Company Overview: The Citadel Group Limited (ASX: CGL) was incorporated in Australia in 2000. The headquarter of the company is situated in Symonston, Australia and it is being currently headed by Mr. Darren Stanley – the Chief Executive Officer (CEO) and the Chief Operating Officer (COO). It is one of the leading technologies and software company that specializes in secure enterprise information management in complex environments. It offers secure information to support real-time decisions across the Health, National Security, and Defence sectors. The company mainly derived its revenue from the long-term managed services, software-as-a-service, and high quality strategic advisory services. CGL has workforce strength of over 160 employees across Australia, with the ability to access 3,000+ subject matter experts through its partnerships.


CGL Details

Obtaining New Contract – A Key driver of the business: The Citadel Group Limited (ASX: CGL) is well placed to win its share of new business opportunities as the Government plans to further increase investment spend to build out national cyber security capabilities. It has signed $62 Mn worth of renewals and new contracts over the first half, diversifying its customer base through new long-term contracts with Queensland Department of Transport, Melbourne City Council, and Deakin University. Recently, the group provided a contract update that reflects the continued momentum of the company in delivering leading software-as-a-service (SaaS) and managed service solutions to the company's clients. Of which, the group has signed a major new hosted software-as-a-service (SaaS) information management contract with a large government organization in Queensland for 10-years. It will support more than 7,000 users and is anticipated to manage over 25 terabytes of data. As per the agreement, it incorporates migration to the Citadel-IX cloud platform, 24/7/365 premium support, integration to business systems and the Kapish Productivity Suite which will provide the suitability of the business in the long run. These kinds of contracts regularly deliver revenues beyond initial values outlined, with scope for additional work a factor of CGL exceeding client requirements, and at incrementally higher margins – a demonstrated model for the group to date.


Major contracts locked in for FY18 (Source: Company Reports)

Synergistic Agreements’ led Overall growth: Tie-up with/ acquisitions of Kapish, Anaesthetic Private Practice, and PJA solution will support ambitions in the eHealth and technology portfolios thus resulting into topline growth in years to come at the back of expanding footprint into the new geographic regions including NSW and QLD, strengthening its core services, increasing clientele base across the market, etc.

a) Acquisition of PJA Solution – Support eHealth and Technology portfolios: In 2015, the group acquired Citadel Health (formerly PJA Solutions) which has been the leading provider of managed technology services to the Australian health sector. The purpose of this acquisition was to expand the group’s position in the eHealth market and create a broader platform to continue the growth of its managed service offerings into the private sector and the international region. We believe that positive development in e-Health sector will help to reduce the concerns around contract renewals.

b) Strategic Acquisition of Kapish – For Growth: In 2016,the company successfully completed its acquisition of Kapish Pty Ltd and Kapish Services Pty Ltd for a total consideration of $14.4 Mn. The objective of the deal was to strengthen its core knowledge management offering, deepening expertise, and capabilities in electronic data management services.

c) Lucrative Acquisition of APP – Support Topline Growth: In April 2018, the group acquired Anaesthetic Private Practice Pty Ltd with the objective of expanding its existing e-health capabilities, broadening the SaaS offerings, extending into other e-health specialisations, and increasing footprint into other states, and categories such as Vocational Education and Training (VETS).

d) Acquisition of Charm Health – Another Positive Move in Health Care Sector: In 2017, the group successfully completed a definitive agreement to acquire Charm Health International Pty Ltd with the objective of expanding its e-health offerings. Charm delivers comprehensive multi-site functionality that managed the clinical and administrative coordination of all aspects of a patient’s cancer care. Going forward, we assume that the group will drive the business through its next phase with help of a leading Australian oncology e-health solution provider thereby supporting topline growth in years to come.

Marquee customer base: CGL has a strong client portfolio across multiple high-growth markets i.e., Health, National Security/Defence, Government, Education, and the private sector. These include Queensland Health, Eastern Health, NSW Government, Health pathology, Western Health, Southern Health, Medicare, Royal Adelaide Hospital, etc for healthcare sector; DFAT, Australian Government Department of defence, Australian Criminal Intelligence Commission, etc for defence sector; AFP, Australian Government Solicitor, etc. for Government; Monash University, Australian National University, Charles Sturt University, etc. for education sector; and Leighton Holdings, Ramsay Health Care, ICON cancer care, Lockheed Martin, DXC technology, and NBN  co limited, etc. for private sector.


Marquee customer base (Source: Company Reports)

Financial Highlights: CGL posted a decent set of 1HFY18 results wherein consolidated revenue increased by 12.7 per cent and amounted to $47.5 Mn in 1HFY18 as compared to the prior corresponding period (PCP). The PBT of the company was $8.9 Mn in 1HFY18, compared to the PBT of $7.4 Mn in 1HFY17. PAT stood at 5.4 Mn in 1HFY18 against $4.0 Mn in 1HFY17, and marked a splendid growth of 34.1 per cent on Y-o-Y basis. On CAGR basis, the company posted consolidated revenue growth of 18.2 per cent over FY13-17 while PAT recorded CAGR growth of 25.9 per cent over the same period. Net cash flow from operating activities came at $2.1 Mn compared to $0.489 Mn on PCP basis. Capital expenditures for the acquisition of property, plant and equipment (PPE) stood at $1.8 Mn compared to $0.717 Mn for the same period a year ago. On the balance sheet front, the group had consolidated net assets of $77.9 Mn (1HFY17: $75.4 Mn) which included the cash and cash equivalent of $19.17 Mn as at 31 December 2017. The quick ratio and current ratio substantially increased from 1.15x and 1.25x to 1.62x and 1.67x, respectively in 1HFY18 from the prior corresponding period. Debt-to-Equity ratio stood at 0.27x in 1HFY18. RoE increased by 80 bps to 8.4 per cent in 1HFY18 as compared to the prior corresponding period. We expect that the group will continue to deliver strong growth ahead backed by potential M&A opportunities in support of organic growth strategies.


1HFY18 Financial Highlights (Source: Company Reports)

Positive Outlook: The company has brighter outlook ahead at the back of strong balance sheet position with virtual debt-free status, increased portfolio of software products and solutions underpinning pipeline growth, securing strategic partnerships and agreements in all key geographical regions, expanding customer base and securing its existing contracts and new contract wins building out CGL’s recurring revenue profile. We trust on the management’s ability to address growth opportunities ahead backed by its unique business model.


Unique Business Model (Source: Company Reports)

Other Key Updates: The company had announced that Ms. Deena Shiff retired from the Board of The Citadel Group Limited, effective from 31 January 2018. As per the release, Ms. Shiff has been associated with the company as a Non-Executive Director and Chair of the Audit, Risk, and Compliance since September 2014. No decision has been made to replace Ms. Shiff on the Board. However, Board of Directors appointed Ms. Anne Templeman-Jones as Chair of the Audit, Risk, and Compliance Committee in place of Ms. Shiff who joined the Board on 8 September 2017. Recently, the company announced that they will release 7,104 fully paid ordinary shares to the shareholders of the Citadel Group Limited from voluntary escrow on August 13, 2018 as per the appropriate Listing Rule. These shares are held by employees of the company.

Stock Performance: The group is well positioned to continue its growth trajectory with all major contracts locked in for FY18 and with confidence in the outlook for FY19 renewals. Delays in signing Government contracts in the first half will provide significant growth opportunity in the second half. In addition to this, the group will continue to pursue attractive M&A opportunities as they arise in support of their organic growth strategy. As of now, the group focuses on to add new IP or new clients that support its business objective to provide long-term, scalable information management solutions into complex environments. Meanwhile, CGL stock has fallen 1.67% in the last six months (as at August 13, 2018) but climbed up 8.46% in the past one month at the back of recent positive developments. Given the recent upside movement (3.52% in the past one week) and regaining of momentum in the business, CGL seems to be a good opportunity to explore. It is worth noting that the stock was up by 213.33 per cent since listing on ASX (November 13, 2014). Given the backdrop of aforesaid facts along with improving financial performance and its capital position, the stock is expected to be witnessing improved momentum in future. Hence, we give a “Speculative Buy” recommendation on the stock at the current market price of $ 7.0 (down by 0.709 per cent on August 14, 2018).
 

CGL Daily Chart (Source: Thomson Reuters)

 
Disclaimer

The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.