been able to adapt and respond to the complex changing need of businesses by offering comprehensive solutions across cloud, voice, data, managed services and cyber security. It plans to grow further with the launch of new products and the expansion of its reseller network. The revenue mix continues to reflect a shift towards the medium and corporate market with higher value contracts. It will continue its investment strategy for system automation and consolidation and further look to improve on its EBITDA margins going forward. ST1 continues to witness strong demand for Intalock Cyber Security services across Corporates & Enterprise clients. It also plans to launch new Spirit-branded mobile products and bundles across the nation in Q3FY21.

Valuation Methodology: P/E 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: The company expects decent demand across the corporate, health & education markets. As per ASX, the stock of ST1 is trading above its average 52-weeks’ levels of $0.120-$0.450. The stock of ST1 gave a positive return of ~80.48% in the past nine months and a negative return of ~7.499% in the past one month. On a technical analysis front, the stock of ST1 has a support level of ~$0.343 and a resistance level of ~$0.401. We have valued the stock using an P/E multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe the company can trade at a slight premium to its peer average P/E (NTM Trading multiple), considering the robust financial performance and expected synergy benefits from the acquisitions. For the purpose, we have taken peers such as Vocus Group Limited (ASX: VOC), Uniti Group Limited (ASX: UWL), MNF Group Limited (ASX: MNF), to name a few. Considering the current trading levels, indicative upside in valuation, impressive financial performance in H1FY21, decent long-term outlook and benefits from the recent acquisitions, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.370, down by 2.632% as on March 05, 2021.

 

ST1 Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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